Interview with Abdullah A. Al Fozan, Al Fozan Group, KSA
The Abdullatif & Mohamed Al Fozan Company, also known as the Al Fozan Group, is one of the largest family businesses in Saudi Arabia. Vastly diversified across a multitude of industries, the 40 years old holding company, employs over 2400 employees. Its main interests lie in distribution of building and electrical materials; architectural hardware and insulation materials; production of plastic containers, wood, aluminum, electrical and steel products; engineering consultancy services; civil construction for buildings; electronics retail; marketing and distribution of cosmetics, furniture, clothing, eye wear and pharmaceutical products; architectural and interior design services; private equity investments; oil and gas refining and exploring. The group in its second generation owns and has shares in over 25 companies whereby it has set leading examples in successful regional alliances.
Abdullah A. Al Fozan, Managing Director of Al Fozan Group, speaks to Tharawat magazine about the challenges in the current economic client, opportunities for growth, financial restructuring, and regional alliances.
In your opinion, due to recent events in the world economy, is this a time for consolidation or growth in family business?
All companies should have a flexible strategy so as to react to recent changes. The new economic situation, has urged us to reinforce businesses and to resort to restructuring. As for the growth strategy, it has become clear inside the current system of our business through development and reinforcement.
I believe it would be best to define priorities, especially after the new changes imposed by the world financial crisis, and its resulting conservative financing policies by commercial banks. Our priority today is not about the new businesses, but it is all about focusing on the core of the current businesses and developing them through intrinsic activities, particularly when bearing in mind that we have largely expanded our business during the last five years.
Undoubtedly, the world crisis we went through was very fierce, but fortunately its influence was limited on the Saudi economy. The Saudi economic position can be summarised to the following sectors:
(1) Government Sector: When looking at the Saudi case, you can notice that it is in its best condition. Saudi Arabia has a monetary reserve amounting to 1.6 trillion riyals. The oil price is $ 70 per barrel, and even if it goes down to $ 50, the government will not suffer much. The government status is very stable and good. The government of the Custodian of the Two Holy Mosques approached the crisis with a great deal of wisdom indeed, supporting and spending on the infrastructure, mega projects, including education, health, housing, etc.
(2) Banking Sector: The question arising with regard to the banking sector is: What are the problems faced by banks? The reserve provisions ranging between 15 – 20 billion riyals, representing no more than 6-month profits for the Saudi banks estimated at 30-35 billion riyals per year. We do not have problems in the Saudi banking sector, and we do not have a mortgage system. Accordingly, individuals are not loaded with debts, as the system is very conservative. The banking sector is therefore very solid in Saudi Arabia.
(3) Business and Companies Sector: The position of Saudi companies is strong, and only few companies face problems. All that the Saudi companies need is minor modifications in the ratio of debt to equity.
(4) Individuals: As you know, people here are not like the typical US individual, holding 9 credit cards, a mortgage etc. The lending level is still limited and conservative.
Therefore, when analysing the Saudi economy, one can safely say that performance is good. However, what gives rise to concerns, in my view, is that Saudi banks continue to refrain from financing projects. This will tie the private sector and the government will become the only sector financing the national economy projects. This is an unhealthy pattern.
Where do you see the growth possibilities in the region and internationally for family businesses?
Regarding the Gulf countries, being the major oil source in the world, I believe the industries relating to oil and petrochemicals are the most important and attractive strategic choice for investment. I also believe that the Gulf countries are in an internationally leading position when it comes to the petrochemical industries.
When you take the Saudi stock market today as a simple example, you can see that banks and petrochemical companies are the ones driving the market, while the other sectors move according to the pace of these two sectors. I also see that the energy-related industries, such as steel and aluminium industries have not fulfilled their potentials yet in the Gulf markets. We are relatively behind in these industries. I think we need to make a great expansion in this sector.
The retail sector is also one of the very promising sectors, especially when noticing that the Saudi market is lacking it. It requires keen insight for the new changes and quick response to them, not to mention its need for excellent management. There are success stories for companies in this sector but they are relatively rare.
In my own opinion, the retail sector and the energy-related industries sector are in need for more attention.
Considering the trends you have noticed recently, what do you think about the international growth possibilities that could be attractive for you as investors?
Our investment strategy is conservative outside the Arab Gulf countries. On the international level, our businesses are restricted to real estate investments, stock, and special contributions, or what can be called alternative investments.
As for expansion, we have preferred it to be through the main activities, such as construction material trade and retail sector, including electronics and consumer goods.
Al Fozan Group as an impressive example of horizontal diversification, what are the industries that you would like to explore in the future or are you not planning to expand your activities right now?
There are several projects included in our strategy, and we have been working on them for five years. They are the businesses we have been keen on pursuing as ideas until we reach final execution. There have been projects being studied for years before the spurt, and still we believe that they are projects of great potential. Such projects are included as goals for business development.
In fact, we were studying projects but we suspended them now after the world crisis as the new changes caused such projects to lose their appeal. For example, we were studying projects in the petrochemicals sector, and when the world crisis took place, there were many petrochemical companies enlisted in the stock market with less than their book value though they demonstrated high feasibility, profitability, history record and good management. This kind of new venture was very attractive before the world crisis, but the changes led us to refraining from engaging in new projects in this sector. Instead, we preferred to buy into these stocks, which was cheaper, more profitable and less risky for the investor.
When you make a decision for a certain project you have certain KPIs (Key Performance Indicators) that you depend on, or is it your feeling as an entrepreneur, or both?
Studying the economic feasibility is essential, but we cannot disregard other factors, such as your insight, experience, feeling good about the project, the qualitative extras it provides as a technical or strategic partner, compliance with strategy, and service offered to society.
Our projects include international partners; all have proven leadership and professionalism in their sectors and they possess the capabilities to read into the market’s variables. They are also shareholders, and I am very concerned about a technical partner who is also an equity partner.
It is always said that investment diversification leads to dispersal. But I say that if you collaborate with the successful parties running the business, there will be no dispersal.
Our business philosophy is based on the notion that it is not necessary to be a part of the management staff. For example, when I entered into partnership with Emaar Company, I did not get involved in Emaar’s management. Likewise, when I engaged into investments with Talaat Moustafa Company, I did not aim to take part in its management.
Our strategic goals urge us to cooperate with successful people and prominent players in their markets who wish to expand geographically in our region. I have never suffered from dispersion as I do not interfere with management. I invest with people who have achieved great success in their industries and fully understand their sectors. My investment with them is to give them assurance and confidence in the new market they are wishing to penetrate.
When a foreign investor shows us an investment possibility, provides us with feasibility studies of the market he works in, proves to us that it is an encouraging opportunity, and then heavily participates with us through partnership and contribution, this helps both parties to have confidence in the market invested in.
And you never get involved in management?
I provide support for my partners when they need and ask for it but they are the ones in charge, due to two factors:
(1) they understand the business interest much better.
(2) in the meantime, I can keep the focus on my own priorities.
My business focus is on two key sectors: construction materials and electronic and consumer goods. This is because these are the two sectors of which I have extensive knowledge and through them I can achieve spread without a partner. As for the other sectors, I prefer to enter with a successful partner who holds the responsibility of management, and my role is to provide him with all means of support.
In general, our policy is based on that the first riyal we spend goes to the basic and intrinsic businesses and expansions therein, and then the second riyal is to be allocated to investment. This strategy is the basis of our investment decisions, which achieves us two objectives: diversification with no distraction.
Thus, I always see that the management of cash flow is very important. With the beginning of the world financial crisis, many thought of how to exploit the opportunities generated by the crisis, despite their poor financial status. That was a fatal mistake. I emphasise that one of the biggest challenges facing the Saudi companies, and the family businesses in particular, is the lack of appropriate cash flow management, and the crisis proved to be the real test.
Some companies achieve profits but they collapse when customers fail to pay, then the bank refuses to present funds, leaving the companies to declare bankruptcy. On the other hand, there are companies that lose, but their good cash flow enables them to pay their dues and pass the crisis successfully.
In the recent months there have been a lot of headlines on family business debt in the region. Do you think family business should have a different way of structuring their debt than corporate companies? Is there such a thing as ideal debt to equity ratio for the family business?
How did the world crisis begin? It began because of the loose control over international and local banks in addition to the KPI’s required from managers and senior executives in banks and the incentives encouraging them to expand in lending. These two factors have led to “Over Financing” of projects worldwide, which in turn increased inflation to more than ten percent, the thing, which contributed to the formation of such a financial bubble.
Thus, the problem began due to the weak regulatory systems on the world banking sector, as well as the incentives presented for executives of banks encouraging them to “Over Financing” that led to inflation, which was reflected in unreasonable raising of prices. The whole world experienced that phase from mid-2006 to mid-2008.
The financing products in banks in Saudi Arabia are few, individual financing is small, and mortgage is weak or non-existent. There is no means other than corporate financing, which has become the only means of external funding. While banks now have more flexibility in this aspect, in addition to the encouraging economic conditions, there has been much exaggeration in this field.
I also think that Saudi companies in the past did not exceed a 1:1 debt to equity ratio, which increased in the period of boom to 2:1. This means that equity decreased, whereas debt remained at its level, which led to raising the ratio of debt to equity in a worrying manner, especially if payment was defaulted or delayed.
Of course, this situation was not healthy. It was necessary to correct it. What is happening now is a kind of de-leveraging in the Saudi market: Suspension of funding, and payment of dues. I expect this process will continue for 3 to 6 months, during which the reservation of funding will continue.
These are the conditions experienced by Saudi companies with the debt to equity ratio. I believe that the ideal ratio is 1:1 maximum. Of course I cannot generalise, since this ratio varies from an industry to another and from a sector to another, which means that there is no ideal ratio for all companies. Our focus here is on holding companies and conglomerates.
For example, industrial companies in Saudi Arabia begin their funding with 25 percent of equity and 75 percent of external financing. This is the custom now.
What is your advice to family business that faces debt?
Priorities that should be the addressed by family businesses facing debt are:
(1) Managing the company‘s cash flow
(2) Focusing on key activities
(3) Reducing expenses
(4) Restructuring in order to align with the new economic variables
(5) Studying risk in investments
I believe that priority should be given to cash flow management. I should not invest each riyal borrowed from banks without considering my commitments and the dues required from me.
This, unfortunately, is what mainly concerns the Saudi banks: the level of transparency and the level of cash flow management on the part of Saudi companies. Yet there is no doubt that unless the Saudi and international banks give up the excessive conservativeness in lending, we will see more recession.
It’s a very challenging time for the next generation to enter the professional environment. Do you have a particular method integrating the next generation into the business? And how do you prepare them?
For 5 years now, even before the period of economic prosperity, the Group has been focusing on the new generations. We believe that we have no choice but to grow and to work on preparing the third generation in the family to continue the process of development of the companies and the Group.
Therefore, we worked on forming our Board of Directors and an Advisory Board, where the latter was entrusted to undertake the process of drafting and preparing the family constitution in collaboration with international think tanks. This took place 4 years ago. A committee of 4 PhDs was formed who are dedicated to the management of the third generation concerns regarding training and qualifications.
We are proud of this achievement and we feel that there are new entries, even in Saudi families, in some of the points we have set. It was an initiative on the part of the family to organize the affairs of the third generation. Approvals have been taken from all of the founding members of the family and there was a blessing on the part of the family for this step. As soon as the constitution was completed, we applied and abided by it. Of course, what distinguishes the group we have is that the third generation is very young and we have not yet faced significant challenges. Still, we are preparing this generation already now.
Over 50% of the Arab world’s population is under the age of 25. What can family businesses do in order to help in providing employment and education for this valuable future pool of talents in the region?
We undertake charitable activities. Many Saudi companies and groups do the same and have a sense of responsibility towards these issues. We have seen good initiatives on the part of Saudi companies, such as the programs of Abdul Latif Jameel for community service. We believe however, that there is no balance between the charity side and the social responsibility side: Much giving on the charitable level is opposed to a weakness in social structures.
Now there is awareness and an understanding of the significance of the social responsibility by some business groups, including ourselves. There must be giving, efforts, money and time allocated to fulfil our social responsibility.
We have set a model in developing policies that align with social responsibility and contribute to its development. In view of this, the year 2003 witnessed our early steps in this aspect through establishing Al Fozan Group for Community Service. Of course, the benevolent aspect is easier. It is easier to build a mosque or to donate to a society as your role finishes upon offering the donation. On the contrary, the social engagement requires greater effort than when you are establishing a company.
When there are initiatives launched, such as the National Certificate for Retailing or development of the community culture through Al Fozan Group for Community Service, then you are investing considerable time, efforts and funds. I think that the development of the culture of community is one of the key issues we focus on to serve the community. It is a great work that needs the united efforts of conglomerates.
We started establishing Al Fozan for Community Service more than five years ago, and appointed for it a board of directors. It has an annual budget allocated to examine the presented projects. The program has supported and sponsored many social programs, including Khawater Shab Program that we have sponsored for 4 years on MBC channel. It raises important ideas that concern society, and the younger generation in particular.
Another initiative of Al Fozan for Community Service is the National Certificate of Retailing Skills which includes training young people and preparing them for work in the retail sector. We are working on recruiting a large number of its graduates, in addition to introducing the remainder of the graduates to the labor market.
To understand the impact of an initiative like the National Certificate of Retailing Skills, let us consider this example: A petrochemical factory whose cost reaches 3 – 4 billion riyals hires 70 Saudis, whereas a branch of the Extra supermarket chain employs 80 – 90 Saudi staff members and workers. Here we are quite confident that this type of investment can sometimes help to solve a macroeconomic problem, such as that of unemployment.
Talking here about business alliance, we see that there is a strategic partnership between Al Fozan and Al Muhaidib. Do you recommend this kind of partnerships to be adopted by companies in the Arab world in particular, as it is rare and quite unprecedented in the region?
When your aim is big and you want to establish major companies, then there is no other choice than alliances. To bear all the administrative, financial and other burdens on your own is a difficult matter in a world full of partnerships and alliances.
I think that the formation of leading companies is best done through such alliances because they add to you and create a sort of integration. When there are valid premises for alliances, they will certainly result in a successful venture. Intellectual compatibility and harmony between the coalition parties is very important.
Strategic alliances are good even from the perspective of separating ownership from management. When you acquire 100 percent, then there is a stronger link between ownership and management, but when you enter into alliances and acquire parts of the project, it will enhance the separation of management from ownership and therefore putting into action governance that contributes to increased success in companies of this type, which we are keen on.
Most business groups in Saudi Arabia have full possession of projects and management, and this is what we had here in the Al Fozan Group. In the second stage, we began to have full ownership but with external management.
In the third stage, we converted to acquiring a part but not all. This is the current stage, wherein we entered into alliances with Al-Muhaidib Group, Al-Saghir Group, as well as other Saudi conglomerates. The fourth stage is to put the companies, emerging from these alliances, to subscription to become public joint stock companies with complete separation between ownership and management.
But I believe at the same time that each company should have a godfather, even if they are public joint stock companies. This is to strengthen the role of follow-up and development.
This is a concept that can be followed by family businesses, fearing to enter into alliances lest they lose power or control. You seem to look at it the other way round; alliances give you more power and increase effectiveness through separating ownership from management.
My opinion here is based on experience, as experience is always the best proof. Our experience is very vast. Yet, I stress the importance of accuracy in the selection of partners with whom you ally. Many companies failed because of the incompatibility of their owners. The number of partners is also very important. It would be wrong to consider an alliance with 20 companies, for example.
When we entered with partners in the first company for property development, we committed ourselves as allies not to individually enter the market with competitive companies, so we succeeded. Other allied, but they competed in the same sector, which led to the doom of the company resulting from their alliance.
Accordingly, alliance has premises:
(1) Type of partners
(2) Conceptual harmony between partners
(3) Clear identification and definition of objectives
(4) Nature of the obligations of partners towards the company
Till what point of expansion or rather to what size of business do you believe that a full family ownership is still sustainable?
Planning is the most important factor in business. In Al Fozan Group we have a strategic plan until the year 2015, including each company and its size targeted according to its own five-year plan. It is true that I work to enlarge and develop the companies, but for what purpose? And when they are to be put to the private or public subscription, or even for mergers?
We are a group of companies, each company has its own plan, strategy and objectives, and therefore the situation of those companies is clear to the owners.
In Al Fozan Group it has always been our concern to make sure that the strategy is clear and the road map is always ready. We work on interaction and to modify the updates of the plan depending on circumstances, but there is always a long-term plan for each individual company and for the group as a whole.
Then you state that the most important aspect is to have a plan?
Exactly. We work and plan based on the targeted size of each stage and we interact with the updates accordingly.
Do you believe there is a possibility for family businesses to withhold a strategic control or to retain executive management if a family business goes public?
Certainly. There are concrete examples of many family businesses that turned into joint stock companies in the Saudi market, where the shareholders invested in them according to their successes and the administrative capacity of their founders. If the founders of these companies were to leave the management after their turning into joint stock companies, perhaps investors would have become reluctant to buy into them.
On the other hand, there are also companies that emerged as public joint stock companies where the management has nothing to do with the owners and they have remained successful.