Howzit, China! China!

SABMiller, Naspers and Sa­sol seek for­tune in world’s big­gest grow­ing mar­ket

Finweek English Edition - - Cover - by bruce whit­field

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

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