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Tue 7 Jun 2005 04:00 AM

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Agencies threaten international companies

Oil&Gas Middle East looks at the challenges facing international companies entering the region.

|~||~||~|The Middle East Economy is booming and most of it has to do with rocketing oil prices. However, with an era of easy oil coming to a closure, companies are trying to explore new ways of maximising production. The time seems to be just right for small to medium size oilfield supplies and services companies from Aberdeen and the Netherlands to come into the region.

However, these companies have often had cold feet about doing business in an otherwise warm region. Could local agents actually deter these companies with their high commissions, or are the agency laws themselves too restrictive and complicated for these businessmen? Hugh Fraser, legal and commercial consultant of Hugh Fraser International, believes that international companies are often left entirely at the mercy of their agents.

If luck is on their side, they may find an able and an efficient local partner. If not, they are lumbered and unable to get out of the agency agreement, he says. “Once an agreement is signed between the company and an agency, which is owned by an UAE national and registered by the Ministry of Economic Affairs, the agency is entitled to a commission for any sale made in the territory, whether or not the agent has played a part in that particular sale,” he says.

Some companies try to be cautious and sign the agreement only after a sale has been made. But, this again depends on the flexibility of the agent, who may insist on an exclusive contract right from the beginning.

Although the percentage of revenue shared may be a problem in the long run, the absence of any sales leads is more often a greater cause for concern. “Sometimes, the local agent may not have the necessary sales expertise to market the particular product or service. The smaller companies who do not have the resources to have a dedicated sales or technical person for the region are stuck without any business,” says a sales representative of a company from the UK, which is forced to have its own marketing representative, as the local agent does not provide it with sufficient leads.

The other problem that plagues international companies is that the number of companies an agency represents is often far greater than its ability to adequately promote them all. There is no suggested cap on the number of companies that an agency can sign up as principals, nor is there a prohibition against contracting business from competitors of the existing clients.

“Many international companies do complain about it, as sometimes they feel lost among the increasing crowd. So, foreign companies should ensure that their contract has a clause that suggests that the agency cannot take up competition,” says Fraser.

Jamal Bochor, the assistant general manager of Emdad, one of the larger agencies in the UAE, agrees with general criticism that some of the local companies act like ‘badge collectors.’

However, at Emdad, he says, company policy is to offer a complete range of services and supplies, but not at the risk of overburdening sales engineers. “We do not go about collecting companies; instead, we work to improve the businesses of our existing clients and also add benefits to the end user,” says Bochor.

One of the other issues that go unnoticed by the international companies in the fine print is the exclusivity right that the agencies can hold claim to.

“Companies that come from Scotland, like us, may not know that the agent is entitled to hold exclusive rights to the region,”says Tim Elley of Scotoil Services. “It is essential to completely understand the contract, as it is likely that an agent highly successful in Abu Dhabi may have no contacts in Saudi Arabia, or even Sharjah. So, it becomes important for the company to understand which regions he wants the agency to hold claim to.”

Scotoil Services set up its business in the Middle East in late 2002. Elley found that there were quite a few companies from Scotland struggling in the region, without any guidance from the agent.

“Trade agencies in Scotland, make it very easy for the companies to come to the region, but once we are in Dubai, there is no central guidance about the various agencies and a third party giving this kind of information will be highly useful,” Elley says.

Terry Willis, the Dubai-based representative of the Energy International Council, helps member companies from the United Kingdom that want to do business in the region. “Every market has its own identity and we are doing our best to inform our member companies of the region’s uniqueness, particularly of the different working days,” he says. “We do not pass judgements on any of the local agents, but provide our members with a database of the agents and ongoing projects,” he adds.

However, Petrocomp, a free zone company set up about a year back in Dubai, aims to do just that. The objective behind setting up such a company according to its promoter, Ahmed Al Mashgari, is that the company realised that there is a gap between the manufacturers and the end users, where professional and experienced services are required.

Al Mashgari hopes to capitalise on his networking skills in the region and accommodate smaller companies within the crowded market. For this purpose, Petrocomp will assist international companies in finding a reliable local partner. “There are lesser known agents in the region hungry for business. So, we will, apart from facilitating business for the international companies, also boost the profile of these smaller local companies,” says Al Mashgari.

Whether these smaller agents have the same clout with the operating companies as the established ones, is a different matter.

However, Al Mashgari is confident of his knowledge of the regional market, having worked previously in ADCO and Woods Group for over two decades. Petrocomp aims to take on three year regional business development contracts with companies coming into the region and acting as their ‘man on the ground’, according to Hugh Fraser, who will also be the legal consultant for Petrocomp.

Fraser is also currently working on another business model, whereby about five international companies will be brought into the region in an umbrella group with an influential local partner and independent management. “Instead of bringing one product or service, we will bring a complimentary mix of businesses that will be very difficult to ignore,” says Fraser.

However, with various Free Trade agreements (FTAs) under discussion, could the agencies themselves may become less powerful? “The energy sector is still a closely held sector”, says Juma Mohammed Al Kait, economic researcher at the UAE Ministry of Economic Affairs.

Negotiations with the USA and Europe are underway to replace agents with distributors, he says, adding that ownership patterns in the energy sector will still be between 49 and 75%, thereby not eliminating agents completely.

“The Agencies Law is unlikely to dramatically change in the near future,” says C. Chakradaran, senior partner, Afridi & Angell, Legal Consultants. “The UAE may be pressurised to follow the lead of Bahrain by permitting companies that are 49% owned by foreigners to act as distributors or the UAE may allow multiple UAE national distributors in each emirate for a particular product,” Chakradaran adds.

According to him, the WTO’s enforcement mechanisms are weak and it is very likely that the UAE may decide to not make extensive changes to its Agencies Law in the near future.

“The UAE may find little incentive in radically altering its Agencies Law unless it believes liberalising those laws will be to the benefit of its citizens, although it would be prudent for current agents to take steps to protect their interests, envisaging some change to the Agencies Law during future negotiations,” he says.

“The role of an agent in the region can never be abolished,” says Al Mashgari. The international companies need a local partner who understands the working culture and all its uniqueness, he argues. Uniqueness or peculiarities are a matter of opinion, but ‘Don’t they know it's Friday’? is certainly easier said than understood.||**||

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