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Cablegate: The Tale of Two U.S. Companies' Exit From Zimbabwe

VZCZCXRO3582
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0280/01 0951321
ZNR UUUUU ZZH
P 041321Z APR 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 2704
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1902
RUEHAR/AMEMBASSY ACCRA 1884
RUEHDS/AMEMBASSY ADDIS ABABA 2007
RUEHBY/AMEMBASSY CANBERRA 1284
RUEHDK/AMEMBASSY DAKAR 1641
RUEHKM/AMEMBASSY KAMPALA 2063
RUEHNR/AMEMBASSY NAIROBI 4494
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1134
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUAEJAA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 03 HARARE 000280

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV ASEC ZI
SUBJECT: THE TALE OF TWO U.S. COMPANIES' EXIT FROM ZIMBABWE


-------
SUMMARY
-------

1. (SBU) In the past several months both Colgate-Palmolive
and Johnson & Johnson have shut down their local production
facilities, driven out by corporate prohibitions on dealing
in the parallel foreign exchange market, ever-shifting
monetary policy including a punishing rate of forex
retention, and limited access to legal foreign exchange, plus
draconian price controls. Their products nevertheless remain
on sale under license, but at unaffordable prices. One
former manager, freed of the forex dealing constraint, seized
the opportunity to open his own medical supplies import
business. He now supplies the market with desperately needed
products at local currency prices indexed to the black
market. He hopes to break even and gain market share until
an economic recovery allows him to operate profitably. END
SUMMARY.

--------------------------------------------- --------
Nine Years of Decline at Colgate-Palmolive (Zimbabwe)
--------------------------------------------- --------

2. (SBU) Former Managing Director of Colgate-Palmolive
Company (Zimbabwe) Inc. Davis Kanyama related to econoff in
March 2008 the tale of the company's decline from 1999 until
headquarters' decision to close the Zimbabwe operation
earlier this year. At peak production in 1999,
Colgate-Palmolive employed 410 people and manufactured
toothpaste, soap, detergent powder and fabric softener for
the local market and, from 2002 to 2005, for export to Malawi
and Zambia; 1999 was also the last year in which the local
company paid a dividend.

3. (SBU) As the economy contracted and, later, as the
official and informal exchange rates started to diverge,
Colgate's profitability fell. Corporate policy prohibited
trading foreign exchange on the parallel market, which
constrained operations further. Frequent shifts in monetary
policy wreaked havoc with planning and also contributed to
the waning of headquarters, support for the local operation.
The high rate of 35 percent foreign exchange retention by the
RBZ acted effectively as a punishing tax on exports. In
addition, Colgate was unable to access sufficient foreign
exchange from the RBZ to maintain the needed flow of inputs
for production. By early 2003, Colgate had shut down
toothpaste and soap production in Zimbabwe.

-------------------------------
Price Controls ) The Final Blow
-------------------------------

4. (SBU) Price controls in June 2007 were the mortal blow to
Colgate Zimbabwe. With the price control frenzy focusing on
producers of food and consumer goods, Kanyama found himself
undergoing hours of intimidating interrogation and
accusations of overcharging and hoarding at the hands of the
price task force. Within a month, the company had slipped
into the red and, over the next months, never managed to get
price increase approvals fast enough to stay ahead of
hyperinflation and turn a profit again. In the meantime, the
Colgate work force had shrunk to 36. Early this year
headquarters shut down the operation, paying out all
employees and mothballing the 8,000 square meter plant,

HARARE 00000280 002 OF 003


warehouse and offices.

5. (SBU) Colgate is still distributing products in Zimbabwe
from its centralized production site in South Africa to
maintain the brand, but prices are well beyond the reach of
ordinary Zimbabweans, Kanyama noted. He himself, a
Zimbabwean, is currently negotiating an agreement to head up
Colgate-Palmolive,s operations in Ghana, but despondent at
leaving home.

--------------------------------------------- -------
But Medical Supplies Desperately Needed At Any Price
--------------------------------------------- -------

6. (SBU) Chris Muyeye, former Managing Director of Johnson &
Johnson, suffered the same problems as Colgate over the last
years: failure to access adequate foreign exchange to import
production inputs or to purchase finished products from
abroad, a prohibition from headquarters on black market
currency trading, an inability to plan due to zig-zagging
monetary policy, and the declining purchasing power of
Zimbabweans. Muyeye saw the writing on the wall and sought,
unsuccessfully, to negotiate the Johnson & Johnson
distributorship in Zimbabwe. The arrangement would have
freed him to purchase foreign exchange on the parallel market
and keep the business going. Johnson & Johnson, however,
sold the distribution rights and its production facility to
Zimbabwean conglomerate Innscor in late 2007, but Innscor,
lacking expertise in the field, has not yet started
distribution, according to Muyeye.

------------------
Filling the Vacuum
------------------

7. (SBU) With their generous compensation packages and long
experience in the business, five former Johnson & Johnson
employees, led by Muyeye, proceeded to set up J-Med Supplies
(Pvt) Ltd. to import medical supplies, primarily from the
U.S. and Germany, for the Zimbabwean market. In late 2007,
when it became known in the health sector that Johnson &
Johnson was exiting Zimbabwe, Muyeye told us he had finally
been able to secure a meeting with Health Minister
Parirenyatwa, who promised him "support" to ensure that
Zimbabwe could continue to import key medical supplies.
Muyeye told us that price was not an issue for his public
hospital customers; they had sufficient funds to pay the
parallel market equivalent of the import price of the
products; J-Med Supplies' quotations are valid only for 48
hours. Private clinics, for their part, simply passed along
the high prices to their patients. Muyeye's goal as Finance
Director is to keep his new company from incurring losses and
to secure market share. He hopes to be well positioned to
operate profitably when the economy recovers.

-------
COMMENT
-------

8. (SBU) Foreign-owned manufacturers need a strong stomach
for risk in these trying times in Zimbabwe as well as a
high-profile brand and market share worth protecting.
Apparently neither Colgate-Palmolive nor Johnson & Johnson
could justify their loss-making presence in Zimbabwe any
longer, and the prospects for recovery were too distant.

HARARE 00000280 003 OF 003


Scrappy entrepreneurs with good government connections and a
willingness to sail close to the wind on matters of legality
are filling the gaps left behind by name-brand players in
some cases. Lamentably, the exit of blue chip companies
further weakens corporate governance in this increasingly
no-rules-barred business environment. END COMMENT.

MCGEE

© Scoop Media

 
 
 
 
 
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