South Africa Pullout Parade

When Congress voted sanctions against South Africa last month over President Reagan’s veto, it left unresolved the thorny question of whether American firms would continue operating in the land of apartheid. While sanctions prohibit new American investments in South Africa, they do not affect the billions of dollars that U.S. companies have already invested in operations there. Thus the American business presence in South Africa has continued to be a focus for con-troversy, as well as a major public relations problem for many large U.S. companies. Last week, in a move that was of great symbolic importance even if of uncertain consequence, several major U.S. corporations announced that they would disinvest their South African holdings and leave the country. In the space of four days, plans for multimillion-dollar sell-offs were disclosed by General Motors, IBM and Warner Communications and privately confirmed by Honeywell, which officially admitted only that it was “considering” such a move.

The four new pullouts immediately raised the question of whether such departures will force South Africa into a future of bleak economic isolation or simply transfer assets to local ownership with no substantial effects on apartheid. Only one thing is certain: more and more American companies are bound to follow suit.

Last week’s departures bring to more than 70 the number of big U.S. firms that have decided to abandon their South African operations in the past two years. Among companies rumored to be contemplating sell-offs in South Africa are Xerox and R.J. Reynolds Industries. Indeed, as racial unrest continues and pressure mounts on U.S. companies to sever more and more ties, it is likely that the 240 remaining American firms have at least a plan for evacuation. Says Wall Street Analyst Pierre Rinfret, a consultant to several corporations with South African operations, including Chrysler and Tenneco: “In two years, for all practical purposes, all American investment in South Africa is going to be liquidated.”

Pretoria’s growing isolation was underscored late last week at a meeting of the 136-nation International Red Cross in Geneva. In a vote led by black African countries, the Red Cross refused to seat the government delegation from South Africa. It was an unprecedented rebuke by an organization that has long prided itself on adhering to principles of “universality and impartiality.”

The corporate pullouts that most shocked South Africans were those of GM and IBM, respectively the first and fifth largest U.S. industrial corporations. Both firms cited as reasons a combination of South Africa’s failure to achieve progress in ending apartheid and a precarious economic climate. Said IBM Chairman John Akers, whose company has operated in South Africa since 1952: “Unfortunately, the deteriorating political and economic situation in South Africa and its trading partners makes our action necessary.”

U.S. firms that disinvest in South Africa, however, by and large continue selling their products to South African customers, often through locally owned firms that buy out the departing company’s assets (see box). These arrangements have so far prevented the U.S. corporate departures from causing the widespread loss of jobs, specifically black jobs, that South African officials had often predicted. The entire GM work force of 3,000, for example, 60% black, will stay on the job at the company’s Port Elizabeth assembly plant under the new ownership.

The sudden rash of U.S. business retreats was more than just a coincidence. In order to recoup their investments in South Africa, many companies that elect to leave find it necessary to advance substantial start-up loans to local buyers. GM, for example, plans to underwrite the sale of its $176 million in assets in South Africa to its own local executives and lend the new management an additional $44 million to wipe out the company’s current indebtedness. These loans, which will be repaid from profits in future years, may be considered “new investments” in South Africa under the U.S. sanctions law and therefore illegal after Nov. 16, when the law goes into effect. Some other American firms will probably scramble to announce selling plans before that cutoff date.

The four new leave-takers were all adherents to the so-called Sullivan Principles, the fair-employment guidelines devised in 1977 by the Rev. Leon Sullivan, a Philadelphia civil rights leader and a member of GM’s board. The Sullivan plan provides for equal treatment of the races in hiring, pay and promotions, and commits employers to improving workers’ living conditions. U.S. firms doing business in South Africa used to be viewed even by most American critics of apartheid as good corporate citizens as long as they abided by the principles. A strong U.S. corporate presence in South Africa, moreover, was applauded by the Reagan Administration, which considered business pressure for enlightened but gradual change an important counterpart to its policy of constructive engagement.

But pressures on U.S. companies to go further began mounting about two years ago, when the period of current unrest began. Shareholder petitions calling for everything from new-investment restrictions to a complete withdrawal became a hardy perennial of annual corporate meetings and proxy votes. During last August alone, more than 170 such resolutions were filed with companies whose stock is traded publicly. A second tactic used by antiapartheid activists was the selling off of stocks and bonds issued by firms doing business in South Africa. At least 15 states, including New York and California, and 116 colleges and universities have either completed or announced plans to sell their stock in companies with South African holdings. These relentless campaigns eventually had an effect. “Many chief executives are tired of being hassled by the protests and the divestment campaigns,” says Stephen Blank, senior associate at New York’s Multinational Strategies consulting firm. “This is not the kind of publicity they want.” Some firms might have endured the hassle factor if they could have pointed to their South African operations as solid profit centers. But fewer and fewer have been able to do so. GM has lost money in South Africa since 1982, and IBM, while profitable, has been losing market share to Japanese computer makers. Last week the U.S. consulate in Johannesburg released a Commerce Department economic report prepared for American investors labeling South Africa as a “chronic debtor” and an “import-starved” nation that is “closer to becoming just another African state.” With the apartheid issue nowhere near a solution, more U.S. corporate executives came to view South Africa’s social and economic future as uncertain at best. Says Lawrence Fox, vice president of the Washington-based National Association of Manufacturers: “Developments in South Africa offered the U.S. companies no good alternatives to departure under present conditions.”

Reaction to the new pullouts from U.S. opponents of apartheid was mixed. Timothy Smith, head of the Interfaith Center on Corporate Responsibility, an umbrella organization representing more than 200 Roman Catholic and Protestant groups, called the moves a “significant victory for antiapartheid forces” because they send a message to other U.S. corporations that “it is bad business to do business with South Africa.” Leon Sullivan termed the new withdrawals a “big first step toward achieving the goal of ending apartheid”; he now believes that a “total embargo” will be necessary if racial segregation is not dismantled by next June. Other antiapartheid activists were less enthusiastic. Richard Knight, head of corporate research for the New York City-based American Committee on Africa, contends that sell- offs alone are not sufficiently punitive. “We want an end to all sales,” he says. “We want to end the sale of key technology, like computers.”

Some South Africans fear that this sell-off of financial assets may not be the final U.S. corporate move. “Disinvestment is most likely the thin end of the wedge,” said the Financial Mail, South Africa’s leading business weekly. “The next demand could well be that no IBM or General Motors products be sold at all in this country.” Such demands might be unlikely right away, since most agreements between U.S. companies that leave South Africa and their licensees guarantee continued delivery of the departing firm’s products for a stipulated period of time. But new pressures for U.S. companies to further isolate South Africa are hardly out of the question. Says the N.A.M.’s Fox: “It remains to be seen if the U.S. public regards (the current sell-offs) as disengagement or merely a shifting of the corporate veil.”

It is doubtful, though, that the corporate pullouts or sanctions passed earlier will have much immediate impact on South African racial policy. The country’s leaders, determined to go their own way, are convinced they can continue to prosper even in economic isolation. Officials are already gearing up to circumvent trade sanctions. They have long since proved their skills at “sanctions busting,” by defying the United Nations arms embargo imposed against Pretoria in 1977. To combat the new U.S. measures and also those imposed by the European Community and Japan in September, the government of State President P.W. Botha has now established an office for “unconventional trade.”

South African authorities expect no trouble exporting gold, diamonds and other minerals, many of which are available from few other sources. The problems will center on coal, agricultural products and manufactured goods. Such items will be sent to foreign “front firms,” which will launder shipments, principally by repacking, relabeling and attaching false certificates of origin. The goods will then be transported to buyers as non- South African products. A lot of South African wine shipments, for example, may soon be carrying Mediterranean markings. Government officials are openly advising South African businessmen on how to get around sanctions. Says Kent Durr, Deputy Minister of Finance and Trade and Industries: “We will remain reliable and consistent suppliers of goods.”

Many U.S. businessmen are opposed to either corporate withdrawals or sanctions. “There’s a limit on what U.S. companies can do to end apartheid,” says a top executive of a major American company with operations in South Africa. “It is a matter for South Africans to decide. The sanctions and withdrawals could hurt the South African people by pulling the rug from under the moderates.” That, of course, is the justification many U.S. firms used for opening operations in South Africa in the first place and for remaining so long. But as last week’s startling reassessments showed, more and more U.S. businessmen are finding that the middle ground in South Africa is rapidly vanishing.