Investor vote of confidence in SA


25 May 2005

Foreign investor confidence in South Africa is taking off, to judge by the number of major deals announced this year, with three of these – together amounting to about US$5.63-billion in foreign direct investment – following hot on each other’s heels since the beginning of April.

First off, General Motors, the world’s largest car maker, announced a US$100-million (R600-million) investment in South African production of a new global version of its famous Hummer sports utility vehicle.

Barely a month later, British Bank Barclays confirmed an offer of US$5.5-billion (£2.9-billion, or R33-billion) for a 60% stake in Absa, South Africa’s fourth-largest bank.

Then last week, Coega, the massive industrial development zone and harbour project near Port Elizabeth, secured a US$31-million (R200-million) investment from Belgian-owned Sander International Textiles.

Vote of confidence
Commenting on the Barclays and General Motors deals, President Thabo Mbeki said the decisions by the two multinational corporations – both of whom had disinvested from the country during apartheid – constituted “an inspiring and unequivocal vote of confidence in democratic South Africa”.

John Reed, writing in the Financial Times (24 May), said Mbeki’s words “have the ring of truth: for what appears to be the first time, a foreign company is ploughing billions of dollars into an African venture other than oil or mining.

“Service industries such as banking promise a future for South Africa’s economy beyond its maturing mining assets,” Reed continued.

“Emerging market banks are highly vulnerable to poor macroeconomic management and political risk, so Barclays must have concluded that South Africa is a safe bet.”

Speaking after the announcement that the Barclays/Absa deal had been approved by SA’s regulatory authorities, Barclays CEO for international retail and commercial banking, David Roberts, said: “We believe in the future of South Africa.

“We have chosen to invest in South Africa because it’s an attractive market. The growth opportunity in banking is striking.”

Biggest single foreign direct investment
The offer by Barclays – Britain’s third-largest bank by assets – represents the biggest single foreign direct investment (FDI) ever in South Africa, with an FDI inflow that could potentially amount to almost 30% of total FDI inflows over the past six years.

Between 1994 and 2004, FDI into South Africa averaged about R10.7-billion a year, or 1.2% of annual gross domestic product (GDP). Between 1999 and 2004, total FDI amounted to R121-billion.

According to Absa economist Christo Luus, the Barclays/Absa deal could finance half of SA’s current account deficit for the year, allowing the economy to grow faster for longer.

“Furthermore, by improving domestic business opportunities, investment and growth, the deal may reduce the desire of both resident and foreign shareholders to repatriate dividend income,” Luus told the SA Press Association.

The potentially huge FDI inflow could also boost the country’s GDP growth by as much as 0.5% a year for a couple of years, Luus said.

Absa’s shareholders will vote for or against Barclays’ bid on 13 June. If ratified by Absa’s shareholders, a South African court will approve the deal on 21 June, with 13 July set for the deal’s conclusion.

Coega nets first investor
The Coega Development Corporation (CDC) announced last week that it had secured a R200-million investment from Belgian-owned Sander International Textiles.

The multibillion-rand Coega project, comprising a new industrial development zone (IDZ) and deepwater port 20 kilometres east of Port Elizabeth, is the largest infrastructure development project in South Africa since 1994.

A high-end niche textile producer, Sander International Textiles will invest the R200-million in building a sophisticated weaving mill in the textile cluster of the IDZ.

“Sander will produce a specialised high-end niche product – fire retardant fabrics – for the automotive and transport industries, including ocean liners and aircraft, and for the hospitality industries,” said CDC spokesperson Vuyelwa Qinga-Vika.

The products are to be exported to North American markets, taking advantage of lower US import tariffs through the United States’ African Growth and Opportunity Act (Agoa), which favours African countries.

Sander chief executive Alex Liessens told Business Report that because of the size of the investment, the government had given the project a tax break under the Strategic Investment Programme, which offers incentives to capital investments of over R50-million.

Alcan of Canada is still considering building an aluminium smelter at Coega, and there has been interest in a similar project from Russian aluminium group SUAL, headed by South African executive Brian Gilbertson.

While uncertainty remains over the aluminium project, however, Business Day reports (25 May) that a new plan is being drawn up to build a stainless steel plant at Coega, “with discussions under way to find an anchor investor for the $5-billion project”.

The Made-in-South-Africa Hummer
In April, General Motors (GM) awarded its South African arm a contract worth US$3-billion (R18-billion) to manufacture a new global version of its Hummer sports utility vehicle for export to markets in Europe, Asia Pacific, the Middle East and Africa.

At the same time, GM said it would make a US$100-million (R600-million) investment in product development and production at General Motors South Africa’s plant at Struandale, Port Elizabeth in the Eastern Cape.

South Africa will be the only manufacturing site outside of the US to assemble the Hummer H3 – a smaller, cheaper, more fuel-efficient version of the famous sports utility vehicle. SA production of the H3 will begin in the last quarter of 2006, with up to 10 000 units a year being targeted.

GM’s H3 export programme investment is over and above the $50-million (R300-million) that GMSA invested in plant and equipment upgrades and the $80-million (R480-million) it invested in the new locally produced Isuzu KB bakkie range in 2004.

“This is a continuation of a trend of expansion of existing investments in SA, and will hopefully mark the start of a real upward trend in foreign direct investment”, Reg Rumney, head of consultants BusinessMap, told Business Day.

General Motors returned to South Africa in 2004 following its withdrawal from the country under apartheid. GM group vice-president Maureen Kempston Darkes told Business Day that the company was now more convinced than ever before that they had made the right decision.

South African vehicle sales soared by a record 22% in 2004, and show no signs of slowing in 2005 – first-quarter sales were up by 23% over the first quarter of 2004.

According to Business Day, SA’s vehicle exports have grown ninefold over the last 10 years – helped greatly by the government’s Motor Industry Development Programme – and the auto industry now contributes in the region of 7% to gross domestic product.

And while vehicle export volumes were slightly bruised by the strong rand in 2004, this has not stopped car manufacturers from forging ahead with investment plans that will see the country exporting even more cars in the future.

Toyota leads vehicle export drive
Toyota got the ball rolling in early 2005 with the announcement that it would double local production to about 200 000 units, with the aim of selling 150 000 vehicles a year locally and exporting 100 000 vehicles a year by 2010.

A record 112 861 units were produced at Toyota’s Prospecton plant near Durban in 2004.

Toyota SA’s increased export drive will see the company continuing its Corolla export programme to Australia – and also starting to export a new light commercial vehicle and sports utility vehicle to Europe and Africa as part of Toyota’s new global IMV (innovative international multipurpose vehicle) project.

The IMV range covers five models: three pick-ups, a sports utility vehicle (SUV) and a minivan, all built on the same, low-cost vehicle platform. Four Toyota subsidiary companies – in South Africa, Thailand, Indonesia and Argentina – will together build 500 000 IMV vehicles a year for sale in 140 countries.

According to the Financial Mail, Toyota SA has invested R2.4-billion in two IMV vehicle ranges: a new Hilux, to be launched this month, followed by a new SUV in September.

Toyota SA plans to build 46 000 IMVs and export 18 000 in 2005, and to build 86 000 and export 49 000 in 2006.

VW, Ford, DaimlerChrysler, Nissan, Tata
Soon after Toyota’s announcement, Volkswagen SA announced that it would start building trucks and buses in SA, possibly for export to Africa and other parts of the world.

In 2004, Volkswagen SA announced a R25-billion export programme that will see the company exporting about 2 300 of its new Golf 5 cars each month for the next five years, mostly to Japan and Australia, but also to New Zealand, Brunei, Singapore, Sri Lanka, Hong Kong, Indonesia and Malaysia.

Other announcements by car manufacturers in 2004:

  • Ford announced that it would be investing R1-billion in starting a local export programme. The company said this would involve doubling production capacity at its Pretoria plant to about 80 000 units a year.
  • DaimlerChrysler confirmed that the new Mercedes-Benz C-Class will be manufactured in SA from 2007. The company plans to almost double production at its East London plant to roll out up to 80 000 units a year, a large portion of which will be exported.
  • Nissan announced that it would begin exporting fully built-up Hardbody one-ton bakkies to Europe, Singapore, Australia and New Zealand from August 2005.
  • Tata Motors, India’s second-largest car manufacturer, invested some R40-million in a bus assembly factory in Johannesburg. reporter