COPING IN ZIMBABWE'S MANUFACTURING SECTOR

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000154

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 01/12/2016
TAGS: ECON ETRD PGOV ZI CH
SUBJECT: COPING IN ZIMBABWE'S MANUFACTURING SECTOR

Classified By: Ambassador Christopher Dell under Section 1.4 b/d

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Summary
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1. (SBU) Wilson International, a world class manufacturer
of billiard tables and bedroom furniture, has become a
low-cost outsourcer for a South African manufacturer and has
also "twinned" creatively with Zimbabwean importers on forex
deals in order to survive in Zimbabwe's harsh business
climate. Its local business savvy, however, has proved
little help in facing down competition from China-based
manufacturers who have copied the company's designs and
deeply undercut its prices in the company's export markets,
including the U.S. End Summary

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Furniture Manufacturer Holding Its Own With Exports
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2. (SBU) Jim Wilson, Managing Director of privately owned
Wilson International, described to econoff on January 26 his
company's efforts to survive Zimbabwe's harsh business
climate. The company's three factories, which employ about
900 workers, manufacture billiard tables for export to the
U.S. and bedroom furniture for the international hotel market
and for the South African retail trade. The billiard tables
have been recognized internationally as among the best in the
world. Wilson said both the billiard tables and furniture
enter the U.S. duty free under the Generalized System of
Preferences.


3. (SBU) Wilson said GOZ policies have been the biggest
threat to his company's survival. He explained that Wilson
International is, in effect, taxed twice ) once by the
Zimbabwe Revenue Authority, and again by the Reserve Bank of
Zimbabwe (RBZ). The RBZ requires exporters to relinquish
32.5 percent of export proceeds to the RBZ at the official
exchange rate (N.B. the official rate has been fixed at
Z$250:US$ for the past eight months while the parallel
exchange rate is about Z$7,500:US$). Furthermore, and most
challenging for an export-only oriented company like Wilson
International, the RBZ liquidates a company's remaining
export proceeds at the official exchange rate if it is unable
to repatriate the proceeds within 90 days of receipt.


4. (SBU) Wilson said his company's first step to ensure its
survival as an exporter was to enter into "toll
manufacturing" with a South African company. Under this
arrangement, the South African company outsources its
manufacturing to Wilson and provides all raw material for
production at no cost or duty. Wilson International then
exports the final manufactured product to the South African
company, charging a unit cost for labor, overhead and profit.
According to the Managing Director, the arrangement reduces
the RBZ's take of the company's earnings by about half.


5. (SBU) In addition, Wilson said his company trades its
excess forex at the parallel exchange rate in carefully
constructed "twinning arrangements." The company imports

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another company's raw material requirements and sells the raw
materials onward to the "twinned" company at parallel market
prices. Wilson admitted he is "sailing close to the wind" on
the legality of such deals.

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But "Ruthless" Chinese Competition Threatens Survival
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6. (SBU) Addressing day-to-day business, Wilson said his
company had recently secured a contract to outfit a
300-bedroom hotel in Egypt. Despite a steady stream of such
good contracts, however, the company was still smarting over
the loss in 2003 of a major tender in the U.S. for a
1300-bedroom hotel due to unacceptably high political risk.
Zimbabwe's internal situation continued to cast a pall over
business with the U.S.


7. (SBU) In this context, Wilson noted, the onslaught of
"ruthless" competition from China has emerged as the latest
threat to his company. China-based manufacturers have
imported Wilson's furniture from South Africa, copied the
designs to the last detail, and undercut the company both in
South Africa and in the U.S with prices that, in some cases,
are below the cost of inputs in these markets.

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Comment
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8. (C) In many respects, the story of Wilson International
is the story of Zimbabwean business in general. At one time,
this country had numerous world class manufacturers. Those
numbers have dwindled as the companies have struggled to
survive the government corruption and mismanagement that have
led to Zimbabwe's economic collapse. The country's
increasing isolation adds to the obstacles as international
investment flows elsewhere and as competitors take advantage
of the country's travails to seize market share from
Zimbabwean companies. Wilson International has had to be
creative to survive this long and has continued to produce
high quality products. However, its long-term future will
remain in doubt as long as the GOZ continues its current
economic policies.
DELL