Sanctions, Disinvestment, and U.S. Corporations in South Africa

 

By

Richard Knight

———–————————–————––––––––—––––—––——––––––—–—–—

Authors Note

This chapter originally appeared in Sanctioning Apartheid (Africa World Press), 1990.  This book, edited by Robert E. Edgar, has a number of useful chapters and can be ordered online at www.africanworld.com.  Type the book title in the search field.  The text here has been slightly edited and corrected, including in the number of states, counties and cities that had taken economic action against apartheid by the end of 1989 and targeted banks (including withdrawal of deposits and divestment) by the end of 1985.  Such counts are rough as the structure of legislation and action varied widely.

 

South Africa is now a democracy and no longer the target for sanctions and disinvestment.  The sanctions mentioned in this chapter, including those at the federal, state, county and city level, have all been lifted.  Some of the companies mentioned as divesting here have returned to do business in a democratic South Africa. — Richard Knight, April 2001

 

[Back to Bibliography]

 

[Home to richardknight.com]

 

———–————————–————––––––––—––––—––——––––––—–—–—

 

Future historians may date mid-1984 as a turning point in the history of South Africa.  Massive protests inside South Africa combined with escalating pressure internationally to force substantial capital flight and perhaps the greatest challenge to the continuation of white minority rule in recent history.  In the five years since then, some 200 U.S. and more than 60 British companies have withdrawn from South Africa, international lenders have cut off Pretoria's access to foreign capital, and the value of the rand, South Africa's currency, has dropped dramatically.  South Africa's economic relations with the international community have been significantly altered.

This chapter will attempt to discuss the effects of sanctions and disinvestment over the last five years and highlight some of the continuing U.S. financial links to South Africa.  Finally, I will attempt to draw some conclusions as to the effectiveness of international attempts to pressure the white minority government through sanctions and disinvestment.[1]

 

The Political Context

 

Undoubtedly the greatest challenge to white minority rule came from the explosion of political resistance which followed Pretoria's introduction of a new constitution in 1983 with a complex set of segregated parliaments.  In a total rejection of apartheid, black South Africans mobilized to make the townships ungovernable, black local officials resigned in droves, and the government declared a State of Emergency in 1985 and used thousands of troops to quell "unrest."  Television audiences throughout the world were to watch almost nightly reports of massive resistance to apartheid, the growth of a democratic movement, and the savage police and military response.  This escalation of popular resistance sparked a dramatic expansion of international actions to isolate apartheid, actions that combined with the internal situation to force dramatic changes in South Africa's international economic relations.  U.S. corporate executives, who hoped that if they just held on for a few years apartheid would slowly disappear, were forced to face the reality of a long drawn out confrontation.  The writing on the wall spelled trouble ahead in South Africa and at home.  As a result, the agenda of South Africa's new State President, F. W. de Klerk, is dominated by efforts to counter the democratic movement and international pressures.

 

The U.S. Anti-Apartheid Movement

 

In the U.S., the long established movement to impose economic isolation on South Africa gathered dramatic momentum in this period.  Activists seeking to stop corporate collaboration with apartheid found the way blocked in Washington and had developed other strategies for exerting pressure on the corporations.  One major focus of this effort was the divestment campaign, aimed at moving individuals and institutions to sell their holdings in companies doing business in South Africa.  Already strong on the campuses across the U.S., new student protests surged after 1984 and the number of colleges and universities at least partially divesting jumped from 53 prior to April 1985 to 128 by February 1987 to 155 by August 1988.

The divestment movement was not limited to the campuses.  Concerned legislators and anti-apartheid activists built strong networks in cities and states and by the end of 1989 26 states, 22 counties and over 90 cities had taken some form of binding economic action against companies doing business in South Africa.  These activities include divestment by public pension funds of stocks of companies doing business in South Africa and pressure exerted via selective purchasing policies, whereby cities give preference in bidding on contracts for goods and services to those companies who do not do business in South Africa.

            All this local activity helped generate the thrust for a victory in 1986 when passage of the Comprehensive Anti-Apartheid Act was won over the veto of President Reagan.  What made the Congressional override more surprising is that it happened while the Republican Party controlled the Senate.  The Act banned new U.S. investment in South Africa, sales to the police and military, and new bank loans, except for the purpose of trade.  Specific measures against trade included the prohibition of the import of agricultural goods, textiles, shellfish, steel, iron, uranium and the products of state-owned corporations.  The Act has had some effect in cutting U.S. imports from South Africa, which declined by 35% between 1985 and 1987.  However, in 1988 U.S. imports from South Africa increased by 14% to $1.5 billion.  U.S. exports to South Africa increased by 40% between 1985 and 1988.  Some of the increase in U.S. imports may be due to lax enforcement of the 1986 Act.  A 1989 study by the General Accounting Office concluded that the US government had failed to enforce the Act adequately.  A major weakness of the Act is that it does little to prohibit exports to South Africa, even in such areas as computers and other capital goods.

            In 1987, the Budget Reconciliation Act included an amendment by Rep. Charles Rangel ending the ability of U.S. firms to claim tax credits in the U.S. for taxes paid in South Africa.  This effectively imposed double taxation on U.S. corporate operations in South Africa.  The sums of money involved are large.  According to the Internal Revenue Service, taxes involved in 1982 were $211,593,000 on taxable income of $440,780,000.  The U.S. Chamber of Commerce in South Africa has estimated that the measure increases the tax bill for U.S. companies from 57.5% to 72% of profits in South Africa.

 

Table 1

Trade with South Africa, 1985-1988 ($million)

Year

US Exports

US Imports

 

 

 

1985

1,205.0

2,070.8

1986

1,158.3

2,364.5

1987

1,281.2

1,345.5

1988

1,690.3

1,529.6

 

 

            In August 1998 the House of Representatives passed a new sanctions bill mandating the withdrawal of all U.S. companies from South Africa, the sale by U.S. residents of all investments in South African companies and an end to most trade, except for the import of certain strategic minerals.  The bill did not reach the Senate floor but the fact that such a sweeping bill got as far as it did alerted both the South African government and U.S. business that significant further sanctions were likely to be forthcoming.

            The impact of the anti-apartheid movement has clearly been felt by US companies.  It has significantly raised the cost of doing business in South Africa, adversely affecting corporate image, threatening the ability to raise capital and maintain domestic markets.  Gone are the days when, as in 1980, David Packard of Hewlett Packard stated, "I'd rather lose business in Nebraska than with South Africa."

 

U.S. Investment

 

            Some 200 U.S. companies have disinvested from South Africa in the last five years and U.S. direct investment has declined from $2.3 billion at the end of 1982 to $1.3 billion at the end of 1998.  However, many of those companies which have disinvested continue to do business through licensing, franchising, and distribution agreements.

 

            Despite the large number of corporate withdrawals and the prohibition of new U.S. investment, which came in effect in the fourth quarter of 1986, the value of U.S. direct investment in South Africa actually increased between 1985 and 1987.  However, the basic trend is down.  A number of major disinvestment took place in 1989, very likely bringing direct investment below $1 billion.[2]

 

 

Table 2

US direct investment in South Africa by type of industry

($ million)

End

All

Petroleum

Manu-

Whole

Banking

Finance

Services

Other

Year

Industries

 

facturing

Sale

 

and

 

 

 

 

 

 

Trade

 

Insurance

 

 

 

 

 

 

 

 

 

 

 

1982

2,281

S

998

295

S

46

18

S

1983

1,987

S

963

210

S

56

20

158

1984

1,440

S

777

79

S

53

21

162

1985

1,394

S

568

227

S

48

12

162

1986

1,567

S

633

291

S

61

26

139

1987

1,590

S

707

186

0

74

32

S

1988

1,270

S

508

80

0

69

S

S

Legend

S = suppress.  Direct investment is a measure of the value of the foreign subsidiaries and associates of U.S. companies.  Department of Commerce figures include only those companies whose ownership goes directly from the US to South Africa.  Not included would be a company which has a subsidiary in a third country, which in turn has a subsidiary in South Africa.

Source: U.S. Department of Commerce

 

 

A Vulnerable Economy.

 

            Not only are U.S. corporations disinvesting, but, as the accompanying table shows, those of many other countries as well.  Since mid-1984, South Africa has suffered considerable capital flight, as a result of corporate disinvestment and because of the repayment of foreign loans.  Net capital movement out of South Africa was R9.2 billion in 1985, R6.1 billion in 1986, R3.1 billion in 1987 and R5.5 billion in 1988.  This trend is continuing, with R1.7 billion in capital outflow in the first two quarters of 1989.  One effect of this capital outflow has been a dramatic decline in the international exchange rate of the rand.  This means that imports are increasingly expensive.  It has also helped fuel South Africa's inflation rate, which at 12-15% per year, is much higher than its major trading partners.

            The South Africa government has attempted to limit the amount of capital outflow.  In September 1985 it imposed a system of exchange control and a debt repayments standstill.  Under exchange control, South African residents are generally prohibited from removing capital from the country and foreign investors can only remove investments via the financial rand, which is traded at a 20% to 40% discount compared to the commercial rand.  This means companies that disinvest get significantly fewer dollars for the capital they withdraw.3

            Few argue against the thesis that the South African economy was developed with foreign capital.  This was especially true of the gold mining industry, which is central to the apartheid economy.  Most South African economists agree that without foreign capital, South Africa will not be able to fund the necessary imports for economic growth at more than a marginal rate.  This is because in order for the economy to grow, South Africa must import capital goods and other inputs for production.  Currently it has difficulty in paying for everything it wants to do.  The modest economic expansion in the South African economy in the first half of 1988 put such a strain on the current (trade) account, that in August 1988, Pretoria slapped a hefty surcharge on capital goods imports.  At the same time, the government increased fuel prices by 15%, despite the fact that the world price for petroleum has been dropping.  If South Africa had a net inflow on the capital account (especially loans and investment), it would be able to fund the necessary imports for economic growth.

 

Table 3

Cumulative disinvestment from South Africa and/or

Namibia, with number of corporations at end of 1987

 

Disinvestment

Divesting

Remaining

 

 

 

Number

 

 

 

 

Australia

17

—

32

Canada

21

3

12

France

6

1

15

West Germany

10

—

128

Netherlands,

12

3

27

  Norway, Sweden,

 

 

 

  Denmark

 

 

 

Switzerland

2

—

32

UK

92

7

266

US

250

21

178

 

 

 

 

Total

410

35

690

Source: Business International, based on UN Economic and Social Council E/1988/23, 8 February 1988.  The figures in this table do not match those cited in the text for several reasons, including that of time period covered.

 

 

            South Africa needs not only foreign capital but also foreign technology.  South Africa imports 95% of all computer equipment, and could not build a car, truck, or other sophisticated item without imported technology and components.  While some South Africans have talked of a "siege economy," in reality South Africa is heavily dependent on foreign input.  The South African Board of Trade and Industry notes that although import replacement has long been government policy, merchandise imports as a percentage of gross domestic product has only declined from 20% to 19% between 1960 and 1986.  South Africa's economy is simply not large enough to develop high-tech products.  Even the mining industry depends on capital goods imported from the U.S. and other countries.  Henri de Villers, chairman of the Standard Bank Investment Corp., put it succinctly. "In this day and age there is no such thing as economic self-sufficiency and we delude ourselves if we think different… South Africa needs the world.  It needs markets, it needs skills, it needs technology and above all it needs capital."

 

A Way to Go

 

            U.S. investment in South Africa is clearly not at an end.  More than 130 U.S. companies still have subsidiaries in South Africa.  And products of U.S. companies are available via licensing, franchising, and distribution agreements.  As a result, U.S. companies and their products are found across the spectrum in South Africa.  Supermarkets in South Africa often look like supermarkets in the U.S. with Kellogg's cereals, Colgate toothpaste, and Coca-Cola.  South African miners use continuous miners, drill bits and other equipment from such companies as Joy Technologies, Baker Hughes, and Dresser Industries.  The chemical products might well come from American Cyanamid Co. or E. I. Du Pont de Nemours and Co.  Computers come from IBM and Hewlett-Packard.  A person reading a magazine will see advertisements designed by J. Walter Thompson.

 

Petroleum Industry

            Nowhere is the strategic nature of U.S. investment in South Africa more clearly shown than in the oil industry.  That remains the case today, although several U.S. companies, including Mobil, have disinvested.  For many years the largest U.S investors in South Africa were Mobil and Caltex (a joint venture of Chevron and Texaco).  In 1995, U.S. petroleum companies (primarily Mobil and Caltex) had a net income after taxes of $75 million, approximately one-half of all U.S. non-bank affiliates in South Africa.

            Caltex Petroleum Corp., the U.S. parent of the Caltex group of companies, is 50% owned by Chevron Corp. and 50% owned by Texaco Inc.  Up-to-date information on Caltex is difficult to come by as the company is extremely secretive about its operations in South Africa.  Caltex is estimated to have $350 million in assets in South Africa, and is reported to service 1,185 filling stations, of which some 393 are company owned. These filling stations give Caltex a 20% share of the South African market.  In 1980 Caltex Oil (SA) (Pty.) Ltd. had 2,257 employees or 17% of Caltex's employees worldwide.  Caltex operates a 100,000 barrel per day refinery, which represented about 6.3% of the company's world-wide capacity in 1980.  Caltex owns 34% of South African Oil Refinery (Pty.) Ltd., a 3,000 barrels per day lube oil refinery.

            The U.S. presence in the South African oil industry would be much larger if it were not for the effort of the antiapartheid movement.  Ashland Oil sold all its South African operations in mid-1986.  For a short time, Ashland had maintained licensing and distribution agreements, including the sale of $300,000 a year in Valvoline products.  However, when faced with the possible loss of a $12 million contract with the City of Los Angeles, Ashland quickly terminated its ties to South Africa.  "Our relationship with Los Angeles was clearly more important than our small and somewhat limited relationship with South Africa," said Ashland corporate attorney John Biehl.

            In 1989, Mobil Corp., which had over $400 million in assets in South Africa, disinvested.  Because of its strategic involvement, Mobil has been one of the foremost targets of the anti-apartheid movement.  Mobil has also headed the corporate efforts to oppose sanctions and disinvestment.  Mobil's disinvestment is a major victory for the U.S. anti-apartheid activists.

U.S. oil companies have claimed in the past that they were not responsible for the actual importation of oil into South Africa, which is done by the government, but they did refine and market petroleum.  The U.S. companies, combined with the UK company British Petroleum and the UK/Netherlands company Royal Dutch/Shell, refined the vast majority of petroleum used in South Africa.

U.S. oil companies have never denied that they sell to the South African police and military.   The get around the U.S. government restrictions prohibiting sales to the police and military because the oil they sell is South Africa has not been exported or reexported from the U.S.  Justifying selling oil to the police and military has not been a problem for U.S. oil companies.  As recently as 1981, Mobil told its shareholders: "Total denial of supplies to the police and military forces of a host country is hardly consistent with an image of responsible citizenship in that country.  The great bulk of the work of both police and military forces in every country, including South Africa, is for the benefit of all inhabitants."

The oil companies have been out in front as companies attempting to present an image of opposition to apartheid.  Shell took out advertisements in the Weekly Mail, an "alternative" newspaper in South Africa, saying it is for a free press.  Mobil had been one of the leading companies behind the Sullivan Principals, and, after the abandonment of the principals by the Reverend Sullivan, the principles' rebirth as the "Statement of Principals."

           

Motor Industry

            South Africa's reliance of foreign technology is clearly demonstrated in the motor industry.  There is no such thing as a "South African" car.  Despite years of a "local content" program, 40% to 50% of the value of input into cars produced in South Africa is imported.  Two of the largest U.S. investors, Ford and General Motors, have withdrawn from South Africa but their products continue to be made in South Africa under license.  Ford vehicles have long been sold to the police and military.  In 1986, in its last proxy statement before ending ownership in South Africa, Ford stated that if it ceased sales to the police and military in South Africa, it would lose all government sales and no longer be economically viable.  Ford has made it clear that although it no longer has any ownership, it is going to continue to provide not only the design, but the management and retooling assistance, without which, Ford maintains, the South African operations would likely not be able to continue.

            General Motors (GM) had made a loss in South Africa for several years prior to its withdrawal.  Now GM cars are made under license by its former subsidiary renamed Delta Motor Corp., which now also assembles Isuzu trucks.

            Early in 1988, as international pressure on companies doing business in South Africa continued to grow, the Japanese company Toyota announced that it would limit the number of cars made in South Africa.  South African motor companies, recognizing their own vulnerability and the danger of increasing pressure on their suppliers, recently agreed to suppress sales data, the publication of which, they said, was aiding advocates of sanctions.  "With sales rising, SA companies don't want to put more pressure on their Japanese principles.  Delta SA, for instance, represents Isuzu's second biggest market outside Japan," observes the Financial Mail.

 

Computers

            All U.S. computer companies have ended direct investment in South Africa, but almost all have continued licensing and distribution agreements.  U.S. mainframe computers represent almost 50% of the market.  South Africa is totally dependent on imported computers and South African businessman display increasing concern about the possibility of computer sanctions.  "Mainframe computers are only one of the items most vulnerable to sanctions and this cannot be replaced by a locally manufactured product," noted one South African business executive recently.  "This year we ware able to import computers but who knows what the situation will be next year."  Despite the U.S. ban on the sales of computers to the police and military, sales are not prohibited to any of the 1,000 private sector companies which handle 60% of military production in South Africa.

            Companies that no longer have ownership in South Africa, but continue to do business through distribution agreements include Amdahl Corp. (disinvested in 1987), Control Data Corp. (1988), Honeywell Inc. (1986), International Business Machines (1986), and Unisys (1988).

            International Business Machines (IBM) sold its South African subsidiary in October 1986.  The South African company was renamed Information Services Management (ISM) with ownership vested in an employee trust named ISM Trustees.  By October 1987 ISM had formed a joint venture with a large South African conglomerate, Barlow Rand, a company with close ties to the South African military.  This new company is called Technology Systems International (TSI).  ISM Trustees and Barlow Rand each own 28%, the remainder is publicly owned.  TSI has two subsidiaries, ISM and Reunert Computers, which had previously been a subsidiary of Barlow Rand.  The one, Reunert Computers, sells Japanese-made Hitachi IBM plug-compatible mainframe computers in apparent competition with IBM computers sold by ISM.  This ISM-Barlow Rand marriage appears to have been designed to circumvent sanctions.  Brian Mehl, managing director of ISM, commented, "What we've done with Technology Systems International is create the best of all worlds for our customers in that we've immediately created an alternative source — we've got IBM and we've got the leading IBM-compatible supplier."

            IBM products continue to play an important role in the South African computer market.  An estimated 40% of South Africa's installed mainframe computer base is of IBM origin, and the company had a 1985 market share of 20%.

            The terms of the Unisys disinvestment demonstrate the concern South African companies have about being cut off from the source of their supply.  In August 1988 Unisys sold its South African subsidiary to a local company, Mercedes Datakor, for R132 million.  Mercedes Datakor, which will continue as the Unisys distributor, insisted on some protections for itself from a possible future cutoff of Unisys products.  Unisys received only R82 million in cash immediately, the balance to be placed into a trust in Europe and paid to Unisys in quarterly payments over four years, provided Unisys continues to supply the South African company.  In addition, Mercedes Datakor demanded a ten-year distribution agreement, where the normal Unisys agreement needs to be renewed annually.  Such a long-term agreement makes it more difficult for Unisys to unilaterally stop supplying its products to the South African company.

            The disinvestment of Control Data Corp. in November 1988 was very similar to that of Unisys.  Control Data sold to a South African company.  Only 60% of the purchase price was paid immediately, the rest to be paid over five years, provided Control Data continues to supply its former subsidiary.  Control Data cited U.S. law prohibiting the financing of any expansion of its South African operations as the reason for its disinvestment.  Control Data retains the right to re-enter South Africa if conditions warrant.

            South Africa is dependent on the U.S. for computer software as well as hardware.  Most Japanese mainframe computers sold in South Africa are IBM-compatible and run IBM or other U.S. software.  Software from most major producers is distributed in South Africa.  The software they produce is central to the running of a modern economy.  In March 1987, ISM became the sole South African distributor for Hogan Systems, a U.S. company that specializes in software for banks.  Since Hogan runs on IBM mainframe computers, the use of Hogan by these banks helps hardware sales.  For example, Volkskas, which uses Hogan, recently purchased R60 million worth of hardware from ISM.

            This continued availability of software raises some interesting questions about the implementation of corporate decisions to distance themselves from apartheid.  Microsoft, the maker of the computer operating system MS-DOS and OS/2, announced in April 1986 that it had ended "direct shipment of software to the Republic of South Africa and terminated its relationship with its local distributor."  Yet clearly Microsoft products are available in South Africa, as without them no IBM or IBM compatible personal computers could operate.  Lotus Development Corp. has taken a stronger position and considers the use and sale of its software products in South Africa a violation of copyright.4

           

Electronics

            Westinghouse Electric Corp. closed its South African office in 1987 but still has contracts with ESCOM for the Koeberg nuclear power plant.  In addition, Westinghouse has several distributors and licensees in South Africa, primarily for electrical equipment.

            The Motorola case is another victory for the anti-apartheid movement.  Motorola sold its South African operations to Allied Technologies (Altech), a South African electronic company.  Motorola products are now made under license in South Africa, including its highly regarded two-way radios.  However, as a result of pressure from municipal governments in the US, Motorola has announced that it would not renew its licensing agreements with Altech when they expire in 1990.

 

Sounding a Confused Retreat

            It is impossible in this chapter to look at each of the corporate withdrawals.  In general, where a manufacturing corporation with plant in place withdraws, the company sells its South African subsidiary either to local management or to a South African company.  In these cases actual disinvestment does take place and capital leaves