Exporters Traverse Minefield

UNCLAS SECTION 01 OF 02 HARARE 000710

SIPDIS

SENSITIVE

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR ROSA WHITAKER
TREASURY FOR ED BARBER AND C WILKINSON
STATE PASS USAID FOR MARJORIE COPSON


E. O. 12958: N/A
TAGS: ETRD ECON EINV ZI
SUBJECT: Exporters Traverse Minefield



1. (SBU) Summary: Battered but unbowed, exporters in the
Eastern Zimbabwe town of Mutare are still hanging tough.
But how long can these resourceful industrialists
withstand a sub-market exchange rate, energy rationing
and political turmoil? End Summary.

Dogged Perseverance
--------------

2. (SBU) While in Mutare April 7-8, Econchief visited
reps from 6 export firms, the timber association and the
local Confederation of Zimbabwe Industries (CZI). Their
stubborn perseverance is admirable. Beset by hostile
government, 221 percent inflation, power rationing, fuel
shortages, an overvalued Zimdollar and political
upheaval, these businesspeople still manage to wring
modest profits out of a nose-diving economy. As
exporters, of course, they are spared the GOZ's domestic
price controls, operate on a more rational U.S. dollar-
based economy and benefit from Zimbabweans' high-caliber
workmanship at bargain-basement US$ 10/month salaries.
But the challenges of doing business here are still
enormous.

Power Rationing
--------------

3. (SBU) Their most pressing concern is energy. The
firms we spoke with are enduring 4-6 hours of outages
each day, double the norm in Harare. The Managing
Director at PG Safety Glass, windshield supplier to the
U.S., said the slow process of restarting the glass-
heating process turns each 4-hour shut-down into an 8-
hour ordeal of lost work. Power rationing has already
stretched the firm's delivery time from 3-to-7 weeks.


4. (SBU) Meanwhile, energy parastatal ZESA is trying to
increase exponentially exporters' monthly bills. It just
raised Mutare Board and Paper Mills from Z$ 20 to 450
million, PG Safety Glass Z$ 3 to 90 million and Border
Timbers Z$ 2 to 76 million. How to cope with exploding
costs and frequent outages? Mutare Board and Paper's
operations manager has successfully lobbied ZESA for a
reduction from the proposed Z$ 450 to 205 million,
convincing the GOZ that it would not have paper to print
the state-run Herald and other press. Several firms have
begun graveyard shifts to make up for scheduled morning
or afternoon shut-offs. Others are overproducing when
power is available, building a reserve stock of products
for low-energy periods.

Other Obstacles
--------------

5. (SBU) However, the industrialists' headaches do not
end there. The 20-year old tea-bagging machine at
Tanganda, Zimbabwe's large tea producer, functions so
shabbily that it wastes 40 percent of packing material.
At the same time, the GOZ slashed Tanganda's controlled
prices in half after it announced higher-than-expected
profits in January (required for listed companies). The
Financial Manager decried the GOZ's ingrained ideological
hostility to honest profit-making.


6. (SBU) From the political spectrum's other end,
opposition Movement for Democratic Change (MDC)'s recent
two-day stayaway caught firms in a tough bind. Border
Timbers, which makes wooden doors for Home Depot,
successfully implored employees to ignore the stayaway.
Border's management argued the mammoth U.S. home-
improvement chain would be unsympathetic to late
shipments caused by political protest. Consequently,
local MDC officials blast the company's "pro-government"
stance.


7. (SBU) Unstable politics clearly hurts. Border Timbers
said its U.S. agent has begun diverting business to South
African competitors. Although he considers Border
Timber's product better and cheaper, the agent seeks a
hedge against political or economic collapse in Zimbabwe.
As a result, Border Timber has had to reduce weekly U.S.-
bound container shipments from 8 to 5.

Comment
--------------

8. (SBU) The approximate 30-fold disparity in energy
prices for exporting and non-exporting firms will divert
resources from productive uses. A non-exporting firm has
already offered to act as "front-man," buying energy from
ZESA at subsidized rates and covertly selling to
exporters at a lower rate. As with firms that now buy
maize-meal or fuel at controlled prices, then resell at
market rates, Zimbabwe's distortion-laden economy fosters
such rent-seeking opportunism.


9. (SBU) That Mutare's exporters are enduring, even
profiting, is a measure of remarkable entrepreneurship.
When Border Timbers first approached the U.S. market 5
years ago, Home Depot's obsession with quality was "far
beyond anything we could imagine." Yet after 2 years of
losses, the company became Home Depot's most dependable
door producer - a success story with parallels throughout
Zimbabwe's economy. But even Mutare's adroit managers
will not be able to overcome a permanently shattered
economic infrastructure.

Sullivan