I. COMMERCIAL OVERVIEW 1. Introduction The outlook for commercial activity in C te d'Ivoire is more positive in 1994-95 than in recent years. Two watershed events: the passing of long-time President Felix Houphoet- Boigny in late 1993 and the long-awaited devaluation of the CFA franc in January, 1994 mark a break with the past political and economic status quo. C te d'Ivoire now has the opportunity, and the challenge, of strengthening and diversifying its economy by creating an environment favorable to investment and the overall conduct of business. Traditionally, agriculture has been the principal economic activity and foreign exchange earner of C te d'Ivoire. Agriculture accounts for one third of its GDP and 80 percent of exports. C te d'Ivoire produces one-third of the world's cocoa crop and is an important producer of robusta coffee, pineapples, bananas, rubber, cotton, and palm oil. The competitiveness of the agricultural sector will, in general, be improved by the devaluation of the CFA franc. Moreover, the recent rise in world market cocoa, coffee, and cotton prices will translate into increased economic growth and higher government revenues. Addressing the required commercial and economic changes is a formidable management challenge, as the incumbent government also faces elections in the fall of 1995. Compared to its neighbors, C te d'Ivoire has enjoyed smooth, almost seamless political transitions in the past which bodes well for the future. Likewise, the fallout from the economic transition brought about by the devaluation has yet to produce more outcry than discussion in media circles, even six months after the fact. Again, such restraint poses a striking contrast to the reaction of its Francophone neighbors who have experienced serious demonstrations, even violence since the devaluation. However, the circumstances surrounding the 1995 election will be different: the master politician, Houphouet, is gone, French attention and assistance are perhaps not what they once were, and competition for export and investment attention is increasing from Asia (China and Vietnam), the former Soviet Union, Eastern Europe, and Latin America. In short, the next eighteen months promise to be interesting, albeit difficult, as C te d'Ivoire strives to adjust to the new order. 2. Overview of the Import Market Although C te d'Ivoire has the largest industrial base in sub- Saharan Francophone Africa, the devaluation reminded Ivorians of their extreme dependence on imports. For example, despite its relatively small population, C te d'Ivoire is among the top ten importers of food in Africa. In 1993, the Ivorian import market was estimated to be USD 1.6 billion and its major trading partner was France. The U.S. ranks fourth behind France, Nigeria and the Netherlands with 4% of the Ivorian import market. U.S. sales to C te d'Ivoire were estimated to be USD 101 million in 1993. This figure does not include the significant amount of U.S. products that are transhipped with little or no value added to C te d'Ivoire via European intermediaries, namely France, the Netherlands and Belgium. The principal U.S. exports to C te d'Ivoire are: paper products, computer hardware and software, air conditioning and refrigeration equipment, agricultural products, and cosmetics and toiletries. During the first half of 1994, the import market was severely curtailed as a consequence of the devaluation of the CFA franc. The erosion of the purchasing power of the salaried middle class led to the appearance of some local substitutes, especially foodstuffs. However, they are not yet a significant factor. The Ivorian government imposed price controls for three months on over thirty types of consumer goods and services including rice, bread, milk, paint, transportation, rents, utility, telecommunications services and dozens of pharmaceuticals. The de facto controls ended April 12, 1994; market prices in the private sector had established their equilibrium at least one month earlier, despite government efforts at holding the line. Telecommunications prices have not been adjusted and increases of 15-20% are expected. Fuel prices rose 15% immediately after the devaluation and will probably increase again in late 1994 or early 1995. Customs duties and import taxes were reduced to a cumulative maximum of 35 percent after the devaluation, a level which is still relatively high when compared to neighboring countries who are also in the process of liberalizing their economies. On a positive note, since the devaluation, many importers have expressed an interest in sourcing from the United States and in moving away from the cozy, but expensive, relationships they had with traditional European suppliers. 3. Commercial Environment French is the language of business in C te d'Ivoire, and in the French dirigiste tradition, the Ivorian government plays a prominent, even dominant, role in the economy and commercial activity. The private sector is highly regulated and access to capital and credit is extremely limited. Parastatal enterprises account for as much as 60 percent of the investment in C te d'Ivoire; however, this may change if the political will develops to follow through with announced plans to harness privatization as a means of increasing the economy's productive capacity. Presently, the regulations governing mining and energy activities are under revision, the Ivorian National Assembly has passed legislation regarding privatization and there is general respect for intellectual property rights in C te d'Ivoire though the regulations have not been subjected to a rigorous test. To establish a business, sound research and a great deal of patience are needed to navigate the web of required paperwork. It would also be wise to hire an attorney. Provided one speaks French, the process is relatively unbiased and transparent. The major problem area lies in the settlement of disputes, especially those that are labor related. Very often contracts are subject to questionable interpretation, if respected at all, and the law invariably favors the employee. All transactions and partners should be scrutinized rigorously and deals structured very carefully. C te d'Ivoire has a respectable pool of skilled, highly educated workers, including a significant number from neighboring countries. The expatriate population, including a sizeable number of French workers, has declined since the devaluation. The overall work force is highly structured, and wages are lower compared to the recent past, but higher when compared to neighboring countries. By developing country standards, C te d'Ivoire has an outstanding infrastructure. There are an excellent network of over 8,000 miles of paved roads; good telecommunications services, including a public data communications network; two active ports, one of which is the most modern in West Africa; rail links; regular air service;and modern real-estate developments for commercial, industrial, retail and residential use. C te d'Ivoire's location and easy, reliable connections to neighboring countries, make it an excellent platform from which to conduct West African operations. In addition to the well developed infrastructure and work force described above, the city of Abidjan is one of the most modern and liveable cities in the region. Its school system is excellent and includes a highly-rated international school based on a U.S. curriculum and several excellent French-based schools. Finally, the Ivorian government has begun to focus on privatization as a means of increasing the economy's productive capacity. In 1994 it sold its stake (24%) in one enterprise, and intends to reduce or sell its shares in at least six others. A committee exists within the Prime Minister's office to evaluate dossiers. The Ivorian National Assembly began debating the issues surrounding privatization in April and passed the enabling legislation shortly thereafter. 4. Host Country Business Attitude Towards the U.S. C te d'Ivoire maintains strong historical, cultural and economic links with France and Europe in general. The devaluation was a major test of those links and there are signs of weakening on both sides. The Ivorian attitude toward conducting business with U.S. firms is best described as tentative, mostly due to language and cultural barriers. It is critical, therefore, that U.S. companies establish and maintain a high level of personal contact within C te d'Ivoire; it is generally not possible to mount a successful enterprise via telephone or fax contact alone. Yet, despite a differing business style, Ivorians appreciate the role the United States plays in world affairs, welcome U.S. products and wish to encourage U.S. investment in C te d'Ivoire. There is a clear desire, however, for business to be conducted with Ivorian partnership in mind, as there is still some residual suspicion of large foreign businesses which is rooted in the excesses of the colonial and neo-colonial past. Increasingly, young Ivorians are considering a U.S. university education versus a European one. Exposure of the future work force to U.S. culture, business and English will help to further U.S. business interests in the medium term. 5. Major Business Opportunities There are several sectors of interest to U.S. business: agriculture, computers, oil and gas, mining, telecommunications, and food processing. Currently, U.S. companies participate in all of these sectors, with greater participation possible when the Ivorian government undertakes to reform and standardize the regulations governing these business activities. Food imports exceed $500 million annually and present opportunities both for bulk commodities and high value consumer-ready products. Rice, milk powder, wheat, and frozen fish are all important bulk import markets that supply the needs of the majority of urban consumers, and they will be less sensitive to the effects of devaluation. Supermarkets and importers bring in alcoholic beverages, fruit juices, fresh and dried fruits, fresh and canned vegetables, snacks, and a variety of other grocery products to furnish the needs of the sizeable Ivorian middle/upper class and still relatively large expatriate community. The reduced French presence, and post-devaluation emergence of more price- conscious shoppers, should lead to increased opportunities for U.S. exporters. Products with good potential include: wine, beer, snack foods, nuts, popcorn, peanut butter, baby foods, dessert and other mixes, and high quality meats. U.S. involvement in mining, oil and gas and telecommunications may increase after the Ivorian government revises existing regulations (mining and energy exploration) and chooses its privatization strategy (telecommunications). In the mining sector, a U.S. firm expects to increase its output of gold significantly in 1994. In the oil and gas sector, in March, 1994 a U.S. firm announced the discovery of an oil deposit capable of yielding 25,000 barrels per day. More importantly, the concurrent gas find is expected to enable C te d'Ivoire to become self-sufficient in natural gas and electricity. In the telecommunications sector, equipment procurement opportunities may also surface as a result of the recent leadership change at CI-Telcom, the national telephone company. It has by far the most modern facilities in West Africa; however, it is highly dependent upon its European suppliers. Nevertheless, a U.S. company has won business in the provision of long distance services (USA Direct); another has won a contract to provide equipment for CI-Telcom's network management and billing software project; others are competing for the potentially lucrative cellular service franchise. While the liquidity in the banking and finance sectors of the economy has improved since the devaluation, access to credit remains restricted and expensive. Lenders are hesitant because they believe the Ivorian government has not taken the required measures to reduce the public debt. Such measures include reducing the civil service payroll, a potentially unpopular action during an election year. Consequently, the import market will remain soft until the Ivorian economy has fully adjusted to the devaluation. Opportunities exist for both U.S. export sales and investment aimed at developing local manufacturing operations to supply goods previously imported by expensive European intermediaries. Such activities could potentially reduce the final cost to the consumer significantly. Opportunity areas include: telecommunications, computer hardware and software and food processing equipment. Franchising is an unexplored possibility that may become more viable once consumer purchasing power improves and the concept of western-style entrepreneurship is more fully embraced. Finally, the services sector plays a strong role in the Ivorian economy. C te d'Ivoire's highly educated work force and excellent telecommunications facilities make it a possible location for transaction processing businesses such as credit card and insurance claims processing. 6. Major Roadblocks to Doing Business For U.S. exporters, the roadblocks to doing business in C te d'Ivoire can be overcome with patience and commitment. Aside from the expected cultural differences, there are four considerations an exporter should take into account when deciding to do business in C te d'Ivoire. First, the ability to communicate in French is an absolute necessity, as is the need to adapt products to European electrical and metric standards. Second, the high costs of transportation and insurance may unnecessarily burden profit margins. Third, a de facto monopoly exists in customs brokering and freight forwarding that often causes lengthy and costly delays in processing. Fourth, many of the laws governing business operations (especially the labor laws) are in need of or are undergoing revision. For agricultural products, given that the CFA franc is pegged to the French franc, importers prefer to purchase based on French Franc pricing, as this reduces their foreign exchange risk. Larger importers make use of hedging instruments available through local banks to reduce the risk of purchasing in dollars. Consumer product labels, generally, must be in French for a product to be of interest to importers and consumers. Manufactured food products must be labeled in French and must have an expiry date. Health officials will often interpret the date of manufacture as an expiry date, if one does not appear on the label, and consequently deny entry to the product. Importers generally perceive shipping costs from the United States as being higher than from European origins. While this is not necessarily true, this perception can act as a barrier to trade. While there are possibilities for investment in production agriculture or forestry, any investment requires a clear understanding of complex land tenure systems. Meanwhile, French interests have used their considerable influence to keep U.S. investors out of lucrative coffee and cocoa export handling. There is U.S. participation in joint venture banana and pineapple plantations. These investments were motivated largely by the European Union's banana import regime, which favors former European colonies. Other investment possibilities include mining and oil and gas. However, the regulatory environment lacks transparency. U.S. firms are active in the sector, but they have universally found the regulatory regime to be a major roadblock to U.S. investment in C te d'Ivoire. There is good reason to expect change, however, as both the mining and hydrocarbon codes are in various stages of debate or revision. Both will require the approval of the Ivorian National Assembly. The recent successes of two U.S. firms in mining and the oil and gas exploration sectors demonstrate that these roadblocks are not insurmountable. There was, however, a considerable financial commitment to the market and a willingness to reside in C te d'Ivoire which ultimately made it possible for these firms to succeed. 7. Nature of Local and Third Country Competition For industrial products, local competition is not a factor for U.S. firms considering the Ivorian market, except where the enterprise is a parastatal. Local competition becomes a factor when it is teamed with a European, especially French, partner. The French continue to wield significant influence over local commercial activity. They often have access to financing and credit through European sources familiar with the peculiarities of the Ivorian market that may cause U.S. financial institutions to walk away. The United States faces strong competition in bulk agricultural products. The only flour mill is owned by a vertically integrated French company which prefers to source from France, although they do purchase some high protein wheat from the United States. Low quality, low priced Vietnamese and Chinese rice compete successfully with U.S. rice in the important market for 35 brokens rice. European Union export subsidies benefit sales of wheat and milk powder. USDA has in place subsidy programs to meet the competition. The consumer-ready food market is dominated by products from Europe, particularly France and Belgium, although South African products are becoming increasingly visible. These trade flows are partly the result of historical ties which have created a French culinary tradition amongst the middle and upper classes. For products which are domestically produced, i.e., vegetable oil, coffee, chocolate, soft drinks and beer, local products enjoy a large market share. C te d'Ivoire meets most of its demand for fresh vegetables and tropical fruits through local production or regional imports. However, deciduous fruits and temperate vegetables are imported, often by air, at very high cost. South Africa is an increasingly important source of deciduous fruits and a wide variety of processed foods and beverages, including wines and fruit juices. European suppliers generally benefit from shorter transit times and somewhat lower freight charges than U.S. suppliers. Freight costs from South Africa are higher than from Europe or the United States. South Africa's freight disadvantage should be reduced as the volume of U.S. trade to West Africa expands.