Mozambique and Aveda Corporation: Investment Strategy for Sustainable Agricultural Practices

Sam Mason Dayna Neumann Lori Russell Josh Shallcross Daniel Wainright

MBA 701

Foreign Direct Investment: Mozambique

Page 1

Executive Summary Aveda Corporation was looking for new areas of expansion within developing countries of Sub-Saharan Africa to promote an emerging fair trade product similar to those currently underway in the Amazon River basin. This plant-derived product line will utilize the active proteins found in the cashew nut, a crop commonly found in Mozambique. Through sustainable agricultural practices, Aveda will partner with the indigenous farmers of the Nampula province of Mozambique to cultivate the cashew crops. Capital investments will go to farming and post-harvest processing plant initiatives including above average wages for employees. The analysis of Mozambique, Aveda Corporation, current and future economic conditions, foreign direct investment and incentives, and barriers and constraints to successful cashew production, supports this initiative. Mozambique History Portugal established Mozambique as a colony when their explorers first landed there in 1498. After WWII the Portuguese tried to hang onto their colony, but faced resistance from several groups that formed the Front for the Liberation of Mozambique (FRELIMO). Mozambique finally won its independence on June 25, 1975 and promptly decided to form a socialist state allied with the Soviet Union. In 1983 President Samora Machel realized that Socialism was a failure because they were not able to control the country outside the urban centers. In 1986 he and several advisers died in a suspicious plane crash. From there the country moved to a free market economy and began to make strides after the civil war ended in 1992. In 1995 more than 1.7 million Mozambican refugees returned to the country (http://www.state.gov/r/pa/ei/bgn/7035.htm). In 1992 Mozambique was among the poorest nations in the world, but has made great strides toward improvement. For instance, the GDP per capita in 2000 was $222, but just fifteen years ago it was estimated at $120. This economic recovery has led to a forgiveness of foreign debt from several countries including the U.S. The GDP grew 6.7% from 1993 to 1997, and more than 10% per year from 1997 to 1999. The floods

MBA 701

Foreign Direct Investment: Mozambique

Page 2

that ravished the country in 2000 slowed growth to 2.1%, but Mozambique rebounded quickly in 2001 with a GDP growth of 14.8%. In 2003 the growth was 7% and it is predicted to expand between 7%-10% a year for the next five years (http://www.state.gov/r/pa/ei/bgn/7035.htm). In the past, Mozambique has suffered from major inflation problems. In 1994 the inflation rate was around 70%, but through tighter controls in spending and in the money supply the country has been able to reduce the amount of inflation to less than 5% in 1998 and 1999. Unfortunately, in 2000 the devastating floods that ravished the country caused inflation to jump to 12% and in 2001 the inflation rate had increased to 13%. The currency of Mozambique, the Metical, has lost nearly 50% of its value against the American dollar since 2000, but since 2001 it has stabilized around a rate of 24,000 Meticals to 1 US dollar (http://www.state.gov/r/pa/ei/bgn/7035.htm). Mozambique has a had a troubled past, but with a stable government in power, a population that has returned home after a civil war, and new economic reform, the country is poised to move ahead with its agricultural and industrial sectors. Aveda Corporate Background The Aveda Corporation was founded in 1978 by the Austrian born Horst M. Rechelbacher, who was the son of an herbalist and a naturalist. The company has worked to create products made from natural proteins and chemicals found in those plants and natural resources. The Aveda company has worked with, “physicians, chemists and pharmacognosists as well as experts and traditional healers throughout the world— especially in India and Asia—and with tribes in the Brazilian Rainforest and North America” (http://aveda.aveda.com/about/bio/default.asp). Rechelbacher and the

MBA 701

Foreign Direct Investment: Mozambique

Page 3

company believe in being socially responsible. He is not only the founder of the company, but also a founder of the Business for Social Responsibility (http://aveda.aveda.com/about/bio/default.asp). One such example of Aveda’s past commitment to socially responsible business practices is its involvement with the native peoples in eastern Brazil, who gather the Babbasu nut. The Aveda Company has helped these indigenous people overcome the slash and burn cattle farmers seeking to force them off their land by forming collectives where the women of this region gather the organic Babbasu nuts. In turn, Aveda processes these nuts for use in soap, papers, and for the babbasu betaine, the foaming ingredient in Aveda’s shampoo products. (http://aveda.aveda.com/protect/we/babassu.asp). Another example of Aveda’s commitment to social responsibility is their involvement in South America with the Brazil nut. The Brazil nut trees are vital to the health of the rainforest, with laws in place to prevent the trees from clear cutting by the logging industry. But in the Madre de Dios area, the government allows the local populations to gather the fallen nuts for food. Aveda buys the leftover nuts from the local indigenous populations to use in products, such as shampoos. This has a great benefit to everyone: Aveda can use the nut proteins as ingredient in the shampoos, the rainforest remains intact, and the local people benefit from a good source of income and are not forced to take jobs with the logging companies that would destroy more of the rainforest (http://aveda.aveda.com/protect/we/morikue.asp). Aveda’s mission sums up its actions in simple terms. The mission states, “to support sustainable and organic agriculture, protect the ecosystem, and partner with

MBA 701

Foreign Direct Investment: Mozambique

Page 4

Indigenous and local communities to encourage their economic independence,” (http://aveda.aveda.com/protect/we/babassu.asp). Throughout South America Aveda has worked hard to be socially responsible in their business actions, and has demonstrated not only that can you make a viable product that people want to purchase, but you can do it in a way that supports instead of exploits and ultimately benefits all parties involved. Aveda will now apply this successful model used in the South American rainforest to cashew production in Mozambique, creating sustainable farming practices and ultimately a socially responsible consumer product. Investment Incentives and Barriers Why Mozambique? In recent years, after a time of unrest and political instability, Mozambique has risen like the Phoenix from the ashes. In a study on FDI in Africa, Mozambique was ranked #3 in Africa in Business Climate from 1995-1997.

Mozambique was ranked #3 in Business Climate from 1995-1997; one of the few growing economies in Southern Africa. In 2002, while the economic growth in

Africa was slowed to a dismal 3.2%, Mozambique grew by 12%. Incomes in this country have nearly doubled over the last decade and Mozambique has established a stable macroeconomic environment, at least by regional standards, for an extended period of time. The government, by focusing on open trade and privatization programs, has attracted many foreign investors and increased the international business communities’ confidence in Mozambique’s infrastructure. With the transformation of Mozambique’s economy, and inflation decreasing from 70% in the early 90’s to single digits presently, investing in Mozambique is a unique opportunity for Aveda to grow profits in a specific niche while impacting a

MBA 701

Foreign Direct Investment: Mozambique

Mozambique is one of the poorest countries in Africa, and is ranked 170th on the Human Development Index. (Millennium Development Goals: A compact among nations to end poverty, Human Development Report 2003. p. 240)

Page 5

developing country at its economic roots. Furthermore, per capita growth has increased from $139 in 1990 to $220 in 2001. Observers believe that Mozambique has the opportunity to reduce its high poverty rate of almost 65% to 32-

36% by 2006 if the current economic growth is maintained. Rural areas, however, show an absolute poverty rate of 71.3%

(Mozambique- The elusive quest for pro-poor

growth, p. 127). 72% of the population in Mozambique is reliant on small subsistence agriculture. Due in large part to the constraints of any developing country, Mozambique currently has vast tracts of arable land, only 10% of which is currently in productive use (Mozambique Agricultural Sector Memorandum, 46). In addition, with the growing affects of HIV/ AIDS in Sub-Saharan Africa, many of the farmers are producing less (FAO, 1). Currently, there is a growing need for individuals and companies to transfer technology and skills to younger generations of farmers. Mozambique is looking for investors to plant and produce cashew nuts in Pebane, Gilé, Namacurra, Maganja da Costa and Mocuba. The chart below illustrates the amount of exported cashew nuts since 1998.

Mozambique: Composition of commodity exports $ millions/ 1998 – 2002 Processed Cashew Nuts Unprocessed Cashew Nuts

1998 19.1 21.6

1999 7.8 25.1

2000 8.4 11.9

2001 2.1 10.9

2002 1.1 16.2

Weakness of the Mozambican regulatory agency, ineffective bureaucracy, corruption, and the cost of doing business were identified as key impediments to business

MBA 701

Foreign Direct Investment: Mozambique

Page 6

growth, development, and confidence (Grobbelaar, 4). However, the importance of the regulatory environment will grow as urban areas become saturated and more businesses move north. Mozambique continues to focus on reducing “red-tape” for new investors. In 2004 the average time to open a business was 153 days, however, the government hopes in 2005 to shorten the period to 60 days. Government authorities must approve all foreign and domestic investment. The Investment Promotion Centre (CPI) handles the approval process for foreign investors. Investment guarantees include: The security and legal protection of property, rights and other assets, unrestricted import and repayment of loan and equity investment capital, repatriation of dividends, profits and capital, liberalized banking and foreign exchange, investment dispute resolution under ICC or ICSID arbitration, and investment risk insurance under MIGA and OPIC facilities Tax and duty incentives are given by sector of investment and area to which you will be investing. The Nampula region, where Aveda plans to make investments, provides up to 65% reduction on taxes. In early 2005, U.S. firms’ Railroad Development Corporation (RDC) and Edlow Resources (ERL), majority shareholders in the Nacala Corridor Concession Group, assumed ownership and management of the Nacala port and railway network. This project is strategic to Aveda, as this port is central to planned production and transportation needs for the cashew crops. To this point, the majority of FDI has gone to the southern capital city of Maputo, but as we look to the future, Nacala will place Aveda in a strategic location with improved transportation (see Nacala map). Aveda will have access to the newly developed port in Nacala and train lines to Lilongwe, Malawi. There

MBA 701

Foreign Direct Investment: Mozambique

Page 7

are also airports in Nacala and Nampula. In the future Aveda could move further inland from the port city to Nampula along the train route. Current and Future Economic Conditions

GDP (US$bn) Real GDP Growth (% YOY) Current Acct Balance (US$m) Current Acct Balance %GDP Inflation (% change YOY)

2000 2001 2002 2003 2004 2005 3.8 3.7 4.1 4.9 5.4 6.7 1.9 13.1 8.7 8 7.8 7.3 -764 -657 -712 -516 -366 -1131 -19.9 -17.8 -17.5 -10.4 -6.8 -16.9 12.7 9.1 16.8 13.4 11.1 6.5

The currency used in Mozambique is the Metical. As of now, it can be exchanged for 28,342 United States dollars. The Metical floats freely in the open market. However, United States Dollars and Euros are being more widely accepted throughout Mozambique as payment for business transactions. Therefore, if the economic predictions that we have made do not contribute to an increase in the value of the Metical, United States Dollars or Euros can be substituted as payment. This will allow us to adapt to changes in the currency markets quickly. As the currency MZM USD Exchange Rate

chart on the right shows, the value of the Metical has been falling since a

0.00007 0.00006 0.00005 0.00004

rally in mid 2004 (http://www.oanda.com/c onvert/fxhistory). We

0.00003 0.00002 0.00001

8/14/05

11/14/05

5/14/05

2/14/05

8/14/04

11/14/04

5/14/04

2/14/04

8/14/03

11/14/03

5/14/03

2/14/03

11/14/02

8/14/02

5/14/02

2/14/02

8/14/01

11/14/01

5/14/01

2/14/01

attribute this decline to

11/14/00

0

the current trade deficit and the resulting outflow of capital. The falling exchange rate is a signal to us that it is a

MBA 701

Foreign Direct Investment: Mozambique

Page 8

good time to move in with an investment that will require a substantial up front monetary exchange from USD to MZM. We will be able to capitalize on the low exchange rate while we get our products up and running. As Mozambique is quickly becoming a leading exporter in Africa, the trade balance should shift in the favor of the Metical (as shown in the graph on the

Price

right, price is the price of the Metical). The higher quantity of exports will increase the demand for Meticals and therefore the value of the Metical should rise when compared against other

P2 P1

Supply 8 7 6 5 4 3 2 1

Demand Q1 Q2 1 23 4 5 6 7 8 9

Quantity

currencies. This shift should correlate with the timing of our products coming to market and generating income that will have to be converted back into MZM. This will mean that the profits (from the sale of exported goods) that are converted back to the Metical will be worth slightly less then they would have otherwise. On a project by project basis, currency futures and currency forwards will be used to manage this exchange rate risk that is inherent with any organization that manufactures in a foreign country and generates sales income in a different country. The minimum legal salary in Mozambique is $60 a month USD. We plan to pay higher rates as part of our “fair trade” initiative. As is explained in another section, it will be necessary to pay higher wages because we will be marketing our products specifically with the salary information. Through the use of higher wages, we can both use our fair trade marketing plan as well as attract high-quality employees.

MBA 701

Foreign Direct Investment: Mozambique

Page 9

Overall, the current economic conditions are not perfect, but the forecasted economic conditions look great. Mozambique is becoming a more attractive country for business investments as the value of the currency appreciates, the trade balance shifts towards Mozambique’s favor, and the average wage level in the country rises. There is a lot of potential for taking advantage of these current economic conditions right now, and understanding where the economy is going in the future will pay off very well. Foreign Direct Investment Aveda Corporation has committed to an initial direct investment in Mozambique of $50-$60 million USD for cashew nut cultivation in and around Nacala in the Nampula province. This initial investment will establish or improve irrigation systems, farming machinery necessary for cultivation and harvesting, fertilizer, seeds, and employee wages and benefits. Additionally, Aveda will begin building post-harvest cashew nut processing facilities, and eventually, complete Aveda product production facilities in the inland regions of the Nampula province, following the model outlined in the Amazon rainforest region. Several trade initiatives like the Trade & Investment Framework Agreement (TIFA) and the Bilateral Investment Treaty (BIT) are in place between the governments of the United States and Mozambique. Together with these treaties, Aveda will take advantage of several investment incentives laid out by the Mozambique government. Finally, an analysis of overall foreign direct investment in Sub-Saharan Africa will be shown to exemplify the stability and renewed interest in African economic growth. The signing of trade treaties between the United States and Mozambique proves government interest and commitment on both sides to fostering positive economic

MBA 701

Foreign Direct Investment: Mozambique

Page 10

development in Mozambique. Beginning with the BIT, which laid the groundwork for open communication on trade issues, the TIFA expanded on these themes with an improved trade relationship between the two countries, and the formation of the Council on Trade and Investment. The council works to remove impediments to trade and investing flows by addressing trade capacity building, intellectual property, labor, environmental issues, and increasing small and medium sized enterprises in Mozambique. (Thomsen) Together with the African Growth and Opportunity Act, these treaties will serve to further the positive momentum for foreign direct investment in SubSaharan Africa, benefiting the Mozambique economy and people, as well as the customers, shareholders and employees of the Aveda Corporation. In addition to political stability in the form of treaties, an analysis of the investment incentives laid out by the Mozambique government shows the cost benefits of investing in Mozambique. Tax incentives include a three year, 40% reduction in Corporate Tax Rates for operations located in the Nampula province. Additionally, Aveda is eligible for a GDP (1996 constant prices)

five-year immediate 90,000

100% write-off for

80,000 70,000

investing in new 10E3 MT

equipment and

60,000 50,000 GDP (1996 constant prices)

40,000 30,000

agricultural infrastructure.

20,000 10,000

Furthermore, exemptions

0 1996

on duties are offered along with a two-fold

1997

1998

1999 2000 Years

2001

2002

MBA 701

Foreign Direct Investment: Mozambique

Page 11

acceleration in depreciation. These investment incentives, together with the sustained nearly 8% economic growth rate Mozambique has enjoyed for a number of years, and one of the highest GDP growth rates in the world since 1996, point to a healthy environment for investing. Moreover, the influx of foreign direct investment by large economic powerhouses like the United Kingdom, France, Germany, and Taiwan and major corporate players like Toyota, Nissan, and Barclays indicates the significance of the region as a viable investment locale. Taiwan employs over 40,000 people in the textile industry in Lesotho, with U.S. and European countries investments in Sub-Saharan Africa focused mainly on petroleum, mining, and manufacturing due to the rich resources in the region. The infrastructure of Mozambique and the surrounding countries benefits greatly from this type of investment because it helps to build the infrastructure in terms of electricity, transportation, manufacturing, and engineering. A recent partnership with South Africa has built a sub-station in Mozambique which imports electricity to the country. Aveda Corporation seeks to work with Mozambique in a similar capacity to mutually benefit from infrastructure building, training indigenous employees, and sustainable agriculture practices. The foreign direct investment for cashew nut production and processing by the Aveda Corporation will involve initial investments of approximately $50 - $60 million USD with additional investments of $100 - $200 million USD over the course of 5 to 10 years for use in crop cultivation initiatives, building processing facilities and ultimately full-scale production plants. By locating post-harvest processing plants next to the agricultural center we eliminate freight expenditures, potential loss of product in

MBA 701

Foreign Direct Investment: Mozambique

Page 12

shipping, and most importantly, we take full advantage of the intellectual capital we have fostered in training of the Mozambique employees. Aveda will bring greater diversification of manufacturing and agri-business to the Mozambique economy while maintaining the high quality standards for ingredients and production through socially responsible business practices. Cashew Nut Production Process Given poor countries’ need for foreign exchange (to repay World Bank, IMF or other development loans and debts) and due to the destructive trends brought about by globalization, developing countries and their people are increasingly in need of profitable alternatives. Many poor and developing countries possess some of the earth’s most diverse and concentrated numbers of living creatures and plants. Their biological resources, if managed and licensed properly, provide a lucrative source of foreign exchange. One prime example of a lucrative biological resource is the cashew nut in Mozambique. Native to Brazil, the cashew tree was “discovered” by the Portuguese in the 16th century and quickly introduced in Mozambique, then a Portuguese colony. Cashew trees now grow widely across the country under a range of conditions from managed plantations, to smallholding plots, to semi-wild or wild populations. The cashew tree is strictly tropical and is killed by the slightest frost. The best climatic conditions are found in the tropical coastal lowlands where there is a well-defined dry season of at least four months, conditions found in the Nampula region of Mozambique, not in the United States.

MBA 701

Foreign Direct Investment: Mozambique

Page 13

New research has demonstrated that like many other plant extracts, certain proteins found in the cashew have beneficial attributes used in beauty products. Cashew proteins infuse hair with extra body for use in Aveda shampoo and conditioner lines. Protein is a favored ingredient in hair products as it fortifies the hair shaft. It is especially nourishing to dry, damaged and chemically-treated hair, helping to revive silky softness and shine. To gain access to the beneficial cashew proteins, it is necessary to invest money and technology in a country with established product capacity and a positive attitude toward foreign investment. Mozambique is such a country. The cashew sector is an important component of Mozambique’s economy. In Mozambique, cashew growing and harvesting is a primary source of income for an estimated 940,000 poor small-scale farming families. The cashew has tremendous potential as a “cash crop” to generate foreign exchange and to create employment, as well as curb desertification in the North and erosion in the South. The drought resistant, environmentally friendly cashew tree grows in the wild throughout Mozambique, leading to niche development opportunities in providing organic cashews with little additional financial burden to current production. There is a large and growing domestic and regional market for surplus kernels, as well as other cashew by-products. Without Aveda’s assistance, Mozambique faces several challenges to improving its cashew production and processing. At the processing stage, the main constraints to development have been technological inefficiencies and the lack of competition in a world market due to quality and scale. Aveda can change this by blending the best of the old with the new by combining Mozambique’s reputation for superior cashews with innovative technology to bring jobs and sustainable economic growth. This would serve

MBA 701

Foreign Direct Investment: Mozambique

Page 14

consumers through the development of high-performing products made with organically and bio-dynamically grown plant-active materials of the highest quality. Due to the difficulty that many governments have encountered in maintaining sovereignty and control over their resources, there has been a surge of interest in legislation governing access to resources and in ensuring that host countries benefit from the commercial products created from their native species. A major objective of Aveda’s investment in Mozambique is to diversify and further develop a bio-respective and people-respective relationship with Mozambique and Africa as a whole. As a supporter of Free Trade and Fair Trade, Aveda would ensure that the people responsible for creating the products were treated with respect and paid well for their work. The objective is to set up a sustainable business partnership with the cashew producers to not only benefit the consumer, but most importantly the farmers and harvesters who work in the fields. Collaborations between Aveda and the people of the Amazon River basin have exceeded expectations on both sides. Aveda anticipates continued success in Mozambique. Through revitalization of existing cashew processing plants, Aveda will provide job creation and job skill training, and by buying cashews directly from the communities, provide needed income to local economies. This will also protect from conglomerate importers and middleman companies that work to usurp native interests. Ultimately, Aveda seeks to sustain established socially responsible business practices through partnerships and investment in Mozambique. The proven model seen in the Amazon rainforests will serve as a roadmap to endeavors in Mozambique. In the

MBA 701

Foreign Direct Investment: Mozambique

Page 15

end, the goal is to provide a high quality, in-demand consumer product, bolster profits, and create sustainable practices in Mozambique.

MBA 701

Foreign Direct Investment: Mozambique

Page 16

Bibliography

1) “Country Background and Notes.” U.S. State Dept. 23 Nov. 2005 < http://www.state.gov/r/pa/ei/bgn/7035.htm>. 2) Food and Agriculture Organization of the United Nations, 23 August 2004. 3) Grobbelaar, Neuma, Every Continent Needs an America: The experience of SouthAfrican firms doing Business in Mozambique, SAIIA, 2004. 4) “Horst Rechelbacher, Aveda Founder.” Aveda Corporation. 23 Nov. 2005 < http://aveda.aveda.com/about/bio/default.asp>. 5) “Millennium Development Goals: A compact among nations to end poverty, Human Development Report 2003” p. 240. 6) Mozambique Agricultural Sector Memorandum, Report No. 16529 MOZ, Volume 2: Main Report. Washington D.C.: World Bank, 30 April 1997. 7) “Mozambique: Foreign Direct Investment.” Globalis. 2003 http://globalis.gvu.unu.edu 8) Mozambique- The elusive quest for pro-poor growth in Economic Report on Africa 2003, UNECA, 2003. 9) Thomsen, Stephen “Foreign Direct Investment in Africa: the private sector response to improved governance.” July, 2005 10) “What We Do. Morikue.” Aveda Corporation. 23 Nov. 2005 < http://aveda.aveda.com/protect/we/morikue.asp>. 11) “What We Do. The Aveda Babbasu Community Project.” Aveda Corporation. 23 Nov. 2005 < http://aveda.aveda.com/protect/we/babassu.asp>.

Additional websites sited: http://www.oanda.com/convert/fxhistory fx history site www.wikipedia.org article on Mozambique for a reference, but not directly quoted