Saudi manufacturing sector able to compete on global scale

Interview with Abdullatif al Abdullatif, CEO of Al Abdullatif Industrial Investment Company

In your opinion, has doing business in Saudi Arabia gotten any easier with all of the new regulations and laws?

We have two issues here. As you said, there are many new laws, but there is also development. There has been substantial development of the e-platforms in Saudi Arabia for interacting with the government and that has substantially eased the burden when it comes to operations. Most of the materials that we deal with here in Saudi Arabia are available locally.

Sourcing of materials has never been the issue. Sourcing of technically-sound people has been the issue, and the legal formalities in this respect are much more uniform now on the government’s end because of the development of e-platforms.

The new laws have regulated the labor environment and I do not see them as impeding the business environment. As a company, we have our own internal rules which were rather liberal. Business is the same as usual.

When we look at the outlook for the manufacturing sector in Saudi Arabia, is it an area of strong growth in your opinion?

The manufacturing sector has to have strong internal resources at its disposal: manpower, technology, and people who can manage the business aspects. What we see is that Saudi Arabia still needs to have the mid-end and the higher-end technologies.

As far as blue collar work force is concerned, there are still certain constraints, but then the private sector and the government both have to work together. We have our own institute where we hire and train. Saudisation has been an issue, but we believe that it is transformation of society that is taking place.

The usual business constraints are of course present, but in the long-term, we feel that there is a strong potential for growth because of the growing per capita income of the people. There is a young population, so local demand will only multiply in times to come.

You are competing against China, against India, against many countries. How difficult is it to stand out in a globalized economy?

When you look at the new investment proposals and business in Saudi Arabia, there has to be a core competence and a core market. Both are available in the country itself. Our portfolios are 70% local and 30% outside. We try to be risk-averse when it comes to the global market, but our product remains a fashion item.

The quality, design, pricing, and servicing are what matters. We are very well aware of this market.  We have a presence in more than 60 countries across the globe. We have been in the business for more than 35 years. We have a very strong partnership with our customers, which is how we are able to compete.

China had the advantage because of the value of their currency and the man-hour cost. On the man-hour cost, they are substantially losing now. Automation has been the answer to the challenges that China is forcing upon us. We are a volume player in this business as is China, but we have been able to match them on equal terms. In terms of the quality, we have been able to command the prices.

What are the key advantages of Saudi Arabia?

Local availability of the material and continuous assured supply of material of required quality and quantity is a key advantage. We consume a huge quantity of raw material in our processing. The assurance of a quality, sustainable supply is helping us in maintaining our core strength. The energy cost has also been low. With the recent lowering of oil prices, this portion has been slightly offset, but comparatively, with the manpower cost, energy cost, and the local availability of raw material at a competitive price, we are rather well-positioned.

Are there perhaps elements of competitiveness in the globalized economy? Automation?

Yes, the technological improvement has been the key word. We look at materials as one part, technology as another, and human resources as yet another important component.  We have spent a lot of time, money, and energy on the training of our workforce. In 2016, we are emphasizing in employee training that our workers should challenge themselves. We need them to stay productive and motivated. Our numbers speak for themselves; we have been upgrading our facilities on a regular basis, keeping abreast of what is happening in the world around us. We try to keep acclimated to the newest technological developments in order to be more efficient and productive.

How would you characterize your short, medium, and long-term strategy?

The company is trying to diversify. We see a huge scope available in the medium- to long-term in the business of raw materials in the textile industry. We also see that costs have to be brought down in a short period of time term in order to remain competitive in the current market; margins have gotten tighter. With the kinds of volumes that we have, we are a huge volume player, ranked as 4th most productive company in the world and we are the 6th largest in the world in terms of volume. Our short-term strategy is to cut down on waste and improve efficiency and productivity, and in the long-run, technological absorption, coming out with new product ranges, and diversifying will be our key strategies.

Diversifying how?

The company has investments in sugar and in power cables and we will continue to explore options to add value to the stakeholders.

Moving, then, to your financial performance in the key ratios in 2016?

The business was impacted by the third quarter of 2015 and continuing into the fourth. Demand has not gone down; it is only because of price fluctuation that the customers were waiting. Oil prices do not affect us directly, but when the fluctuation is there, customers tend to hold off on purchases. We are not doing business based on B to C, our business is B to B. With B to B, what happens in such market situation is that customer’s try to reduce stock exposure to avoid negative returns. We expect the market to improve this year in the second and third quarters.

The top line is your sales. Therefore if the raw resources are reduced, you would have a better margin?

Not really, because normally what you do is stock your basic requirements with the huge consumption that you have. Once the prices have gone down ultimately benefit has to be passed on to the customer. In terms of the numbers, it may appear that the sales has come down by over 20%, but this is for two reasons; one actuals volumes may been impacted and second the price of the product has reduced due to lower cost of raw-materials.

Could you present a brief history of the company? What was the original idea behind it?

More than 60 years back, the business was originally started with a showroom for furniture and home furnishings. Our founder started trading in furniture, carpets, home decor items, and over a period time, this grew into a big brand. Originally, he would import, and trade, and then 37 or 38 years back, he got the idea to start manufacturing. We set up a small unit in the 2nd industrial area in Riyadh and we established a manufacturing unit. This was furthered over long number of years and the basic facilities were renovated, updated, and the vertical integration was created to make a healthy and powerful organization. Now today, except for the basic raw materials, we do not buy anything from outside anymore. We make everything on site. And we are not only the manufacturers for the carpets and rugs, but we also produce intermediaries like yarn, carpet backing, fiber, and different kinds of yarn made of the man-made fibers. We export to more than 60 countries as one of the very high quality suppliers. We employ more than 4,000 people today. It’s a huge success story. In 2007 we were listed on the stock exchange, and in the last ten years, the turnover has gone up from about SAR 800 million to about SAR 1.4 billion. Now we are investing into other sectors as well. We went from a trading entity to a manufacturing and have become one of the top ten in the world.  Carpet and textile became our whole business, actually, but from here the group of which we are part of has moved on to cement, power cables, ceramics, to sugar, real estate, furniture (manufacturing and trading both), that is how the group has emerged.

As a proportion of business, how much is dedicated to all of these business interests?

For the group, I would say that carpet is 40% of our activities per year. The carpets & textiles represent A-Abdullatif Industrial Investment Company which is a listed entity. It’s a profit center while the group has certain other interests also. Each company is a certain profit center for the group.

How much of your business is done in Saudi Arabia? How do you respond to design needs locally?

About 65% business is in local market and about 35% is in the global market. Everywhere we have our local contacts, all of whom interact with us to get us the trends in the market. We show the new products and designs developed in-house to the customers and even the customers come up with their own designs and we integrate these into our manufacturing process. Our carpet intermediaries, however, are also a huge business. Our customers have their own requirements, and we have our own product line in the related segments which are generally used and also there could be some specific requirements which could be adjusted in our manufacturing process. When it is only the final product, then it becomes about design and products. In any market, they have their own preferences of patterns, some of which we design and some of which they design. We have been going to various exhibitions to see the trends in fashionable colors, lines, and other design elements which are on the rise.

Why did you decide to focus only on B2B and not launching your own showrooms?

Our entire marketing strategy is riding on our distributor and customer sales network, so B to C would not be the right strategy for us. Others may believe otherwise, but we have been doing business successfully.

Let’s briefly talk about the vision for the company.

We want to be among the top five, not the sixth one. That’s our vision. The leading companies right now are in the U.S., not in China. China is more into handmade carpets. We are only into the machine-made products. It’s about volume. It’s a continuous process for us. At one point of time we decided we needed to expand in the yarn market, so we went exhaustively on that, developing products, studying new yarn types, etc. Then for the carpet backing, we developed new products and in blanket also this year we developed new products to be amongst the best in the market. Business is never static.

And what is your main target audience? Higher end? Medium? Low?

Carpets and rugs are an entirely different sector. It’s not a luxury brand. It’s medium. Outside of Saudi Arabia, we have a presence in Australia, Asia, Africa, the US, Russia, the Middle East, Canada, and Russia.

What are the major business risks at this stage?

The country needs to raise the import duty taxes to protect local Saudi industries. We feel that many of the products coming in are not up to standard and are competing on price alone. There are other issues relating to dumping etc. and we do not have enough mechanisms to counter them.

The requirement of the availability of a locally-trained workforce is huge. You can train people but retaining them has become difficult. They keep moving out. I see that happening all over the world with younger people, even in mid-management. This impacts continuity. This is an industry that requires a lot blue-collar workers. To maintain a trained workforce of some 4,000 employees is a huge issue. The cost of Saudisation in terms of their ability to deliver is a key challenge.