Global performers: Foreign direct investment plays a key role in development

Just as significant as its role as a gateway to Africa for foreign investors, South Africa is also the source of outward foreign direct investment (FDI) flows on the continent, as well as further afield in emerging markets globally and increasingly in developed markets. “In recent years foreign investment by South African corporations has been higher than FDI inflows,” Konrad Reuss, managing director for South Africa and sub-Saharan Africa at Standard & Poor’s (S&P), told OBG. While larger firms like brewer SAB Miller or mining firm Anglo American have since moved their primary listings to London, a younger generation of South African firms have expanded both geographically – in Africa and beyond the continent – and in terms of sectors.

Five corporations in particular stand out as top performers globally, according to the Boston Consulting Group’s ranking of “100 global challengers” – emerging market firms that are reshaping their sectors and overtaking traditionally dominant multinational companies – including pharmaceuticals producer Aspen Pharmacare, print and electronic media operator Naspers, telecoms provider MTN, services and distribution firm Bidvest and petrochemicals producer Sasol. The consultancy found that the five firms created approximately 1.4m jobs since 2007 and generated average revenue of $26.5bn in 2011, while employment at S&P 500 firms remained stable over that period with average revenue of roughly $20bn in 2011.

African Expansions

The historical focus on investments in mining and hydrocarbons on the African continent has extended to a diverse range of industries over recent years. South African banks have expanded their network from neighbours within the Southern African Development Community (SADC), to East and West Africa. Firms in sectors as diverse as retail and distribution, agro-industry, telecoms, media and insurance have followed suit in the past decade. In the five years to 2011 the Treasury reports South African companies completed nearly 1000 new investments in 36 African countries. The total FDI stock held in Africa grew from $1bn in 1990 to nearly $20bn by 2012, or around 6% of GDP and 23% of outward FDI, according to South Africa Reserve Bank data, making the country the fifth-largest holder of FDI stock on the continent (and the second-largest of developing countries after Malaysia).

The IMF reported in October 2012 that the stock of South African FDI in Mauritius, Mozambique, Swaziland and Zimbabwe exceeded 10% of the host country’s GDP. Further, “investments in Mauritius (in large part as a gateway to third countries) and Nigeria have been particularly important in increasing South Africa’s exposure in sub-Saharan Africa”, according to the fund.

An Ernst & Young survey on Africa in 2012 found that South African corporations ranked among the top five investors in 10 of 14 African economies surveyed. Corporations have also diversified the shareholding of local subsidiaries, according to the IMF: “Ownership in these firms, typically listed on several exchanges, including elsewhere in sub-Saharan Africa, is highly diversified.”

Tapping Resources

The growing breadth of investments in Africa has not hindered the appetite of South African mining and resource firms for expansions on the continent, with their focus expanding from anglophone countries to francophone and lusophone ones.

PetroSA’s oil exploration agreement with DRC’s Cohydro and its purchase of stake in Ghana’s Jubilee oil field, both in October 2012, are recent examples, although other resource companies like Sasol have also expanded to countries like Nigeria and Mozambique, where it opened a $250m gas-fired power plant in December 2012. State-owned Transnet also won contracts in southern Africa, including rehabilitation of the Maputo Port in Mozambique and Walvis Bay in Namibia. It is also planning to re-establish the rail link from DRC to South Africa. An early success is telecoms operator MTN, now present in 21 African countries, whose investment in Nigeria in 2001 is now its most profitable subsidiary.

Take It To The Bank

South African banks have expanded their footprints notably to some 16 economies, with subsidiaries among the five largest banks in 11 of these markets by 2012, according to the IMF. The largest of these, Standard Bank, opened its 19th office in South Sudan in 2012, although its three other main competitors are proving increasingly aggressive too. Old Mutual-owned Nedbank concluded a partnership in 2012 with Togo-based Ecobank, which operates in 30 African countries, giving it the option of acquiring a 20% stake in the lender. Barclays Bank agreed to merge its African operations with its South African subsidiary Absa in order to drive continental expansion beyond the existing nine markets it covers and create the largest bank in Africa by branch network and customers. Finally, FirstRand Group, traditionally present in southern African markets, is expanding into East and West Africa through acquisitions focused on merchant and retail banking (see Banking chapter).

Retail Growth

Other non-financial services firms, such as retailers, have expanded their footprint within southern Africa and farther afield. The biggest retailer on the continent, Shoprite, operated 243 stores in 17 African countries beyond its home market in 2012. The latest, DRC, is providing “a significant conduit for goods and services from South Africa, mainly in the SADC region”, according to the IMF. Markets outside South Africa accounted for 11% of the group’s turnover in 2012, but the share is growing in line with its expansion. Yet some of the group’s key suppliers, like Zambeef, have increasingly developed local supply chains in countries like Nigeria and Kenya to support the retailer’s expansion. Meanwhile, Shoprite’s largest competitor, Pick’n’Pay, operates 100 outlets in SADC and aims to expand to DRC and Malawi in the medium term.

Key agro-industrial producers like Tiger Brands, the largest domestic food producer, has expanded to Zimbabwe, Kenya and Cameroon (alongside Chile) and in 2012 concluded its largest series of acquisitions to date in Nigeria. Following acquisitions of local biscuit producer Deli Food and a 49% stake in UAC of Nigeria’s food and beverages unit in 2011, Tiger paid R1.5bn ($182.9m) for a 63.35% stake in Dangote Flour Mills, the country’s largest flour and pasta producer, in 2012. While this expansion gives the food manufacturer a commanding stake in some of the continent’s largest markets, Tiger is also exporting from these countries across Africa. “We have sought to localise the management of our local subsidiaries in Africa,” Peter Matlare, CEO of Tiger Brands, told OBG. “Our exports are expanding from countries like Kenya, not only to neighbouring countries, but also to South Africa.”

Global Emerging Markets

While corporations are eager to seize opportunities on the continent, they have also proven active in emerging economies further afield, particularly among its partners in Brazil, Russia, India, China, South Africa (BRICS). “While SADC membership has only had a minor impact on trade flows, our interactions with BRIC countries have supported the development of more South-South trade and investment,” Alex Johnstone, country manager of investment management company BNY Melon, told OBG. The March 2013 UN Conference on Trade and Development ( UNCTAD) report found that South Africa accounted for the largest share of intra-BRICS investment in 2011, which totalled roughly 20% of its outward FDI stock, almost as much as its investment in Africa. The majority of this investment has flown to China and, to a lesser extent, Russia. India and Brazil have also attracted a marginal but growing share, with the majority of investment in mining, construction, infrastructure and financial services, according to UNCTAD.

Insurers & Media

While domestic banks have focused on expansions in Africa, insurers have tended to be more active in ventures farther afield. Marketleader (and London-listed) Old Mutual has operations in India and China. Sanlam is the third-largest underwriter in India through its joint venture Shriram Life Insurance. In 2012 it took a 49% stake in Pacific & Orient, a Malaysian insurer, for roughly R760m ($92.6m).

Media firm Naspers has been one of the most active purchasers since it expanded to China in 2001. The firm has bought both print media and online platforms in Brazil, Russia, Turkey and China over the past decade and has launched region-wide platforms for Latin America and Eastern Europe in the last three years. While only 27.3% of the firm’s revenue was generated outside its home market in 2012, it holds a commanding lead in direct-TV (through its subsidiary Multichoice) in Africa, as well as a large presence in e-commerce platforms in Eastern Europe. Naspers also serves as a media producer in Russia and Brazil.

While policymakers in South Africa anticipate growing competition from other major economies, such Nigeria and Kenya, to its status as a gateway for investments on the continent, its leading corporations have already built dominant positions in a number of key markets. As investment flows towards other major emerging economies, internationally competitive blue-chip corporations are reshaping their industries globally. As the government seeks to support growing outward investment, facilitating the growth of mid-sized firms and adding to its number of national champions will be key to sustaining the momentum of moves abroad.

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The Report: South Africa 2013

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