How Gulf companies can build global businesses

As Gulf companies expand into other cultures and compete to hire top global talent, they will need to find a balance between their own established cultural values and the expectations of the global corporate environment, write Saleh Al-Ateeqi and Hans-Martin Stockmeier

When, in 2006, DP World acquired the British port and ferry operator P&O, in a deal valued at US$7.1 billion, political debate over the company’s ownership of US port assets dominated the headlines. What was not in dispute was the transaction’s significance for the industry – the deal catapulted DP World to the position of the world’s third-largest container terminal operator.

Lying behind that massive acquisition is a growing trend for companies from across the Gulf Cooperation Council (GCC) states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) – to use petrodollars flooding into the region to finance strategic investments abroad. Even if oil prices declined modestly over the next few years, these states are likely to accumulate US$2.4 trillion in windfall revenues through 2014. While much of this money is headed toward domestic investments in healthcare, education and infrastructure, a significant portion of it is financing overseas investments.

Deep pockets alone, however, will not buy GCC companies a seat at the global economy’s head table. If they are to become global leaders in their industries, they will have to master capabilities that equip them to face global competition.

Companies of all stripes are active in this transformation. The petrochemical giant, Saudi Basic Industries (Sabic) was among the early movers, acquiring the petrochemical division of the Dutch chemicals and pharmaceuticals group, DSM, in 2002 for US$2 billion. The deal helped Sabic become the world’s 10th largest chemical company, with revenues of US$20.9 billion in 2005.

Private companies are also fuelling the trend. In 2005, the Kuwaiti logistics group, Agility (formerly PWC Logistics), bought companies in Singapore and the US as part of a drive to become one of the world’s top logistics groups. Smaller, family-owned businesses, such as the Saudi independent car distributor, Abdul Latif Jameel (ALJ), and the Kuwaiti retailer, M.H. Alshaya, are rapidly venturing into Europe, Russia and elsewhere.

Building capacity
In general, two factors motivate such expansionist ambitions. The first is the need to find new growth opportunities as domestic markets become saturated. Many GCC companies are larger and more advanced than their counterparts in neighbouring North Africa and the countries bordering the eastern Mediterranean.

Although these regional markets can provide a significant growth opportunity for any company – in mobile telecommunications, for example – the inherent risks and relatively small size of the markets have kept them off the agenda of many large multinationals.

The second motive for expansion is a desire to acquire particular skills or capabilities. Acquisitions in Europe and North America, especially, are typically part of a broader strategy to gain rapid access to Western management know-how and technology; they allow Gulf companies to short-circuit the laborious task of building such capabilities internally.

In 2006, for example, the Dubai property group, Emaar Properties, acquired both the second-largest private homebuilder in the US, John Laing Homes (for US$1 billion), and the UK realtor Hamptons International (for US$154 million). Besides gaining access to the British and US markets, Emaar can now draw on John Laing’s vast experience in real-estate development and Hamptons’ expertise in marketing.

Strong cash positions have not only opened the door for aggressive takeover strategies but have also given GCC companies time to learn about new markets and to absorb the skills they need.

The advantages that drive margins at home – high-income customer pools, cheap labour and low energy costs – can’t be transferred to external markets, and Gulf companies will need to become more efficient abroad to be profitable there. The acquiring companies must out of necessity bring in (or quickly develop) special capabilities that foster competitive advantages.

Acquisitions inspired by growth will probably have to be underpinned by a strong customer service ethos, while integration skills will be especially important when an acquirer buys a company to gain its capabilities. Other factors also come into play: for example, customers will span a broader range of incomes, including a large segment of the poor and “near poor”. Segmentation, pricing and cost-efficiency skills will be crucial in these cases.

In addition, companies will have to transform their organisations to manage operations across a number of countries, and finding and retaining managerial talent will require more attention as the need for it develops.

Cultural adjustments
The long-term success of expanding GCC companies may also rest on something more nebulous – a change in corporate culture. In the GCC and throughout the Arab world, relationships between people and social structures have traditionally carried great weight in every aspect of life: social, business and public. What in the West would be criticised as nepotism or cronyism is still widely accepted in the GCC as a way of reinforcing cultural bonds.

Yet, as Gulf companies expand into other cultures and compete to hire top global talent, they will need to find a balance between their own established cultural mores and the expectations of the global corporate environment. This challenge will extend to the boardrooms: GCC acquirers must understand and work within the governance structures of other business environments, which may be quite different from the GCC norm. The board of the acquired company must be active and aggressive in setting performance targets for it and not allow it to drift without direction after the takeover.

In the near term, a steady diet of petrodollars will fuel the growth trend. But over the longer term, larger servings of distinctive capabilities and skills must balance the menu.

(Saleh Al-Ateeqi is a consultant and Hans-Martin Stockmeier is a director in McKinsey’s Dubai office).

From The McKinsey Quarterly c. 2007 McKinsey & Company Inc. (Distributed by The New York Times Syndicate).

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