Behind SA companies’ foreign misadventures

The Australian government’s recent refusal to permit SA construction company WBHO to sell its stake in its subsidiary, Probuild Constructions, is proof once again that companies must have their own "foreign policy" when investing offshore.

WBHO was close to closing a deal with a Chinese construction company when it received word that the Australian government would not approve the deal "for security reasons".

It meant WBHO’s board found themselves in the middle of a diplomatic fallout, after Australia criticised China’s handling of the Covid pandemic and tariff war. The result: a failed transaction that could have returned R3bn in value to WBHO.

It shows how trade, which has been "weaponised" in the modern era, can torpedo a company’s best-laid expansion plans. The reality is that countries are now more economically dependent on each other, as their local industries are outsourced to cheaper countries and new markets open up.

In tangible terms, it means sanctions are a more potent weapon than an aircraft carrier anchored off the coast of an enemy state. Countries no longer have to invade others to assert dominance — they simply have to deny access to their markets.

Aside from that, a number of countries, including SA, have new laws allowing them to veto private transactions regarded as "contrary to the state’s perceived economic or security interests".

This has been happening for years.

In 2006, the US blocked a deal in which a management contract for six US ports would be sold to Dubai Ports. The reason: security.

And in 2010, Canada blocked BHP Billiton’s acquisition of that country’s Potash Corp, citing the lack of a net benefit for Canada, as the Investment Canada Act stipulates.

It’s a pattern that continues — as WBHO has found out to its detriment.

In 2016, the Harvard Business Review (HBR) argued that companies which fail to understand geopolitical risks can end up sabotaging themselves. The HBR gave as an example MTN’s failure to adhere to Nigeria’s decision that it should cut off unregistered sim cards, to prevent groups such as Boko Haram from communicating using untraceable phones.

Not only did MTN fail to appreciate Nigeria’s domestic political situation, it also failed to appreciate the thinly veiled resentment towards SA companies. The result: a huge fine and a new requirement that MTN undertake a secondary listing on the Nigerian Stock Exchange (NSE).

But it isn’t just Nigeria. MTN’s decision to invest in the Middle East has brought more than its fair share of headaches. Last year, for example, it reported that R3bn in loans and profits are trapped in Iran because of sanctions on that country.

Syria and Yemen, in which MTN is invested, are both in a state of civil war, fuelled by foreign proxy forces. Just last month, MTN Syria was placed under judicial guardianship following allegations that the company was in breach of its licence conditions.

It’s no wonder that, in late 2020, MTN announced that it planned to exit the Middle East, citing political instability and sanctions in the region.

Further afield, its investment in Afghanistan has spawned a class action lawsuit from families of US soldiers killed by roadside bombs. In that case, the families claim MTN paid "protection money" to the Taliban, and that its network was used to co-ordinate such killings. MTN denies this.

But the risk isn’t just in the world’s most troubled areas.

Many banks and large firms in the UK were caught wrong-footed when the UK voted to leave the EU. They seem to have failed to appreciate the anti-European sentiments (and widespread ignorance of Brexit’s meaning) outside of cosmopolitan London.

China’s trade war with the US mirrors the fight for dominance in the South China Sea, a major commercial shipping route.

The country is also the base for some of the world’s largest tech stocks — including Tencent, a company that’s 31% controlled by the JSE-listed Naspers and which has a market value of about $900bn.

Investors need to understand that Beijing is not New York. As The Wall Street Journal points out, the growth of these Chinese tech stocks has been facilitated by the restrictions imposed on Western companies such as Google and Amazon in that country.

Now, the Chinese government is worried about the unique insight that the data collection systems of these tech companies has given them. As a result, it recently imposed antitrust and internet rules designed to take back control of this data. And who knows what other regulatory intervention these companies may face?

Hong Kong, one of the world’s financial hubs, is also in serious danger of losing its status, due to China’s crackdown on democracy there.

Then there’s the currency issue — something SA companies that trade internationally know all about.

As countries try to revive their economies after Covid, they may manipulate their currencies to decrease or increase the prices of their exports and imports. This can cause major swings in foreign-currency earnings for SA companies.

Given all these factors, why is foreign policy so low on the list of priorities for most SA companies with foreign ambitions?

Part of the problem is that SA companies still think they’re welcome everywhere because of the "miracle of 1994". The reality is that that goodwill has long since been squandered. Thanks to the regime of former president Jacob Zuma, many now see SA as just another corrupt African state.

It doesn’t help that the government’s foreign policy is also virtually nonexistent, and seems to be based on the "do nothing, say nothing" principle.

Nominally, SA is a member of the G20, though it has no ability to influence its decisions. Its membership of the AU almost seems as irrelevant as the AU itself. And who knows what has happened to the Brics forum of Brazil, Russia, India, China and SA?

So how can companies develop a "foreign policy"? The HBR study says they ought to go about it in the same way countries do.

First, and most obvious, don’t assume your company is immune to geopolitical events. Saying you’re "apolitical" won’t protect you from sanctions or civil war.

Second, define your interests — but not so that you’re an extension of the state you’re headquartered in.

Huawei is an apt example. Its attempt to expand 5G operations in the US and UK has hit a hurdle because the company is seen as being too close to the Chinese government.

In Canada, Huawei CFO Meng Wanzhou, the daughter of company founder Ren Zhengfei, is under house arrest and facing extradition to the US over claims that she facilitated the circumvention of US sanctions on Iran.

Doing a due diligence of a country before investing there would include looking at neighbours
— What it means:

China, in a tit-for-tat response, then detained two Canadian businesspeople on charges of espionage.

In the same vein, proclaiming yourself to be "proudly South African" may work against you when your host nation’s citizens are subject to xenophobic attacks back home in this country.

To avoid too closely identifying with any state, the HBR says companies should adopt a "transnational character" by localising management and workforces and identifying regionally. In this way, MTN’s listing on the NSE could help it. It means MTN, by market capitalisation, is now the second-largest company on the bourse after the Dangote Group. The Nigerian government may hesitate to act so harshly against it in future.

Companies should also maintain diversified political relationships — without opening the door for corrupt activities. Maintaining links only to the current regime may work against you when power changes (peacefully or otherwise) or it becomes an international pariah.

You need to do a proper due diligence of the countries in which you invest. Just as you would when buying a house, consider the neighbourhood. Hostile neighbours are a threat.

Internal conflicts are just as critical. Ignoring the Sunni and Shia divide in the Middle East or the militant uprising in northern Mozambique, for example, won’t end well for investors.

The HBR speaks about using neutral experts, rather than those lobbying for any one group, or conflicted "think-tanks", to examine these tensions.

If MTN had the chance to do it all over again, you can bet it would do it differently.