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In today's global marketplace nation states are losing their importance as economic entities. Fifty-one of the world's one hundred largest economies are corporations and only forty-nine are nation states. For instance, the economy of the Mitsubishi corporation is larger than that of Indonesia - the world's fourth most populous country and a land of enormous natural resources. The diminishing role played by governments in national economic welfare is set to continue as companies throughout the world continue to merge, building ever larger corporate entities that transcend national boundaries and whose only loyalty is to the global financial market.
In 1998 according to Securities Data Company there were mergers worth US$2.4 trillion worldwide, a fifty per cent increase on 1997, itself a record year. The list included several enormous deals, notably the US$80 billion between Exxon and Mobil. The forecast for 1999 is that deal making will be just as frantic with analysts talking about the first US$100 billion merger.
Why do companies seek to merge? The answer is that they are defending themselves against the way the global economy can bring about dramatic change in every area of economic life, for instance, contracting markets in the defence and aerospace industries, contracting commodity prices (oil), excess capacity in key markets (automobiles) the uncertainties of technological change (banks, insurance and telecoms) and the soaring cost of research (pharmaceuticals) have made corporate management realise that they are more likely to prosper in a fast changing global economic environment if they are huge.
A good example of merger pressure can be seen in the oil industry where larger tankers, 3-D seismic imaging, horizontal drilling and immense off-shore platforms have raised productivity in the global oil industry at a time when there is a lowering of demand. This growth in productivity means an excess of labour. This is why the merger of Exxon and Mobil will save US$2.5 billion a year by laying off duplicate staff.
So what are Arab companies doing to position themselves to survive in the global economy? It seems nothing. Arab business houses tend to be family run businesses where secrecy, individualism, bad decision-making and poor management practices are the rule rather than the exception. This leaves them weak and unable to compete in a new world economic order where size is strength. Arab companies continue to find the idea of merging their businesses to protect their markets and market share from larger more efficient multi-nationals a difficult concept to grasp. This is largely the fault of the otherwise excellent virtue of loyalty developed through the value system of Arab society. For companies in the region to compete they need financial strength to see off the challenge of foreign companies entering their traditional markets and grabbing a large portion of their business. This would be disastrous because as more and more capital leaves the region economies will slow and this will hinder development in the region at a time when Gulf countries need to create jobs for the many millions of their citizens who will be entering the work force over the next few years.
But attitudes are changing in some areas of business in the region, particularly the banking and insurance sectors, where too many companies and institutions are chasing too few customers. Recently there have been a few mergers involving some of the region's most prestigious institutions and marks the start of a long overdue process of rationalisation in an industry crammed with small players. This is no accident. The Asian crisis has affected the Middle East, even with its strong regulatory barriers. Gulf banks and insurers are no longer immune to storms in the global market place, they now realise that if they want to thrive, then size really matters.
But this process must continue not just in the banking and insurance sectors. It must spread throughout all sectors of business in Gulf. A few far sighted regional business leaders realise that they must look around for alliances with other companies and business groups within the region, in order to bring about economies of scale that will allow them to rationalise and consolidate their business activities, cut costs and give them the power to compete effectively against large corporate conglomerates.
If the regional business community continues to drag its feet in making strategic alliances and looking for mergers that strengthen their trading positions they will get left behind in the new economic world order. This will not just be a loss of business for themselves, but will generate a slow down of growth in all the Gulf states and the region as a whole, putting at risk the remarkable achievements of two decades.
Khalaf Al Habtoor
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Chairman's Message