Family Business in Abu Dhabi November 2019

www.abudhabichamber.ae

In association with Sectoral Report

Family Business in Abu Dhabi

Dear reader

The subject of the family-owned company is business and best practices elsewhere in fairly underrepresented in today’s economic the world. It quickly becomes apparent that publications and research lists, at least if the challenges and opportunities are very measured against the overarching economic much the same. The long-term success of importance that family-owned businesses a business dominates the mindset of family have for the economy. For example, Abu business owners both in Germany—the Dhabi’s economy is driven by family- example quoted here in the report—and controlled companies. In fact, its entire in Abu Dhabi. Preserving the business for private sector, except for several listed the next generation matters, even if, like in companies, consists of family-controlled the case of Germany, demographic change businesses. makes it difficult to find a successor. Far from aiming to filling this research The editorial team for this report had gap, this report highlights the importance the opportunity to conduct interviews with of family-controlled companies, how they executives of local, family-owned firms. The have performed in the recent past, and what authors of this report decided to conduct the challenges they are confronted with. The interviews in anonymity. focus is on the challenges family businesses The results of the interviews are face. Except for sectors that are usually in summarized in the latter half of this report. government control or require large upfront Key policy recommendations have been investment, family businesses are active distilled, which will hopefully enable family in most parts of the economy. Family businesses to continue to thrive in the future. businesses play an important role in the The authors wish to thank their interview economy as a whole. partners for their time and thoughtful This report also provides a view on family feedback.

About IHS Markit: www.ihsmarkit.com IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 85 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, scanning, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in non-commercial uses permitted by copyright law.

For permission requests, write to the publisher, addressed to: Key Sector Permissions Coordinator Main Building of Abu Dhabi Chamber Corniche Rd., P.O.Box 662 Tel + 971 2 6214000 Fax + 971 2 6215867 E-mail: [email protected] 8:00 AM - 3:00 PM (Sun - Thu)

Printed in the United Arab Emirates Cover images: Shutterstock/IHS Markit

www.abudhabichamber.ae www.linkedin.com/company/abu-dhabi-chamber

November 2019 Sectoral Report

Family Business in Abu Dhabi

The world of family business shareholders might be regarded as a second- Family business is critically important for order question. The family business referred any economy. The share of jobs that family to in this report is generally assumed to businesses support is reckoned between include a broad definition of family ownership. 50% and 80% of total jobs in an economy, A family business can take many different depending on the region or country. It also shapes. It includes startup companies, small depends on how the term family business and medium-sized enterprises (SME), and is defined. In all cases, family business by large family business conglomerates—some definition means private-sector enterprises. well-known, some less so. Family businesses A common, short definition of a family operate in most sectors of the economy, business is a business entity that is owned although most family businesses are found or in control of a family. Whether a family in agriculture, retail, tourism, finance, real fully or majority owns the company or has estate, construction, and manufacturing. In a key controlling stake with which the family Gulf Cooperation Council (GCC) countries, dominates decision-making relative to other and in Abu Dhabi, family businesses play a

Chart 1: Abu Dhabi's nonoil GDP breakdown 2018 (%)

9.2 Costructio

8.4 iace a isurace

6.7 Mauacturig

5.0 etai

4.9 ea estate

2.7 Iormatio a commuicatio

roessioa scietiic 2.1 a techica activities

1.3 ucatio

1.1 Hotes a restaurats

0.7 gricuture

0.6 ctivities o househos

42.7 ooi rivate sector

57.3 thers

Family Business in Abu Dhabi

reported by statistical authorities. However, Chart 2: The magic square of family business success most of the data are simply not available in the first place, since many family businesses are relatively shy animals who keep their cards close to their chest. It lies with private-sector institutions to Succession report on family business performance. A report from the Credit Suisse Research Institute, published in 2018, said that family businesses outperformed their nonfamily Talent peers considerably over a 12-year time management frame, dating from 2006 until 2017. The institute found this pattern for almost all Family global regions and countries. In Europe, for example, the European dynamics Family Businesses (EFB) association claims that family businesses support 60 million jobs in the private sector, equivalent to a bit more than a quarter of total employees, Governance and that the sector generates 50% of GDP. As many as 14 million business entities in Europe are family-owned, EFB says. Altogether, this means that family business © 2019 Abu Dhabi Chamber plays a somewhat smaller role there compared with Abu Dhabi and the region. Listed public companies, which are not family-controlled businesses for the most particularly strong role in the economy. This part, are stronger in Europe relative to the is due to the traditional role of the family, Middle East. which in Islamic culture is the center of Many family companies or family-owned life. The value of the family and the related company conglomerates are governed by a cultural rule set is emblematic for the family small circle of insiders or even a single family business. This is not confined to GCC member. This has certain advantages, but it countries. Family businesses where certain also carries certain risks. A family breeze, if values are ingrained in the corporate DNA carried out within the circles that also take are found everywhere in the world (see decisions for the company, can implicate chart 1). corporate governance. Talented nonfamily This DNA includes values that tie outsiders can be antagonized, and their employees to a family-owned corporation. interest turned away. However, in most cases, Turnover of personnel is typically less a strong rule by a family member or a small frequent compared with other companies group of family stakeholders still ensures 17 because of those quasi-emotional or the best outcome for the performance of the million employees material bonds that tie nonfamily employees family business, as was shown by the Credit to a business family. Suisse study (see chart 2). are in family- In Abu Dhabi, and the GCC member Opacity of a family business could impose controlled firms in states in general, family business had to potential obstacles for succession. Carrying cope with challenges of a lower oil price in forward the business responsibilities from Germany the last couple of years. Businesses had one generation to the next is critical for any to adapt to the downward slope that has company. A leader of a family is potentially dominated the economic landscape in the at risk of taking an ill-informed, irreversible Gulf region since 2015. According to various decision that could lead to loss of corporate anecdotal surveys from consultancies, asset value. including McKinsey, KPMG, PWC, and The long-term sustainability of the Deloitte, family businesses have weathered business model of a family company or the more challenging climate and are now conglomerate is thus among the prime looking ahead again with confidence. concerns and risks quoted by most family That being said, there is little else to be business members in surveys. Finding a found in statistical publications when it solution for these issues is one of the most comes to family business performance. difficult tasks for a family business owner— This is partly rooted in the fact that family besides successfully starting and growing business is not a category that is usually the business in the first place.

4 November 2019 Sectoral Report

Family Business in Abu Dhabi

International example: Germany a more favorable demography. That being Most companies around the world are said, demographic change will likely sooner family-owned. In Europe, and in Germany or later take its toll here as well. in particular, family businesses form the backbone of the economy, the so-called Abu Dhabi Global Market (ADGM) Mittelstand. The Mittelstand (roughly and the Tharawat-NYUAD translated as medium-sized enterprises) cooperation is particularly strong in Germany’s Recognizing the importance of family manufacturing sector. Several players there businesses for the economy, Abu Dhabi has are world leaders in their niche markets, been actively seeking to improve conditions producing highly specialized products. for family businesses. Two examples stand A report by German institute ZEW says out: the Abu Dhabi Global Market and the that, out of the 3,300 companies that existed cooperation between the pan-Arabian in Germany at the end of 2018, around 90% Tharawat family business forum and the Abu were family-owned and 86% were controlled Dhabi campus of New York University. Cash is something by a single owner. The number of employees The opening of the Abu Dhabi Global Market many smaller in all German companies was 31.8 million, on Al Maryah Island in 2016 institutionalized which included 17 million employees in support and facilitation of private-sector companies rely on family-owned and 15.8 million in owner- asset management on behalf of Abu Dhabi due to lack of credit controlled firms. authorities. Easy access to registration, a lines The vast majority of these companies large number of double tax treaties in force, regard themselves as self-reliant to the zero domestic taxes, the status of an UAE point that they simply do not want the state company, common law jurisdiction, and to interfere in their business, either in a other goodies—all under one roof—attract negative form or in a positive way to support investors from in and outside of Abu Dhabi. their business, such as granting subsidies. Investors with a family business background Still, since politics in the western world are particularly welcome. is what it is, family business is represented Meanwhile, the Tharawat family business by an association in Germany, Die forum, established in 2006 to provide, Familienunternehmer, which represents the among other things, thought leadership and interests of family-owned businesses in the the opportunity to network, offers learning public discourse and toward the German and educational programs to support family government. On the European level, there is business in the Arab world. The forum the EFB association operating to protect the signed a cooperation agreement with New interests of the family-owned companies. York University Abu Dhabi in April 2017 to For most family businesses in Germany, a launch a project on family business histories. sustainable business strategy that prioritizes This unique project examines the history of long-term viability over short-term success family business in Abu Dhabi and the Arab is the overriding goal. Company owners are world. It creates an archive for oral and written concerned about their lifetime achievement histories of family-owned business across and thus in many cases need the business the region and will publish case studies as a retirement scheme and eventually want and other examinations, using this trove of to ensure they can hand it over to the next documents that have not been collected and generation. brought together before in a similar way. However, demographic change requires company owners to think differently about Interview results succession. The 2019 report from the In the course of preparing this report, the German Foundation for Family Companies research team had the opportunity to talk (Stiftung Familienunternehmen) noted that to executive members of family-owned it might no longer be possible to hand over business companies. The interviews touched because the next generation is simply not on several aspects of the business involved there, or potential successors might not be and asked about key performance indicators, qualified or look elsewhere for a job that such as revenues and jobs supported. In offers better perspectives. the following section, we summarized the Most challenges for family businesses answers from these interviews. in Germany are identical to those faced by The interviews revealed a common family businesses in Abu Dhabi. There are pattern. Family businesses, like almost any different nuances. In Abu Dhabi, the desire other business in Abu Dhabi, rely heavily on to keep a business within the family is likely government projects. Therefore, government to still be more pronounced, partly owing to spending heavily impacts their performance. the cultural role of the family in Islam and This has been the case in the past, and

Family Business in Abu Dhabi

Chart 3: Policy areas touched by the interviews

Governance

esio iacig eguatios reeacig oca cotet

overmet seig romotioa activities ami usiess couci

until recently this pattern has not changed company and the economy, but also because fundamentally. of a level of social obligation they feel toward Meanwhile, smaller-scale businesses with the people they employ and the country they less business history are less dependent live in. on government projects and tend to grow Family businesses have an enormous faster (from a lower base of course). Yet, social and economic impact on Abu Dhabi. the issues that were revealed echoed the Smaller contractors and businesses rely on Counter-cyclical: recommendations given in the previous large family businesses to survive, while the Government could report of the Abu Dhabi Chamber on larger businesses provide many jobs and entrepreneurs. Issues like access to financing impact consumer sentiment. spend more to and bureaucratic hurdles were mentioned. However, the introduction of the value- kickstart demand The discussion also related to whether added tax (VAT) at the beginning of 2018 the companies involved have benefited was noted differently. While one company from support schemes of any kind from the acknowledged a brief blow to its sales but government. We also asked whether there is without any longer-term consequences, something the government can do to support another company said that the VAT is still a a family company or business in general drag on its sales. from a family business point of view. Yet another said the VAT has heavily In all cases, the comments are driven by increased its operating cost, while also the genuine desire to ensure that Abu Dhabi acknowledging increases in utility cost, rising is a great place to do business. This is their interest rates in the past five years, and a home and they are happy to do business worsened market condition. The short-term here. Many family businesses are immensely revenue boost achieved by adding the VAT proud of their achievement and their business comes at a time when the private sector is and will do everything they can to ensure the looking to the government for support while prosperous future of their company. One the cost of operating a business is rising interviewee said, “This is our home and we during a market downturn. will stay no matter what. Our money will stay here, and our business will stay here.” Recommendations In terms of concrete benefits, therefore, The research team has extracted and company executives noted that financial compiled a list of recommendations, such support to hire locals was appreciated as as policy measures and new initiatives, a scheme where companies had a direct that came up during the interviews. Some advantage. Family businesses are loyal of the aspects mentioned are specific for to their employees—one refused to lay off family owned companies, and some can be people in the past years despite the market seen as measures to improve the business downturn not only because of faith in the environment in general.

6 November 2019 Sectoral Report

Family Business in Abu Dhabi

The Abu Dhabi government has created whereas banks do a 0% guarantee for clear long-term goals and plans that have government projects. Changing this balance been well received. For family businesses even by small increments would better that rely on government support, clear support the private sector. government policies and stable long-term With the Khalifa Fund, the government of action plans actions are essential. The Abu Dhabi has already provided a tool that government should continue to improve helps startup companies in many ways, communication. Changes to rules and not least with providing financing schemes. regulations should be updated promptly on However, providing ordinary banking services office websites in order to notify businesses is of course not among Khalifa Fund’s tasks, of changes in a clear and informative way. but it is rather essential for many businesses. Nudging banks to offer more generous credit Financing lines is therefore a good way to support Providing more and better options to finance family business and improve local business and bankroll a business is one of the most conditions. common traits of interviews with family business companies. Family businesses find Government spending themselves in the same position as a startup One theme that resulted from the Awareness: company (because, in many cases, they interviews was the demand for more Local content are one) with a need for venture capital to government spending while cutting costs. could be increased finance expansion. This is predicated on the strong role of the However, oftentimes, the need for credit government and governmental entities for if local companies touches on even more basic payment the economy. knew about mechanisms. If more banks offered more The government influences private-sector generous credit lines for family business, spending as many private-sector companies projects sooner costs could be reduced because many rely on demand induced by the government, companies complain that they have to pay in either directly through government cash for virtually everything . If they were able purchases of goods produced by the private to draw on a credit line with a bank, that would sector or indirectly through wage payment ease the burden with cash management and for an employee and the related household enable them to focus on their core business. who would purchase such goods or utilize Local banks could provide better support to services. Many, possibly most, family family businesses in the long term. Financing businesses rely heavily on government and debt restructuring are issues that some projects. local businesses are facing in the wake of the For an economy like Abu Dhabi, there is a market downturn. case for a relatively high level of government For example, selling off company assets spending . Despite its high per capita income, in order to pay back debt is not a realistic which came from its oil wealth in the past, the solution since the price a company can get economy still has properties of an emerging is not favorable. One recommendation is economy in many ways. for banks to give extensions and work with As the economy morphs from an oil- companies to find a long-term solution, or producing to an innovation-driven economy, a more time to sell an asset at a preferred stronger role for the government is warranted price—benefitting the bank and the business. until the private sector can take over. More Banks can begin by looking at their non- public spending—within affordability and performing loans (NPL) and work with purpose constraints—could be a means to the company to find a long-term solution. support the private sector for a certain time Banks are in an ideal position to play a frame. more supportive role in order to help private enterprises flourish. Cutting regulations The key is incentivizing banks to foster Cutting regulation is a frequent request long-term relationships with local businesses from all businesses around the globe. The by growing with private sectors in the long Abu Dhabi Chamber has made positive term. The government should continue to steps toward minimizing regulations. Abu support the private sector by facilitating Dhabi has already significantly improved better communication between banks and and ranked 12th in the World Bank’s Doing businesses. Business survey. However, there is still more Another recommendation is to level the to be done. playing ground for private companies. For The following examples were mentioned example, private companies need a 100% during the interviews. Family businesses cash margin in order to get a bank guarantee, in the UAE—just like elsewhere—can be

Family Business in Abu Dhabi

limited by succession, family feud, or other business council” in Abu Dhabi where all reasons. More options should be available family businesses can gather, exchange to transition themselves if required, such as ideas, and form plans. This could be set an option for IPO. Loosening regulations on up by family business themselves with percent ownership or providing more options assistance from the government or set up would be helpful. as a government entity. Such a council can To register a business, one company give family businesses a voice so they can owner suggests that the process can still be heard as a group with quick and effective become more efficient toward a one-stop feedback. shop, while at present, multiple visits are still One possibility is to consolidate some required. Reducing the paperwork required business activities between family businesses to set up a business makes the process more to create a better business environment for user friendly and open. Clear communication all. This would best be a decision made by of the streamlined registration process the businesses themselves, hence another #12 currently in place can help the Abu Dhabi reason to have a “family business council” ranking worldwide business community to be better able to where the owners can meet and exchange benefit from government policies. ideas. in the World Moreover, another owner feels that Bank’s 2019 Doing costs for foreign visa are still a burden, Freelancing as hiring scheme especially for smaller-scale businesses and Freelancing can be an inexpensive way to Business report export-oriented companies. Reducing the satisfy personal resource needs on a short- complexities of the visa process and costs term basis. There is a clear benefit for both for visa application will help companies the freelancer and the employer. venture into new markets more easily. For the former, a short-term engagement might just be the right thing to do, either as Family business council a test before picking up a more permanent Local businesses would greatly benefit job or personal circumstances do not permit by having a properly established “family a longer-term affiliation. For the employer,

8 November 2019 Sectoral Report

Family Business in Abu Dhabi

it is a cost-efficient and convenient way of filling a short-term resource need. The Abu “This is our home and we will stay no matter what. Our Dhabi government could do more to support money will stay here, and our business will stay here.” freelancers as this employment scheme is of particular interest for family-owned Abu Dhabi family business executive businesses.

Local content developers meet are therefore crucial, and The question of how best to support the Abu Dhabi Chamber as one organizer local content in many ways reflects the of such events is already doing this. New struggle between big versus small. While platforms on the internet that might call out the government favors local produce, the key projects for registered users could help demand could be spread more evenly across to mend the awareness issue. all company sizes of local origin. To put it simply, the largest local company Pension scheme for company might not always offer the best deal. Looking owners further than just the well-known brands could When Emiratis own a company and generate help a smaller outfit to gather reputation and income solely from there, they no longer embark on a new growth path. Moreover, stay on the official pension scheme. This awareness about large-scale projects is is potentially discouraging for people who critical in the first place, and is a potential think about starting a new business, hence task for institutions such as the Abu Dhabi the relatively large number of part-time Chamber to follow up on. business owners who are also employed by a government agency. Offering participation Promotional activities in the official pension scheme for a certain Advertising projects and making family period after starting a new business could businesses aware is important. Regular entice a potential entrepreneur to fully events where business folks and project venture into the private sector.

Contacts

IHS Global GmbH Abu Dhabi Chamber Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt, Germany P.O. Box 662, Abu Dhabi, U.A.E

Dr. Ralf Wiegert Mohamed A. Rahim Sid Ahmed Associate Director Consulting – IHS Economics Economic Consultant – Abu Dhabi Chamber & Country Risk [email protected] [email protected] www.abudhabichamber.ae +49 (0)69 20973 320 +971 2 6177532 +49 (0)151 42628 143 +971 508101754

IHS Markit 300 Brickstone Square, Suite 500, Andover, MA 01810, US

Janice Branco Principal Consulting – IHS Economics & Country Risk [email protected] +1 781 301 9018

Disclaimer The IHS reports and information referenced herein (the “IHS Materials”) are the copyrighted property of IHS Inc. (“IHS”) and represent data, research, opinions or viewpoints published by IHS, and are not representations of fact. IHS conducted this analysis and prepared the IHS Materials utilizing reasonable skill and care in applying methods of analysis consistent with normal industry practice. Opinions, statements, estimates, and projections in this report (including other media) are solely those of the individual author(s) at the time of writing and do not necessarily reflect the opinions of IHS Markit. Neither IHS Markit nor the author(s) has any obligation to update this report in the event that any content, opinion, statement, estimate, or projection (collectively, “information”) changes or subsequently becomes inaccurate. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. The IHS Materials speak as of the original publication date thereof (and not as of the date of this document). Moreover, while the IHS Materials reproduced herein are from sources considered reliable, the accuracy and completeness thereof are not warranted, nor are the opinions and analyses which are based upon it. To the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on the IHS Materials or any statement contained therein, or resulting from any omission. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. The IHS Materials are not to be construed as legal or financial advice, are supplied without obligation and on the understanding that any person who acts upon the IHS Materials or otherwise changes his/her position in reliance thereon does so entirely at his/her own risk. The IHS Materials were prepared for the sole benefit of IHS’ client for IHS’ client’s use. IHS and the IHS globe design are trademarks of IHS. Other trademarks appearing in the IHS Materials are the property of IHS or their respective owners.” Address: Main Building of Abu Dhabi Chamber, Corniche Road, P.O.Box: 662 Phone: 00971-2-6214000, Email: [email protected]