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March 24, 1980
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by LOUIS KRAAR Approved For Release 2007/03115: CIA-RDP83M00914R0022Oo1- eO564 Over the past decade, American corpo- rations have been discovering one suppos- edly rich foreign market after another -only to have their hopes dashed or diminished by unexpected political chang- es or upheavals. But it remained for the rev- olutic,n in Iran, which exposed U.S. companies to potential losses totaling $1 billion, to drive home the lesson in global survival. Now even the most seasoned multinationals are looking for better means to assess-and manage-their po- litical risks. As Stephen Blank, a political scientist with the Conference Board (the leading nonprofit research group for busi- ness), says: "Many chief executives got clobbered by winging into Iran without ad- equately understanding the country, and they've gone into China the same way. Now a lot of them want to improve their grasp of the world." Like the U.S. government, the nation's businessmen confront greater turbulence abroad and wield less power than in the past. The once-favored stratagems to shape or even topple a foreign regime-in the brash tradition of United Fruit in Central America-are no longer acceptable corpo- rate practices. In lands where payoffs to gain leverage or win contracts are custom- ary, Americans are bound-or at least in- hibited-by the U.S. Foreign Corrupt Practices Act. As one executive remarks, "The time has passed when we could buy or rent governments." Approved For Release 2007/03/15: CIA-RDP83M00914R002200160056-4 After the Iranian bloodbath and other foreign surprises, U.S. corporations are seeking sharp professional intelligence to warn and guide them. Instead, the top executives of major cor- porations are gradually acknowledging that they need both new skills and fresh in- sights to thrive overseas. The enjoyment of cordial, personal relations with a head of state is no longer, if it ever was, a re- liable way. to appraise the prospects of his nation's market. Nor does the penchant of many c.e.o.'s for flying off to intriguing places, such as Islamabad or Peking, as- sure considered judgments back at their headquarters. Just as senior officers have long consulted their specialists on market- ing and finance and law, they now sense the need for staff expertise toddirect a more systematic approach to international af- fairs. Confronting the world these days cannot be a do-it-yourself job. Beyond economics This new political-risk, game requires anticipating the currents of change abroad, then plotting how to move with them. To do this' demands going beyond economic forecasting to gauge other forces, from re- ligious movements to nationalistic pas- sions. If also requires U.S. executives, who have learned the hard way, to refrain from plunging into foreign ventures merely on the strength of Washington's judgments. The potential for corporate disaster of- ten lurks in seemingly stable places. A few years ago Aris Gloves, a division of Con- solidated Foods, wanted to spread its risks beyond the Philippines, its only manufac- turing base. In 1976, the company picked a spot that its vice president, James Mc- Corry, says "everyone, including the U.S. embassy, -described as a happy, sleepy country." This carelessly promised land was El Salvador. Within some two years, political turmoil hit the Aris plant, with leftist dissidents holding its president and about 120 local employees as hostages for nine days-until the company agreed to wage increases that it couldn't afford. Six months ago, Aris fled from El Salvador. Around the globe, the computing of fu- ture risks remains a tauntingly imprecise science-as the Philippines lustrate. Thus one major manufacturer is Research associate: Grant F. Winthrop nervously concerned that the martial-law regime of President Ferdinand Marcos has made no visible arrangements for succes- sion after his lifetime. On the other hand, American Can still finds the Philippines an attractive place to invest. Here as else- where, the right course for a company may depend heavily on its particular kind of business. In any nation, the gamut of risks runs from revolution and expropriation to the more common, but often crucial, prob- lems of government regulation. To avoid costly surprises, many major companies are trying a range of new safe- guards. Turning to another breed of spe- cial consultants, Bechtel Corp., a loser in Iran, checks out the political climates of its Middle East markets with Richard Helms, a former director of the Central Intelligence Agency and ambassador to Iran; his one- man firm is called Safeer, the Persian word for ambassador. Varying the formula for sophisticated counsel, such major manu- facturers as General Motors and Caterpillar have formed advisory councils of promi- nent foreign businessmen and retired gov- ernment officials. Henry Kissinger serves as a paid adviser to Merck; Goldman, Sachs; and Chase Manhattan Bank, where he sits on the risk committee for foreign loans. All such moves make c.e.o.'s feel and look better-without relieving them of the . ultimate responsibility for risk decisions. A more direct damage-control device is buying political-risk insurance, a growth industry lately. The U.S. government's Overseas Private Investment Corporation (OPIC) has long insured investors in friendly underdeveloped countries against such perils as war damage and inconvert- ibility of earnings. A few private under- writers will fill other gaps for premiums that start at 0.1 percent for the safest places and run up to 6 percent or more for the most dangerous areas. policy can cover a company's entire foreign exposure. Some corporations have therefore set up,; private intelligence systems: Far from us- ing shadowy operatives with networks of secret informers, they employ political an- alysts who work openly. Samuel De Palma, I.T.T.'s analyst and a former assistant sec- retary of State, says: "There's plenty of in- formation available, but the problem is trying to find out what the hell it could por- tend for the company." Since executives tend to talk mostly to like-minded asso- ciates, De Palma strives to introduce them to a wider range of foreign views, "even if they're not from the sort of people we would normally invite to dinner." The experience of Gulf Oil has made it especially sensitive to political assess- ments, since it was hit harder than any other oil major by the wave of national- ization that swept the producing countries in 1975. Already Gulf's four-man interna- tional-studies unit has demonstrated its perceptiveness. Richard Macken, its Mid- dle East specialist, warned of the Shah's probable fall four months in advance and well before it was widely anticipated. Hav- ing calculated what pressures could under- mine the ruler, Macken saw the Muslim demonstrations pushing Iran to a point of no return. Accordingly, the company be- gan early its planning to cope with the sub- sequent loss of Iranian oil, then amounting to 10 percent of its crude supplies. Shortly after the Soviet invasion of Af- ghanistan, the same analyst discounted the immediate prospect of a broader plot to seize Pakistan, where Gulf has a risky ex- ploration venture. Jerry McAfee, Gulf's chairman, found the report "extremely useful." And McAfee adds: "Hopefully, we've helped cover the political risks by having the World Bank involved along with the Pakistan government. But we need good information on the real facts of life out there-and in the rest of the world." Spies in the cold To tell its top management what it should know, Gulf hired Hoyt Price, a former for- eign-service officer, eleven years ago. He recruited the other analysts from govern- ment and universities to tap sources that few businessmen have the time or knowl- edge to pursue-from specialized publica- tions to area experts. The analysts, who also visit key countries, are completely re- moved from Gulf's operations, to ensure their objectivity. Inescapably, though, this B O I T I N E Marcn24, 1980 87 15 : CIA-RDP83M00914R00220016005 d4 --- Appruve&For eteas-e- lM7i&3M-5-= GIB,-?, 3P Ib"rQf~9 l4 d 99-1 C~1C~~6~4 To anticipate political changes that may affect its business overseas, Eaton Corp. relies on Thomas Reckford (below), its senior international. analyst and a former assessment A officer for the CIA. Gulf Oil gets its information '--.and insights on the world from John Sassi, who isan Africa specialist and manager of its "international studies" team. insulation'often makes most analysts feel as lonely as spies out in the cold. "We're 'so'indepeindent," Price says, "that I some-. times wonder if we're effective." s -His- team's situation 'reports have en- r`.eouraged Gulf to make deals in nations that 1=looked forbidding at first glance. As Price says, "We try to determine whether there's a government that you can reason with." `-`Seieial? years ago, he recalls, Gulf Presi- ,t.."derit James Lee responded to a measured `assessment'of Zaire by remarking: "What -you re really saying is that if we can get -along with Mobuto [Sese Seko, the pres- 'ident], then go in." Today Gulf is certainly '-getting along with. Mobuto, and its pro- ' 'duction in Zaire is being increased. Good gamble in Angola ".p J. The company's most daring political de- cisionhas been to work with the Marxist regime in Angola, despite Washington's initial qualms. By following its own intel- ligence, Gulf survived the transition from 'Portuguese colonial rule and the ensuing civil=war among three indigenous groups 'in i975. The U.S. opposed-with arms and 'm6hey-the Popular Movement for the Liberation 'of _.Angola, which was backed by Cuban troops and appeared to Wash- ington as a mere tool of the Soviets. But Gulf, which had men on the scene, drew a different conclusion. John Sassi, its Afri- can analyst, correctly foresaw the emer- gence of a well-organized Marxist group as both the dominant force and a poten- tially stable business partner. He explains: "Its leaders, who were the most consistent among the Angolans in meaning what they said, indicated an interest in continuing the oil arrangements." As things turned out, Angola has become one of Gulf's larg- est overseas production sources. In weighing similar hopes and hazards Exxon goes a step, further than most cord porations by integrating its political as' sessments.into financial plans.''In consid- ering a possible $1.2-billion expansion of its copper-mining project in Chile, for in- stance, Exxon is comparing its vast intel- ligence with views from a panel of outside experts on the country. The Chile invest- ment proposal could include what an ex- ecutive gingerly calls "an environmental uncertainty factor." If Exxon detects the probability of a radical change in govern- ment or tax policy, the company may add 1 to 5 percent to its required return on in- vestment. This risk factor is not arbitrari- ly tacked on, but jointly estimated by financial planners and political analysts. So far, Exxon has avoided rude shocks abroad by getting sophisticated appraisals through its regional divisions, the hubs of its corporate intelligence. Esso Eastern in Houston has already assigned its managers in Asia an "alert reporting list" of possible events that can affect future business. Rich- ard Barham, the company's government- relations adviser and a fifteen-year veteran of the U.S. foreign service, says that he an- alyzes each Asian society in terms of its "principal influence groups." His col- leagues in the field maintain regular con- tact with intellectuals and labor leaders as well as politicians. "We never accept their reports at face value," Barham adds, "but check them with many other sources." Decisions in a vacuum This political monitoring has prompted Exxon to withdraw from refining and mar- keting in India, Bangladesh, and the Phil- ippines. Earlier, its analysts dissuaded the company from carrying out a commitment to build a refinery in South Vietnam at a time when other U.S. companies were still expanding operations there. Unlike the worldly oil majors, Eaton Corp. long took its readings of foreign po- litical climates with what an execu- tive admits was "a seat-of-the-pants approach." Its managers, narrowly preoc- cupied with manufacturing truck compo- nents, marched blind into some avoidable pitfalls-such as putting a plant in France's southern Normandy region, which is no- table for its troublesome Communist unions. Three and a half years ago, Eaton's chairman, E. M. de Windt, decided, as he now says, that "we can't afford to make far- reaching decisions in a vacuum." So the company hired a pair of able CIA veter- ans. Richard Lethander, a Ph.D. in econom- ics, is the chief analyst at corporate headquarters in Cleveland. Thomas Reck- ford, the senior political analyst, based in Washington, says: "We try asking the right questions to help prevent Eaton from be- ing startled by what happens abroad." Its department of international informa- tion and analysis now alerts Eaton exec- continned .To anticipate o