Having weathered the global economic crisis, Ghabbour Auto, an Egyptian company, is pushing ahead with expansion plans that envisage it stretching its footprint across borders from north Africa to the oil-rich Arab Gulf states.
It is involved in a $70m joint venture with Marcopolo, a Brazil-based bus manufacturer, to produce 8,000 buses in Egypt by 2011, and looks to export across the region and open offices in Dubai, Jordan, Algeria and Saudi Arabia.
The company has already entered the Iraqi market, after agreeing a joint venture earlier this year to become the main distributor of Hyundai vehicles in that market. “We slowed down at the beginning of the [economic] crisis, but since last autumn we came back aggressively,” says Raouf Ghabbour, chief executive.
In many ways, Ghabbour illustrates the potential for an ambitious company bent on taking advantage of growth opportunities in the region. The Middle East is blessed with more than half the world’s proven oil reserves, and a rapidly growing and young population.
But Ghabbour’s transition from small, family-run trading business to regional auto manufacturer and distributor also highlights some of the issues that have stymied the development of the Middle East’s small and medium-sized companies sector. And there are few companies in the Arab world that can lay claim to be genuinely region-wide.
SMEs are expected to play a key role in job creation and economic development as increasing numbers of young people enter job markets and governments talk up the need to reduce dependency on volatile oil prices. Yet the sector remains poorly developed, analysts say.
“This is the dog that hasn’t barked,” says Jarmo Kotilaine, chief economist at NCB Capital. “There’s a huge opportunity for SMEs, and the sooner the sector develops, the better. But I don’t think enough has been done to support their growth.”
Mr Kotilaine cites numerous factors that have hampered SME development. Chief among them has been the problem of accessing capital, as lenders in the region have focused on government-related entities or large conglomerates.
“Clearly capital is a significant constraint, and it’s an area where not much has happened,” he says. “The big problem is, a company sets up and has brought in equity, but then how does it grow? Often, the only way is through retained earnings because it’s not easy for a company to establish a good credit history and use banks to get what might be called venture capital.”
The situation has been exacerbated by the global economic crisis, which has slowed growth in the Middle East, made banks more risk averse, and created a liquidity squeeze, particularly in the Gulf, where banks have been hard hit by the collapse in the real estate market and debt problems in Dubai.
Analysts also blame a lack of government support, and a poorly developed corporate culture among many of the region’s private businesses.
“Governments have to create the incentives to boost lending,” says John Sfakianakis, chief economist at Banque Saudi Fransi. “But the companies also have to be more realistic in terms of what they have to do to become more open to bank credit. If you don’t have a balance sheet, the bank is not going to give you money, so it’s an effort from all sides – governments, banks and companies.”
In developed markets such as the US and Europe, SMEs are estimated to account for 60 per cent of industrial output and 40 per cent of gross domestic product.
The figures vary across the Middle East. In the oil-rich Gulf, where governments and government-related entities tend to dominate economies and crowd out the private sector, the SME contribution is at its lowest.
In Saudi Arabia, the Arab Gulf’s most populous country and the Middle East’s largest economy, SME contribution to gross domestic product is negligible, according to a report by Standard Chartered Bank. In the United Arab Emirates, the region’s business, finance and trade hub, it is roughly 30 per cent.
In the poorer and more populous Middle East states, where economies are more diversified, the numbers are healthier. In Egypt, SMEs contribute 80 per cent of GDP, according to the Standard Chartered report.
But Ghabbour, which began life as a general trading company in the 1950s, has still had to endure operating in an emerging market that historically has been held back by a cumbersome bureaucratic
environment and business-unfriendly governments. Between 1999 and 2002, the company was forced to cut staff from about 4,000 to 2,000 as the economy stagnated. Passenger car sales in a country of more than 70m people slumped to 40,000, and Ghabbour’s total sales revenue was E£500m ($88m) in 2003.
The Egyptian business environment has improved markedly in recent years, as a government-led economic team has pushed through reforms that have opened up the economy and cut red tape. Last year, Ghabbour’s profit was down by half as a result of the economic downturn, and its sales revenue fell by 18 per cent compared with 2008, but it still reached E£4.2bn.
Now that it has grown into a sizeable company, employing 5,300 people, it faces other challenges as it pursues the path to cross-border expansion – issues that are region-wide and help explain some of the barriers to growth.
Mr Ghabbour says his number-one challenge is finding partners, which he says is due to an outdated mind-set and business culture. Companies are “like old-fashioned grocery shops”, he says. “[A company leader] doesn’t see the value of increasing the capital of his company; he doesn’t understand how he can let go of the day-to-day management of his company, so he will be very much willing for it to stay how it is – mediocre.”
It is an ailment that afflicts businesses across the region, where private companies, often family owned, are reluctant to open up their books to outside eyes, and are wary of offering share ownership.
“Opportunities are there and will continue to be there, but to exploit those opportunities, it’s really up to the chief executives of the companies and their boards to change their state of mind,” Mr Ghabbour says.
His other main concern goes to the core of a pressing challenge facing Middle Eastern nations – poor educational standards. “You might have the most brilliant ideas, you might have the money to do it, but when you grow you don’t find the people to support the growth,” he says.
Experts say that for the SME sector in the Middle East to flourish, governments will need to offer more incentives to bolster financing, training and education, helping to improve access to capital and developing a business mentality to foster more entrepreneurialism, while enhancing corporate structures and transparency.
The issues are particularly relevant for the Gulf, where the SME sector is least developed.
“These are fairly new markets and, as they and their populations expand, the opportunities for the SME sector will increase, so over time there is a positive momentum for the sector to take more of a role,” says Farouk Soussa, Middle East economist at Citigroup. “Second, we are going through a pretty strong period of consolidation of bank balance sheets, and lending to the SME sector is close to zero. But going forward, as banks recover, you could expect that to improve.”
But the question, Mr Soussa says, is whether SMEs will become significant drivers of growth and job creation in the Gulf, “and I don’t see that happening in the near term”.
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