INTERNATIONAL. A new business book by Aamir A Rehman shatters many myths about the Middle East. He offers an easy-to-read guide at a strategic level for firms seeking to do business in the six nations of the GCC. He explains why Dubai has become a major hub for the region as it experiences an unprecedented expansion in energy, financial services, consumer goods, hospitality, retail, real estate and countless other industries. Here he speaks with BI-ME about his inspirations and insights for tapping into Gulf capital and opportunities. If you read just one book this year, we recommend that you pick up this one.
McGraw-Hill Professional has just released the first-of-its-kind book about the fastest-growing city in the world, ‘Dubai & Co: Global Strategies for Doing Business in the Gulf States' by Rehman, an expert global strategist and consultant to many Fortune 500 companies.
Dubai & Co provides readers with important and necessary strategies on how to successfully approach the GCC by using savvy tactics while crafting business models specifically designed for this market, which ranks as the third tiger economy of the world, alongside China and India. Using a pragmatic, problem-solving approach, it also offers a deep understanding Gulf capital markets, sovereign wealth funds and institutional investors that are increasingly taking major stakes in global firms as oil prices and government surpluses in the region are at an all-time high.
Another major aim of the book is to raise understanding of the United Arab Emirates, Saudi Arabia, Qatar, Bahrain, Kuwait and Oman, which comprise the GCC, and their importance in the global economy (beyond the aspect of oil exports), as a subject that is not sufficiently recognised around the world.
The GCC economy is now being compared to China in terms of the surge in export receipts, the substantial current account surpluses, and the large accumulation of foreign assets by the central banks and the rest of the banking systems, and the investment boom. The GCC’s current account surplus at US$155 billion is roughly on a par with that of China (US$161 billion). China however achieves this with a population that is roughly 30 times larger than the GCC countries. The GCC’s contribution to global savings is believed to greater than that of China’s. The tiny state of Qatar, reached a GDP per capita of US$45,000 last year, which is ten times that of India. If Qatar’s economy grows as expected, it will have the highest per capita GDP in the world by 2011. In a recent study, the IIF noted that in 2006 the GCC's total export earnings exceeded those of Russia, India and Brazil combined.
During the 2002-2006 period, Gulf states, with a population of 35 million, are estimated to have earned between US$1.2 trillion and US$1.5 trillion in revenue, enabling them to boost their foreign assets to more than one trillion dollars. This windfall and massive crude reserves, estimated at over 40% of global reserves, have increased their importance on the world scene.
"Certainly, the spike in oil prices has tremendously boosted the weight of the GCC states in the world economy. Now they have attained a significant position in the global economy," Kuwaiti economist Hajjaj Bukhdour said recently.
The importance of the GCC is no longer limited to its huge oil wealth. Its influence has multiplied, driven by massive foreign investments, large-scale acquisitions and global alliances in the United States, Europe and Asia. Spurred by the oil windfall, GCC economies have grown by an average of 7% annually over the past four years and the growth is expected to continue.
Total GDP of the six states rose sharply from US$406 billion in 2003 to US$712 billion dollars in 2006, according to the International Monetary Fund (IMF). It forecasts that GDP will be at US$790 billion for 2007 and growing to US$883 billion in 2008.
The IMF also predicts that the six nations will spend at least US$800 billion on domestic investment projects over the next five years, with 75% of that total in non-oil sectors, especially in infrastructure and tourism.
But as their abundant liquidity can not be absorbed locally, the Gulf countries have extended their reach beyond their borders with tens of billions of dollars worth of acquisitions.
The booming Emirate of Dubai, gas-rich Qatar and OPEC king-pin Saudi Arabia have made impressive acquisitions. DP World, owned by Dubai, became a top global port operator when it acquired the UK’s Peninsular and Oriental Steam Navigation Co (P & O) in a US$ 6.9 billion deal in 2006.
As one of the Dubai’s several state investment firms, it has also bought a 3.12% stake in European aerospace giant EADS, owner of Airbus. And in a major foray into the financial markets, Borse Dubai, the Emirate's financial holding, agreed in September 2007 with Nasdaq to acquire 19.99% of the shares of the US-based firm and 28% of London Stock Exchange (LSE). The prospect now is for an East-West alliance of global exchanges that is bringing the very best expertise and market-making to Dubai.
Saudi petrochemicals giant SABIC has acquired GE Plastics of the United States for US$11.6 billion, while tiny Qatar has acquired about 20% of the LSE with several other acquisitions in the cross-hairs.
Undoubtedly, Gulf states this time are investing their surpluses prudently in a very professional way, choosing synergies and leveraging their holdings so as to bring a technology and knowledge transfer for strategic industries locally. They are thinking of the future. They plan to make returns on assets as a viable source of income when oil prices slide. So far, they have succeeded in doing just that.
These are just a few known examples of GCC holdings whereas much larger investments exist, especially in real estate, stock markets and stakes in major companies. Official figures for the size of GCC foreign assets are not available, but the IMF and the International Institute of Finance (IIF) have estimated them at close to US$1 trillion.
Returns on these investments this year are forecast to be between US$60 billion and US$100 billion, the equivalent of the countries’ entire oil income before prices started to rise in 2002. This time around, GCC states have learned the lessons of the past, when they squandered oil revenues in the first and second booms in the 1970s and early 1980s.
Dubai & Co offers insight on key characteristics that presents an understanding of the culture, history, demographics, politics, economics and corporate plans particular to each of the countries involved in this economic transformation. This important information will allow marketers and company bosses to properly adapt their businesses to the unique environments that can lead to constructing leading businesses, hotels, clothing stores or restaurants.
Additionally, Dubai & Co includes case studies of actual firms illustrating what is appropriate for multinational companies in the GCC. It teaches why the Arabian Gulf states are among the most dynamic in the world, explains how major companies paved the way for others to succeed and demonstrates how to create a winning strategy by utilising the ‘Key Lessons’ section at the end of each chapter.
BI-ME: What inspired you to write Dubai & Co?
AAR: The book came out of the realisation that there is a gap between the GCC’s importance to global strategy and most business leaders’ awareness of the region. My approach in this book is to give a global “outside-in” perspective on how to integrate the region into a firm’s global strategy.
Credit for the idea also goes to McGraw-Hill, whose perspective was quite insightful. They observed a number of books about China and India and felt that the next big market for this type of book would be the Gulf.
It’s also worth noting that although the title of the book mentions Dubai, the book itself covers all the GCC states, as they are in reality connected as a common economic unit. Our research showed that there is still very little recognition among US business leaders of the terms “GCC" and even “Gulf.” Thus the iconic name of Dubai appears on the cover.
BI-ME: What can we learn from the early days of development in Dubai and the region? Is it not a very interesting case of a “virtuous circle,” how to start a positive economic cycle?
AAR: The leadership in Dubai had the foresight to focus on the building blocks of the economy, such as its huge Jebel Ali port and the associated free zone. They had the first-mover advantage, but also created an “open for business” mentality, an efficient infrastructure, and enabling regulations. The fast-track approach to government services eases doing business in Dubai and the UAE.
When one looks at the history of Dubai, one finds a defining moment in the granting of business ownership rights in free zones. These rights encouraged global firms to do business in Dubai and to use the city to access the rest of the UAE and the Gulf region more broadly.
BI-ME: Obviously you have extensive experience in strategy development for multinational corporations in the Middle East and GCC region. How did you distil all that into the book?
AAR: The book was shaped by my experience at the Boston Consulting Group and at HSBC Amanah. It is aimed at the business person who has relatively little knowledge of business in the Middle East but understands the mindset of corporate strategy.
The Gulf is often “lost” inside global organisations. I have seen many instances of multinational corporations having the wrong reporting structure in relation to the region, which often reports through the a multi-cluster (Europe, Middle East, and Africa) division. In fact, I devote a whole chapter to raising awareness and the need for Gulf-specific business units to have access to senior management.
The book takes a problem-solving, step-by-step approach covering the entire array of corporate strategy, from sizing up the market opportunity to operational and logistical issues.
BI-ME: Why is the GCC region relevant to almost any multinational company’s long-term global strategy?
AAR: There are a number of compelling reasons, but market realities are often misunderstood. I devote a full chapter of the book to de-bunking common misconceptions people have about the region in an effort to clarify the business opportunities that exist. GCC per capita income is three times China’s and five times India’s, so compared to other emerging markets it represents a considerable opportunity.
In another chapter, I discuss the GCC as a new market that is here to stay. It has its elements of attractiveness - sustained prosperity, attractive demographic shifts, and ongoing de-regulation - as well as risks. The demography of the region, with half of the population under 20, means that growth opportunities will be present for many years. The younger generation in the Gulf is well-educated and more connected to the broader world than previous ones. This is in stark contrast to the usual television images of the Middle East states as dispossessed, violent, or failing.
Another misconception is that women in the region don’t matter. In fact, they hold a large share of wealth in the GCC and are important in purchase decisions, from household and personal spending to cars, homes, and investments. They are also increasingly taking on leadership roles in the workplace and in public service. Two-thirds of college students in some GCC countries, including Qatar, Kuwait and the UAE are women. Young unmarried working women, living with their parents with very few expenses, have considerable disposable income and present an attractive market for multinational companies with appealing brands.
BI-ME: In your book you discuss how the Middle East is not a monolithic or uniform market, and how some countries are more attractive from a business perspective than others. How should Middle East markets be classified?
AAR: In my book I use a three-cluster model, distinguishing between the Levant, North Africa and the Gulf states. The Levant (Lebanon, Jordan, Syria, Iraq, Israel and the Palestinian Territories) is well-endowed with an entrepreneurial culture and fertile land, but its development has been hampered by conflict and strife. North Africa (including Egypt, Sudan, Morocco, Algeria, Libya, and Tunisia) is geographically large and populous, with modest GDP per capita and a middle class. The GCC, a meaningful economic but incomplete political union, is the most developed of the three clusters and presents important opportunities for international brands and companies.
This model is and indigenous one (“al-khaleej,” “bilad al-sham,” and “al-maghreb”) and one which reflects a natural and ages-old classification.
BI-ME: How should global companies customize their offerings for the Gulf market?
AAR: The book includes a framework on “four degrees of adaptation” for customising a firm’s approach. The highest level includes devising specific products and services for the Gulf. One example is the McArabia burger by McDonalds (which is also sold in Malaysia) and one step below that is the customisation of the product portfolio which is done for the region by the fast-fashion brands like Zara. If you walk into Zara in the GCC, you will see hallmarks of the brand and you will also see more long sleeves and more long skirts. Zara’s approach to stocking products that suit the market is an interesting lesson for retailers. We will see a lot more of this in the future, and also more in terms of adapting the marketing communications.
In the next five to ten years you will see a lot more customisation for this region, and the introduction of Islamic financial services by global banks is part of this. I believe that multinational companies that adopt “smart adaptation” will have an advantage over other MNCs as well as local companies.
BI-ME: Regarding this aspect of deeper engagement with the market, do you think the eventual removal of the agency rules, the requirement of a local sponsor for any international brand or operator, will affect how business is done?
AAR: In my book I talk about companies moving up the “engagement spectrum”, from shallow engagement or simple distribution agreements, to joint ventures and partnerships, to a higher level of engagement and direct market entry, organic or acquisition-based. Certainly at the moment, the agency rules limit the range of strategies available. But the rules are changing as Gulf states modify their regulations in the wake of joining the WTO. The Gulf is more attractive than ever before and now is the time for global companies to capture some of these opportunities before their competitors do.
Local companies will also have to adapt. Shallow engagement has been the norm, but increasingly we are seeing world-class joint ventures, such as Al Futtaim-IKEA and Abdul Latif Jamil-Toyota. In the end, value-adding partners will be in a strong strategic position even as markets liberalize. For local companies, de-regulation demands higher levels of performance. While joint ventures are happening, cross-border acquisition activity awaits further regulatory relaxation.
BI-ME: Can you give other successful examples of the “Dubai model”?
AAR: Dubai’s model of strong infrastructure and selective ownership rights has attracted a great many multinational firms that have subsequently increased their level of focus on the Gulf. Since the time when Sony set up in the Jebel Ali Free Zone at the launch of the project in 1999, for example, this relationship has been considerably extended. The Sony Science Shows were created to help the UAE education sector. Dubai International Capital has now acquired an equity stake in Sony worldwide.
There is a lot of wisdom in the model of gradual engagement. Companies gain exposure and experience through the free zone and then this leads to something more substantial. First, marquee companies like Microsoft and Oracle were enticed to join Dubai Internet City but may not have given it much priority. Subsequently, their presence inspired the sector to thrive. Injazat is now a leading company in data systems and business outsourcing, thriving here because the international companies, entrepreneurs, and talent are all present.
With these moves the government is enabling more substantial interaction with international companies. One begins with tactical links to lay the groundwork for longer-term strategic partnerships.
BI-ME:. What are the risks involved when businesses misunderstand the GCC?
AAR: The risks fall under two headings. First, companies may simply not have the opportunity despite having the potential to succeed there. Second, companies run the risk of entering the market in a fashion that does not fit and therefore this leads to sub-optimal results.
As mentioned before, the book addressed misconceptions and stereotypes of the Gulf, that it is “all about oil” and that “everyone is rich,” that from the US perspective “the GCC customer hates us” and that the markets are entirely Arab. Holding on to these misconceptions can be deadly, as they lead to misguided strategies.
Entering the market in an inauthentic fashion is another risk: offending customers or having a short-term “mercenary” perspective will not lead to lasting success.
BI-ME: What sort of physical presence do multinationals need in this region to be successful?
AAR: To be effective, a GCC organisation needs to have adequate presence, with appropriate decision-making rights and resources. Too often, the Gulf organisation lacks the decision rights and support it needs to capture the opportunity.
Dubai and the UAE more broadly have emerged as the generally preferred location for multinationals to have their regional headquarters. But the aspects that have made Dubai so successful also have some related drawbacks - such as inflation and crowding - that need to be considered.
Consumer product companies need to have a strong presence in Saudi Arabia to stay close to the largest market and to the cultural elements of the Kingdom. Saudi Arabia is, after all, the core market of the Gulf with a majority of both population and GDP.
BI-ME: In closing, how would you sum up the key messages of the book?
The Gulf region represents an opportunity that no global business can afford to ignore. Success in the GCC relies on understanding the region’s unique attributes and dynamics, and on building authentic business models that fit.
Note: Aamir A Rehman is an expert in global corporate strategy. He was formerly Global Head of Strategy for HSBC Amanah, a business unit of the world’s third largest bank. He has extensive experience in strategy development for multinational corporations and the Middle East region. At HSBC Amanah, Rehman was responsible for strategy development and implementation across global markets, including the UAE, Saudi Arabia and the broader Gulf. HSBC is one of the world’s largest banks, and HSBC Amanah serves over 300,000 customers worldwide. Prior to joining HSBC, Rehman was a strategy consultant to Fortune 500 and other leading businesses since 1999. He has worked with the Boston Consulting Group and with the Monitor Group.
Rehman has written several articles on business strategy in the Middle East, including a piece entitled “Dubai Inc.” for Harvard Business School (HBS) publication. His management commentary has been featured in the New York Times, the Financial Times, on National Public Radio and in the Wharton Leadership Digest. He is also an author of a 2008 piece in the Harvard Business Review.
Rehman serves on the advisory panel of Dinar Standard and has contributed to that publication. He and a group of colleagues are currently founding an investment holding company focused specifically on principal investments in the Gulf States, Asia and other emerging markets.
He holds an MBA from the Harvard Business School, a master’s degree in Middle Eastern Studies from Harvard University and a bachelor’s degree from Harvard College. He is a native of Staten Island, New York, and lives in New York City. His ongoing commentary can be found on www.rehmaninstitute.com