Cablegate: Heinz Subsidiary Barely Weathering the Storm

Published: Wed 5 Mar 2003 12:28 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E. O. 12958: N/A
SUBJECT: Heinz subsidiary barely weathering the storm
(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.
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
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
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.
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.
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.
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