Middle East

PointPublished by Deloitte & Touche (M.E.) and distributed to thought ofleaders across the region | Summer View 2018

To stay or not to stay? Leading the way Tax, this is pharma Race to the future GCC energy reforms Technology in the GCC Pharma, meet tax Manufacturing Formula One

Transform Saudi Arabia Deloitte | A Middle East Point of View - Summer 2018 |

Summer 2018 Middle East Point of View Published by Deloitte & Touche (M.E.) www.deloitte.com/middleeast 2 Deloitte | A Middle East Point of View - Summer 2018 | Editorial

A word from the editorial team

By this time of year there’s a good chance These national economic plans include jurisdictions, banks and financial services nearly every new year resolution taken in mega projects that seek to lessen some companies need to continually calibrate January has failed. There’s a reason for countries’ reliance on energy revenues. their compliance management function.” that. Change is not easy. It is easy to think One such plan is Saudi Arabia’s Vision of, easy to plan and even easy to do for a 2030. According to Martin Cooper: “A key Foreign pharmaceutical companies short while. But change, transformation, success factor for Saudi Arabia’s Vision operating in the region are facing their is not easy to maintain. And yet, this is 2030 will be dependent on whether the own compliance challenges: taxation. Jan exactly what any organization wishing to kingdom has learnt from previous Roderick Van Abbe, in his article Tax, this thrive, not only survive, the Industry 4.0 attempts at economic diversification is pharma suggests that “With the further economy must do. through other mega projects, such as implementation of taxes and tax Riyadh’s King Abdullah Financial District developments in the region, foreign The Harvard Business Review, as far back (KAFD) and Jeddah’s King Abdullah pharmaceutical companies are advised to as 2009, published an article entitled Economic City (KAEC).” In his article develop a tax strategy for the region and “Constant Transformation is the New Transform KSA, Cooper highlights some review their current operating models to Normal” in which it touted that “Success of these mega projects and the keys to identify areas of potential tax risk.” now requires not just doing it better, but their success. mastering the ability to do it differently.” And in our article from the Deloitte Review And all the time. And as the GCC economies recover with we discover an industry that is, not only increased oil prices, M&A activity in the thrilling, but also on the cutting edge of In this new economy, our constant gear region is also expected to increase. Zaid engineering, technology and design. must be on forward, there is no neutral, Selman and Khalid Faiq attest that: “If “Formula One teams use nearly every and there is certainly no return. There is there is one industry that could spur advanced manufacturing technique no waiting for things to go back as they growth in the number of M&A deals in available, from additive manufacturing were. The world of today is already the region, it is technology.” In their to the digital thread. These technologies, different than that of only yesterday and article Technology in the GCC: Leading the in turn, change how the race teams must will be different from that of tomorrow. way and driving value, they write: “We are operate as a company. In short, Formula Adaptation is our constant state of being. witnessing increased digital disruption One race teams are already experiencing Adaptation is the new normal. which will reshape many industries and today the technological and management force companies to think about how they shifts that mainline manufacturers will Going back is precisely what Salam fit in the overall industry ecosystem.” likely see in 5-10 years’ time,” says Joe Awawdeh warns against in his article To Mariani in his article Racing the future of stay or not to stay? The oil and gas industry This overall industry ecosystem is the production. reforms continuum. Awadeh says: “With main driver behind The changing role of OPEC’s decision to raise oil prices, there compliance say Hossam Samy and Disha So, our advice? Stop resolving to change is the risk of systematic industry reforms Rustagi. “The pace of regulatory change,” and actually do it. We show you how in being halted [but] reforms must continue they say, “has created a complex this latest issue of Middle East Point of (and at a fast pace due to foreseen environment for compliance leaders View. budget deficits) to help shift and sustain across all industries […] the world of healthier GCC energy economies and regulatory compliance is always evolving, ME PoV editorial team deliver on the adjacent national with requirements constantly multiplying. economic plans.” To ensure adherence to increasingly stringent rules imposed across multiple

03 Deloitte | A Middle East Point of View - Summer 2018 | Contents

Contents

06 To stay or not to stay? The GCC energy reforms continuum Salam Awawdeh

32 Racing the future of production A conversation with Simon Roberts Joe Mariani

04 Deloitte | A Middle East Point of View - Summer 2018 | Contents

12 16 22 28 Transform KSA Technology in the GCC The changing role Tax, this is pharma Saudi Arabia’s Vision 2030 Leading the way and of compliance Pharma, meet tax Martin Cooper driving value Hossam Samy and Jan Roderick Van Abbe Zaid Selman and Disha Rustagi Khalid Faiq

05 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

06 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

To stay or not to stay? The GCC energy reforms continuum Energy reforms spark change but the question of how to proceed remains.

07 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

The agreement between he energy industry plans There are now attempts to organize this underway in the Gulf, namely, agreement to a 10 to 20-year OPEC and leading oil T Dubai Energy Strategy 2030, arrangement, as per Saudi Crown Prince producers from outside Oman’s Energy Master Plan, the National Mohammed bin Salman. Transformation Program in Saudi Arabia OPEC, particularly Russia, and Vision 2030, among others, give the In Saudi Arabia, the National Oil Company has led to higher prices impression of significant and undeniable is undergoing a transformational change. and reduced a bloated reforms. However, with OPEC’s decision One theme that has captured most of the to raise oil prices, there is the risk of headlines is the plan for the initial public inventory. There are now systematic industry reforms being halted. offering (IPO) of 5 percent of Saudi attempts to organize this This is especially true for the energy Aramco. Even as the IPO is still in sector where the heightened urgency for preparation, it has led to a thorough agreement to a 10 to 20- reforms is viewed by many policy makers reform of the company's culture and year arrangement. as a source of discomfort given the scale organization. of change needed over a relatively short period of time. This author argues that The Abu Dhabi National Oil Company reforms must continue (and at a fast (ADNOC) has undergone additional pace due to foreseen budget deficits) to transformation under a different help shift and sustain healthier GCC restructuring model. The emirate’s energy economies and deliver on the Supreme Petroleum Council has decided adjacent national economic plans. to further diversify its upstream and Reforms of energy subsidy models were another common step for the Gulf states. Fuel, electricity and water prices have been raised throughout the GCC, although in some cases at very low levels, and still need to move to parity with prices in the global market.

Reforms, yes! downstream investments among western Significant progress has been made so partners (the largest oil and gas far. The agreement between OPEC and companies, such as Shell and Exxon leading oil producers from outside OPEC, Mobil), Japanese buyers and key particularly Russia, has led to higher customers in growth markets such as prices and reduced a bloated inventory. China, India and South Korea. Markets

08 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

have also witnessed ADNOC Distribution, its retail fuel arm, moving quickly to sell All this seems to be a great effort. 10 percent of its shares in the local market in December 2017. But rising oil prices have weakened

The sovereign wealth fund Mubadala, a the dire need for reform, with a major energy investor, has significantly expanded through its merger with the widespread feeling among International Petroleum Investment Company (IPIC) in early 2017, adding a policymakers that the worst is over. large refining and petrochemical portfolio. In parallel, the Abu Dhabi Investment Council (ADIC) has also Fuel, electricity and water prices have become part of the Mubadala group, with been raised throughout the GCC, a combined portfolio worth over US$200 although in some cases at very low levels, billion. In March 2018, the Abu Dhabi and still need to move to parity with Water and Electricity Authority (ADWEA) prices in the global market. Natural gas and the Office of Regulation and Control prices for energy and industry uses have were subsequently merged with ADIC risen in Saudi Arabia, Bahrain and Oman. and brought under new management, The Saudi and UAE governments have consolidating three critical utilities arms. eased the impact of rising energy bills on low-income Saudi citizens through In Kuwait, some major projects eventually payments under the Citizen Account, in offered improvements in the refining many ways, similar to the cash aid sector: a new LNG import terminal and provided by Iran after energy price deep sour gas production in northern increases in 2010. Kuwait are two examples. BP and Shell have been giving discreet assistance as In Abu Dhabi, small increases were part of technical services agreements. imposed on citizens and the biggest increases were imposed on expatriates. Qatar has merged its two gas companies Gas prices are still far from international to produce liquefied natural gas (LNG), levels in all GCC countries, except Kuwait. gain efficiencies and move forward with Diesel prices are still heavily subsidized in the resumption of development in the Saudi Arabia and below global levels in North Field, widely recognized as the Kuwait, Bahrain and Qatar. world's largest exporter of LNG by early 2020. Renewable energy has also been introduced in the UAE and is accelerating Bahrain has just announced a major elsewhere with 300-megawatt solar discovery of crude oil and deep gasses at power plants in Saudi Arabia, as well as sea, although actual production will not further tenders for 3.3 gigawatts of solar begin until a few years later. and other energy renewable sources. Similar renewables-focused projects exist Reforms of energy subsidy models were in Bahrain, Kuwait and Oman. Solar another common step for the Gulf states. energy programs have been

09 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

implemented on rooftops. Riyadh’s 200- 2017 to about US$78 a barrel in May of gigawatt project plans—with Softbank— this year. The idea of a long-term OPEC have attracted a lot of attention. The deal involves a strategy aimed at raising gas-rich state of Qatar has so far made prices and limiting production growth in little progress in this area. the short- and medium-term, at the In the wider GCC economies, a variety expense of losing market share and of budget cuts were made and new accelerating the transition to non-oil resources introduced to fill the deficit, technologies in the long-term. This makes including a 5 percent VAT in Saudi Arabia diversification more urgent. Conversely, if and the UAE. Saudi taxes increased on the agreement collapses, or if strong U.S. unused land, soft drinks, expatriate shale oil growth continues, or a global residences and their families. economic slowdown occurs, it could lead to increased supply in the market, driving Yes, but… a decline in recent price gains and thus All this seems to be a great effort. But giving new impetus for reform. rising oil prices have weakened the dire need for reform, with a widespread The GCC–including Bahrain and Oman, feeling among policymakers that the which do not have large oil reserves–has worst is over. Saudi Arabia's Minister of faced debt-raising challenges. In the face Energy, Industry and Mineral Resources of stagnation in the non-oil economy and Khalid Al-Faleh commented that purported public resentment, Saudi continued production cuts would keep Arabia has benefited from recent gains in the market “stable,” while Brent prices oil prices, Saudi Arabia has loosened its rose from a low of US$45 a barrel in June austerity program, recouped bonuses, reduced salary cuts and made one-off payments to Saudi students abroad, Further privatization and costing the budget approximately US$13 billion. The plan to balance the budget encouragement of small and medium from 2020 to 2023 has been postponed. It requires oil production of 11.03 million enterprises and international arrivals barrels per day and oil prices to reach US$75 per barrel. would reduce the GCC countries’ It is not clear how these figures are vulnerability to energy and commodity consistent with the continued commitment to restrain OPEC, the price fluctuations while boosting agreement with non-OPEC countries, or the potential impact of rising prices on private sector production and job global demand and competition for supply. creation.

10 Deloitte | A Middle East Point of View - Summer 2018 | Energy & Resources

Kuwait and Oman have provided extensive lists of privatizations, including To bear the fruits in full, reforms must refining, petrochemicals, drilling, oil field services, fuel trading and power be viewed as a perpetual, fast-paced generation, and it is this author’s view that they need to act on them. Similarly, it effort across policy making, planning, would be beneficial for Saudi Arabia to move ahead with its plans to split the and executive branches. The downside Saudi Electricity Company and sell it to local companies. for potential disruption of the current

Other energy-intensive or extractive effort is likely to carry unbearable costs industries, such as petrochemicals, steel, cement, aluminum and mining, continued to fiscal budgets and deceleration in to expand, sometimes reaching more sophisticated products, but they still attracting private sector investment. largely depend on state support and often described as quasi-government in terms of their organizational agility. Further privatization and encouragement of small and medium enterprises and international arrivals would reduce the GCC countries’ vulnerability to energy and commodity price fluctuations while boosting private sector production and job creation.

To bear the fruits in full, reforms must be viewed as a perpetual, fast-paced effort across policy making, planning, and executive branches. The downside for potential disruption of the current effort is likely to carry unbearable costs to fiscal budgets and deceleration in attracting private sector investment. Higher oil prices, coupled with the expedited continuum of reforms, will undoubtedly reinforce a faster shift to non-oil based revenue and boost delivery on industrialization plans. by Salam Awawdeh, Partner, Consulting, Energy & Resources Leader, Deloitte Middle East

11 Deloitte | A Middle East Point of View - Summer 2018 | Real Estate and Construction

12 Deloitte | A Middle East Point of View - Summer 2018 | Real Estate and Construction

Transform KSA Saudi Arabia’s Vision 2030 Saudi Arabia has unveiled a number of mega projects to help transform the kingdom’s economy, including Neom, a city of the future on the Red Sea coast with a total investment requirement of US$500bn, and Al Qiddiya, a 334 sq.km. entertainment district in Riyadh. Their success depends much on whether the kingdom has learnt from previous attempts at economic diversification through other mega projects such as Riyadh’s King Abdullah Financial District (KAFD) and Jeddah’s King Abdullah Economic City (KAEC).

13 Deloitte | A Middle East Point of View - Summer 2018 | Real Estate and Construction

The target for the The need: Stimulate economic for the economic diversification of Saudi growth and create jobs Arabia is to increase the non-oil sector’s economic diversification Saudi Arabia's Vision 2030 sets out an contribution to GDP from 58 percent in of Saudi Arabia is to ambitious economic development 2016 towards a regional benchmark of 69 roadmap that seeks to diversify the percent by 2020. increase the non-oil kingdom’s economy beyond the oil sector’s contribution to sector. It aims to attract foreign A key focus of Al Qiddiya GDP from 58 percent in investment, stimulate economic growth, create the jobs needed to employ the is to create jobs in Saudi 2016 towards a regional kingdom’s rapidly growing labor force and Arabia’s tourism and benchmark of 69 develop a more resilient economy. hospitality sectors while percent by 2020. Data from the Economist Intelligence Unit at the same time (EIU) shows that the oil industry still enhancing the leisure contributes over 40 percent of Saudi Arabia’s Gross Domestic Product (GDP). infrastructure in the As such, oil price declines earlier this Kingdom. decade–from a high of US$115 per barrel in June 2014 to a low of US$29 per barrel in January 2016–led to a substantial The vision: Key projects slowdown in the kingdom’s economy. A number of major infrastructure Real GDP growth in Saudi Arabia declined projects are being delivered through from 3.7 percent in 2014 to -0.7 percent Vision 2030, many of which are being led in 2017. Although oil prices continued to by the Public Investment Fund (PIF). recover in 2018–to over US$70 per barrel Below is a summary of two of these in April–they are well below the highs projects, Neom and Al Qiddiya. reached earlier this decade. Subdued oil prices continue to act as a drag on the The city of Neom is one of the major kingdom’s economy, with the EIU transformational projects being delivered forecasting that real GDP growth in Saudi by Saudi Arabia. With a land area of Arabia will be 1.0 percent in 2018 and 2.0 26,500 sq.km., Neom will be located in percent in 2019. the Northwest region of the country on the Red Sea coast. A combination of the The focus: Economic diversification Greek for new (neo) and the Arabic for Saudi Arabia’s Vision 2030 program is future (mostaqbal), Neom has been being led by Mohammad Bin Salman Bin designed to create jobs in a diverse range Abdulaziz Al-Saud, Crown Prince and of growth industries that include new and Chairman of the Council of Economic and renewable energy, mobility, biotech, Development Affairs. An ambitious technological and digital sciences, economic development roadmap, Vision advanced manufacturing, media and 2030 will be delivered through the entertainment. Japan’s Softbank intends National Transformation Program (NTP). to invest in what will become the world’s The NTP has set out a series of interim largest solar plant at Neom as well as a goals to be achieved by 2020 that include major tech fund in the city. Although the the creation of over 450,000 jobs in the project is in the early stages of non-government sector and the development, total funding requirements strengthening of partnerships with the for Neom are estimated at approximately private sector to increase the private US$500bn. sector’s contribution to GDP. The target

14 Deloitte | A Middle East Point of View - Summer 2018 | Real Estate and Construction

Abdullah Economic City (KAEC). Changing A key success factor for Saudi Arabia’s market dynamics, global economic challenges and, in certain cases, a lack Vision 2030 will be dependent on of alignment with immediate market requirements meant that many of these whether the Kingdom has learnt projects did not reach their full potential with regard to attracting the investment from previous attempts at economic and creating the businesses and the jobs diversification through other mega they were slated to do. To succeed this time around, Saudi projects. Arabia needs to scale and phase the planned mega projects in line with Al Qiddiya is another major tourists from across the region. A key anticipated market demand, clearly transformational project being delivered. focus of Al Qiddiya is to create jobs in differentiate the offer from current and Located approximately 40km southwest Saudi Arabia’s tourism and hospitality planned competing schemes in the of Riyadh, Al Qiddiya will be an sectors while at the same time enhancing region and build a legal and regulatory entertainment district that will include the leisure infrastructure in the Kingdom. environment that enables the foreign theme parks, water parks, motor sports, investment required to deliver these cultural and heritage events, hotel Conclusion projects. resorts, retail and residential A key success factor for Saudi Arabia's development across 334 sq.km. of land. Vision 2030 will be dependent on by Martin Cooper, Director, Financial Al Qiddiya aims to capture demand from whether the Kingdom has learnt from Advisory, Deloitte Middle East Saudi Arabian tourists who currently previous attempts at economic spend their tourism Riyals in Dubai, Abu diversification through other mega Dhabi, Oman and elsewhere in the Gulf, projects, such as Riyadh’s King Abdullah in addition to attracting international Financial District (KAFD) and Jeddah’s King

15 Deloitte | A Middle East Point of View - Summer 2018| Strategy and valuations

Technology in the GCC Leading the way and driving value

16 Deloitte | A Middle East Point of View - Summer 2018| Strategy and valuations

17 Deloitte | A Middle East Point of View - Summer 2018| Strategy and valuations

Within the last five he GCC economies are expected to Strong customer service and lead the Middle East and North consulting capabilities years, the technology T Africa (MENA) region’s economic In a sector that is fiercely competitive, marketplace in the GCC, growth in 2018 and 2019 through large- building strong customer relationships is scale infrastructure investment–such as of paramount importance. Successful and the UAE in particular, the Expo 2020 in the UAE and Al Qiddiya, technology companies place customer has grown and evolved Red Sea and Neom projects in Saudi service and support central to everything from a highly fragmented Arabia–and other reforms designed to they do, guiding them through an ever promote non-oil sector activity. The GCC increasingly complex technology market of resellers, region’s economic growth is forecast to environment, helping them derive the consulting and systems increase 2 percent in 2018 from 0.7 most value from their IT investments. In percent in the previous year, as per the adopting a service-oriented approach, integration service firms, World Bank. As the GCC economic they are able to change the dynamics of to an ecosystem of recovery builds momentum in 2018, their relationship from supplier to trusted mergers and acquisitions (M&A) activity in advisor, helping them to build the basis of product, service and the region is also expected to increase. a long-term relationship and a more solution providers And if there is one industry that could sustainable and robust business model offering artificial spur growth in the number of M&A deals going forward. in the region, it is technology. intelligence, data Technology companies realize that analytics and smart Within the last five years, the technology offering advisory services effectively can marketplace in the GCC, and the UAE in help forge strong client connections solutions, to name a few. particular, has grown and evolved from a based on strategic advice rather than a highly fragmented market of resellers, transactional relationship, though it consulting and systems integration requires a different operating model and service firms, to an ecosystem of product, organizational capabilities than a product service and solution providers offering or delivery-focused business that many artificial intelligence, data analytics and companies have found time-consuming smart solutions, to name a few. and challenging to implement.

According to research company Industry- or function-oriented Mergermarket, there have been solutions in markets where there is approximately 40 technology-related proven demand transactions in the Middle East region Hardware and common IT services are between 2015 to 2017 with software, becoming increasingly commoditized. internet service providers, Investors are increasingly looking for telecommunication services and online firms with a strong value proposition in commerce platforms being the main the form of a strategic product or acquisition targets. There appears to be solution that meets the specific niche common themes developing as to the requirements of an industry or sector. nature of the target businesses and those that drive value. We have set out four of Being positioned in the market as a these themes below. generalist or low-value reseller is

18 Deloitte | A Middle East Point of View - Summer 2018| Strategy and valuations

becoming less viable; focus and specialization are becoming key. The Companies that focus on building GCC market increasingly requires more sophisticated solutions, with dual customized solutions, leveraging language support (English and Arabic), tailored to the specific requirements of industry best practices and mature the Gulf region. technology platforms, but suited to the Companies that focus on building customized solutions, leveraging industry requirements of the Gulf client base, best practices and mature technology platforms, but suited to the requirements could see revenue growth and an of the Gulf client base, could see revenue growth and an increase in enterprise increase in enterprise value. value. Over time, and with an increasingly larger customer install base, these solutions may become more functionally In certain instances, a prospective rich and mature, potentially driving value acquirer may make a strategic investment and attracting potential investors. for the purpose of: • Acquiring a specific technology or set of In contrast, those companies that do not capabilities; have a clear market or sector focus, or • Leveraging the target’s customer base to take a more opportunistic approach to upsell/cross-sell their products; or sales growth, are facing greater • Injecting new talent into the challenges as the GCC market continues organization as part of a broader to develop. transformational or repositioning exercise. Complementary services It is common for acquirers of technology For the most part, organizations grow companies to look for firms that through evolution rather than revolution, complement their existing portfolio of the former being easier and more likely to products and services, potentially lead to growth. increasing the value of their offerings by making them either more comprehensive, A focus on depth of vendor or better suited, to the specific relationships over breadth requirements of a particular function, Today, being a generalist product or sector or industry. service provider is harder to sustain. Technology companies that choose to Prospective acquisition targets with work with third-party vendors are likely margins broadly similar to, or higher than, valued by strategic acquirers based on that of the acquirer might be perceived as the depth of their vendor relationships more attractive, other things being equal. and knowledge of their products and

19 Deloitte | A Middle East Point of View - Summer 2018| Strategy and valuations

Corporates and investors services, rather than breadth. While This approach may be applicable to a having multiple vendors is still relatively mature technology business but are taking an active recommended to ensure the company is may not be suited for businesses with a interest in digital never too dependent on revenues from a pipeline of software solutions that have single vendor, GCC technology firms yet to be market-tested and not revenue- disruption, which is could focus more on relationships that generating. Any cash flow-based valuation driving a fundamental will assist the business in building a would require robust financial forecasts rethink of business deeper area of expertise in a selection of which, given the nature of some solutions, industries and functions, rather than the will contain subjective inputs. It has been models and has generalist approach. Acquirers reported that financial forecasts in dramatically reshaped increasingly ask how do these companies technology tend to exhibit a high bias (i.e. add value and how defensible are their optimism) perhaps due to the rapid pace the competitive offerings in the market? of development in the sector.1 landscape for many The next wave of M&A growth From an appraiser’s point of view, it industries. Corporates and investors are taking an becomes very important to objectively active interest in digital disruption, which understand the subject business and is driving a fundamental rethink of each of the products/technology business models and has dramatically solutions in the portfolio. This would reshaped the competitive landscape for include the following: many industries. • What is being sold? Is it hardware consisting of installation and after-sales Given the rapid pace of technology support or a comprehensive bespoke change, three questions for prospective solution that generates competitive acquirers are likely to be: advantage? 1. How will this acquisition add value in an • Is it a transactional or relationship- environment where digital disruption based business? continually changes market dynamics? 2. Does this acquisition complement our One approach to help ascertain the value existing business(es)? of such a business is the development of 3. Is this a strategic long-term investment, an evaluation scorecard with the objective a short-term tactical move or merely a to assess the strengths of their product distraction? and service portfolio. The key focus areas may include the following: Measuring value in technology • Product/service demand drivers. transactions • Market potential (size, growth rate and The traditional way of measuring value is degree of competition). to assess the impact on cash flows for • Product/service alignment with firm customer service and consulting strategic objectives. capabilities, market niche, solution • Product status (applicable for early- strength, complementary service stage software solutions). offerings and vendor relationships. Each • Strengths and relevance of technologies should translate into cash flows if they used. have any merit. • Experience of product management teams.

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• Product roll-out plan and market penetration strategy. Technology companies that focus • Future funding and resource requirements. on one or more of the strategic

Based on the above criteria, a composite drivers discussed could secure higher rating may be generated for each of the products based on the strength of enterprise valuations and succeed in product offering and market attractiveness. Subsequently, using the the increasingly competitive IT services discounted cash flow methodology, the value contributed by each product and and solutions market in the GCC. service may be broadly calculated, adopting a consistent approach. The value of the business may be estimated by Zaid Selman, Assistant Director, and with regard to the sum of the value of the Khalid Faiq, Assistant Director, Financial product and service portfolio.2 Advisory, Deloitte Middle East

To make the valuation process robust, any such analysis may be supported Endnotes with crosschecks using market-based 1. ‘Bias in European Analysts’ Earnings Forecasts’ by valuation approaches. This may include Stan Beckers, Michael Steliaros, and Alexander M&A transactions of companies selling Thomson published in 2004 as part of the Financial Analysts Journal software solutions (or related 2. Special considerations may be required from businesses), and comparable listed case to case for overhead and head office companies together with their composite management costs. ratings.

Summary M&A is becoming a more common approach for businesses to be able to provide a solution for specialized technologies, tools and capabilities.

Technology companies that focus on one or more of the strategic drivers discussed could secure higher enterprise valuations and succeed in the increasingly competitive IT services and solutions market in the GCC. That being said, we are witnessing increased digital disruption which will reshape many industries and force companies to think about how they fit in the overall industry ecosystem.

21 Deloitte | A Middle East Point of View - Summer 2018 | Compliance

22 Deloitte | A Middle East Point of View - Summer 2018 | Compliance

The changing role of compliance

23 Deloitte | A Middle East Point of View - Summer 2018 | Compliance

Organizations are rganizations today are challenged The role of the CCO to address a confluence of A Chief Compliance Officer (CCO) sits at realizing that business Oregulatory and business changes the center of a compliance framework and operational value, that are putting new demands on that demands the ability to work across compliance. The pace of regulatory functions and provides an opportunity to such as better quality change, convergence in global regulation, look at the breadth of risks facing their data and an improved and competition from new market organization. Compliance should ideally customer experience, entrants–that is driving increased be integrated across the business and be consumer and technology demands– positioned to contribute to business can be derived from have created a complex environment for decisions and adapt to the changing anticipating risks and compliance leaders across all industries. business and regulatory environment. With compliance now at a tipping point, With greater integration compliance meeting regulatory the role of the Chief Compliance Officer leaders can take immediate steps to requirements, making (CCO) in the Middle East has gained more enhance compliance effectiveness, compliance an prominence and is evolving rapidly. efficiency, and sustainability. increasingly integrated Adding to the challenge is the risk of Compliance officers have been tasked part of the business reputational damage and significant with an increasing number of financial penalties that frequently responsibilities and have exceeded investment strategy. accompany compliance failures. expectations in many areas. Compliance costs and inherent risks have dictated significant changes in product Some of the common challenges CCOs offerings and business operations for face today include: some organizations and many are now • Compliance landscaping viewing compliance more as an Organizations that operate across a investment than a cost. Organizations are country or in multiple countries may not realizing that business and operational have an inventory of all the obligations value, such as better quality data and an they are supposed to comply with. improved customer experience, can be Regulations change as companies grow, derived from anticipating risks and there is a plethora of obligations to meeting regulatory requirements, making comply with that get missed on compliance an increasingly integrated occasion. There is a large number of part of the business investment strategy. federal, local, or global compliance obligations related to Corporate, The fact is that the world of regulatory Secretarial, HR, Fiscal, IT, HSE and compliance is always evolving, with Industry laws that make it difficult for requirements constantly multiplying. organizations to comply with all of them To ensure adherence to increasingly consistently for a sustained period. stringent rules imposed across multiple Compliance obligations include one- jurisdictions, banks and financial services time, event-based, ongoing, licenses, companies need to continually calibrate filings and statutory dues that need to their compliance management function. be tracked and acted upon in a timely manner.

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• Inconsistency in understanding/ interpretation of compliance The fact is that the world of regulatory requirements Many laws/regulations are complex to compliance is always evolving, with understand and may have multiple interpretations. In the absence of requirements constantly multiplying. expert advice, organizations may make incorrect decisions that can result in To ensure adherence to increasingly heavy fines/penalties. For instance, the recently launched VAT regulations in the stringent rules imposed across UAE may be interpreted in different ways and can lead to non-compliance, multiple jurisdictions, banks and due to lack of understanding or interpretation. financial services companies need to

• Compliance ownership continually calibrate their compliance Ambiguity with respect to the ownership of certain compliance obligations is a management function. very common challenge faced by all sectors and can expose organizations to the risk of non-compliance due to regulations are changing every day, and status through comprehensive lack of ownership. Many times, due to organizations are expanding operations compliance dashboards and reports. not having a centralized responsibility in new geographies or diversifying tracker, some compliance obligations business in other different industries, Compliance framework get missed as a result of the lack of the compliance landscape becomes A framework for compliance ownership or accountability. Leading very dynamic in nature. Therefore, encompasses multiple components that organizations that are running effective organizations need to develop a model drive prevention, detection and response compliance programs define that is agile enough to respond to these across the three lines of defense. In a responsibilities and Key Performance changes. compliance framework, the business Indicators that help control such risks. process owners are the first line of In today’s age of accelerating regulation defense, compliance and centralized risk • Compliance reporting and scrutiny, leading organizations management functions are the second With multiple locations and multiple understand that the human and line of defense, and internal audit is the compliance requirements, it becomes financial capital required to build a third line. increasingly difficult for organizations to strong corporate governance monitor compliance and report to top infrastructure can be turned into long- Each line of defense plays an important management on a day-to-day basis term investment that can create value role in the organization’s overall using manual processes, which may and contribute to the bottom line. compliance framework and governance. lead to incorrect decision-making. Development and automation of a The three lines of defense model aids • Continuous monitoring compliance framework significantly organizations in promoting compliance Most organizations think of compliance speeds up the internal processes across agility, identifying emerging risks, and as a one-time activity, whereas in businesses and locations by providing clarifying the compliance program’s today’s environment, where laws and senior management with a one-stop strengths and weaknesses. view of the organization’s compliance

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In today’s age of 3rd Independent assurance External Independent challenge and accelerating regulation audit assurance and scrutiny, leading Internal organizations audit 2nd Oversight functions understand that the Internal Strategy and policy setting, Monitor baselinecompliance reviews human and financial functional oversight capital required to build Business self assessments a strong corporate 1st Business operations governance Establish and monitor risk Business process infrastructure can be and control environment Risk governance and coordination Board, risk committee, audit committee turned into long-term Risk and control requirements stablish baseline investment that can E create value and Key industry concerns can easily adopt this International contribute to the • Are there any benchmark standards Standard as a stand-alone guidance bottom line. to be referred to while designing the within their organization. compliance program? One of the leading and most commonly This International Standard is suitable adopted standards in Compliance is ISO to enhance the compliance-related 19600:2014 Compliance Management requirements in other management Systems. ISO 19600 is an international systems and to assist an organization standard that has incorporated a high- in improving the overall management level structure developed by ISO to of all its compliance obligations. improve alignment among its International Standards for • How to ensure 100 percent management systems. In addition to its comprehensiveness? generic guidance on a compliance The organization should systematically management system, this International identify its compliance obligations Standard also provides a framework to and their implications for its activities, assist in the implementation of specific products and services. The organization compliance related requirements in any should take these obligations into management system. account when establishing, developing, implementing, evaluating, maintaining Organizations that have not adopted and improving its compliance management system standards or a management system. compliance management framework

26 Deloitte | A Middle East Point of View - Summer 2018 | Compliance

The organization should document its compliance obligations in a manner that Key questions to ask yourself is appropriate to its size, complexity, structure and operations. The • Do you know the extent of legal compliance landscape is dynamic. It is compliance across your operations? critical to continuously monitor the • Are you aware of the latest impact of any compliance obligations developments as they arise? triggering changes in the • Is your compliance reporting internal/external environment in order proactive and real time? to keep the inventory comprehensive • Do you have a compliance and updated at all times. mechanism that can withstand regulatory scrutiny? • Are there any sources in the region • Have you experienced any recent that we can refer to while building compliance failures? Do you know? the repository? It is difficult to get all the updates under one umbrella and so it is important for every organization to maintain its own tracker of sources of compliance The compliance landscape is dynamic. obligations that are relevant to their industry and business. Some examples It is critical to continuously monitor of these sources can be monitoring the websites of regulators, being on the the impact of any compliance mailing lists of relevant regulators and membership to professional groups. obligations triggering changes in the Conclusion internal/external environment in order While there is no one-size-fits-all approach to a compliance structure, to keep the inventory comprehensive organizations that fully understand their organizational regulatory requirements, and updated at all times. including emerging regulatory changes and challenges, history, people, technology, control coverage and risks are well positioned to assess if changes to the program infrastructure would be required to keep pace with the dynamic environment. by Hossam Samy, Principal, and Disha Rustagi, Manager, Risk Advisory, Deloitte Middle East

27 Deloitte | A Middle East Point of View - Summer 2018 | Pharmaceutical companies

28 Deloitte | A Middle East Point of View - Summer 2018 | Pharmaceutical companies

Tax, this is pharma Pharma, meet tax

29 Deloitte | A Middle East Point of View - Summer 2018 | Pharmaceutical companies

Pharmaceutical The pharmaceutical market in the Middle allowed full ownership, they are restricted East, and in particular in the United Arab in their ability to do business on the companies, in many Emirates (UAE), is expected to grow mainland. The UAE government has instances, either have to significantly over the next couple of years decided that it will remove these especially with the UAE quickly gaining restrictions, although specific details have enter into joint venture popularity as a medical tourism yet to be released. On another hand, arrangements or destination. While foreign pharmaceutical branches of foreign legal entities are outsource their companies have recognized the potential sometimes limited in their business of certain markets in the Middle East, scope and may not be permitted to operations to third their legal, as well as physical, footprint in perform trading activities in certain parties in order to the region remains comparatively light. markets. conduct business Common operating models Against this background, pharmaceutical operations in such Very rarely do foreign pharmaceutical companies, in many instances, either companies manufacture their own have to enter into joint venture markets. products in the Middle East, though arrangements or outsource their some do outsource certain operations to third parties in order to manufacturing/packaging operations conduct business operations in such locally under manufacturing markets. Both options bring their own arrangements.1 Foreign pharmaceutical inherent challenges. companies may maintain, or own, a trading/logistics hub in the region (e.g. Manufacturing side in a free zone such as Jebel Ali or KIZAD) The foreign pharmaceutical companies though rarely do they have their own that do maintain their own distribution channels or entities in the manufacturing facilities in the region, destination markets and instead typically operate in the UAE. We understand that rely on third-party distributors to service there is an increased pressure from local local markets. To provide on-ground governments to produce locally and meet support and due to other regulatory local content requirements in order to be reasons, foreign pharmaceutical granted access to public tenders. Certain companies maintain manufacturing operations are representative/scientific offices in the outsourced and performed locally in the local markets with regional headquarter destination markets under respective functions generally performed in the toll/contract manufacturing UAE. arrangements. However, such arrangements may pose challenges in The reason for the relatively light practice and should be carefully footprint is manifold. For one, the reviewed. regulatory environment, notably protective measures such as foreign Pharmaceutical companies entering into investment limitations, prevent foreigners toll manufacturing arrangements2 on a to set up wholly owned companies in cross-border basis may be particularly some Middle Eastern countries. In the exposed to a set of challenges. In a UAE for example, foreign investors can number of Middle Easters countries, only hold up to 49 percent of their foreign entities are prohibited from businesses outside of the free zones. trading or owning goods in said country Within the free zones, where they are unless they are duly licensed and

30 Deloitte | A Middle East Point of View - Summer 2018 | Pharmaceutical companies

registered with the competent authorities. Likewise, such arrangements A common approach adopted by may put pharmaceutical companies at risk from a tax perspective as they could pharmaceutical companies to provide be deemed to have created a permanent establishment and become taxable on on-ground support is to maintain any trading gains.3 The foreign companies may further be considered as making representative/scientific offices in the domestic supplies leading to a VAT registration and filing requirement. The destination markets. disconnect between the ownership and legal/beneficial title to the goods (lack of beneficial ownership) can lead to issues activities only. On this basis such such as non-recoverability of VAT on structures are generally exempt from Endnotes imports.4 The manufacturer as the income tax. In reality and over time, 1. There are two models which are commonly used: Toll manufacturing and contract importer may also be viewed as making however, the operations of such manufacturing. While they are similar, there are inaccurate representations to the establishments have been some subtle differences. One key distinction customs office. (unintentionally) expanded and may have between the two manufacturing models relates crossed the line potentially triggering an to the ownership of the goods. Under the toll Distribution side income tax exposure by creating a manufacturing model, the principal In the absence of having their own contractually holds title to the goods. taxable presence. In an ever-changing tax 2. Similar considerations may apply to distribution companies, pharmaceutical environment locally as well as globally, it consignment arrangements. companies commonly rely on a network is likely that some of the structures will be 3. Under KSA domestic tax legislation for example, of third-party distributors. subject to regulatory scrutiny. holding stock in KSA by a non-resident company Pharmaceutical companies try to exert constitutes a permanent establishment which would trigger a corporate tax filing obligation. some level of control/supervision over Outlook Availing protection from taxation under double the distributor (e.g. through the The trend of removing some of the taxation agreements may be challenging in assignment of staff). From a tax barriers, especially in terms of investment some of the Middle Eastern countries. 4. We note that qualifying medical supplies may perspective, such control and restrictions, will give the pharmaceutical not be subject to import duties and VAT. In the dependencies can be harmful and companies the opportunity to further UAE, as per the Cabinet Decision No. 56 on potentially trigger a local tax exposure for expand in the region and reorganize Medications and Medical Equipment, the supply of all medications and medical equipment the foreign supplier. Some of the some of the local operations and get a registered with the Ministry of Health and structures and distribution relationships better grip over some of the potential tax Prevention shall be subject to VAT at a zero-rate. had been put in place many years ago challenges. With the further 5. The UAE has joined the OECD Inclusive and may not have kept pace with implementation of taxes and tax Framework on Base Erosion and Profit Shifting on 16 May, 2018. international tax developments that are developments in the region, foreign now gaining significant traction within the pharmaceutical companies are advised to region as well.5 develop a tax strategy for the region and review their current operating models to A common approach adopted by identify areas of potential tax risk. pharmaceutical companies to provide on- ground support is to maintain by Jan Roderick Van Abbe, Senior representative/scientific offices in the Manager, Tax, Deloitte Middle East destination markets. Strictly speaking, the business scope of such structures is typically confined to promotional

31 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

Racing the future of production A conversation with Simon Roberts

32 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

33 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

We have a two-week arbon fiber, titanium, and rubber hurtle around a racetrack at nearly mandatory shutdown in A quick guide to Formula One C 200 miles per hour. Engines roar August, and really from and fans cheer as drivers throw their cars History: Formula One is the highest that point on, we start into every corner. Formula One racing is class of single-seat auto racing not only among the most exciting sports sanctioned by the Fédération having to split our on the planet, but also perhaps the most Internationale de l'Automobile (FIA). activities in two between technologically advanced. Every car is a While Grand Prix racing began in 1906, symphony of advanced materials and the inaugural FIA Formula One World keeping the current car novel design. Yet the real excitement Championship was held in 1950. running and competitive starts well before the crowds and and starting to think champagne of race day, and far away Rules: The “formula” in Formula One from the track. refers to the set of technical and about next year. sporting regulations all cars must It all begins with the hundreds of meet, determining vehicle size, engine designers, manufacturers, and support performance, and safety standards. staff that make up the race teams, which Teams have leeway to innovate within in reality are mid-sized manufacturing these rules, and the effort to gain companies. But these race teams are not milliseconds has resulted in the merely typical manufacturers. In an effort creation of technologies that are now to shave every ounce of weight from the standard on passenger vehicles, car, every tenth of a second from lap including disc and anti-lock brakes, times, Formula One teams use nearly rear spoilers, semi-automatic every advanced manufacturing technique gearboxes, advanced engine available, from additive manufacturing to monitoring, all-wheel drive, and the digital thread. These technologies, in electronic stability control. turn, change how the race teams must operate as a company. In short, Formula Races: The most recent season One race teams are already experiencing comprised 20 Grands Prix, starting in today the technological and management March 2017 in Australia and ending in shifts that mainline manufacturers will Abu Dhabi in November. likely see in 5–10 years’ time. Performance: Current Formula One cars feature: To get a glimpse into that potential future • 1.6 liter V6 turbocharged engines, and the fast-paced world of Formula One limited to 15,000 RPMs. While teams racing, we sat down with Simon Roberts, do not disclose horsepower data, the the chief operating officer of McLaren engines are believed to produce as Racing. The interview was conducted by much as 1,000 brake horsepower Joe Mariani, a research manager with • A minimum weight of 722 kilograms Deloitte’s Center for Integrated Research. (1,592 pounds) • Top speeds in excess of 330 Pushing the boundaries of the kilometers per hour (205 miles per possible hour) Joe Mariani: At its core, McLaren Racing • Ability to go from 0 to 60 mph (0-100 seems to be a car manufacturer. I am kph) in less than 2 seconds—and sure we all have a picture of how cars stop again almost as quickly come together, likely black-and-white images of a Henry Ford assembly line. The power and downforce of the cars Can you give us a quick overview of the mean drivers can experience lateral design and manufacturing cycle that you loads of as much as 6G (six times the go through every year to pull these cars force of gravity) while cornering— together? similar to fighter pilots.

34 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

Simon Roberts: Compared to most Mariani: That is fascinating, especially automotive industries, we do to the comparison to a main line car ourselves every year what most big company that may slowly design and automotive companies will do every three build many thousands of cars, where you to five years. We start designing our cars must very rapidly build a small number of in March with the longest lead activities, cars. which is the gear box. As the year goes on, we end up with draft regulations Roberts: Yes, we only ever build four around August, and that is when we start chassis, and there are only ever two fully laying out the chassis for the car based built cars that will race. The other thing is on whatever our research has been that we never really stop. Once we have doing and where we think the sport is built the car and start testing and racing going so that we can be competitive for it, we change the car about once every 10 the next year. minutes. Every 10 minutes we get a new CAD drawing out. That is a kind of Mariani: But March is also the beginning relentless upgrade of everything. Normal of the race season. So are you designing carryover from year to year of about 3–10 the next car even before the current car percent is typical. But by the time we get is finished racing? to the end of the year, it is about 0 percent. The entire car is new. It is just a Roberts: Yes, we have a two-week rapidly changing environment really, mandatory shutdown in August, and meaning we are only ever committing to really from that point on, we start having small batches of things. A batch of four to to split our activities in two between six is a fairly typical manufacturing run, keeping the current car running and because by the time we have made six competitive and starting to think about front wings, we have changed the design next year. So right now, in early October, and are doing something else. we are probably 50/50 in the design office and engineering. Obviously we race until the end of November, and we start the ordering long lead time parts to fill Once we have built the car and inventory from November onwards. From those two points on, then, it is start testing it and racing it, we basically a rush to get everything designed and released, hopefully, in time for Christmas. That is normally about change the car about once 16,000 components that have to be designed and then manufactured for the every 10 minutes. new car. Then, at the end of January, we build the first car. Mariani: When you are making these So it is a fairly short lead time. We will parts and fitting them together on such pre-book capacity both internally and astronomically tight timelines, how do externally, and that will all come together you ensure that everything is up to on an hour-by-hour basis just before we quality standards? launch the car. It is quite normal for us to literally only have a finished car in the few Roberts: Every part we make or buy is hours before the launch event. loaded to a work order, so we have full traceability. All the material and all of the

35 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

inspections are tracked against the weekend, you can actually see parts individual part number in the work order. booking onto the car or off of the car as We can trace right back to the mill where mechanics make changes at the track. we get the metal from, and we can see That also auto-records mileage, the who loaded the blank onto the machine, number of starts, the time that part has when it was loaded, when the part came been on a car to make sure that no part off, when it went to inspection, and heat exceeds its life span or design limits. It is treatments, certificates, or checks that a bit like aircraft from that point of view. were done on it right down to the We are lifing at the level an aircraft does. finished product. Mariani: Tracking the individual location Mariani: I suppose that lifing process— and life span of each of 16,000 parts where you can determine the useful life seems like an incredible amount of span for each individual part—does not detailed data. How do you bring together end when they are entered into the all of those parts and all of that data into system, but continues with the data one small car and make it work at peak actually gathered as the race car is performance? driving? We probably run 50,000 simulations just to get our heads in the game and figure out what we need to do.

Roberts: Yes, we have got these tiny little Roberts: Where to start? Even before RFID chips. On carbon parts, we laminate we get to the race track, we are running them in under the skin. They are so small simulations. We are running simulations you can’t even see them. On metallic now for Japan, for example. We have a parts, where we can, we attach them with pretty sophisticated Monte Carlo a glue/resin system. But they are so small simulation which has all the data we can we can fit them inside bolt heads. So find for every driver and for every team, once we have issued the parts, we scan what has happened at that event in the them so that it takes out all the human past, everything you can imagine. We error of typing the life codes of part probably run 50,000 simulations just to numbers. get our heads in the game and figure out what we need to do. That is just for a The odd thing is that we do not sell pure race strategy point of view. anything in general terms. Everything we make is for our own race cars. So we In terms of the car itself, we are also don’t ever have a sales transaction. In running very sophisticated [digital twin] fact, our two race cars are actually stock models of the race car. We are testing all locations on the system. So if you sat and of the parameters we can think of for the watched our stock system on a race car—all the latest upgrades, all the

36 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

suspension variables—they’re all dialed Roberts: It varies. On the composite What we only recently into the computer. We then use that data side, which is all the carbon fiber, chassis, in a driver-in-the-loop simulator, which is body work, wings, etc., it is a fairly manual realized is that itʼs OK, the ultimate test for us. That is one of the process. Our carbon molds are still and that we actually rely reasons why we think when we turn up at handmade. We don’t have any a track on a Friday, we always look slightly automated tape laying or laying of cloth. a huge amount on the better in the first practice session than But we do use technology where we profound knowledge in everyone around us. can. We use lasers on all the large all of our employees. We components—chassis, front wings, rear Adapting advanced technologies to wings, gear cases—to validate layout and used to take it for real-world needs dimensions. We can’t afford to finish a granted, and the big Mariani: In manufacturing, it seems like chassis after eight weeks of laminating we often have the idea that new and discover that the third ply is the thing that has changed technology will simply replace human wrong material or laid in the wrong is that we no longer workers. But even amidst so much orientation. So we try and mistake-proof take it for granted. advanced technology, many of your it using lasers and laser files. processes still have strong manual components. Have you noticed a shift in The operation and monitoring of the car new gear, you can, with hydraulic what you ask of your workers? is another area where technology plays a pressure, pull the old gear out without significant role. In practice, we probably smashing the teeth off it. But that gets a Roberts: So what we notice is—because run up to 500 channels of data on the car bit glitchy on wet pavement when you get we are rushing—our work instructions to during a practice session. All of that feeds a lot of unexpected wheel spin, which the our people are very high-level compared back in real time to the pit wall, and then algorithm doesn’t like very much. If to what you would see in an automotive back to the factory in Woking, England something like that happens and a driver or aircraft industry production facility. where engineers try to piece together a calls for a shift, it won’t just bang two What we only recently realized is that itʼs picture of what the car is actually doing gears in without using the clutch, it will OK, and that we actually rely a huge vs. what we want it to be doing at that dip the clutch in, take one out and put amount on the profound knowledge in particular track at that time. one in. That is what we call a “safe shift.” It all of our employees. We used to take it takes a few milliseconds longer and the for granted, and the big thing that has However, once the race or qualifying drivers don’t like it. So that kind of thing is changed is that we no longer take it for starts, we are limited by regulation to only happening all the time in the background. granted. So if they find something difficult 250 sensors on the car. So we must use or if we have got something wrong or if quite a lot of clever methods both on- Mariani: That concept of telemetry things have not worked out as expected, and off-car to effectively combine looking after itself and how it interfaces we really need to take notice of that. channels and find more interesting data with the driver and the crew on the pit in virtual channels. As a result, the whole wall seems like a form of AI-human Mariani: So much of the success of the telemetry system on the car is set up so interaction that we have seen other race team seems to be about balancing that it looks after itself. It will industries, including aerospace and high technology with the very human automatically flag channels where data is defense, struggle with. So that seems to needs of workers. Our recent research1 going out of limits or rising or falling be a very interesting solution. is pointing towards the fact that the faster or slower than expected. This greatest productivity comes when demands a close cooperation between Roberts: You know we are looking at AI humans and machines are working humans and the automation. and how we can use it, particularly, in the together to do what neither could do optimization of simulations and stuff. It is alone. How do you strike that balance or One example is gear shifts. When a driver the same with big data. We have find the right mix of human-machine calls for a gear shift, it actually puts two inadvertently been doing big data and a teaming? gears in mesh at once, because it is so low-level version of AI and Internet of fast that, as the torque loads up on the Things for a while really. But because we

37 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

are not in that field, we put all of our time If things go wrong and someone knocks a and energy into developing the racecar, bit off the side of your car, the guys at the we don’t look at these things and badge track are only going to check if it is safe. them. They will look at the loads on the wishbone of the wing and decide if it is Maintaining speed and flexibility safe to run. They don’t have time to look Mariani: With all of the sensors on the at all of the aero data to see how many car generating so much data, and some points of downforce we may or may not analysis being done on site, and some have lost at a particular end of the car. back in the United Kingdom, how do you But the guys here will do all that and then divide up the workload between track- advise them. side and the facility back in the United Kingdom? Mariani: Talking about all of these complex processes both on the race day Roberts: In terms of division of tasks, in and in the manufacture of the car, simple terms, what happens is, the stuff because all of these components are so where you need cool, calm calculation interdependent, does that change how and analysis, and detailed thinking is the work groups must function together? best done back here at the factory. An In other industries, we have seen the rise example of that in the race is trying to of cross-functional teams or rotations work out tire degradation for all our between work groups. Your thoughts competitors or fuel usage by all along those lines? competitors, so that we can strategically decide if we want to push hard or back Roberts: We are trying to make sure that off at a certain stage of the race. That is everyone is very free with their data really hard to do if you are in the back of internally. Because you never know how the garage with all the heat and emotion what you’re doing is going to affect of the race, but relatively easy to do if you someone else. Luckily, because we go are sitting back at your desk in mission racing every one to two weeks in the control here in a nice air-conditioned unit season, the race events force us—and with headphones on. You only hear the force people—to get together things you need to hear, and you have communally. Even if they are not in the loads of computers and power around same office, they are all on the same you if you need it. intercom systems. Everyone has a role and everyone understands what they are trying to do and what the overall We are trying to make sure objective is. That kind of cuts through what, in many other companies, could that everyone is very free with grow into an issue. Managing change in an uncertain their data internally. Because future Mariani: We have talked a little bit about how the technologies are developing, and you never know how what your last comment talks a bit about how you’re doing is going to affect the organization is developing, so what is someone else.

38 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte Review

next for McLaren? What is on the where they sit in the organization. We Everyone has a role and horizon? What is the next big technology ask so much of them, and they give so or organizational shift that will take you much, we are OK with giving them a bit everyone understands even faster? of stability. It doesn’t stop us from doing what they are trying to what we need to do as a team. do and what the overall Roberts: If only we knew . . . Reprinted from Deloitte Review, issue #22: objective is. That kind of 2018 Mariani: That’s right, you will know it cuts through what, in when you find it! by Joe Mariani, research manager with many other companies, Deloitte Services LP and series editor for Roberts: I think the future is really about could grow into an issue. Deloitte’s research campaign on the giving people the balance—the balance Internet of Things (IoT). He is responsible of technology, balance in their lives. I for examining the impact of IoT on a have noticed that the engineering diverse set of issues, from business organization here is quite resistant to strategy to technical trends. organizational change, more so than other groups here. I don’t actually know, but my hunch is that, because their world Endnotes changes—either the regulations every 1. Joe Mariani, Brenna Sniderman, and Cary Harr, year or the designs they are working on, “More real than reality: Transforming work the parts they are making—the one thing through augmented reality,” Deloitte Review 21, July 31, 2017. they cling onto for a bit of stability is

39 Deloitte | A Middle East Point of View - Summer 2018 | Publications

New thought leadership publications from Deloitte

ME PoV provides you with a selection of Deloitte’s most recent publications accessible on Deloitte.com

Tax Diversity

Doing business guide Doing business guide Middle East tax View from the top Understanding Understanding Saudi handbook 2018 What business Kuwait’s tax position Arabia’s tax position Expanding executives really perspectives and think about women possibilities leaders in the GCC

Financial Advisory Construction TMT

Middle East Real Navigating the year Deloitte GCC Powers Technology, Media and Estate Predictions: ahead of Construction 2017 Telecommunications Dubai 2018 Financial Services If it’s fundable it’s Predictions Regulatory Barometer feasible 2018 – Middle East Middle East 2018 Edition

40 Deloitte | A Middle East Point of View - Summer 2018 | Publications

Middle East Deloitte Point of View Review

www.deloitte.com/middleeast

Financial Services Aerospace & Defense Human Capital

2018 Banking Outlook On a solid profitable 2018 Human Capital 2018 Deloitte Accelerating the growth path Trends Millennial Survey transformation 2018 Global Millennials aerospace and disappointed in defense industry business, unprepared outlook for industry 4.0

Life Sciences Islamic Finance Retail and Health care Sports

Islamic Finance Global Powers of 2018 Global health Rising stars Scalable and Retailing 2018 care outlook Football Money sustainable funding The evolution of League source for social smart health care infrastructure

41 Deloitte | A Middle East Point of View - Summer 2018 | Deloitte offices

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© 2018 Deloitte & Touche (M.E.). All rights reserved.