By Massoud A. Derhally
As domestic oil demand threatens to pose a fiscal challenge for Saudi Arabia in the coming years, one of the kingdom’s top executives, Abdulla Al Zamil, argues the case for making the most of the country’s most precious asset
Abdulla Mohammed Al Zamil is something of a visionary. He represents a younger generation of Saudis looking to shake things up and in many ways symbolises the changing dynamics of family businesses in the Gulf that have made the transition from traditional merchant houses rooted back in the 1970s to companies that have had to adapt and evolve in tandem with the changing global economy.
At 47, an upbeat and energetic Al Zamil heads Zamil Industrial Investment Co (ZIIC), the fourth-largest Saudi industrial company by market capitalisation and one of the fastest-growing companies in Saudi Arabia. After earning a bachelor’s degree in Industrial Engineering from the University of Washington in Seattle, Al Zamil returned to the kingdom in 1987 to join the family business while completing his MBA. He worked his way up from an industrial engineer on the assembly line, to then being part of the purchasing department, before going on to sales and marketing and eventually operations.
“My father was the best silent teacher,” he says. “His actions spoke volumes.”
He's helped the company transform in line with the expanding economy of Saudi Arabia and realised, along with other family members, that moving beyond the traditional markets in the Gulf and wider Arab world would provide opportunities for growth. And, the company realised, a catalyst to expansion would be by becoming a publicly traded entity.
“To be public, you need to have economies of scale; you cannot be a small trading firm that would want to go public,” Al Zamil says. “There are certain prerequisites and back in the mid 1990s we thought we had those prerequisites. The government was very much encouraging family companies to start going public, especially the ones that employ a lot of locals.”
About 23 percent of Middle Eastern family businesses plan to grow quickly and aggressively in the next five years, according to a recent PwC survey. A further 69 percent in the region expect steady growth, and only two percent expect to contract, according to the consultancy.
Today, Zamil Industrial sells its products in more than 90 countries with manufacturing facilities in Saudi Arabia, the United Arab Emirates, Egypt, Austria, India, Vietnam and Italy, employing more than 10,000 people in 55 countries. The company sells about 1 million air-conditioning units a year and in the last ten years almost doubled its production. ZIIC derives 40 percent of its revenue from outside the kingdom and despite the challenges of the past few years, ZIIC continues to be one of the Gulf’s best performing companies.
“Usually when you’re a publicly traded company governance becomes an integral part of your overall process and it makes it much more institutionalised... You tend to separate management from ownership clearly when you have other partners in the business,” Zamil says.
For ZIIC, diversifying its portfolio was key to its future and it needed to monetise. Going public on the Saudi Tadawul stock exchange, the Arab world’s largest bourse, meant a greater level of flexibility in terms of how ZIIC would finance its growth down the road. It meant being able to go to lending institutions without having to put on the table personal guarantees, and carrying out debt restructuring.
“When we decided to go public one of the reasons to monetise was partly to deploy those funds into parallel investments and that’s exactly what we did,” Al Zamil says. “When 30 or 40 percent was sold, those funds were immediately deployed into two other companies which we created from scratch; those were in the petrochemicals field. We always wanted to enter into the petrochemicals field but we lacked the proper funds to do so and that was partly the reason why we wanted to go public.”
“When you’re a public company, banks and financial institutions look at you differently,” Al Zamil says. “You can be in the capital market a lot more because of the transparency that you put forward.”
Like other family businesses that have gone public in Saudi Arabia over the past ten years, Al Zamil believes the decision to do so has served the company well. He also realises that controlling the share price is futile.
“You have to concentrate on increasing shareholder value,” he says.
Despite the political turmoil the Arab world has undergone the past two years, the delayed recovery of the global economy and deeper recession in Europe, ZIIC posted a 39.4 percent increase in its third quarter net profits which reached SAR46.8m ($12.5m), compared to SAR33.6m during the same period in 2011, as sales increased 9.8 percent.
The company is likely to see similar growth next year as a result of greater demand in the kingdom spurred by Saudi Arabia’s government spending heavily on infrastructure. Saudi Arabia’s economy is forecast to grow by about 5.8 percent this year even though the recovery of the global economy stalls, as a result of higher oil production, according to Jadwa Investment.
“The first three quarters of this year we’ve seen nice bottom-line growth because we’ve had two expansions in the insulation sector and concrete and we’re now realising the benefits of those,” Al Zamil says.
“We will continue to grow positively in the year 2013, the economy is still very strong, the government demand in the oil and gas sector is still very strong and we’re a major player in that field.”
Zamil Industrial, which has a presence in North Africa, wasn’t affected by the wave of protests that swept the Arab world toppling four leaders. Of the countries that have witnessed upheaval, Libya could be a potential market for further expansion into Africa beyond the company’s existing presence in Egypt.
“Libya is quite an interesting place; we are watching it very closely. We have an office in Benghazi and have started receiving orders there,” Al Zamil says. “Libya being a very much similar economy to the Gulf, being oil- and gas-based.”
Al Zamil says that if the company was to invest in the North African country it would be in a steel factory that would tap into the reconstruction phase. Libya’s economy is set to grow by 122 percent this year, according to the International Monetary Fund, as the country rebounds from a rebellion that overthrew the regime of former leader Muammar Gaddafi.
In Egypt, where the company was initially concerned in the wake of the revolution that toppled Hosni Mubarak, the firm’s operations have been resilient. The country serves as a springboard for other markets in Africa and southern Europe where as much as 60 percent of what the company produces goes.
“I hate to quote Bernard Lewis [the US-based author on Middle Eastern issues], but the Arab Spring was not asking for democracy, it was asking for justice,” Al Zamil says when asked about what lessons can be drawn from the turmoil of the last two years. “I don’t believe at this stage in this region that Western-style democracy will work. Justice is what people are looking for. We still need to go through stages. Those economies and countries were in bad need of change but turmoil will still be with us. The French Revolution took seven or eight years and it was bloody.”
In India, where Zamil Industrial has invested about $200m, there is concern about a slowdown in growth in the world’s ninth-largest economy and Asia’s third largest.
“The only concern we have is India because we have an air-conditioning plant in India as well as a steel plant,” Al Zamil says. “But today we are in November, our order book is quite strong in India, there might be a bit more competition so that might put pressure slightly on margins there. To us it’s important to fill up the factory because of the cyclicality there. It’s an important market for us, we’re investors in various sectors of the economy. But you cannot go wrong with India, it’s an economy that will continue to grow, the demand will continue to be strong."
Like China, India’s economy has been slowing down. The IMF last month revised its 2012 economic growth forecast for India to 4.9 percent from 6.1 percent previously. India had been growing between eight and nine percent before the 2009 global financial crisis. Growth has stalled on lower internal consumption in the country.
In Vietnam, 2012 will probably be the company’s best year in the country, where revenue will increase an annual 27 percent on the back of a new manufacturing facility in Ho Chi Minh City. Operating in the Southeast Asian nation wasn’t always so smooth, however. In 1998, after completing a private placement of about 40 percent to businessmen in the Gulf, the company was faced with the Asian financial crisis just after investing $100m in the country.
“We had to learn the hard way," Al Zamil explains. “We seriously considered selling our operation there completing and minimising our losses. But we stuck to the initial decision that we cannot leave a market because of a one-year dip. When you invest outside you need to be a believer in the long-term aspect of investment. It gave us a wider look on the global economy and it widened our scope.”
Looking forward, ZIIC is considering buying two companies as it seeks to expand its operations. “We think expanding through acquisitions along with organic growth gives you the targeted growth that you aspire to,” Al Zamil says.
If Zamil Industrial concludes the agreements with the companies, it would finance the deals internally, Al Zamil says. “We’re one of the few companies in the region that almost did one acquisition per year over the past five or six years,” he adds. “When we entered the insulation sector we didn’t want to start from zero so we acquired the largest company in Saudi. I believe in the route of acquisition rather than greenfield.”
At the company's home in Saudi Arabia, the world’s largest producer of crude, Al Zamil says in the wake of all the economic challenges, stiffer competition, energy security and diversification of the energy mix increasingly are becoming a major policy driver for renewables and the region can no longer continue to rely on an oil-based economy.
“I think if you properly read the cycles of the petrochemicals market I think you’re in for a good investment going forward,” he says. “In the alternative energy field we will see an influx of industries catering to that specific segment of the economy. It will bring more diversity to the economy because we never had an alternative energy sector. If we have a strong foothold in that specific sector then those are very much export-oriented products and services.”
“Saudi has core competence in hydrocarbons, we cannot deviate from that fact. Oil is cheap, gas is cheap, so we should just continue down that road,” Al Zamil adds. “Unfortunately we have not done enough in pursuing that road further and that means creating more downstream to create value. That, in my opinion, will create enough jobs, make the economy grow and be competitive.”
The industrial manufacturing sector, which presently employs 200,000 people, can help play a role in providing jobs where the unemployment rate among young people can be as high as 40 percent. If the industrial manufacturing sector increases its percentage of overall gross domestic product (GDP) of the country from thirteen percent to 20 percent by 2020, this will change the dynamic of the labour workforce in the country and create more jobs, Al Zamil says.
“The Saudi government has realised — in my opinion a bit late — that this is an important aspect of the economy growing further,” Al Zamil says. “We cannot forever sell commodities. The value addition is not there, employment is not there, and there is no doubt in my mind that downstream industries and converting industries are important roads going ahead.”
just a correction, the industrial sector employs 600,000
Fixed capital investments needed for diversifying up and down the production hierarchy are hampered by the perceived risk on behalf of the government of a stable future. In other words, pocket the cash while it's available.