Howzit, China! China!
SABMiller, Naspers and Sasol seek fortune in world’s biggest growing market
IF dOING buSINESS IN chINA were easy, more South African companies would be there. Despite the fact that only a handful of local companies have invested capital in its economy, corporates such as SABMiller and Naspers are already dominant players in their respective industries. With China extending its investments in Africa, a small but growing band of South African business leaders is going the other way – with mixed results.
While several firms are seeing decent returns, others are loss making but determined not to miss out on the potential spoils in a country expected to be the world’s next superpower well within the next half century. It’s a big bet in a country where the rules of doing business are very different to what SA’s CEOs are used to.
China became SA’s largest import market in first quarter 2008, taking over that position from Germany, while the country is the fifth largest export destination for South African goods. Trade between China and SA has been increasing at around 20% to 30%/year over the past 12 years. Investors in China are desperate to turn opportunity into profit. However, the latter is tougher to come by.
Chinese investors have been investing heavily in extractive industries throughout Africa. The acquisition by Chinese state-controlled bank ICBC last year of a 20% stake in SA’s Standard
Bank indicated just how seriously the country views this continent. It also provided Standard with an opportunity to explore opportunities in China with a team of its own staff ensconced at ICBC’s HQ.
SABMiller was the first South African company to make a large-scale investment in China 15 years ago. It’s grown to be the single largest brewer in that country. Naspers owns magazines and a highly profitable consumer technology firm called Tencent. Sasol is completing a feasibility study that could see it invest up to R8bn in a new gas-to-liquids (GTL) plant, Old Mutual recently spent €165m on a 49% stake in an asset manager, while Bidvest has (through an acquisition) acquired four food service operations there. There are others.
Not everyone who operates in China has been successful. Volumes tend to be high but margins tight in a disparate market. Local customs and bureaucracy can be downright infuriating, and as Spur Corporation learned to its cost in 2005 success isn’t guaranteed. Spur withdrew almost as soon as it arrived. It entered China on the basis of a master franchise with a partner that claimed to have superior local knowledge but failed to apply tried and tested Spur principles.
“You have to be true to your ethos. Locations were wrong, we ended up diluting the menu and language was a barrier. We got into a situation where we had no control and the cracks appeared,” says Spur MD Pierre van Tonder. The experiment cost Spur shareholders R1m – not a vast amount of money but an expensive lesson, as the group had just opened its second restaurant when it decided to walk away. But it doesn’t mean it’s not eager to go back: the allure of a massive market is just
too big to ignore.
Not everyone is eager to commit capital to setting up shop in China. CEOs such as Steinhoff ’s Markus Jooste are content to build relationships with suppliers. “We have no plans to set up our own production facilities there,” says Jooste.
“South African companies aren’t flooding into China,” says Stanley Subramoney, deputy CEO at PricewaterhouseCoopers South Africa and chairman of the Nepad business foundation operations committee. “But most of those that are there are performing well.” Recent PwC research has forecast China’s economy will be the world’s biggest by 2030 in terms of purchasing power parity.
“If you look at the globe today there’s a very clear shift in economic activity and it’s shifting away from New York to centres such as Beijing, Shanghai, Dubai and Mumbai,” says Subramoney. He says South African companies have an advantage over many other foreign firms the Chinese traditionally view with suspicion. “There was a warm political feeling for SA when (ANC party president) Jacob Zuma went to China recently (to meet) senior business leaders and government officials.”
There’s no question there’s opportunity but South African participants in that market all suggest it should come with a health warning: it’s not just a single market with more than 1bn customers. China is complex, diverse and massively challenging and is best consumed as one would an elephant – one small bite at a time.
“I think a lot of people are blinded by size and ignore the inherent risk in the Chinese market. Our approach is far more measured and cautious. It’s not necessarily about top line growth but delivering sustainable returns,” says Bidvest Asia Pacific CEO Bernard Berson, whose regional food service unit recently bought four operations in mainland China as part of the larger acquisition of a firm called Angliss.
A big challenge facing any foreign firm striving to do business in China is that many of its competitors in that market are stateowned and state funded.
Profit isn’t always a motivating factor for Chinese companies, says Delphine Govender, a director at fund managers Allan Gray. Rather, she says, the focus is on guaranteeing employment. That makes competing in China very difficult. But she says it’s an exciting market. “As nations industrialise, the first thing they see is an infrastructure boom; the next wave is consumerism. We’re seeing more and more Chinese demand higher wages and that will have a positive impact on companies exposed to that segment,” says Govender.
Business bookshelves are littered with volumes of work on “How to do business in China”. The volume of books that have been written on the subject in itself suggests that while it’s a challenging environment there’s an appetite for the potential rewards.
Although China began to open up in 1978 there were teething troubles aplenty. SABMiller insiders tell how managers at its recently acquired Blue Sword brewery in Sichuan were instructed to introduce new efficiencies and cut staff numbers. The instruction was carried out. However, six months later the employees (now sitting at home) were still on the payroll. Redundancy was a foreign concept.
The 2008 Beijing Olympics were crucial for China to show its willingness to deal with the outside world. It wasn’t always like that. It was only by 1994 it was becoming acceptable for local firms to globalise when SABMiller took the first tentative steps into China. To date it’s invested around US$600m in
its Chinese joint venture CR Snow. But the relationship between it and its joint venture partner – China Resources Enterprises (CRE) – wasn’t always easy. The partnership – in which SABMiller has a 49% stake – produces China’s biggest national beer brand called Snow. The brand (which is typically drunk at room temperature) saw sales for the first half of 2008 jump 22% to 2,89m hectolitres, putting it in a prime position to overthrow Anheuser Busch’s Bud Light as the world’s most consumed beer, according to research by Nielsen. The Wall Street Journal reports that’s been achieved without a single keg of Snow being sold outside China.
SABMiller has learned some crucial lessons over the past 15 years, says regional financial director Wayne Hall, one of just three South Africans representing the group’s interests in that market. “Relationships are more important in China than they are in other parts of the world. Foreigners here need to learn to be firm in their business dealings but have to be able to learn to compromise. That’s one of the main reasons why so many expats fail. Anyone with a short-term strategy in China is bound to fail,” says Hall, who has been in China for eight years.
PwC’s Subramoney agrees the major challenge companies face in China is one of culture. “Their concept of documentation is different and they tend to operate on a handshake. Whereas we like detailed written agreements, their concept of due diligence is different, as is their concept of management. We like things to be a lot more formalised.”
PwC employs around 9 000 people in China, but for the first time the South African firm is setting up a China/Africa desk and has sent two partners – Marthie Fourie and Jean Roux – to China, one to Beijing and the other to Shanghai. “It’s easier to refer South Africans to South Africans when your clients are doing deals in China. We also plan to bring a Chinese person to SA for the same reason,” says Subramoney.
Though SABMiller usually seconds senior staff to its regional operations for about three years, the demands in China are different. “The Chinese say it takes a year to build up trust. In the second year you can work together – so you can’t simply remove someone after three years. That would seriously set your business back,” says Hall, who says the group is keen on expansion but the cost of acquisition has risen dramatically. When it first entered the market it paid about $20 for each hectolitre of production. Now the acquisition cost is four or five times that. The joint venture currently owns breweries in 19 of 31 Chinese provinces; it’s the country’s biggest volume producer, with around 18% of the market brewed at 60 breweries. There are about 500 breweries in China in total. SABMiller has focused on building regional positions, the strongest being in earthquakehit Sichuan, where it has 14 of 40 breweries.
In the early days of the venture SABMiller had up to 25 staff on the ground in China. That number was cut to three in 2004, when the relationship between both parties was renegotiated. It was a tricky time, but a compromise was reached and Hall is one of the three foreigners in the Chinese beer operations, alongside veteran Gert Goedhals, who was brought out of retirement in 2003 to chair the joint venture. Technical director Jack Knight is the third.
“Before we renegotiated the deal we really struggled with issues about accountability. In many cases functions were duplicated. When things went well everyone wanted the credit and when they went badly nobody would take the blame,” says Hall. “Things are much tighter now.”
Naspers (parent of Finweek) has one of the more profitable South African owned businesses in China. It has print interests through a 37% stake in China’s leading sports publisher – Titan Media – which focuses primarily on soccer. It also has a small interest in Beijing Media Corporation, which operates a leading local newspaper in a tough environment.
But its crown jewel sits in its MIH division, which has a 36,1% interest in Tencent, a leading provider of Internet and mobile value-added services in China. It gives Tencent the biggest instant messaging community in China, its core market, where it allows users real-time communication across the Internet as well as mobile and fixed line networks. Tencent’s QQ Game Portal is reputed to be the leading casual game portal in China, while its telecommunications offering includes everything from cellphone chat to mobile music and pictures and mobile games.
Tencent contributed R615m to Naspers’s core headline earnings last year. However, its early days were fraught with difficulties, says Naspers CEO Koos Bekker. “We created a company under Western managers but miscalculated and made a complete hash of it. After 18 months we had to fire almost everyone, close the doors and write off almost $70m. Our Chinese competitors were simply smarter and burnt the midnight oil later than our team.”
Naspers currently backs Chinese management teams and takes stakes in promising companies with solid executives. Bekker says SA has plenty to learn from China. Key lessons come from the creation of elite universities, superior broadband provision that allows for speedy dissemination of information or electronic access to customers and ensuring its best and brightest return home.
Bidvest is a relative newcomer to the mainland China market despite it having an established Asia Pacific business. The four food service businesses that came with its Angliss deal are outside Bidvest’s comfort zone, where traditionally it focuses on providing Western style food products to Western customers.
“From an internal perspective we didn’t attribute a great deal of value to the Chinese businesses. They were a small component and appeared very complex – so we viewed them as opportunistic at the time as opposed to strategic,” says Bernard Berson, CEO of Bidvest Asia Pacific. Though currently profitable, like many other businesses in China it operates at a lower margin than Bidvest is used to from the balance of its Asian operations.
Three of its four businesses in China are joint ventures, with its local partners owning between 10% and 30% of the operations. The fourth is a relatively new business at Shenzen, which isn’t far from Bidvest’s regional HQ in Hong Kong, which is likely to see local partners introduced in future.
“I believe it’s the correct model to pursue in China,” says Berson, who points to some of the challenges in working there. “We’re frustrated with the lack of speed in running the business from a bureaucratic perspective. The economy is still tightly controlled and there’s a great deal of red tape to process even the smallest of transactions. You can’t get impatient with the system or the people, as that just slows you down more.”
Sasol conducted its first pre-feasibility study in China in 2005. China imports more than 50% of its fuel requirements and sources the bulk of its oil from Angola. In 2006 the Chinese government began to include the prospect of introducing fuel from coal to liquids (CTL) plants in its five-year planning process.
To date Sasol has invested around $140m in feasibility studies to build an 80 000 barrels/day CTL plant in the Ningxia region. It’s a big investment but will swell to anything between R6bn and R8bn/plant if it comes off. As oil prices began to rise, a growing number of players began to investigate opportunities in China. There were between 10 and 20 studying the market when, earlier this year, the government ruled it would allow only two to proceed. Sasol was one of them. Its Beijing office employs 20 South Africans out of a staff total of 30 so far. The target is to be producing by as early as 2012. Sasol’s figures suggest processing just 10% of China’s coal reserves could produce as much liquid fuel equivalent as that produced from the world’s proven oil reserves.
Its CTL investment in the west of the country fits neatly into what PwC’s Subramoney says is China’s “Go West” policy, which is aimed at uplifting 400m people living in poverty in that part of the country.
Sasol is cognisant of the fact that intellectual property rights have been infringed in China in the past. It’s also aware it would operate in that country at the behest of the state. It’s risky, but it’s registering its patents worldwide – including in China – and knows if Sasol doesn’t provide the technology the country needs to turn part of its massive coal reserves into fuel, someone else will.
“We know they are in full control of the process. Government is sovereign and within its rights to change its mind,” says group GM of Sasol International Energy Lean Strauss when challenged on the group’s security of tenure.
Sasol opened an office in Shanghai in September last year, from which it markets a diverse range of chemical solvents in that country. Operating under the banner Sasol Chemicals Shanghai Co Ltd, it planned to initially market products from its global Sasol Solvents business.
Six Anglo American units have operations in China: Anglo Platinum, Base Metals, De Beers, Coal, Industrial Minerals and Ferrous Metals. The group opened its corporate office in Beijing in 2002, but AngloCoal had been operating there a year earlier. Anglo Platinum established its own representative office in Beijing in 2005.
Last year China surpassed SA as the world’s biggest gold producer, despite the fact it remains one of the world’s most underexplored regions in terms of gold reserves. Gold Fields owns 19,9% of a Hong Kong and Singapore listed exploration joint venture in China called Sino Gold. Its purpose is to find deposits of more than 3m oz. Until it sealed the deal Gold Fields had its own representative office in China and has injected its own people and resources into the joint venture.
“It could well be our biggest producer in 10 years,” says CEO Nick Holland, who is planning a visit to the region before Christmas.
Old Mutual has had a small presence in China since 2004. It was only when it bought Swedish life insurer Skandia in 2006 that it got any scale. The deal saw it take on the Chinese joint venture Skandia:BSAM, a 50:50 split with the Beijing state-owned Asset Management Company (BSAM). It sells unit-linked products and has licences to operate in Beijing, Shanghai and in Jiangsu province. For the year ended 31 December 2006 the venture reported a loss of 59m renminbi (yuan). Skandia BSAM had the 10th largest gross premium flows of foreign JVs there. China’s life insurance market has increased by around 30%/year over the past decade. The group maintains that growing sales in China is one of its main priorities.
This year saw Old Mutual buy a 49% stake in Chinese TEDA Fund Management from Belgian/Dutch financial group Fortis for €165m in cash. Investors, concerned about Old Mutual overpaying for assets, immediately linked the deal to previous acquisitions where the firm had overpaid – notably in the United States.
“This is a rare opportunity to buy a sizeable stake in a well-established and wellmanaged asset management business in the region,” Old Mutual’s Asia Pacific head Steffen Gilbert says. Analysts have been closely watching Gilbert’s appetite for deals in the region and TEDA is Old Mutual’s first significant step in Chinese asset management. It employs 206 people, while Old Mutual has a handful of staff in Hong Kong. The numbers exclude the recent acquisition of the firm, which will be known as OMTEDA and which is still awaiting domestic regulatory approval. China’s asset management sector is likely to be the fastest growing in the world over the next decade, according to McKinsey.
PwC’s Subramoney also points to the rise of sovereign wealth funds out of China and says companies that set up solid operations in there could end up being bought out themselves, possibly along the same lines as the ICBC’s 20% stake in SA’s Standard Bank. “Provided business can manage the risk, the upside is there. If you want to be a serious player globally you can’t afford not to be in that market,” says Subramoney.
Be true to your ethos. Pierre van Tonder
Not eager to commit capital. Markus Jooste
Challenge is culture. Stanley Subramoney
Guaranteeing employment a priority in China. Delphine Govender
Backs Chinese management teams. Koos Bekker
Local partnerships the correct model. Bernard Berson
Patent infringement a problem. Lean Strauss
Rare opportunity. Steffen Gilbert