Companies in the Kingdom must learn to separate business requirements and family obligations. Zaher Al Munajjed, a specialist on business development, told Arabies Trends in a recent interview that family businesses need to see the difference between the family relationship and the business requirements. “Business requires professional management to take it to the next level, away from the sensitivities of the family,”says Al Munajjed, a business consultant who has, over the last 25 years, worked for and advised a number of large Saudi business groups both in Jeddah and in Riyadh. Al Munajjed’s focus has been on business restructuring and family business governance systems. He is a graduate in Business Administration from Harvard Business School and also holds a Masters in French International Law. Following are excerpts from the interview:
Q: As a consultant to Saudi businesses, how would you characterize them generally? What’s the state of Saudi business today?
A: Saudi businesses are among the most sophisticated in the Middle East. Over the past 50 years, Saudis have gone through a long period of trial and error. As a result, today we see Saudi industries and business that not only operate across the Middle East but sometimes across the globe. There are Saudi industries that export all over the Middle East and sometimes beyond. There is, for example, an air-conditioner supplier that exports to South America from Saudi Arabia. So, in general, large businesses in Saudi Arabia can be considered the business leaders of the region. That may sound surprising to someone living outside the Kingdom. In the West, what you hear is that Saudi Arabia is a backward country, that Saudi Arabia needs to be reformed, that the country is not up to date. It’s true that we do have a huge bureaucracy, but over the last few years this begun to be streamlined. Crown Prince Abdullah, over the last few years, has pushed through a number of reforms, among them the establishment of Saudi Arabian General Investment Authority (SAGIA), the tourism authority and a range of other reforms that have really helped the system start moving forward.
Q: But you’ve got to be aware of all the criticisms of the system. The red tape, the trouble with sponsors.
A: I was just speaking with the French Chamber of Commerce, and they were complaining about that. They were saying that the sponsorship system is a great problem in Saudi Arabia, that foreign businesses get stuck with their sponsor whether he’s any good or not. But I explained that the new investment laws permit any industrial conglomerate, or large company, to now come in and establish their own business without any need for a joint venture. Even in the distribution area, where there is still the need for a sponsor, we have seen over the last few years many so-called agencies changing hands sometimes amicably, sometimes not. Today, this is simply a business matter: There are discussions and then agreements, then the deal is done. Nobody is stuck for life with anyone else. So, yes, Saudi Arabia is moving forward with reforms in the business sector and they’re having an impact. A slow impact? Yes, perhaps. But a positive one, nevertheless. Think about this: The head of the new investment authority, Amr Al-Dabbagh, is a businessman. Then there’s Abdullah Alireza, who came from the private sector to the Ministry of State. There’s more and more synergy between the private and public sector, and they’re now working together for the good of the country.
Q: As a business consultant, your livelihood depends on problems. When firms come to see you, what’s the most common problem they’re facing? What do they need help with?
A: The problems vary. It depends on the level of maturity of the company. We see a whole spectrum of businesses. But let’s talk about the maturity of companies in Saudi Arabia generally. The majority of Saudi companies need to move beyond the paternalistic family structure.
Today, most Saudi companies are family owned and run in a very patriarchal manner. There’s also the problem in large families, where every child has to join the business whether he’s really up to the task or not. Now, a very interesting field in the Kingdom is family-business consulting, where you help these families realize the importance of differentiating between the family and the business. They need to see the difference between the family relationship and the business requirements. Business requires professional management to take it to the next level, away from the sensitivities of the family. I know of one family, which is very sophisticated, where to avoid confrontation among family members who have very different opinions about how to run the business, there hasn’t been a formal board meeting in 20 years. This is obviously not a way to prepare to face the competition. This has to change.
Q: I was speaking with Khalid Abdullah Al-Zamil, of Zamil Steel, who told me that by going public, at least partially, and dividing up ownership by shares, they were able to avoid a lot of this conflict. Should more family businesses in the Kingdom go public?
A: Definitely, yes. But only those companies that are mature enough to go public should do so. The mere fact of wanting to go public, however, forces the company to begin to organize itself. There are certain rules and conditions that are set in stone for going public: You need to have a full-fledged professional management team in place, you need a set of audited financials, ongoing accounting, no current accounts for members of the family within the company and so on and so on. So, yes, the fact of even thinking about going public has a positive impact on the organization of the company, on the fact that disagreements within the family would not destroy the company, but would just mean a transfer of shares.
Q: Imagine that you’re advising a foreign business that wants to set up shop in Saudi Arabia. What would you tell them about the current environment and the outlook down the line?
A: What kind of business?
Q: Let’s say that it’s a European food-processing company that wants to distribute its products in the Kingdom and across the Gulf. How would you advise them?
A: I would first tell them that this is a good move. Saudi Arabia is a country of 20-something million inhabitants, with the highest per capita purchasing power in the region. It’s the focus.
Q: Hold on. Qatar, to name just one Gulf state, has higher per capita purchasing power.
A: Yeah, but Qatar doesn’t count as a consumer market. Qatar doesn’t have the mass. Saudi Arabia has the mass and the purchasing power. But to get back to your question, Saudi Arabia is the only country or one of the very few countries in the world that is completely open. You have no quotas for cars, no quotas for textiles, no quotas for anything. Anyone who is competitive and who has a good product can succeed. Of course, as in any other market, it takes a lot of effort: For marketing, advertising, distribution. But that’s the norm worldwide.
The rules in Saudi Arabia have been easing up. And Saudi Arabia is a hub, whether you like it or not. The bureaucracy, the problems with visas, all these impediments that have existed for quite some time all these things have encouraged a lot of companies to set up shop in Dubai. But they’re setting up shop in Dubai to do business in Saudi Arabia. In the medium to long term, from a business perspective, the current fascination with Dubai will disappear. Saudi Arabia is back in the race. In the medium term, Saudi Arabia will take back its rightful position as the center of business in the area.
Q: But if you look at the indices, for instance, on the time it takes to set up a business in the region. In Dubai, it takes a day. In Saudi Arabia, it takes six months. There are no taxes in Dubai. There are significant corporate taxes in Saudi Arabia. If I’m looking for a regional destination for my food-processing business, why wouldn’t I go to Dubai?
A: Today, I would agree with you. Today, yes, you’re better off setting up shop in Dubai assuming that you have perfect logistics that will get your products to Saudi Arabia. But, from what I’m seeing, there are significant, positive changes taking place in Saudi Arabia. Again, look at SAGIA; look at the reforms in the telecom sector, how you can now get a phone line in a day when, a year or two ago, it would have taken six months. The changes are taking place, and it’s in your interest to be close to your customer. Shipping goods from Dubai does not satisfy the requirements of your food business. So, yes, Dubai has put in place a very attractive package. But, in the end, the interest of any manufacturer, or any businessman, is to be among his customers. And that’s what Saudi Arabia offers.
