The Herald (Harare)

11 December 2012

Zimbabwe: Smokes and Mirrors

column

Call it a perfect storm for Zimbabwe's tobacco industry. At the same time as the Zimbabwean Government is riding roughshod for greater, more equitable, access by historically excluded groups to the tightly controlled industry, old-order behemoths are fighting a rear-guard battle against new entrants.

In recent weeks a blizzard of allegations and counter-allegations of "espionage", "industrial sabotage" and "cronyism" have been rolling with unprecedented size and speed.

Normally, that's the last way anyone would describe the object of a process of unbundling heavily concentrated assets and levelling the playing fields that got underway in earnest when the Government promulgated its indigenisation policies amid rising expectations that its focus on local economic empowerment and poverty alleviation would help black Zimbabwean companies acquire businesses in structured deals.

But these days? To speak of the transformation of the tobacco industry as lurching forward would be -- well, a charitable understatement -- when British American Tobacco shows signs of clinging on to an exclusive market of brand names, entrenched privilege and unfettered consumer power that has (until quite recently) remained fundamentally unaltered.

Last month BAT fingered Savanna Tobacco -- a leading cigarette manufacturing company in Zimbabwe, founded to claw back a large segment of the tobacco value chain that was being lost overseas -- for exercising an unfair advantage in the industry pipeline in what seemed to some industry analysts as a perverse twist.

The hardening of BAT's stance against competitors coincided with pressure from Government at an indigenisation conference last month to speed up the implementation of the new empowerment dispensation in line with prescribed quotas and deadlines.

BAT is also said to have come under pressure from senior Government officials, among them President Mugabe and Youth Development, Indigenisation and Empowerment Minister Saviour Kasukuwere, to temper its approach to indigenous players and halt its use of "criminal means to kill off Savanna", considered BAT's major competitor in Zimbabwe.

It is alleged that BAT not only spied on competitors but sabotaged Savanna Tobacco's delivery trucks in neighbouring South Africa in what has been construed as an attempt to block Savanna's products from reaching the market.

Far-fetched? In April 2002 a South African legal team secretly obtained an urgent High Court order in the wake of phone-tapping and industrial espionage allegations by a rival Pretoria-based manufacturer against BAT authorising a raid on the company's South African offices and a firm of private detectives called Forensic Security Services, a private investigating outfit believed to

be covertly running the company's Zimbabwean operation with the help of a Zimbabwean security company, Ticoz Protection Services.

The secret surveillance began when BAT formed BAT South Africa in 1999 as a result of the global merger of Rothmans International and British American Tobacco plc.

When Zimbabwe finally promulgated its own competition policy and, later, indigenisation laws, BAT Zimbabwe adopted similar methods of corporate combat. Predictably, BAT Zimbabwe has roundly rejected allegations of espionage levelled by its Zimbabwean competitors.

In a Press statement released last week the multinational company said it "strongly denies any involvement in industrial espionage and/or illegal activity that may be linked to other local tobacco manufacturers.

"It should be underscored that BAT Zimbabwe does not export any cigarettes outside Zimbabwe, and as such, our products are not exposed to the risk of alleged hijackings of cigarette trucks while in transit to neighbouring countries," the statement read.

But some industry sources have gone so far as to argue that the timing of BAT's broadside against Savanna was merely an attempt to deflect attention from the multinational's complicity in the espionage and sabotage debacle.

For their part, BAT senior managers and executives may have preferred to couch the reputational damage of the expose -- amid perceptions that the company is bent on maintaining its grip on the market -- by parrying criticism in euphemistic schemes such as the recent offer of a 10 percent stake in the company to an employee share scheme, including another 10 percent to a Tobacco Trust, and catch phrases such as "indigenisation".

However, critics have rightly outdone themselves in coming up with synonyms for subterfuge and co-option.

Certainly, while the Zimbabwean Government has renewed its indigenisation case for fortifying the tobacco industry against monopoly practises by committing to broaden the scope of the indigenisation programme through various initiatives to be undertaken by Government, the sheer scale of BAT's continued monopoly has clawed back potential benefits to local producers and consumers.

In real terms, Zimbabwe's small businesses make up less than 15 percent of market share in comparison to targets of 75 percent estimated by the Global Entrepreneurship Monitor to effectively diversify the country's ownership base and soak up unemployment. In actual fact, the latest gambit by BAT to empower Zimbabweans does not extend to indigenous ownership; it is rather a disbursement of non-transferable shares to employees.

Subterfuge, indeed. If there were any doubt, a 2009 commission into anti-competitive behaviour in Zimbabwe found worrying signs of resistance to the Government's indigenisation policies by a slew of multinational corporations.

Of a total 366 cases of restrictive and unfair business practices handled by the Commission since 1999, the Commission report fingered as "predatory" BAT's behaviour in deliberate violation of the country's Competition policy.

According to the Commission, the merger in 2000 of the then Rothmans of Pall Mall (Zimbabwe) Limited and British American Tobacco (Zimbabwe) Limited to form British American Tobacco Zimbabwe (Holdings) Limited had created a monopoly situation in the local manufactured cigarette industry but was conditionally authorised by the Commission "because of its other efficiency and public interest benefits that outweighed the perceived anti-competitive elements of the monopoly situation".

To the untutored, the manufacturing sector as a whole in Zimbabwe was highly concentrated in the early 1990s: of 7 000 plus items produced, half were produced by only one producer, and approximately 80 percent of all items were produced by three firms or less.

Many major industrial groups had close relations with each other, either through direct equity holdings or through cross-directorships, indicating further concentration of ownership and/or control; and significant barriers to entry served to increase or maintain high levels of industrial concentration, preclude entry by other firms, and furthered the creation of uncompetitive market structures which served to increase prices and restrain output to the detriment of consumers.

By 1999, the Competition authorities, invoking a "rule of reason" approach, prohibited restrictive practices, termed "unfair business practices".

Close to a decade after the merger, however, BAT dominated the manufactured cigarette market with a whopping market share of about 96 percent -- a situation, the Commission found, that was patently "anti-competitive in that (it) had the effect of driving competitors out of the market or preventing their effective entry into the cigarette manufacturing industry".

Three years on, there are now signs that BAT might be edging closer to driving competitors -- such as Savanna -- out of the market.

It's not just that the level of BAT's market concentration is a painfully costly stratagem that's blasted gaping holes in the industry pipeline.

The real test of Government's gamble on a fundamental restructuring of the tobacco industry has been a stubborn refusal by BAT to confront historical challenges facing the country.

Given high unemployment and poverty levels, and vast disparities in the distribution of economic opportunities, that's particularly significant.

At a time when indigenisation policies have permitted established multinationals such as BAT -- notwithstanding its recent announcement of an employee share ownership scheme -- to play an even greater role in empowering new black corporate entrants, expectations of delivery on a scale consistent with people's needs are not unreasonable.

Yet, as the push for indigenisation has gained ground, a new complex of factors -- principally the rise of new, nimble indigenous players outside the BAT stable -- may very well be fuelling anxieties in the top brass of the company about potential threats to its monopoly by indigenous rivals loyal to Zimbabwe.

And therein lay the rub. As Savanna's executive chairman, Adam Molai, has succinctly put it: "When we set out, Zimbabwe's tobacco production was at its peak, at around 220 million kilos. It was clear to us that to export the bulk of our production was to export most of the value chain from our economy.

"After threshing, the cut rag (shredded tobacco) business, cigarette manufacturing and distribution were all being eliminated from the value chain. That is where we thought we could take a fresh look at Zimbabwe's competitive advantage, exploit it and leverage a new industry off it."

The approach was disruptive, certainly to the established sensibilities of BAT. "Savanna was started using private equity, structured finance, and debt to facilitate the capex and capital needs," Molai recalled.

"And of course as time went on and we established a track record; we have been able to leverage on supply credit and enhance the working capital base."

Suddenly what seemed like a risky proposition -- taking on dominant players in the region, notably BAT-- meant more than feeding at the trough. It certainly meant more than a junior partner status in a spurious BAT share ownership scheme.

The simple fact of the matter is that new entrants have amply demonstrated that in a period blighted by hyperinflation and general economic decline, there have still been opportunities to set up new businesses and create value in the Zimbabwean economy.

As one analyst put it: "Companies such as Savanna Tobacco have done their bit to reverse the leaching out of profits to overseas companies and capture more of the value chain for Zimbabwe."

And that's what has probably rankled nerves within the BAT stable.

"We have to have quality in the product if people are going to choose them over the major brands," Molai says, adding: "I always say that where we are short on capital we make up for it by being long on innovation! Our driving ethos has been innovation -- the industry had its way of doing things and in many ways we broke the mould."

Or, to put it differently, the incumbent market leader is BAT, and while BAT remains monolithic as a global brand, it must feel threatened by the spectacular growth of new entrants.

"When they lose significant share in one market in less than four years they have to be worried," says Molai.

Media Revolutions is a South African-based media organisation.

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