In the middle of the region’s most sustained economic boom, Saudi Arabia’s private sector has its hands full keeping pace with the massive rise in business activity.

Corporate investment is strong and order books are full. But Saudi companies, mainly active in trading, retail, real estate contracting and small-scale manufacturing, have yet to reap the benefits of the bonanza.

The massive slew of liquidity has brought challenges, notably an inflationary bubble that has hit import-reliant firms particularly hard, while a stream of megaprojects intended to deliver the next phase of Saudi economic growth still appear too vague to the kingdom’s largely family-run business community.

“The mantra is that the private sector must run things,” says the head of a key Jeddah-based family company. “But the private sector is still a small percentage of the oil economy, and so long as oil prices keep rising, this will remain the case. Even Sabic [Saudi Basic Industries Corporation] is relatively small since the oil component of the economy has got bigger.”

So far, few of Saudi Arabia’s family businesses, which comprise about 90 per cent of the country’s corporations, have participated in the megaproject boom. Only the very largest have the scale and expertise to take on major projects.

Trend setters

Xenel, founded in 1973 by the descendants of the Alireza family, is one of the oldest trading houses in the Middle East, and one of the few businesses to break the mould. It developed Pakistan’s first privately owned greenfield power plant in the late 1990s, and the kingdom’s first private petrochemicals plant, in Yanbu. Xenel’s affiliate, National Petrochemical Company, is preparing to start producing 400,000 tonnes a year (t/y) of propylene and 400,000 t/y of polypropylene in early 2008.

Xenel’s ability to take on megaproject developments reflects the clear strategy it adopted from the outset. Starting as a contractor to the government, operating in airport maintenance and healthcare, Xenel then focused on areas where Saudi Arabia’s competitive advantage was most evident: in downstream energy and energy-reliant industries.

It developed a decentralised structure in which divisions operate on a standalone basis. The company positions itself as an opportunist, preferring to enter deals early and take control of boardroom decisions. Xenel takes a long-term view of projects. This is important as it means the company is unlikely to follow a growing number of Saudi businesses in seeking to go public.

Most publicly quoted companies have to report annually, but Xenel and other major Saudi family firms do not have to show quarter-on-quarter improvements to dividend-hungry shareholders. And Xenel’s model is sufficiently flexible to allow some of its subsidiaries to be listed – four are publicly traded.

There is a residual scepticism among Saudi business families about the opportunities a booming industrial economy can offer. “The private sector recognises it cannot be an industrial power as it does not have a real cost advantage,” says the head of the Jeddah family business. “What we need to do is develop a proper service economy. We need to copy Ireland’s model and leapfrog the industrial revolution.”

Such a transformation will require much faster social and economic change. “The government cannot sit there like King Canute and hold back the tide of reform,” he says.

In the meantime, more and more companies are considering becoming joint stock operations as the old-fashioned business model jars with modern-day economic realities.

Few weeks go by without a family business announcing plans to go public. In November, Jeddah-based Halwani Brothers, a diversified group involved in manufacturing food, announced preparations to convert to a joint stock company. The Al-Sawani group, a Saudi retail business with 500 outlets in 13 countries, is preparing to go public early next year.

Going public

“There is now a trend by the merchant families, especially those managed by the second and third generations, to take them public,” says Basil al-Ghalayini, head of BMG Financial Advisors, which will arrange an initial public offering for Al-Sawani early next year.

Corporate succession is a big issue in the Gulf. Many fear future generations will let the family silver slip from their hands. “Disputes between siblings and cousins are becoming more frequent, so the wiser heads are advising other family members to restructure,” says Al-Ghalayini.

WTO accession is another driver of corporate change. One major Saudi family business recently appointed an external audit committee to ensure it was in compliance with best practice in international accounting.

The listing culture is now so firmly entren-ched in Saudi Arabia that even the stock market correction of 2006 has failed to reduce the appetite for corporate offerings. With a new breed of investment bank on hand to advise on the process, the time has never been better to list.

“The correction may have affected the timeline of some firms looking to go public, but the ones with strong brands and the best business models know it does not matter what the status of the market index is,” says Al-Ghalayini. “If they have good products and good financials, people will want their stock irrespective of the market conditions.”

Such a process will trigger a wider dispersal of wealth and may help many Saudis overcome their concerns about being bypassed by the economic boom.

CASE STUDY: Tameer Group

Jeddah-based pharmaceuticals company Tamer Group can trace its history back to the earliest days of the kingdom. Its trajectory is typical of many of the biggest Saudi family companies.

Tamer group chief executive officer Ayman Tamer’s grandfather, Mohammed Said Tamer, was the first pharmacist to register in the kingdom back in 1922. His father and uncle, Farooq and Mamoun – a pharmacist and financier respectively – took over the business in 1958. Since 1986, the third generation has taken over management of the company.

“It was in the late 1950s that people started to take up agency representations,” says Ayman Tamer. “My father was keen to move into wholesale rather than stay a retailer, so we expanded and opened a second pharmacy in Riyadh. But in the late 1980s, we decided to discontinue retail and focus only on wholesale.”

Embracing change

The third generation took the group into manufacturing pharmaceuticals, diversifying and developing the business. Now it employs more than 1,300 people, with about half its revenues coming from pharmaceuticals.

Tamer considered launching its own manufacturing facility in the 1980s, at a time when international companies were closing factories rather than building new ones. “Contracting out manufacturing during that time was against their objectives and intellectual property rights were not clearly defined,” he says. “Companies were more keen to export to Saudi Arabia than produce there.”

This changed when it was approached by the Japanese International Development Organisation (Jido) in the 1990s. “One of its projects was to look into the healthcare industry,” says Tamer. “It visited several pharmaceutical houses and after long discussions, Jido decided to establish a pharmaceutical factory with two Japanese partners and a trading house.”

Now Tamer’s manufacturing arm, the Saudi Japanese Pharmaceutical Company (Saja), established in 1996, is a 50-year joint venture of Tamer and two of Japan’s largest Japanese pharmaceutical firms: Astellas and Sankyo. It manufactures the latest Japanese products and makes its own brands and generic products under licence for the Saudi and Middle East markets. It has introduced a confectionery distribution service and is looking to invest in a confectionery factory.

Tamer’s challenge as it builds the business is no different to that facing many Saudi family companies. “The only thing constant in life is change,” says Tamer. “In order to survive and provide useful services, you have to adapt to the requirements of the territory. So we changed from a retail pharmacy into a trading house, and now to a manufacturing unit.”

This raises the question of whether there is now pressure to go public, like some other family businesses. “We have no intention to join the stock market at present,” he says. “We are now in the third generation in Tamer and it is all about integrity, understanding, intelligence and continuity, whether through the family or not.”

Innovation is hard-wired into the company’s ethos, says Tamer. “We know that services provided in the past might not be good enough in future, so we have to add value and be innovative. Today you really need to think outside the box. You have to have a system that encourages creativity and innovation – doing things more effectively and in a smarter way.”

The competitive marketplace is driving change, but strong relationships are still key. “Pharmaceutical companies are not forced to work through us, but they choose to do so because we add value and take the risk and financial burden, and will meet professional standards,” says Tamer.

Local opportunities

The local market presents major challenges, but also big opportunities. “We spend less than $60 a head on medicine in Saudi Arabia, which is low compared with developed country averages,” says Tamer.

“With health awareness and the community demanding better healthcare, we see big growth in this area. Take diabetes. Statistics show 25-30 per cent of the population suffers diabetes, compared with about 8 per cent in Europe. Chronic diseases will only be addressed with improved public health education and patient awareness.”

Reform of the healthcare industry is at an advanced state. WTO entry has already led to the creation of the Saudi Food & Drug Asso-ciation, but regulatory improvements are still needed.

“There needs to be better understanding of patent protections, and they need to conform with international standards,” says Tamer. “With improved legislation, this country can turn from an importer to an exporter.”