Exodus of U.S. Firms Quickens in South Africa : Big-Company Pullouts May Have Domino Effect

The exodus of U.S. companies from South Africa has grown dramatically in the past year and a half and has reached a new, more critical stage: Now, more American firms with large work forces there are leaving, considering leaving or reducing their operations.

Firms with hundreds of employees in South Africa, such as General Electric and PepsiCo, are among 50 American companies that have pulled out since the beginning of 1985, including 12 so far this year. That compares to only seven firms that withdrew in 1984, according to the Washington-based Investor Responsibility Research Center.

Others, such as Xerox and International Business Machines, are considering withdrawals, while firms such as American Telephone & Telegraph and Apple Computer have stopped sales to some or all South African customers.

Banks Stop Loans

Meanwhile, Security Pacific and Wells Fargo are among 29 of the 105 largest American banking firms surveyed that have banned new loans to either private or government borrowers in South Africa, up from only three banks two years ago, the research center said. Fifty-five of those banks ban loans to the South African government, up from 26 in 1984.

The increasing disenchantment of American firms reflects the continuing slump in the South African economy and growing racial strife. It also illustrates the increasing effectiveness of pressure for divestiture by American state and local governments, investors and opponents of apartheid, South Africa’s system of racial segregation and discrimination.

“There is no question that more and more mainstream firms are reconsidering their position” in South Africa, said Marcy M. Murninghan, president of the social investment services division of Mitchell Investment Management Co., an investment advisory firm based in Cambridge, Mass.

More pullouts of large companies--those with several hundred employees and millions of dollars invested--could spur the withdrawals of many more of the approximately 260 U.S. firms still operating in South Africa, some observers say.

“If we see IBM or Xerox beginning to head for the exits, there will be a domino effect,” said Timothy Smith, executive director of the Interfaith Center for Corporate Responsibility, a New York-based coalition of religious groups that own stock in corporations.

Most U.S. companies pulling out so far have had only small numbers of employees in South Africa, such as American Express (four employees), Boeing (three employees) and Flow General (seven employees). For most, the withdrawal has been relatively painless.

Big Firms Leaving

But the past year has seen the departure of at least 10 U.S. businesses with 100 or more employees there, compared to five in the year before that, according to the Investor Responsibility Research Center.

Companies withdrawing since June, 1985, according to the center, include Carnation (1,043 employees), BBDO International (340 employees), Computer Sciences (550 employees), General Electric (727 employees), Motorola (250 employees), VF Corp. (960 employees), Alexander & Alexander Services (291 employees), Manpower (102 employees), Eaton (375 employees) and Bell & Howell (166 employees).

In the year before that, the largest of the companies withdrawing were Blue Bell (with 600 employees), International Harvester (now Navistar Corp.) (556 employees), Oak Industries (299 employees), Pepsico (556 employees) and Singer (100 employees). Another firm, Tidwell Industries (150-200 employees), withdrew in 1985 but would not say in what month.

Other firms selling to South Africa but without employees actually stationed there also have been reducing their activities. Most notable is AT&T;, which announced earlier this year that it will phase out purchases of special metals from South Africa and end sales of communication services and computer products to that country.

Reducing by Attrition

Other firms, such as IBM, are quietly reducing their presence by not replacing workers leaving through attrition. And in 1985, no American company started or acquired operations in South Africa for perhaps the first time in a decade, according to Patrick McVeigh, vice president of investments for Franklin Research & Development, a Boston-based investment advisory firm.

As a result, total American investment in South Africa continues to plummet. At the end of 1985 (the latest date for which complete figures are available), it totaled $1.3 billion, down from $1.8 billion a year earlier and a peak of $2.6 billion in 1981, according to the U.S. Commerce Department.

Although the American pullout has affected at least 7,600 jobs in South Africa since the beginning of 1984, it has not resulted in a large increase in unemployment there because most of the U.S. firms withdrawing have sold their South African subsidiaries to their South African employees or to South African or other foreign companies, rather than shutting them down.

Many also continue to have licensing and distribution agreements with South African companies. Sixty-five U.S. companies now have such distribution and licensing agreements, up from only 24 in 1984, according to the Investor Responsibility Research Center. Motorola, for example, sold its South African subsidiary last October but retains licensing agreements with two South African firms, according to the research center.

Profits Suffering

Most of the withdrawing firms say they are pulling out largely because of South Africa’s troubled economy, which has been hurt in part by continuing racial tensions. The economic slump--evidenced by sluggish consumer spending and rising unemployment and bankruptcies--has hurt the profits of American firms, which once considered South Africa among the most profitable foreign markets.

IBM, one of the largest American employers in South Africa, blames the poor economic conditions for its not replacing workers who leave its operations there. As a result, IBM’s work force in South Africa has declined to about 1,600 from 1,967 at the beginning of this year.

IBM Chief Executive and President John F. Akers said in an April newspaper interview that the company “is growing increasingly discouraged about its ability to continue business operations in South Africa and is constantly reviewing” the operations there.

Many firms also say they are increasingly frustrated with the lack of progress by the Pretoria government toward dismantling apartheid. They also note the growing violence in South Africa’s black townships and recent South African raids into neighboring Zimbabwe, Botswana and Zambia.

Watching for Progress

“I am not optimistic about South Africa,” David T. Kearns, chairman and chief executive of Xerox, said in a newspaper interview last month. “I don’t know whether we will stay or not . . . but I think if we go through the rest of 1986, and there really isn’t any progress at all down there . . . we might pull out.” Xerox operates a 790-employee subsidiary in South Africa.

American firms’ justification for staying in South Africa also has been weakened by what some anti-apartheid activists say is the relative ineffectiveness of the Sullivan Principles--a code of conduct intended to promote equal opportunity and other improvements for blacks--in leading to an end of apartheid. The Rev. Leon H. Sullivan, who developed the code, has said that if apartheid is not ended by May, 1987, he will call for U.S. firms to leave South Africa.

In recognition that mere compliance with the Sullivan Principles is not enough, American companies in South Africa were asked this week by a South African black activist group to adopt an unprecedented set of proposals under which the firms would use civil disobedience to ignore laws enforcing apartheid. The companies are being urged to mount legal challenges against segregated buses and trains and to encourage the movement of blacks into white residential areas, among other things.

Pressure in U.S.

But while most firms blame poor business conditions for their disenchantment, an increasing number of firms are citing pressure from the growing anti-apartheid movement in the United States.

That movement first began to make headlines in the late 1970s through protests on college campuses but has attained far greater success and legitimacy in the past two years, thanks largely to the heightened racial violence, increased media attention and such events as the awarding of the Nobel Peace Prize to Bishop Desmond Tutu of South Africa’s Anglican Church.

One of the first companies to cite political pressures was Apple Computer, which suspended sales to South Africa last October. It was joined last month by General Motors, which, in a major policy shift, said it would stop selling cars and trucks to the South African military and police, partly to comply with Reagan Administration sanctions against the Pretoria regime.

The newest, and arguably most effective, political threat to American firms in South Africa is the growing number of selective purchasing rules passed by state and local governments. By making it harder for firms with operations in South Africa to get government contracts, selective purchasing “hits firms right in the pocketbook,” investment adviser Murninghan said.

24 Cities, Counties

So far, 24 city and county governments--including Los Angeles, New York City, San Francisco, Kansas City, Pittsburgh and New Orleans--have adopted these rules, up from only two before 1985, Murninghan said.

One of the most visible examples of the power of selective-purchasing rules has been the case of Salomon Inc. (formerly Phibro-Salomon), the New York-based diversified securities firm. It withdrew from South Africa at the end of last year in part because of the threat that Los Angeles, New York and possibly other cities would not give it contracts for underwriting municipal securities because of its presence in South Africa.

Last August, Salomon’s investment banking arm also lost a bid to finance a $200-million waste and energy recovery project for Los Angeles. Some have said its South Africa ties were a factor.

But other forms of political pressure also have been mushrooming and becoming more effective.

Shareholders Join Move

Shareholder resolutions asking target companies to pull out or reduce business ties with South Africa have more than doubled so far this year, to 40 compared with 15 in 1985 and 14 in 1984, according to Carolyn Mathiasen, director of the social issues service at the Investor Responsibility Research Center.

These resolutions also are winning a far higher percentage of votes. Shareholders of several firms--including IBM, Chevron, Goodyear, Control Data, U.S. Steel and Burroughs--have voted 10% or more of their stock in favor of South Africa-related resolutions. About 28% of shares--thought to be an all-time record for such resolutions that management had opposed--voted to ask Foster-Wheeler not to do any work for the electricity supply commission in South Africa, Mathiasen said.

“Three or four years ago, 3% to 5% would have been considered a major victory,” investment adviser McVeigh said. The higher voting rate indicates that resolutions are being supported “not as much by the ‘left-wing crazy’ side of the anti-apartheid movement, but by traditional investors as well,” McVeigh added, noting a growing number of public employee, university and union pension funds and other investors initiating such resolutions.

More state and local governments and universities also are passing rules requiring their employee pension funds or other investments to be free of stocks of some or all firms in South Africa. For example, about 45 universities instituted either partial or full divestiture rules in the current school year, more than double the 21 in the 1984-85 year, according to Joshua Nessen of the American Committee on Africa, a New York-based anti-apartheid research and advisory organization.

The private sector also is increasingly taking part. Such firms as Lotus Development, Connecticut Mutual Life Insurance and Levi-Strauss have added South Africa-related criteria to the selection of stock in their employee pension funds, investment adviser Murninghan said. Employees of AT&T; are being given the option of investing in a South Africa-free retirement plan.

Stock Gains Compared

Divestiture proponents have been bolstered by a recent report by Boston Co., an investment management subsidiary of American Express. Based on the Standard & Poor’s index of 500 stocks, it showed that from the beginning of 1984 to the end of March, 1986, the stocks of the 380 firms without employees in South Africa were up 61%, compared to a 48% gain for the stocks of the 120 firms with employees there.

That report is being used by divestiture proponents to counter arguments by critics that selling shares of firms operating in South Africa would hurt the investment returns of the pension funds involved.

However, the proponents concede that selling shares has very little impact on the stock prices of most target firms and does little to force them to leave South Africa. That is because the pension funds and other institutions being required to divest hold only a small fraction of the total shares of the companies involved.

But for some firms, the threat of divestiture has had an impact. Bell & Howell, which sold its 166-employee operation in South Africa in April, has as much as 10% to 15% of its stock owned by state pension funds, labor union pensions and others with divestiture rules, spokesman Tim Croasdaile said. The firm’s largest shareholder, with more than 5% of its stock, is the investment board of Wisconsin, one of several states that has passed divestiture legislation.

The shareholders pushing for divestiture “were becoming a fairly strong voice,” Croasdaile said.

‘I am not optimistic about South Africa,’ the head of Xerox said. ‘I don’t know whether we will stay or not.’