Building and Managing Successful Businesses in the Middle East

Building and Managing Successful Businesses in the Middle East

(Lukas Brosseder, David Khalil, Pablo Metz, Glen Osmond)

Joern-Carlos Kuntze, Marc Hormann

Published by Motivate Publishing Dubai: PO Box 2331, Dubai, UAE Tel: (+971 4) 282 4060; fax: (+971 4) 282 7898 e-mail: books@motivate.ae www.booksarabia.com Office 508, Building No 8, Dubai Media City, Dubai, UAE Tel: (+971 4) 390 3550; fax: (+971 4) 390 4845 Abu Dhabi: PO Box 43072, Abu Dhabi, UAE Tel: (+971 2) 677 2005; fax: (+971 2) 677 0124 London: Acre House, 11/15 William Road, London NW1 3ER e-mail: motivateuk@motivate.ae Directors: Consultant Editor: Editors: Assistant Editor: Senior Designer: Designer: General Manager Books: OC&C 2008 Motivate Publishing 2008
All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means) without the written permission of the copyright holders. Application for the copyright holders written permission to reproduce any part of this publication should be addressed to the publishers. In accordance with the International Copyright Act 1956 and the UAE Federal Law No. (7) of 2002, Concerning Copyrights and Neighbouring Rights, any person acting in contravention of this will be liable to criminal prosecution and civil claims for damages.

Obaid Humaid Al Tayer Ian Fairservice David Steele Albert Harvey Pincis Moushumi Nandy Zelda Pinto Cithadel Francisco Charlie Banalo Jonathan Griffiths

ISBN: 978 1 86063 228 0 British Library Cataloguing-in-Publication Data. A catalogue record for this book is available from the British Library. Printed by Rashid Printers & Stationers LLC, Ajman, UAE

CONTENTS
Preface Introduction 7 9

Chapter 1 1.1 1.2 1.3

Fast Facts & Figures

13

Profile of the GCC The UAE Setting the economic example of the GCC Profile of the United Arab Emirates Why Multinationals are Heading to the GCC 27

Chapter 2 2.1 2.2 2.3

Favourable market conditions Market challenges Summary Basic Strategies of Internationalization 49

Chapter 3 3.1 3.2 3.3 3.4 3.5 3.6

Motivation Strategies Value chain configurations The UAE as a regional hub Company formation Summary Successful Market Participation 71

Chapter 4 4.1 4.2 4.3

Local commitment Raising capital Managing people 99

Chapter 5 The Four Ps of Marketing to the Region 5.1 Effective brand positioning 5.2 Matching products and services to markets 5.3 Finding the right price point 5.4 Developing and managing effective relationships

Chapter 6 6.1 6.2 6.3 6.4

Long-Term Risk Factors

131

Economic risk Political and regulatory risk Social risk Summary Business Opportunities 139

Chapter 7 7.1 7.2 7.3 7.4 7.5

Logistics sector Tourism, travel and aviation Environmental sustainability Management solutions and professional services Energy intensive industry

Conclusion Company Register

151 153

PREFACE

This book investigates the opportunities for foreign companies to do business in Arabian countries, especially in the United Arab Emirates (UAE). The main part of the book, an empirical study, was supported by our students Brosseder, Khalil and Metz, based on the authors master thesis delivered in August 2006 at WHU-Otto Beisheim School of Management, one of the leading business schools in Europe. I find this volume exceptionally comprehensive and valuable. It derives its conclusions not only from a solid evaluation of press reports and available secondary data but also from fifty-four personal interviews that the authors conducted with high-profile business people and political leaders in the UAE. All these interviews took place in the UAE. I am not aware of any other available study on the region that would be comparable in terms of the breadth of its approach, the quality of the interview partners, and the clarity of the conclusions drawn. For practitioners, the main benefit of reading this book is the well-structured overview on opportunities and risks of doing business in the UAE. The authors present six strategic options for foreign companies to enter the Arabian markets and convincingly weigh the pros and cons of each strategy. The study distinguishes between different industries and different business models. It also gives a very broad range of real examples. Thus, readers can easily determine suitable market entry strategies for their own industry and their own company. Another major benefit of this book is the thorough analysis of the legal and macroeconomic conditions of doing business in the UAE. The authors clearly point out, where foreign companies need local partners, where they need government approval and what markets are difficult to enter without political support. The dependence on public orders in many industries, the rising costs of

living, and the lack of local management talent are risk factors to be taken seriously. On the other hand, this book also leaves no doubt that the whole region is a quickly growing and fascinating market. It is a melting pot for cultures and offers leading companies from abroad unprecedented opportunities for growth, as long as these companies are really willing to learn about local cultures, rules, and habits. To do so, this book is the perfect starting point. Professor Dr Peter Witt, Academic Director of the Chair for Entrepreneurship, WHU-Otto Beisheim School of Management, Germany

CHAPTER 1 Fast Facts and Figures

1.1

Profile of the GCC

In May 1981, the UAE and five of its neighbours in the Gulf Bahrain, Kuwait, Oman, Qatar and Saudi Arabia founded the Cooperation Council for the Arab States of the Gulf, commonly known as the Gulf Cooperation Council (GCC). Within the GCC organization the members have been following shared economic goals and ultimately hope to create a unified economic bloc on a par with other regional organizations such as the Association of South East Asian Nations (ASEAN) or the European Union. Triggered by the regional security threat of the Iran-Iraq War, the underlying aim of the GCC was to promote security and stability in the region, particularly through the integration of foreign and security policies. Economic integration has been limited, until recently. In 1993, the first concrete steps were taken to establish single tariffs on goods coming into the GCC. But follow-up talks took time and were marred by disputes over compensation arrangements. In September 1999, the members accepted a draft set of customs laws that became effective in January 2003. Under the customs union, a flat five per cent tariff on basic goods and seven per cent on luxury goods is charged when entering the bloc. To date, this is the extent of economic integration in the GCC. However, future plans are ambitious, and include the formation of a common market by the end of 2007, and a monetary union. The members hope that by creating a common market with a GDP of roughly US$600 billion the region will increase its international economic visibility. The organization is also in the process of debating several free trade agreements. While negotiations for a free trade zone with the European Union have been going on since the early 90s, talks with China began in

14

Building and Managing Successful Businesses in the Middle East

2005. Until recently, trade agreements by individual members were not officially permitted. Regardless, member states such as Bahrain, Oman and the UAE have been actively pursuing Free Trade Agreements (FTAs) with the United States for years. This has especially irked Saudi Arabia, which protested by boycotting the 2002 GCC Summit in Doha. In 2004, Bahrain signed its FTA, while Oman and the UAE began negotiations for their own. In 2005, the GCC agreed to allow bilateral FTAs with the US, as the only exception to the requirement for treaties to be region-wide. Oman signed its agreement in 2006. Talks between the UAE and the US have stalled, although the UAE is hoping to finalize the agreement by 2008. The organization also cooperates in many other fields such as infrastructure and transportation. Construction of a US$3 billion causeway between Qatar and Bahrain has been agreed, while the UAE and Qatar have announced plans to build an elevated highway linking the two countries. The GCC is also set to go ahead with developing a region-wide rail network, after completing a pre-feasibility study in mid-2007. The economic significance of the GCC The GCC has witnessed impressive economic growth throughout the past decade. These countries, some of which used to exclusively draw their economic power from their energy resources, are today successfully promoting the Gulf as the dominant, non-oil business hub for the Middle East North Africa (MENA) region. They have clear advantages. Their strategic location at the intersection of Africa, Asia and Europe is vital. They offer low or no tax regimes for foreigners, and there is the possibility of tapping into the tremendous liquidity from high oil prices since 2002. The GCC is looking to attract foreign investment and technology transfer from all over the world to provide momentum for their rapidly growing economies. By diversifying into non-oil industries, the GCC countries hope to make their economies stronger and more stable in the event of fluctuations in the price of oil and gas. The creation of a unified economic bloc with a series of high-profile trade agreements would give the GCC increasing global visibility and significance. As a single economy in 2005, the GCC would have ranked as the worlds seventeenth-largest, equalling the Netherlands in terms of GDP (see Figure 4). Although its dramatic rise has been overshadowed by other emerging markets such as Brazil, Russia, India and China (BRIC), the GCC has climbed to the top of companies internationalization agendas around the globe. While supranational efforts are bringing the GCC countries closer

Fast Facts and Figures

15

together, its individual members are embarking on drastic transformations of economic policies on the national and local level. Through these changes, the GCC has created one of the worlds most attractive investment environments, offering world-class infrastructure, well-developed free trade zones, industry clusters and long-term tax exemptions on both a corporate and personal level. The GCC has also witnessed a significant increase in both government and private sector spending, fuelled by the regions vast financial resources and an unprecedented influx of foreign direct investment. Differences naturally exist between the GCC countries. However, many of the findings presented in this text broadly apply, as similar regulations on issues like foreign direct investment with respect to local ownership, and workforce nationalization programmes, influence the general business models chosen by companies throughout the region. Kingdom of Bahrain Regarded by many as the most open and free economy in the region, the Kingdom of Bahrain has focused on establishing itself as the leading financial hub in the Middle East. Although it is facing increased

Bahrain

Oman

Qatar

500 400
6.3%

500 400 300

4.2% 4.0% 4.8%

500 400 300

4.7% 8.1%

300 200 100 0

1985 1990 1995 2000 2006

200 100 0

200 100 0
1985 1990 1995 2000 2006 1985 1990 1995 2000 2006

Figure 5a: Development of GDP [Index 1985 = 100] and CAGR [compound annual growth rates] (International Monetary Fund, 2007)

competition from the UAE, there is evidence that Bahrains strategy is paying off. Bahrain continues to attract some of the worlds leading financial institutions. In September 2006, Hannover Re, the worlds thirdlargest reinsurance group, set up its first MENA subsidiary under the name Hannover Re Takaful in Bahrain. The significance of the decision was emphasized when the Hannover Re Group transferred its Islamic insurance business to the new subsidiary.

16

Building and Managing Successful Businesses in the Middle East

USD million (# world rank)

Country GDP in US$ billions (World Rank)

Saudi Arabia 308 (22)

United Arab Emirates

134 (37)

Kuwait

75 (55)

Qatar

38 (62)

Oman

30 (67)

Bahrain

13 (94)

GCC

5 9 7 (1 7 )

Figure 3: Nominal GDP of GCC Economies (International Monetary Fund, 2006)

USD million (# world rank)

India Mexico Russia Australia Netherlands GCC Be l g i u m Switzerland Turkey Swe d e n T a i wa n

Country GDP in US$ billions (World Rank)

775 (12) 768 (13) 766 (14) 708 (15) 625 (16) 597 (17) 3 7 2 (1 8 ) 3 6 8 (1 9 ) 3 6 2 (2 0 ) 3 5 9 (2 1 ) 3 4 6 (2 2 )

Figure 4: Nominal GDP of the GCC Bloc compared to other economies (International Monetary Fund, 2006)

Fast Facts and Figures

17

The Sultanate of Oman After Bahrain, Oman is the least blessed with hydrocarbon reserves among its GCC neighbours. The oldest independent state in the Arab World depends on agriculture, fishing and tourism, as its main sources of income. The diversification efforts of the government are encouraging the tourism industry to become a driver of future growth. Projects such as Al Madina Al Zarqa (The Blue City), which will take up roughly thirty-five square kilometres of land, along the Al Sawadi coastline, highlight these efforts. Al Madina Al Zarqa will include sixteen hotels, two hospitals and a large university. Only the Dubai Waterfront project, with its 150 luxury planned communities, covering eighty-one square kilometres is bigger. Qatar Controlling the worlds third-largest natural gas reserves, Qatar has become the worlds largest exporter of liquefied natural gas (LNG).1 Benefitting from a sharp rise in LNG production capacities, the country is expected to grow its gross domestic product (GDP) faster than any other nation in the region. Qatar is also vying to become the sports centre of the Gulf. In December 2006, it was the venue for the 15th Asian Games. It is a mainstay on ATP & WTA tennis tournament circuits. Other international events on Qatars sporting calendar include, motoGP and the cycling Tour of Qatar. Doha has also announced a bid for the 2016 Olympics and has indicated that it may jointly bid for the 2018 football World Cup.2 Kuwait Kuwait is a constitutional monarchy and has the oldest elected parliament of the GCC countries. It has a population of around three million including approximately two million non-nationals. Compared to its Gulf neighbours its economy is most contingent on hydrocarbons making up roughly ninetyfive per cent of the countrys exports. With roughly ten per cent of the worlds proven oil reserves, Kuwait has the third-largest oil reserves in the world. In order to diversify its economy Kuwait encourages FDI by allowing foreign companies to hold 100 per cent equity stakes in local firms, and has reduced corporate taxes from fifty-five per cent to twenty-five per cent.3 The Kingdom of Saudi Arabia The Kingdom of Saudi Arabia is the worlds largest exporter of petroleum and with an area of about 2.24 million square kilometres is by far the largest country in the GCC. With a population of twenty-seven million, of which sixty per cent are under the age of twenty,4 Saudi Arabia has the most interesting domestic market of all GCC countries, and potentially the

18

Building and Managing Successful Businesses in the Middle East

most promising business environment. However, its existing legal and regulatory framework has discouraged foreign investment. In 2001, it launched the investment authority SAGIA, aimed at attracting foreign direct investment and reforming the Kingdoms economic structures. The Capital Market Authority, designed to encourage transparency, was established in 2003, and in 2005 the Kingdom joined the World Trade Organization (WTO). Plans to create a more open Saudi Arabia include the erection of six new cities that the country is building to stimulate business. The government hopes to attract more than US$100 billion of investment into these new economic centres, which include the King Abdullah Economic City, currently being developed near Jeddah on the Red Sea Coast.5 A full understanding of the cultural, economic and political landscape in the various GCC countries can be found in books such as Rosemarie Said Zahlans The Making of the Modern Gulf States, Madawi Al Rasheeds A History of Saudi-Arabia, and The Merchants by Michael Field.

UAE

Saudi Arabia

Kuw ait

500 400
7.3%

500 400 300

4.0% 4.1% 3.0%

500 400 300 200 100 0

1985 1990 1995 2000 2006 1985 1990 1995 2000 2006
2.3% 7.4%

300 200 100 0

1985 1990 1995 2000 2006

200 100 0

Figure 5b: Development of GDP [Index 1985 = 100] and CAGR [compound annual growth rates] (International Monetary Fund, 2007)

1.2

The UAE Setting the economic example of the GCC

Representing more than twenty-four per cent of the GCCs GDP, and accounting for more than sixty per cent of all foreign affiliates operating in the market, the UAE has become the Middle Easts second-largest economy behind Saudi Arabia, and naturally plays a significant role in the Gulf. Saudi Arabia, however, still contributes more than fifty per cent of the six countries total revenue. The UAE has gained a greater leadership role within the bloc, and some argue that its unique federal structure allows it to be one of the most