LESSONS FROM OZ
AFTER BURNING ITS FINGERS in Australia, South Africa’s biggest motor vehicle financier – WesBank – is planning to enter the Brazilian market as a minority shareholder in a new joint venture with one of that country’s biggest banks.
WesBank hadn’t confirmed the transaction at the time of writing, as SA banking regulator Errol Kruger hadn’t cleared the deal. However, details of the transaction were published on the website of the Brazilian regulator.
If given the nod by the authorities, WesBank will take a minority stake in the joint venture, which will be controlled by Latin America’s biggest lender in terms of assets – Banco do Brasil SA. While the boards of both banks are understood to have approved the deal, regulators in both countries must still do so before it can be ratified.
Banco do Brasil is expected to hold 73,5% of the partnership, while FirstRand will have a 26,5% stake. Though Kruger is well known to frown upon joint ventures, WesBank has made a strong case as to why it’s pursuing this particular model. It regards its entry into new markets as imperative for its future growth. Sales in its home market are rapidly stagnating and with a market share of around 36% it’s a dominant player with few prospects of growing its base. However, entering new markets will require deep pockets and the group needs a capital rich partner if it’s going to have any success.
Investors in FirstRand will hope the local unit learned valuable lessons from its Australian adventure, in which it had invested R500m by the time it withdrew earlier this year. Their confidence and that of the SA regulators in the global mobility of WesBank has been damaged by its costly experiment in Australia. WesBank’s Australian adventure failed to yield the returns the group demanded – and in the midst of a global credit squeeze and the rapid demise of the popularity of securitisation, was unlikely to do so.
While new vehicle sales in SA have plummeted and repossessions are topping 6 000/month (see cover story), the market in Brazil is still growing rapidly. Official figures
show the new vehicle market grew 21% in the 12 months to end-May. Brazil’s economy is growing strongly and is an increasingly popular emerging market investment destination, integral in the BRIC acronym for preferred emerging markets: Brazil, Russia, India and China.
What lessons did WesBank learn in Australia? First, it underestimated the country’s regulators. Its investment was tripped up even before it started. A start-up process the group estimated would take six months ended up consuming three years. It also invested too much in new technology – in motor vehicle parlance it created a RollsRoyce IT system as opposed to developing an entry-level model and adding to it over time. Most importantly it underestimated the locals and the lengths they’d go to to defend their market.
At the time of the Australia withdrawal, WesBank chairman Ronnie Watson conceded arrogance had been a pitfall that had caused the unit to have no Plan B. It was a fatal error that was to scupper the planned investment.
Unlike SA, where WesBank has cheap access to capital thanks to depositors’ funds via First National Bank, the entity was massively exposed with securitisation options dried up.
The group will be hoping that its decision to partner with a majority Brazilian shareholder will give it access to local knowledge and contacts it would otherwise not have. In return it will offer its top-notch systems and successful business model to the Brazilians as it seeks to diversify its earnings from a battered SA lending market.
Arrogance a pitfall. Ronnie Watson