Saudi Arabia: Climate For Change

Join the Family Firm

In a country where tradition is very strong, thriving family businesses are adapting to global changes and competitiveness by offering outsiders opportunities for joint ventures

“You trust your blood, and that's it,” goes a Saudi summary of the advantages of family business.

While this may sound old-fashioned in a globalized world, where exchange of ideas and business models are as important as the products or services provided by any given company, in Saudi Arabia the concept of family business takes on a different dimension.

sheikh Mohammed Al-Rajhi, chairman of Al-Rajhi Group of Companies, happens to be the scion of one of the country's most successful and diversified family groups. “I opened my first grocery shop with about 60 riyals, which is less than 15 dollars; and it wasn't even my money, I borrowed from my brother,” he says, laughing.

Rajhi Steel is the group's flagship and third largest producer of steel in Saudi Arabia, but the holding operates in diverse sectors of the economy such as construction, maintenance, supplies, manufacturing, agriculture, trading and consulting.

It is estimated that up to 90 percent of companies in Saudi Arabia are still wholly family-owned, compared to 70 percent in the European Union. At least 500 of them can be classified as large corporations in terms of volume of business.

Whether this is a good thing for Saudi Arabia is a current topic of discussion in the kingdom's business circles. As the economic deregulations implemented by King Abdullah create new opportunities for multinationals seeking a greater share of the Saudi market, many wonder about the future of family businesses, often labeled as unprofessional and exposed to internal squabbles at the time of succession.

But Al-Rajhi is proud of what his family has achieved. “I believe that our lines of business, especially industry and real estate, can really make a difference in a country and change people lives,” he says, referring to the number of jobs and infrastructure his companies provide for Saudi Arabia.

One thing is for sure: family firms can be socially more responsible and have a longer-term vision than publicly-traded companies, especially because they don't have to show constant improvement in their quarterly results. “Even though the return is not so great in some of these areas, they are solid businesses and they are growing consistently,” says Al-Rajhi.

Few leaders of non-family-owned companies can afford to consider where the business will be decades from now, just because few will stay in power that long. He is also proud of the company's charity work which, besides paying 2.5 percent welfare tax on wealth in accordance with Zakah, the fourth pillar of Islam, also supports community work in several cities around the kingdom. “Start helping your immediate family, then go further. This is the teaching of the Prophet,” says Al-Rajhi, who believes that this fundamental doctrine can be embraced by any society or nation around the world, despite its religious belief. “In our teaching if you fulfil the need of your Muslim brothers then you can also go to help your Christian brothers and anybody else,” he says. “We are working hard to fill this need locally and, God willing, we will be able to do more and more in the future.”

Critics of the family-business model are plenty: “The first generation builds the company, the second lets it stagnate and the third squanders the money.”

While there may be some truth to that, it certainly doesn't apply in every case. Ayman Tamer, president of Tamer Group, inherited a pharmaceutical company established by his grandfather in 1922. After completing his studies abroad, Tamer changed the company around, streamlining the non-performing sectors, and formed joint ventures with foreign firms. Today, Tamer Group is one of the leading companies involved in healthcare products and consumer goods, with a strong commitment to the medical sphere.

But what can second-generation ownership bring to Saudi Arabia's transforming economy? How many of them will survive the transition or welcome the arrival of a professional manager outside the family?

Corporate succession may be the ultimate test of a family business, but with an average of five children in every Saudi family, businesses in Saudi Arabia have plenty of choices at this crucial time. Often the result is that the firm is split at management level, according to the individual interests of the founder's children or close relatives.

Rajhi Steel, for example, established in 1984 by Abdul Rahman Al-Rajhi, one of the founder's sons, is a spin-off of the group. The company now boasts three steel factories, with an annual capacity of 250 million tons, covering 35 percent of the domestic market share.

Creditworthiness and stability are two things that the second generation can also count on when taking over the business from their fathers, which come in handy if a company needs to raise money for future expansion or diversification projects.

A joint project of the Al-Rajhi Group at the moment is the development of a chain of hotels in Saudi Arabia with the Swiss group Mövenpick.

The most impressive will be a hotel located in the business district of Riyadh which will boast 300 rooms and suites, poolside villas, nine conference rooms and a ballroom with a capacity for 1,000 guests. The hotel is scheduled to open in 2008, followed by one in Buraidah in the Al-Qassim region and another in Yanbu in the north-west of the country.

Partnership with family businesses in Saudi Arabia is proving to be a good opportunity for foreign companies. A few years ago, Shell tried and failed to enter the Riyadh petrol-station market. Many Saudi businessmen commented at the time that the British-Dutch giant should have looked for a local partner with indispensable local knowledge if it wanted to be successful.

“The relationship between the kingdom of Saudi Arabia and the United States has always been very strong and we must maintain what I would define as a friendship,” says Al-Rajhi. “King Abdullah is now encouraging speed of development for the country and is getting involved in making sure that reform happens fast.”

Many Saudi firms are currently bringing in new investors to increase liquidity for expansion by becoming joint stock companies, thus opening their ownership beyond the ranks of the families that founded them. But ultimately, it is not about being family or non-family; it is about being a good company which is professionally run. Plenty of them exist in Saudi Arabia and, according to Al-Rajhi, American companies should seize on this opportunity.

By Marco Venditti