LESSONS FROM OZ

Finweek English Edition - - Companies & Markets - BRUCE WHIT­FIELD brucew@fin­week.co.za

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

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