Saudis seek help to grow family businesses

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Hyundai’s new 3,000-sq metre car showroom in the industrial city of Dammam in eastern Saudi Arabia is the largest in the world, says Abdullah al Majdouie. A gleaming new ­multi-story office block next door dominates the highway and a chain of chic coffee shops is among other developments coming soon to the eastern part of the kingdom.

They are all projects run by the Almajdouie Group, a family-owned business with 15 operating companies. The oil-rich economy is booming and the Majdouie family is reaping the rewards. The group enjoyed revenue growth of 40 per cent last year and needs to increase its workforce from 2,000 people to 5,000 to match its expansion, says Mr Majdouie, group president.

Yet even while he speaks of the success he is thinking of the potential minefield that lies ahead, ensuring the group survives the all-important transition to second and third generations.

Many Gulf companies are nearing that critical period, and experts quote global statistics showing only 30 per cent of family companies pass successfully to the second generation. More worryingly, only an eighth of those are thought to make it to the third, as cousins and siblings squabble over succession. This is “because they deal with the company like their house, and it’s a totally different environment”, says Mr Majdouie.

The problem is particularly acute in Gulf countries such as Saudi Arabia, where families tend to be large and more than 90 per cent of businesses are estimated to be family-owned. In Saudi Arabia, their success is critical to the government’s goal of diversifying the economy and providing more job opportunities.

Gradually, experts say, the mindset is changing in Saudi Arabia, particularly among larger companies such as Almajdouie Group.

To ensure it bucks the trend of failures, the company – founded in the 1960s – has enlisted the services of PwC, the professional services firm, to draft a new family constitution. This will tackle the issue of who takes over the firm when it passes to the third generation – and there are many candidates. Mr Majdouie is the eldest of the second generation and one of five brothers and four sisters, who between them have 32 children.

The group had a constitution before this but it was “very primitive”, he says, and “while things are dynamic and changing, we have to change”.

The process of thinking with more of a corporate mentality began for Almajdouie two years ago, he says. This led last year to the creation of a four-man strategy planning team, conscious that taking advantage of the boom is one thing, prospering in a downturn another.

Hischam El Agamy, director of corporate development at the Swiss-based IMD business school, says the change in mindset is part of a trend that is creating a “golden egg” for consultants. The boom is providing the perfect launch-pad for companies to become more corporate in their thinking, he adds. “In the past we saw the family and business as one unit. Now, with the increasing need to professionalise the organisation to face the new business challenges, we are seeing more of a separation between family and business.”

He and others predict a greater number of initial public offerings by family companies in the Gulf, as well as acquisitions and strategic alliances.

But listing on the stock market is still a step too far for Almajdouie Group. “We thought about that but we were not brave enough to sell away our power,” Mr Majdouie says.

Others, however, are taking the plunge. Zamil Industrial Investment, part of the Zamil Group, was one of the first to look to the stock market, selling a 40 per cent stake in 1998. Since then, its turnover has risen from about $200m to $1bn (€680m, £480m), says Abdulla al-Zamil, chief operating officer. The decision was taken both to bring a more corporate structure to the businesses and also due to the realisation that the family could not keep injecting cash into the business.

Managing the group through the boom is now the tricky task, Mr Zamil says. “Growth management, that’s the name of the game nowadays ... How you are able to grow your business without being overly fat.”

After the 1970s boom, he says, the problems of a stagnating economy were exacerbated by the government’s failure to pay contracts. This time there is pressure to expand to meet the demands of Saudi Aramco, the state-owned oil company that is spending about $90bn to increase its capacity. Aramco is the lifeblood for many companies in eastern Saudi Arabia, like the Zamil Group. Such pressure can “frighten” suppliers, Mr Zamil says.

Zamil is also preparing for a third-generation transition. Mr Zamil is head of a “cousin’s council” which brings together 18 family members, and “many more are coming”, he says. “That’s what worries us. The pipeline.”

If the family constitution, “which deals with every conceivable thing you can think of”, did not exist, it would be chaos, he says.

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