Doing Business In South Africa: Globalization Up Close

Sent: Wednesday, March 14, 2007 8:36 PM

Hello from Johannesburg, South Africa—

I left Cape Town on Saturday and have enjoyed the research, restaurants, nightlife, and tourist attractions we have indulged in since then (not necessarily in that order). If Cape Town is the San Francisco of South Africa, Johannesburg is the New York.

Thanks to everyone who has written back. Writing about these experiences gives me a chance to reflect on them; in that process I usually end up learning something that I wouldn’t have picked up otherwise. Reading and responding to your notes has only deepened my experience of this extraordinary place. Although I haven’t yet decided to pack up my apartment and move to sub-Saharan Africa, one of my friends (who visited this area one year ago) and I did agree that it might be worth the move just for the weather and the golf courses. It has been between 65-75 and sunny here almost every day since I arrived (then again I heard the weather in DC was pretty good yesterday as well).

We are leaving for Maputo, Mozambique tomorrow morning to do some field research and present our project. I think we have some interesting, creative ideas and I am excited to hear what our client thinks of them. But I wanted to take a break from preparing for that so I could share some of my thoughts and experiences from my Africa adventures so far.

MACRO OVERVIEW

One of the biggest reasons I am glad I had the opportunity to study and visit this country is because of all the interesting parallels between South Africa and the United States. Both countries are relatively young, having been settled by Europeans about 400-500 years ago. Unfortunately, both countries have histories of racial injustice partly resulting from that European migration. These histories impact the way governments and people behave today as the countries work to put those pasts behind them. Like my home state of Ohio, South Africa has a “brain drain” problem; South African doctors, dentists, and air traffic controllers often leave the country to pursue sweeter opportunities in other parts of the world. Finally, both countries are economic engines, and are dealing with a wave of immigration as a result of their economic success. For now I want to focus on this last similarity. I have visited Robben Island, the Apartheid Museum, and several other destinations, and have assisted in the Landmark Advanced Course (an event that I believe greatly improved relations within the multi-racial participating group), but will describe those events in a later email. To put in perspective how important South Africa is to the African economy, consider the following facts:

• 50% of Africa’s purchasing power is within South Africa
• 55% of cars driven in Africa are driven in South Africa
• 75% of electricity generated on the continent is generated in South Africa
• 45% of airline flights in Africa are flown within South Africa
• 35,000 km’s of Africa’s 70,000 km’s of railroad are located in South Africa
• 47 million of Africa’s 782 million people are in South Africa (6% of the population)
• That 6% of the population is producing 24% of the African continent’s GDP.

As one of our guides put it, in terms of economic impact, South Africa is to Africa what the United States is to the world.

South Africa’s economy has boomed since the end of apartheid in the early / mid 1990’s. 2006 was a particularly good year; the Johannesburg Stock Exchange’s index rose by 46%. South Africa has also been chosen as the host country for the 2010 FIFA World Cup. World Cup soccer has since prompted a debate in Cape Town as to where a new stadium should be located and how it should be paid for…a debate not unlike DC’s current/recent experience with the new baseball stadium. The United States is currently the Republic of South Africa’s second largest trading partner, and is currently running about a $3 billion trade deficit with the RSA.


To give us a better sense of what factors are affecting how business is done in South Africa, we were treated to a presentation Saturday night by Craig Allen, the Senior Commercial Officer for the U.S. Embassy (many of the facts I cite above and below were gleaned from his Power Point, so if anyone has a quibble with them, I’ll be happy to forward his email address ;-) ). Craig gave us an overview of both the current macroeconomic environment in addition to laws and regulations affecting how business is done in South Africa. One of the laws important to understanding South Africa’s business environment are those pertaining to Black Economic Empowerment, or “BEE.” BEE has many of the same goals and operates in a manner similar to “affirmative action” laws in the United States. Just as in the United States, South Africans are not of one mind on this issue. Some (both black and white) think that BEE serves only to patronize and ultimately harm those it is designed to help, and unnecessarily restrains economic activity. Others credit BEE with the emergence of a black middle class, political stability / national unity, and even with helping to improve race relations by ensuring blacks and whites work together in business organizations. One of the features of the law involves ranking companies according to a “BEE scorecard” weighted by the following factors:

Black / colored Ownership (20%)
Black / colored Management Control (10%)
Employment equity (15%)
Skills Development (15%)
Preferential Procurement (20%)
Enterprise development (15%)
Socio-economic development (5%)

A key element of the underlying philosophy of BEE is that if South Africa is to achieve its full economic potential, the skill sets of the entire population must be developed. It is not good enough to fully develop only the skills of those who were given advantages by accident of birth. The argument is that BEE broadens skill development by providing business opportunities to non-whites that would not have been present otherwise.

The impact of globalization to this region of the world was highlighted when we passed the L’Oreal plant in the picture to the right. Although I had the chance to visit plenty of overseas destinations in the Navy, I never gave much thought to whether U.S. companies were doing business there. Currently, 600 U.S. companies have a presence in South Africa (including Coca-Cola, IBM, GM, and GE, among a long list of other household names).


AEROSUD

In order to better understand these trends, on Monday we were given the chance to tour the plant of Aerosud Aviation, a supplier of aviation systems and parts for the civil and military aviation industry. Like many other South African businesses, Aerosud (a privately owned company) has enjoyed phenomenal growth in the last six years. It has an order book exceeding 4 billion Rand (about $541 million), has a staff of 470 employees growing to 700, and currently manufactures about 750,000 parts per year for Boeing and British Aerospace. One of their technological achievements is the heat suppression system manufactured for the Super Lynx helicopter, one the most formidable attack helicopters in the world. As an American, all this left me wondering during the tour “why isn’t this work being done in the United States? Boeing is an American company and should be using U.S. suppliers. These are great jobs that would be wonderful to have back in Ohio (a state that has lost hundreds of thousands of manufacturing jobs over the same period of time that this company has grown so much).”

Our tour started with an introduction given by Frans Nortje, a young engineer whose enthusiasm for his company is evident from his attached picture (the one titled “Quality Control at Aerosud”), and Isaac Nkama, an equally ebullient man who serves as Boeing’s Director of Economic Affairs for Southern and East Africa. Isaac also serves on President Thabo Mbeki’s Black Business Working Group. In the link below Frans comments on his perception of the job the South African government has done managing the economy:

http://www.youtube.com/watch?v=eH_04wvn5as

The first thing that impressed me about the presentation was the way the two men described Aerosud’s culture. Having twice gone through the law firm recruiting process, I am used to hyperbolic discussions of organizational culture (I think my grad school loans would already be paid off if I had a dollar for each time I heard “you are going to love the people here”). But there was something different about Aerosud. South African firms have a more informal, family-like atmosphere than many American ones. Junior engineers address their seniors as “oom,” (meaning “uncle”) or “tannie” (meaning “aunt”), a subtlety that helps foster a nurturing work environment conducive to mentorship. This distinction was further impressed upon us during a visit with Dr. Paul Potgieter, Aerosud’s CEO. Dr. Potgieter mentioned that one of the biggest management challenges he faces with the company is finding a way to “take the wealth of senior engineering talent and impart it on our young engineers in a way that their creativity is not stifled.” When questions about tensions surrounding BEE were raised, Aerosud’s culture was credited with enabling the firm to turn BEE into a competitive advantage by ensuring high levels of training were achieved throughout the company through open communication. My inner cynic did raise a raise flag at this last assertion, but I don’t have any other reason to doubt its truth.

The picture of Frans in the file titled “Quality Control at Aerosud” tells a story about Aerosud’s culture and innovative use of technology. He is standing next to a document called the “Not Right First Time Chart.” If a worker undertakes a task resulting in the production of scrap or requiring rework, the worker must own the reason for the failure on a publicly-displayed paper and state what he or she will do in the future to prevent the error from happening again. Aerosud has experienced dramatic quality control improvements from successfully implementing this culture of ownership, openness and mentorship. For example, since implementing this system, the factory has improved the time it takes to smooth parts (called “deburring” them) from 4.6 minutes to 1.9 minutes per part. Aerosud’s European competitors reportedly have a “scrap rate” (the rate at which raw materials must be discarded as scrap) of 60% when welding. Aerosud’s scrap rate is only 12%. The links below will give you a feel for what it was like to tour the plant (and how noisy it can be…might want to turn down the speakers on your computer):

http://www.youtube.com/watch?v=kkYaWYTitXo

http://www.youtube.com/watch?v=lrnzbYAE7cQ

Another interesting thing about Aerosud is that it lists two competing companies (Boeing and Airbus) as clients. That fact left me wondering through the tour how they got their primary client, Boeing, to agree to allow the supply of parts to their primary competitor without incurring any harmful consequences. When that question was asked, the answer was pretty simple: “we asked.” Aerosud explained to Boeing that they had extra capacity that they would like to use to manufacture parts for Airbus, and Boeing agreed so long as Boeing production was not affected.


LONMIN MINING COMPANY

On Sunday evening my stellar four-person IFC Mozambique team (consisting of Karlene, Rob, Jeremy, and myself) and one of our professors (Richard America) had the opportunity to meet with Tony Dallas. Tony is one of the people who helped bring Landmark Education to South Africa in an effort to transform the country and help it move past its history of racial tension. When Landmark started a private consulting group in the mid-1990’s (called “Landmark Education Business Development,” or LEBD), Tony took advantage of the opportunity to use Landmark methodology to improve the area’s businesses, economy, and way of life.

Landmark Education Corporation is a for-profit LLC based in San Francisco that seeks to improve people’s lives and relationships by causing a shift in their way of thinking. The company is best known for its introductory weekend seminar called “The Landmark Forum.” If you have not heard of Landmark, it is probably because the company does not advertise; it relies almost entirely on word-of-mouth recommendations from its current and former customers to ensure the company’s profitability and future viability. This extremely passive marketing effort is workable only because 94% of participants in the Landmark Forum report that their Landmark experience made a “profound, lasting difference in the way they live their lives.” I am grateful to be one of those people (and I thought I was pretty happy before I did the Forum). Like many people who experience Landmark, I completely blew off the first person who suggested I look into it, then decided to enroll when 2 other friends also raved about their experiences. Since my participation during the weekend of January 12th, 2007, I have enjoyed many of the benefits described in the video link below, and so have my father and one friend (both of whom completed the Forum on my suggestion since then).

www.landmarkeducation.com/wdcintro

My initial thought in asking Tony to meet with my group was that Landmark’s transformative methodology could be used to make businesses in Mozambique more profitable, thus enhancing the rate of return on the investment fund model my team is recommending to the IFC. LEBD has been uniquely successful in developing, at all levels of their clients’ organizations, a shared ownership of organizational objectives, resulting in creative solutions focused on those objectives from all organizational members, regardless of rank or status within the company. Put simply, I thought Landmark might be able to help bring about a culture similar to the one we saw at Aerosud in the companies in which the IFC plans to invest.

Tony, like many other people I have met from Landmark, has a grace and calmness about him that makes him very easy to listen to. He began by telling us about his current project at the Lonmin Platinum Mines outside Johannesburg (in the “Bushveld”). Lonmin is the world’s third largest platinum producer. It operates four mines in South Africa with proven mineral reserves of over 60 billion ounces, employs 27,000 people, and enjoys a market capitalization of over $9 billion. When a new CEO was brought in by the name of Brad Mills, Mills made the decision to hire LEBD to improve the company’s performance (both its financial performance and performance as a corporate citizen). Mills had used LEBD at one of his former companies (Magma Copper), and hoped that LEBD could achieve the same transformational effect in South Africa that he had seen on other continents in the past.

Before Mills decided to hire LEBD, Lonmin suffered from strained labor and shareholder relations, a poor work safety record, and a poor relationship with the surrounding community. Racial tension lay at or near the core of many of the issues that were hurting Lonmin’s performance. By improving the nature of the relationship amongst Lonmin’s stakeholders, LEBD was a cause in tripling Lonmin’s share price and raising its community approval rating from 14% to over 60% in just two years (these results are documented in the attached pdf file).

At Lonmin, management consisted of many white Afrikaners (South Africans of Dutch descent who are identified by many as creators/sustainers of apartheid). Labor was composed largely of non-whites. The two sides did not get along very well. 80% of the population of the surrounding community lived in shacks, and the community had a 40% unemployment rate as a result of a lack of jobs outside the mine. HIV/AIDS was rampant.

Tony related to us that one of the first steps was to set up a 4-day program to which over 100 major stakeholders (management, workers, members of the community, etc.) were invited. As Tony described it, the first day is spent by most people being angry—both at the people they are with and with their Landmark facilitators. On the second day, many of the nasty things people had been keeping bottled up inside of them began to come out in public. By the fourth day, the participants had begun to design a future together.

This isn’t to suggest that all of the problems I described above were solved over a 4-day weekend. However, I believe that if I had been at Lonmin before LEBD began its project, I would have thought it a miracle to bring such a group of people together to the point where they could all talk to one another and begin to work productively together in such a short period of time. That initial weekend was only the beginning of LEBD’s work at Lonmin. Two years later, Tony is still working on his project. Since LEBD arrived, the mine has seen a 10% increase in production, a 68% boost in revenue, and a 152% growth in earnings per share. At the time the attached report was written in October 2006, year to date industrial fatalities were down to 3, compared to 12 in 2003, 8 in 2004, and 6 in 2005 (the project began in 2004).

How was Landmark able to achieve these results? The answer has much to do with why I believe South Africa has the potential to become an economic powerhouse not just within Africa, but eventually for much of the world. South Africans unite themselves (regardless of race) behind a core principle called ubuntu, which translates into “I am because of you,” or “We are, therefore I am.” This contrasts sharply with the Cartesian philosophy embraced by so many Americans and Europeans: cogito ergo sum, or “I think, therefore I am.” At the core of Landmark’s philosophy lies the notion that when human beings place too much value on their own subjective thoughts and beliefs, they become closed-minded and feel threatened by alternative ways of thinking. Although it can be comforting to stick to ways of thinking that may have served us well in the past (or that we think have served us well in the past), this “steadfastness” and “consistency” ultimately limits the number of people with whom we can have relationships, and also undermines the depth of those relationships we are able to gain. Worse, these rigid ways of thinking limit what we believe to be possible for our lives, preventing us from striving for goals that are actually within our reach. This has much to do with the quote by Albert Einstein pictured above (taken at the Landmark Advanced Course where I assisted last week). Landmark teaches that most of the reasons and excuses we create for not striving for or realizing our most extraordinary possibilities are actually just lies we tell ourselves in order to avoid responsibility for the great things we are all capable of achieving when we let go of our need to be right, feel comfortable, look good, dominate people, avoid being dominated, and make others wrong.

South Africans seem to grasp this principle of ubuntu implicitly. This principle lies at the core of the culture of any organization operating at or near its full potential. It might be that other African countries are poor not because their people do not embrace ubuntu, but because so many of them are led by corrupt, incompetent governments that misappropriate national wealth and cannot be relied upon to uphold a just rule of law (such as one particular country located on South Africa’s northeast border…and I am not referring to Mozambique). South Africa does not seem to have this problem to nearly the same extent as its neighbors, which is why I will watch for it to become the next China or India in terms of its economic growth rate. The country is literally “teetering on the brink of success” (to borrow an expression from Craig Allen). Which way it falls will be largely determined by the outcome of the transition of power that will take place this year when President Mbeki’s term expires.


THE CHALLENGE OF SOWETO AND PLACES LIKE IT

The meeting with Tony was the perfect segue into a conference held yesterday at Witwatersrand Business School, popularly known as “WITS” (pronounced “VITS”). Tony related to our team that although South Africa has enjoyed fantastic economic growth since the end of apartheid, for a large number of citizens, especially those who are members of races whose freedom was limited under the old regime, life hasn’t improved all that much. Far too many people still live in settlements and squatter camps without sewage services, running water, electricity, or any of the other basic necessities of human life we take for granted in the U.S. and elsewhere. Professor Charles Villa-Vicencio (not a socialist) described it best yesterday afternoon when he remarked “Capitalism is great at generating economic wealth, but not very good at distributing it.” How South Africa manages the widening income gap between its rich and poor will be critical in determining whether its current level of political stability will be maintained, or whether it will once again flirt with the severe instability that was anticipated when the African National Congress took power in 1994. How the United States manages the same problem (especially as it applies to an aging baby boom generation) will be critical in determining its future as well. South Africa’s wealth is forcing it to confront the same age-old question that has been the focus of so much debate for so many years within the U.S.: how can we (or should we even attempt to) structure a society in which the basic human needs of each citizen are met without inhibiting the freedom, creativity, and drive of those individuals who generate national wealth through entrepreneurial, business, and other activities?

This morning we were given an up-close-and-personal view of the implications of this question. Our group was given the opportunity to tour a “squatter camp” in Soweto. Soweto is the location of the Soweto uprisings of June 1976. These uprisings convinced the ruling white National Party to begin negotiations with Nelson Mandela, and ultimately paved the way to the end of apartheid in South Africa. Soweto has a population of 4 million, and that 4 million is comprised of an extremely diverse mixture of millionaires, the poorest of the poor, and everything in between.

My initial reaction to the camp (before I even got off the bus) was one of total shock and surprise. I immediately noticed the man whose picture is below. Here was a community of 20,000 people living in conditions decrepit to a degree I have not yet seen in the United States (and hope never to see). Yet these people actually seemed happy. Or if not “happy” as I prefer to think of the term, they at least seemed not miserable, or at least no where near as miserable as I imagine I would be if I ever had to trade places with one of them. Why? How? I will not pretend to know the answer to that question, because it is still blowing my mind as I type this. How can this man give me two enthusiastic thumbs up walking out of a slum he calls his home when I sometimes struggle to fake a smile toward my colleague passing me on the street? How can these children run up to me in the middle of their dirt road and hug me, a total-stranger-white-man-born of a race their parents should naturally have taught them to hate when I struggle to have a conversation longer than five minutes on topics more meaningful than sports, the weather, or my job with my family members and friends? How can these children show such joy over being given a lollipop by visitors to their camp when I cannot find happiness in a new car, apartment, or six-figure starting salary? How can they have so much pride and self-esteem that they meticulously clean these tiny, run-down shacks when I so often lack the motivation to clean out my microwave oven? The reality of this is both humbling and embarrassing.

Our tour guide introduced himself, and then we proceeded into the camp. The people of the camp have a 60% unemployment rate. The guide gave us his introduction:

http://www.youtube.com/watch?v=kCJMTPwcqmk

Even though our professor had assured us beforehand that everything was ok, I still felt uncomfortable that these people were being put on display, and that their dignity was being threatened. The guide persuaded us not to worry; we were invited guests (of a sort):

http://www.youtube.com/watch?v=DoW8IqSWVYY

There is no free public education, however the camp did have a day care. One of my colleagues brought lollipops, so we handed them out: http://www.youtube.com/watch?v=F5VRrnkEwkQ

And then we played with the children for a little while and left.

These were not the starving, miserable children of Ethiopia I had seen on TV growing up as a child. And I certainly don’t mean to suggest that such children do not exist or don’t need to be helped. What was powerful about today is the fact that the children who were hugging me do need to be helped, yet they showed so much generosity even as I thought they had nothing to give.

I am still not sure what to make of my experience in Soweto this morning, because it is all still sinking in. I certainly have not arrived at any firm conclusions about the “age old debate” I mentioned in the first paragraph of this section. What I do know is this: the debate is no mere intellectual inquiry. A government’s approach to this debate over has consequences no less real than the children in these photographs. And I don’t think I will ever arrive at a “firm conclusion” or “answer” to the question of the debate, because at the point where I have my “mind made up” I will lose the possibility of having it made again and again in a better and more effective way. The best I or anyone can hope for is to deal with the tensions of the debate in the most effective way possible—the way that best aligns our values and hopes for the future.


There is another question I want to know the answer to: why were these children running up to us white Americans and hugging us, when so many children in Iraq and Afganistan are shooting at us? True, the U.S. never invaded South Africa, but I believe the answer is deeper than that. The discussion at WITS yesterday did shed some light on that, and I look forward to sharing more about that in a later email.

Very best,
Jim