US embassy cable - 03HARARE468

UNCLAS SECTION 01 OF 03 HARARE 000468 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
 
E. O. 12958: N/A 
TAGS: EAGR, ETRD, ECON, ZI 
SUBJECT: Heinz subsidiary barely weathering the storm 
 
 
1. SENSITIVE BUT UNCLASSIFIED -- NOT FOR INTERNET POSTING 
 
(SBU)  Summary:  A recent visit to an American company in 
Zimbabwe shows that no strategy is too insignificant for a 
local branch of a multinational to consider in its efforts 
to stay afloat in the current economy.  Despite crippling 
price controls, soaring input costs, and severe labor force 
pressures, Olivine -- which is locally based and has no 
ability to relocate outside of Zimbabwe -- is limping along. 
Survival strategies include the usual:  decreasing 
production, or rebranding, reformulating, and resizing its 
products to avoid government-mandated prices that recover 
barely a quarter of production costs.  Olivine has even 
inquired whether it can refine relief oil provided by food 
donors in order to earn some reasonable income.  Recognizing 
the surreal environment in which they operate, Olivine's 
managers are attempting to keep their business afloat -- for 
their employees as well as for their bottom line -- until 
some long-hoped-for economic solution appears. End summary. 
 
2. (SBU)  Laboff and Econ chief visited Olivine, a former 
Zimbabwean company now jointly owned by American 
multinational Heinz and the GOZ, in order to assess the 
impact of the current economy on an "American" company. 
Olivine was sold by its local founders to Heinz, which 
purchased the company in a cooperative venture with the GOZ, 
in the early 1980s.  The deal actually took several years to 
complete, since the GOZ originally demanded 51% ownership. 
Heinz, which refused to buy in unless it retained majority 
status and control of management, finally prevailed and 
Heinz formally purchased the company in 1984.  Olivine's 
primary businesses include processing oilseeds and producing 
edible and industrial oils, manufacturing soaps, 
manufacturing margarine, bakers' fats and other vegetable 
spreads, and preparing and packaging Heinz branded products 
such as catsup, condiments and canned goods. 
 
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Operational Constraints 
----------------------- 
 
3. (SBU)  The current economic climate has been devastating 
to Olivine.  Many of its products -- cooking oil, soap, 
margarine, bakers' fats and some canned goods -- are 
considered "essential," and have been subjected to price 
controls.  In some cases, the government-mandated prices are 
barely one-quarter of the cost of production.  Additionally, 
since the majority of Olivine's products are intended for 
the domestic market, the company cannot benefit from export- 
directed economic strategies, such as the ability to retain 
forex.  Olivine is also subject to increased constraints due 
to its American-based legal obligations; in a post-Enron 
environment, Olivine is precluded from taking advantage of 
some less-than-forthright tactics which are supporting its 
Zimbabwean competitors (with the sole exception of 
purchasing necessary forex on the parallel market, see 
below). 
 
4. (SBU)  Labor concerns remain a constant headache for 
Olivine's management.  The brain-drain has had a massive 
negative impact on Olivine's skilled workforce:  Olivine has 
lost 11 of 31 journeyman-level craftsmen to emigration 
within the last year.  HIV/Aids has also taken its toll; the 
manager of the cotton seed processing unit died the day 
before our visit after a three-year battle with Aids, and 
attendance of his co-workers at his funeral actually closed 
the processing unit for the day.  Finally, the hyper- 
inflationary pressures on Olivine's 2000-plus workforce have 
erupted into several major labor confrontations, culminating 
in an episode in which Olivine managers were besieged and 
held hostage in their offices by an angry mob of workers 
demanding higher wages.  Currently, management is conducting 
a last-ditch negotiating marathon with the Works Council in 
an attempt to formalize a wage increase by the end of 
February and ahead of a GOZ-imposed six-month wage freeze. 
 
5. (SBU)  Additionally, as an agro-industrial company 
dependent upon agricultural produce, Olivine has been 
particularly hard hit by the reduction of Zimbabwe's 
agricultural productivity as it is forced to search farther 
afield for its inputs.  Olivine has traditionally processed 
about 75% of the soybeans produced by Zimbabwe farmers. 
While an average year would see an annual yield of 120 to 
130 thousand kgs of soybeans, forecasts for this year are 
indicating a total crop of less than 60 thousand kgs. 
Olivine must necessarily make up the difference by 
purchasing imported inputs -- at real-world prices -- if it 
intends to even approach current production rates. 
 
-------------------------------------------- 
Coping Mechanisms While Waiting for a Change 
-------------------------------------------- 
 
6. (SBU)  As with most other manufacturers, Olivine is 
simply trying to maintain its positions while hoping for a 
political change which will bring economic relief.  Despite 
the legal and ethical implications which constrict American- 
related businesses, Olivine has been reduced to sourcing its 
forex on the parallel market -- an illegal necessity which 
has had direct impact on its bottom line.  Its most recent 
purchase of parallel-market forex was in November, at a 
1600:1 rate.  That translated directly into price increases 
in mid-November, at about the time the new budget was 
announced.  When the GOZ noticed the "unapproved" price 
increases, it quickly slapped price controls on many of 
Olivine's products -- and back-dated the price controls to 
the beginning of November. 
 
7. (SBU) Olivine has reduced its production to a bare 
minimum in efforts to keep its plant operational without 
being so unprofitable that it must close down.  It has laid 
off its seasonal complement of 300-400 contract workers, and 
management sees no possibility of re-hiring them for the 
next production period.  The soybean oil refining plant is 
running at 30% of capacity.  Where it used to produce ten 
types of soap, Olivine now produces three.  Ironically, 
because of the skewed exchange rate, Olivine's "official" 
profits (at the fictitious 55:1 official rate) would make it 
appear to be one of the best-performing Heinz facilities 
worldwide.  Olivine's managers have consequently refused to 
calculate its profits at the official rate, and Olivine 
therefore shows no profit at all in Heinz's international 
figures. 
 
8. (SBU)  Olivine has also resorted to many of the coping 
mechanisms of other Zimbabwean manufacturers: rebranding, 
reformulating, and repackaging.  Although its economy-line 
soap is price controlled at an unrealistically low retail 
level, Olivine has simply changed the color of the soap from 
blue to brown, and increased the price of its "new" product 
to a sustainable level.  Similarly, it has changed the 
moisture content of its margarine in order to produce a new 
"spread" which is not price-controlled and allows them to 
keep operating.  Although the 750 ml size bottle of cooking 
oil is price-controlled, the 50-liter drum of "industrial" 
oil is not controlled -- despite the fact that it is exactly 
the same product.  To be sure, the GOZ is aware of some of 
these coping mechanisms, and Olivine has been warned not to 
divert too much product to the "industrial" packaging, under 
the threat of having that, too, slapped with price controls. 
Olivine has cut production to a mere trickle, which is not 
sustainable but which allows them to at least stay in 
business, in hopes of economic changes.  However, faced with 
the prospect of shutting down completely -- and putting two 
thousand employees, some of them 30-year veterans, out on 
the street -- Olivine simply plows ahead, making management 
decisions on a daily, ad hoc basis. 
 
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Positioning for the Hoped-For Recovery 
-------------------------------------- 
 
9. (SBU)  However, Olivine -- like most other Zimbabwean 
businesses -- tries to prepare for a better economic 
environment in a post-Mugabe economy.  For instance, cotton 
is one of the few crops actually predicted to do well in the 
short term.  In an attempt to facilitate its handling of an 
increased cotton crop, Olivine has made plans to increase 
capacity in its cottonseed production unit should the 
promise be fulfilled.  Olivine is also trying to maintain 
its permanent workforce so that it can ramp up production 
with a minimum of delay should the situation improve.  At 
significant cost, Olivine continues to subsidize a canteen 
for its lowest-grade employees, and often provides the only 
meal many of its employees get each day.  Olivine has also 
approached the Embassy with the request to refine any relief 
oil provided by international donors, and hopes thereby to 
utilize some of its excess capacity and earn some badly- 
needed revenue. 
 
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Comment 
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10. (SBU)  Olivine is admittedly only one of the 
manufacturers struggling in Zimbabwe today.  However, its 
status as an American business offers both provocation and 
protection.  The only canned goods in Zimbabwe subject to 
price controls are Heinz brands; Olivine's CEO, while he is 
aware of this anomaly, has not ascribed it too much meaning 
-- yet.  Due to its position as the largest refiner of 
edible oils in Zimbabwe, Olivine is an attractive target to 
certain elements in the GOZ, which believe that if an 
"essential" business cannot compete under price controls, it 
should be given to somebody who can make it.  Although the 
GOZ would reportedly like to "indigenize" Olivine, 
contractual obligations require that its 49% stake be 
offered to Heinz on a first-refusal, sweetheart-deal basis. 
Only if Heinz refuses to buy, can the GOZ offer its shares 
to an indigenous businessman -- and then at a higher price 
than that offered to Heinz. 
 
11. (SBU) The alternative, of course, is for the GOZ to 
nationalize the entire business.  Olivine's CEO is keenly 
aware of that possibility, which is another reason he 
attempts to carefully balance his operation in order to 
simultaneously avoid bankruptcy and avoid being declared an 
"economic saboteur."  Such a declaration, of course, would 
open the door (under the current political reality) for a 
takeover which would destroy the company -- and which could 
not effectively be resisted by management, American business 
or not.