Cashed Out by MediaquestCorp.

May 2010 /N° 143

IRAQ

ISRAEL

Turkish consulate for Kurdistan

OECD may punish it for inequalities

Cashed Out Are U.A.E. banks broke?

Birkin Stock Luxury brands storm the East to keep up with rising demand

IA ta D I N Ta

Carbon’s Footprint

n G ata R N V I ya &

I all R M D jay

The Middle East may proﬁt from a new crop of energy exchanges

A MediaquestCorp Publication Registered in Dubai Media City

Canada ........................C$ 7.50 France .......................... € 4.57 Germany ....................... € 6.14

Egypt ..............................E£ 10 Italy.............................. € 5.17 Jordan ............................. JD 4

Kuwait ...........................KD 1.2 Lebanon .................... L£ 5,000 Morocco.........................DH 22

Oman............................ OR 1.5 Qatar .............................QR 15 Saudi Arabia ...................SR 15

Switzerland ....................SFR 8 Syria............................ S£ 100 Tunisia .......................... TD 2.5

UAE .............................AED 15 UK .....................................£ 2 USA ....................................$ 5

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MAY 2010 • Issue 143 • www.TRENDSMAGAZINE.NET S.C.C. Arabies, 18 rue de Varize, 75016 Paris, France Tel: +(33) 1 476 64600 • Fax: +(33) 1 438 07362 E-mail: editor@trendsmagazine.net

COVER STORY

LIQUID ASSETS

Widespread accounts of the U.A.E.’s cash troubles are highly exaggerated. Here’s why.

leading TRENDS

leading trends

TREASURY BUILDING Even the best businesses benefit from the establishment of a central treasury.

DOHA WEF 28

IRAQ

leading TRENDS

CONSULATE FOR KURDISTAN

MARKETING McLAREN

Why low-tech market screening can work wonders at a high-tech firm.

The World Economic Forum decides how to put all those lofty plans into action.

The Iraqi region’s relationship with Turkey takes a giant leap forward.

leading trends

ISRAEL

GULF’S EURO CONFLICT

WILL the OECD SAY YES?

Greece vs. Germany foreshadows Gulf squabbles when the Khaleeji arrives.

4 TRENDS | May 2010

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APRIL 2010 • Issue 142 • www.TRENDSMAGAZINE.NET S.C.C Arabies, 18 rue de Varize, 75016 Paris, France Tel: +(33) 1 476 64600 • Fax: +(33) 1 438 07362 E-mail: editor@trendsmagazine.net

AUTOMOTIVE

INDIA’S DRIVING FORCE How two Indian businessmen are turning their country into a motoring powerhouse.

74 6 TRENDS | May 2010

ENERGY

TOP ARAB CITIES 2010

A DATE WITH CARBON

urban warfare

Energy exchanges will dot the Middle Eastern financial landscape before you know it.

The world’s major Arab cities, head-to-head. We reveal the best place to live.

HOSPITALITY

ON THE ROAD

MID-MARKET MONEY

CLUBBING, NEWPORT-STYLE

Five-star is so last year. Budget lodging is where the lucrative action is.

124

For these Rhode Islanders, a “drive” means more than a wicked golf swing.

RETAIL

LAST WORD

LUXURY’S STAYING POWER

YOUSEF TUQAN TUQAN

Premier brands discover how to stay profitable: Head eastward.

130

Flip Media’s chief executive on social networking, apps and iPads.

CORPORATE FINANCE

Giving Your Treasury a Boost

Dreamstime

By Jay Akasie Dubai

aniele Vecchi says that being a treasurer of a development company is a lot like being a risk officer at a bank: Nobody listens to you during good times and everybody scrutinizes you when the economy takes a turn for the worse. Vecchi is senior vice president and head of group treasury at Majid Al Futtaim Group LLC, one of the Middle East’s premier developers of shopping malls and hypermarkets. The lessons he has learned over the past couple years are proof that even the most successful businesses benefit from the creation of a strong, internal treasury culture. 10 TRENDS | May 2010

Centralization is key, according to Vecchi. When he first arrived at Al Futtaim, the company treasury appeared to be disconnected from the rest of the company’s operations. “We had a lack of treasury culture, I’ll admit. In the past, different sections of the company were talking to and borrowing from the same bank without knowing what the other was doing. The bank must have had a good laugh,” he said at EuroFinance’s recent Trade, Treasury, and Cash Management in the Middle East conference. What Vecchi did was transform the company treasury into a value-added cost

center. The advantage of making the treasury just as accountable as any other department is that the strong team he assembled would know that their performance would be measured – and rewarded. Operating with the belief that a central treasury is vital to liquidity management, Vecchi set up Al Futtaim’s treasury to act as an internal bank. Majid Al Futtaim Group’s developments attracted 110 million visitors last year. In 2008, the company had Ebitda of $395 million on sales of $3.8 billion. Within those vast operations, two different models coexist: The first, developing malls, is extremely capital intensive, while the second, managing hypermarkets, generates positive cash flows upfront. They are extremely complementary businesses, but they can keep a treasurer on his toes. From an operating point of view, the company needed a model that managed fragmentations in the business, according to Vecchi. He also addressed the issue of financing and capital structure, not to mention financial risk management. Because he came to the Middle East from Europe, Vecchi found it very different to find the right level of support and commitment among treasury management companies in the region. That task has gotten harder during the recession, he said. Majid Al Futtaim’s successful creation of a central treasury hinged on the fact that management liked what they saw. “There’s a certain cultural change that’s going to happen within the company,” Vecchi said. “You need to build a solid business case. You can be the ultimate politician and marketer of yourself, but if you can’t make a sound business case and quantify advantages to your CEO, it doesn’t work.”

MARKETING

A High-Powered Expansion

Getty/Gallo Images

By Jay Akasie Dubai

he world is still a year away from the highly anticipated debut of the McLaren MP4-12C supercar. And yet the company already boasts 1,600 customer registrations on its Web site indicating “expressions of interest to purchase,” even before it officially opens its order book. Customer service technicians will soon make telephone calls to confirm intentions to buy one of the 1,000 vehicles set to be produced in the first year. It’s all part of a sophisticated plan to quadruple annual output and establish a car company alongside the already legendary McClaren racing operation. Much of that action will flow out of

12 TRENDS | May 2010

the new McLaren Production Center when it opens in six months. Designed by Norman Foster, the building will stand next to the existing technical center on the company’s campus in Woking, England. In the field, McLaren is fashioning its showrooms around what the company’s Middle East regional director, Ian Gorsuch, describes as a “sanity, not vanity” approach. For instance, computer touch screens designed by Microsoft will walk would-be customers through an informative introduction to the brand. McLaren’s overall strategy – first detailed in the pages of this magazine – is to develop a full range of high performance sports cars by the middle of this decade.

That would mean a production output of some 4,000 automobiles a year. All in all, it’s a bold corporate expansion plan that hinges on McLaren’s engineering know-how and passion for science. Yet there’s another aspect to the overall plan that comes from a less scientific source; McLaren’s customer service technicians are screening potential customers using good old-fashioned gut instinct. Gorsuch offers an example. “If someone’s responded to us online and he says he already owns 20 Ferraris, chances are it’s a schoolboy,” he says. It’s a simple marketing screen, but when you’re selling something like the MP4-12C, it’s also a necessity.

CURRENCIES

Khaleeji Survives Greek Tragedy

Dreamstime

By Emily Meredith Dubai

very few months, news re-emerges that the Khaleeji – the informal name for the Gulf’s unified currency – could be just around the corner. Officials meet, promises are made, and for a day newspapers run stories that paint the picture of a future monetary utopia, without discussing how to confront the challenges inherent in creating a single currency. Those challenges have been highlighted in the months since the Greek government confessed its financial problems. After owning up to €50 billion

16 TRENDS | May 2010

($68 billion) in loans due at the end of this year and a 12.7 percent deficit – far in excess of the eurozone’s 3 percent limit – Greece appeared ready to drag the healthier and more productive economies of Europe into trouble. Germany voiced its consternations the loudest because it has the most to lose. A rescue plan called for a majority of eurozone countries to loan moneys based on the size of their economies and populations, meaning Germany and then France would pay the most.

Despite the ominous news from Europe, the central bank governors from Saudi Arabia, Kuwait, Bahrain, and Qatar met in March to form the monetary council that will be the precursor to the Gulf’s central bank. They appointed Saudi Arabian Monetary Agency chief, Mohammed Al Jasser, as chairman. At first glance, a Gulf monetary union may seem unnecessary. With the exception of Kuwait, the region’s currencies are pegged to the American dollar. Given Europe’s disparate currencies and high number of national borders, the euro was expected to lower the costs of trade between countries. With fixed exchange rates already in place, Gulf economies would be unlikely to see such a benefit. “The benefits you have [in a monetary union] are more transparency, lower transaction costs, lower exchange rate volatility and more liquidity, but these gains are very small. And everybody knows that these are very small,” says Alexis Antoniades, an economics professor at Georgetown University in Qatar’s School of Foreign Service. Antoniades says that trade did not increase nearly as much as expected in Europe after the introduction of the unified currency. The motivators and results of the union have been largely political, just as they will be in the Gulf. While transaction costs may not be significantly lowered, investors and economists frequently cite the region’s lack of data as a significant problem. Antoniades, whose work focuses on inflation, says basic numbers taken for granted in other parts of the world are not available here. Simply going through the processes necessary to introduce monetary union may have benefits in the Gulf.

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“If I want to find data in the U.S., in Japan, you have a lot of access to data. And not only do they have data, you can find out the way they get it. Here, it is hard because they don’t have it or they don’t publish it,” he says. “They are trying to build capacity and they are doing it, but it takes time.” A monetary union can significantly constrain the policies countries can use when their economies start to sour. Typically, when a country faces crisis, its currency becomes weaker. Its goods then become relatively cheaper and exports increase, which helps recovery. But because the currencies concerned are currently pegged to the dollar, they do not have their own monetary policies anyway (see cover story). The central banks are not able to increase the money supply in order to decrease the costs of goods because they 18 TRENDS | May 2010

are constantly balancing the values of their home currencies with the value of the American dollar. A regionally based monetary union could allow the countries involved to more tightly control their monetary policy than they can under the current dollar peg. “Right now the monetary policy is given to the Fed,” Antoniades says. “If the Fed was to raise interest rates because of inflation in the U.S., the countries have to follow. And the Fed will never care about what is going on in these economies. The Fed will care about what is going on in the U.S.” Back in Europe, Germany has had a disproportionate influence on the decision to grant a €30 billion loan to Greece. Some fear that Saudi Arabia could hold similar sway in a Gulf union, as the Saudi economy is the Gulf’s biggest. In fact, the

Gulf monetary council is located in Saudi Arabia; after the decision to move the location to Riyadh was made last year, the U.A.E. pulled out of the unified currency. With Al Jasser as the bank’s first chair, Saudi Arabia has an even bigger chance to dominate the union. “You will have one unified voice but they are afraid this will be Saudi Arabia’s voice that will dominate the other countries. That is Oman’s fear also,” Antoniades says. The Gulf monetary union has been in the works for more than 30 years. Antoniades thinks it may take another five to ten years to for all of the data organization and coordination necessary, but the improved economic information will be worth it. “It doesn’t matter,” he says, “because my main argument is its not when the GCC union will happen but how it will happen.”

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ECONOMICS

A Taxing Delay

Dreamstime

By Emily Meredith Dubai

GCC-wide value added tax slated to come online in the next few years could catch regionally based companies off guard, costing them millions. The potential value added tax, or VAT, is part of economic diversification efforts by regional governments. The vice ministers of finance met in early April in Riyadh to discuss the plan, and while the six nations of the GCC have all agreed in principle to the tax (originally conceived of as a way to compensate for lost customs revenues), its implementation still may be years away. One advisor with an international tax firm who works locally says that many com20 TRENDS | May 2010

panies were concerned several years ago when governments first started discussing a value added tax as compensation for falling customs revenues. But because action on the part of the governments has been slow, none of his clients have moved to ensure their contracts provide for potential taxes. Contracts with foreign companies often include a standard provision for a VAT, but companies accustomed to operating in tax-free environment often do not think to negotiate for more favorable terms. The VAT, which might take hold as early as 2012, could cost corporations operating under these old contracts.

The need for a VAT partially stems from a need for governments to diversify their revenues. When the economy is doing well, energy demand is typically high and hydrocarbon-rich countries have strong revenues. Fiscal spending on large infrastructure projects increases when these economies have surpluses, boosting the rest of the economy. But when a contraction or recession drives energy demand down, hydrocarbon revenues decrease. â&#x20AC;&#x153;You have this double effect on the economy,â&#x20AC;? the chief economist at the Dubai International Financial Center, Nasser Saidi,

says. “And then you aggravate what is already the boom and bust cycle.” Although many GCC countries have corporate taxes, their revenues come from a relatively small number of sources. “What we tend to see in this part of the world is a reliance on one or two taxes rather than a reliance on a whole range of taxes,” a partner for Pricewaterhouse Coopers’ Middle East Tax practice, Dean Rolfe, says. Studies undertaken by the IMF and championed by Dubai Customs – which faces significant losses under a trade agreement that eliminates or greatly reduces duties – showed that the VAT could double customs revenues. Saidi also says that proving guaranteed revenue streams from a VAT will enable regional governments to more easily gain access to credit. As banks become more reluctant to lend based on implicit guarantees, this will become more important. 22 TRENDS | May 2010

Ehtisham Ahmed, who works as an advisor in the U.A.E.’s prime ministers office, says he does not think the introduction of consumption based taxes will lead to personal taxes. “That’s not going to happen with the current environment.” More importantly, companies and consumers frequently encounter what Ahmed calls “nuisnace fees,” or charges for services from government agencies. The economic impact of these disparate charges is largely unknown. Ahmed, who coordinated the IMF’s report on taxation for the GCC when he worked for the organization, said that a consumption tax will most likely affect the top consumers. “For the emirates it would roughly double customs duties if you were to implement the value added tax,” says Ahmed. While the U.A.E. and Dubai Customs were initially some of the biggest propo-

nents of the taxes, analysts say their calls for the VAT have since quieted and the structural reforms necessary for implementing a consumption tax are not moving as rapidly as they need to be for a 2012 implementation. Even with the revenue potential, it could take years to set up a tax administration after the governments have signed the necessary treaties. Other governments appear more prepared. Saudi Arabia already has a tax administration in place. Bahrain, Qatar, and Oman – countries which Ahmed says were initially opposed to taxation – are preparing their own administrations. The director of public revenues and taxation department at Qatar’s Ministry of Economy and Finance, Moftah Jassim Al Moftah, says his government’s preparations are near completion, and only need a final agreement at the GCC level to begin administering. “We are ready,” he says.

FINANCE

Risky Business

Dreamstime

By Jay Akasie Dubai

apital markets aficionados operate under the mathematical certainty that the greater the risk, the greater the reward. But risk can be a dirty, four-letter word to executives at old-line industrials. They’re the sorts who don’t like the risks associated with commodities, treasuries, energy, or currencies. Especially commodities and currencies. Volatility in both sectors has wrought havoc on corporate profitability during the past 12 months. The obvious solution is hedging. But what kinds of hedges and what types of financial instruments are most effective? Two of the region’s leading financiers recently shared their thoughts about hedging strategies at the EuroFinance Cash Management conference and offered valuable 24 TRENDS | May 2010

advice on coping with a turbulant market. Arijit Shome is group treasurer for Almarai Co., a dairy company that’s a household name across the Middle East. The cardinal rule for successfully facing any type of risk is to focus on your core business. For Almarai, it’s food. “If you diverge from your core business, you bring in more uncertainties that you need to manage,” he said. So what’s keeping Shome up at night? For starters, currency risks. He said he had luck with an active hedging program to get him close to what he had planned at the beginning of the year. Available structures may look attractive, but you need to manage underlying exposure, he said. Add to the currency swing some interest rate fluctuations. Shome said that Al-

marai tries to keep exposures open. With various banks and products to hedge, a corporate treasurer has plenty with which to arm his company. It’s also helpful to look at currency swings relatively. “It’s not good or bad – it’s relative. If the rate is at 5 percent and I took a fixed rate swap at 6 percent, then you need to keep in mind what was going on at the time,” Shome said. Then there’s commodity prices. Almarai’s not involved in commodity hedging, but enters into long-term contracts with suppliers, according to Shome. Could that policy change? “Sure. Going forward we’re most likely going to be looking into hedging feedstocks,” he said. Mussab Abdulmajid Al-Wohabe is group treasurer at Saudi Arabian Amaintit Co., the region’s leading pipe manufacturer with a diversified clientele, 35 plants and a presence in 18 countries. That means he’s constantly facing a basket of risks: economic, political, commercial, credit, and currency prices are the most common. Al-Wohabe said that pig iron price volatility caused a sensation a couple years ago when a ton of the material went from $400 to $1,200 to $300 over the course of a year. “This type of fluctuation could put you out of profitability during an 18-month project unless you mitigate the risk. You don’t want your balance sheet affected by huge back-up of inventory,” he said. Targeting commodity prices to a basket of prices worked for Saudi Arabian Amaintit Co. So did a central warehousing system, according to Al-Wohabe. Another strategy has been to take a 5 to 10 percent stake in the company’s raw material suppliers. The very best way to cope with risk is money. “The key is liquidity. When you have that, you can void risks and tap into more opportunities in the market,” he said.

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INDUSTRY

The Continuing Promise of Plastic

Dreamstime

By Jay Akasie Dubai

he character of Mr. McGuire in the 1967 motion picture “The Graduate” was right on the money. “Plastics … There’s a great future in plastics,” he said to the young Benjamin Braddock. The folks at Bayegan, the Turkish industrial conglomerate, have known about the promise of plastics since the mid20th century, when the company’s founder decided to concentrate on polymers instead of burlap. Talk about foresight. As much of a visionary as he was, even Cafer Bayegan could not have imagi-

26 TRENDS | May 2010

ned how far the company that bears his name would come to dominate the plastics trade in the Middle East. “Plastics used to come almost entirely from Europe and North America, but now the Middle East is becoming central to this business,” the company’s co-chief executive, Ruya Ermec Bayegan, says. Baygean is obviously well-placed to take advantage of this geographical shift. Its headquarters in Istanbul is perfectly situated between the European industrial centers and the oil fields of the Arabian peninsula.

For decades, the Middle East concentrated on refining oil. But these days the governments – many of which are cashstrapped after a dizzying decade of infrastructure development projects – have decided to concentrate on higher margin oil businesses like plastics manufacturing. It’s proving to be a shrewd move. The raw materials are already here and the oil refineries make them fully integrated. The next hurdle is developing the kinds of manufacturing capacities that will make the Middle East the undisputed plastics champion of the world. “We’re here to bridge the gap between the Middle East and the West,” Bayegan says. “As capacities improve, we’re ready with our consumer-oriented approach.” Always mindful of improving their margins, countries like Saudi Arabia and the United Arab Emirates are tweaking their refineries to extract polymers from natural gas, which is a cheaper process than doing so from oil. Turkey is set to help with this revolution. The country is the world’s No. 2 chemical importer, and Bayegan has organized its business operations to take advantage of the three most lucrative areas in this industry: oil & derivatives, petrochemicals, and fertilizers. It forms strategic partnerships with chemical companies – mainly suppliers – in order to dominate regional markets with its trading and distribution operations and raw material supply. The company’s Dubai office is one of its largest satellites. Mrs. Bayegan, who met her husband, the son of the company’s founder, while an employee two decades ago, is already grooming their two children to continue the family’s mission to dominate the petrochemical business.

ECONOMICS

Walking the Walk

Reuters

By Jay Akasie Zurich

hey’ve talked and talked and talked. In fact, some participants of the World Economic Forum’s plethora of events have been known to tell a selfdeprecating joke that goes something like this: Did you hear that the hot air generated by WEF panellists speaking about global warming resulted in a two-foot rise in world ocean levels? True, the high profile business tycoons and politicians (not to mention the editors of this magazine) who gather in Davos, Switzerland, each year are fountains of knowledge who come armed with longwinded ideas that can change the world.

28 TRENDS | May 2010

But do you ever wonder what happens to the ideas – indeed, all that talk – generated by the Davos conference and all the other regional WEF events throughout the year? If you do, we have the right WEF event for you. At the end of this month, in Doha, Qatar, the World Economic Forum holds its Global Redesign Summit, the first time participants will begin putting into action a year’s worth of discussion groups and break-out sessions. So what kind of proposals has a year’s worth of WEF events come up with? If you’re not fortunate enough to be invi-

ted to Doha (we at TRENDS are among the fortunate few), then take a look at what ideas world leaders will begin putting into action at the forum (at Davos it’s known as walking the walk): International Economic Governance ▪▪The empowerment of a global systemic financial risk watchdog under the auspices of the Financial Stability Board. ▪▪The aggregation of systemically relevant data across the global financial system for the benefit of regulatory authorities via public-private cooperation. ▪▪The creation of a wholesale insurance scheme for the financial sector.

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▪▪A strengthening of the global financial safety net through reforms of the IMF that would enable the IMFC, at the request of the managing director, to issue SDRs for the provision of emergency liquidity in times of financial distress. ▪▪A new, structured public-private process aimed at identifying model national labor migration policies around the world. 30 TRENDS | May 2010

International Security and Transnational Threats ▪▪Creation of new international norms regarding the responsibility of states that harbor international terrorists. ▪▪A new international framework to facilitate self-associating mobilization of cooperation to strengthen the resilience of the World Wide Web.

▪▪A series of steps to strengthen particularly the non-military institutional capacity required for the effective prevention of mass atrocities under the Responsibility to Protect framework. ▪▪An international platform to improve the connectivity of networks of risk experts across countries, disciplines, and stakeholders as a means of facilitating a greater degree of proactive cooperation on global challenges. Development Cooperation and Humanitarian Assistance ▪▪A new international process to catalyze water management public-private partnerships in key water-stressed regions of the world, such as South Africa and India. ▪▪The establishment of a new agency partnership model between recipient governments and donors as a means of supporting funding flows and capacity-building for fragile states with weak domestic institutions. ▪▪A global multi-stakeholder partnership to scale the “supply side” commitment to a zero tolerance policy with respect to bribery as a complement to official “demand side” efforts by governments to strengthen policy in this respect. Environment, Energy, and Sustainability ▪▪A suite of public-private, low carbon infrastructure investment funds in each developing country region ready for business by 2013 and able to mobilize up to $75 billion per fund every three years to 2030. ▪▪A global platform for intra-industry cooperation on energy efficiency via the addition of a private sector dimension to the International Partnership for Energy Efficiency Cooperation at the International Energy Agency, potentially leading to a set of globally accepted minimum energy standards on a limited but critical range of energy intensive industrial and consumer goods. ▪▪Creation of a global standard for the labelling of emission footprints on consumer products, building on work currently underway in the non-governmental organization community.

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Focus: Iraq

Good Neighbors The opening of a new consulate in Iraqi Kurdistan may signal the start of a new phase in the tumultuous relationship between Turkey and northern Iraq. By Tanya Goudsouzian & Lara Fatah Erbil, Iraq

n March, the president of Iraq’s Kurdistan region, Masoud Barzani, received a Turkish official at the Salahaddin Resort. It might have been a run-of-the-mill event, had the official not been the new Turkish consul Aydin Selcen, who had arrived to take up office in Erbil. The opening of a Turkish consulate in the capital of the Iraqi Kurdistan Region fell below the radar of most press reports, but its significance cannot be underestimated. It is a crowning achievement for Iraqi Kurds. They have walked a tight rope of diplomacy over the years, attempting to balance their own interests without compromising those of their brethren, the longoppressed Kurds of Turkey. “[Turkey] understands that there is great poten-

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tial in the region and that it can serve as a gateway to Iraq, while the region looks to Turkey as a gateway to Europe. It’s a win-win situation,” says Minister Falah M. Bakir, the Kurdistan Regional Government’s (KRG) Head of Foreign Relations, in an interview with TRENDS magazine at his office in Erbil. Since the American-led liberation ousted the Baathist regime in 2003, Turkish firms have constituted more than 70 percent of the foreign commercial presence in Iraq’s northern Kurdish region. Annual trade volume between Turkey and Iraqi Kurdistan was expected to reach $20 billion this year, and roughly 80 percent of the goods sold in Iraqi Kurdistan are made in Turkey. Still, that has not impeded the

Turkish military’s relentless and ongoing aerial bombardment of Iraqi Kurdistan’s border areas, where fugitive Kurdistan Workers’ Party (PKK) militants have found refuge. The KRG has condemned the bombardment, and repeatedly stressed that, short of military intervention, it is prepared to assist in resolving the contentious issue. While reluctant to be seen as traitors to the Kurdish cause, it is clear that the KRG cannot jeopardize its own security and prosperity by antagonizing its strategic neighbor, with which it shares a long and mountainous border. In effect, observers now consider Turkey’s ongoing military strikes against the PKK in Iraq’s northern region a tactical and political success, as Turkey and Iraqi Kurdistan are on the way to

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Focus: Iraq

Turkey and Iraqi Kurdistan are on the way to being strategic partners in maintaining security becoming indispensible strategic partners in maintaining security, in commerce and in energy development. Last month, it was announced that the Iraqi Kurdistan Region would export oil at a rate of 100,000 barrels a day through Turkey. This was initially announced in June 2009, but the process was delayed by Baghdad. The KRG plans for oil exports from Kurdistan Region to reach 250,000 barrels per day by 2011. At a recent conference, the KRG’s Minister for Natural Resources, Ashti Hawarami, announced that the KRG would launch a new project to construct a pipeline that would pump 1 million barrels of oil to neighboring states. Most high-level Iraqi Kurdish officials will readily admit that the key to 36 TRENDS | May 2010

their future lies in maintaining positive relations with Turkey and also with Iran, which already has a consulate in Erbil. As such, disputes and disappointments of the past are being put aside. The establishment of official Turkish diplomatic representation underscores the headway that has been made in transcending these political tensions and building upon the fruitful commercial relations that have characterized the relationship in recent years. The Iranians have had offices in the Kurdish region’s two main cities Erbil and Suleimaniyeh for many years, but following the unification of the two Kurdish administrations in 2006 and Erbil’s designation as the region’s capital, the Iranians opened an official consulate in Erbil.

The Kurdish street. However, while the politicians are being pragmatic in order to preserve stability and enhance economic relations, the Kurdish masses are finding it much harder to forget their grievances with neighboring Turkey. Many on the Iraqi-Kurdish street are dismayed by what they perceived as Turkey backtracking on some of its promises to the Kurds in Turkey, notably when Turkey’s Constitutional Court voted unanimously to shut down the DTP, the only pro-Kurdish party in the Turkish Parliament, in December 2009. “Turkey is an important neighbor and country. It has helped us in the past. Being neighbors, it’s normal to have issues and difference of opinion. But the important thing is we have seen a drastic change in relations with Turkey,” Bakir says. “We have always stated we are friends with Turkey and seek good

Kirkuk question. Aside from the rights of their brethren in Turkey, an issue far closer to home for Iraqi Kurds is the fate of oil-rich Kirkuk. One of the greatest obstacles to resolving the Kirkuk question is believed to be Turkey, which backs the claims of the Turkmen minority and opposes Kurdish calls for the annexation of the city to the Kurdistan Region. The concern among some Turkish officials is that an economically viable Iraqi Kurdistan with Kirkuk as its capital could pave the way toward full-fledged independence, and inspire similar demands by Kurds in Turkey. The KRG has been calling for the implementation of Article 140 of the Iraqi Constitution, which would “normalize” the demographics of Kirkuk and other

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neighborly relations based on mutual benefit and understanding.” Bakir stresses that the KRG’s policy is not to interfere in the internal politics of Turkey, and more significantly, he underlines the KRG’s commitment to the territorial integrity of Turkey. “We respect the sovereignty of Turkey and their territorial integrity,” he says, alluding to longstanding concerns among neighboring countries, notably Turkey, Iran and Syria, over Kurdish territorial ambitions. Bakir lauds Turkey’s “opening” policies toward Kurds and Armenians as measures that could help heal the wounds, but he refrains from commenting on the closure of the DTP party. As for the PKK, Bakir reiterates that it is not a military problem and as such does not warrant military intervention. “This problem is political in nature. We don’t believe there is a military solution for it. We have stated clearly to the Turkish side that short of military operations, we are ready to do anything to solve this problem peacefully. We are ready to lend a helping hand in this regard. Having a safe and secure border is in the interest of both sides,” he says.

‘This problem is political in nature. We don’t believe there is a military solution for it’ disputed territories – i.e. reverse the Arabization policy of the previous regime – then stage a popular referendum to determine the fate of the city. The Americans have warned the KRG to tone down their demands for accelerating the much-delayed process for fear that it would further ignite tensions both internally and with neighboring countries.

In the recent Iraqi elections, the Turkmen, Arabs and other minorities manuevered themselves in an ‘anythingbut-a-Kurd’ campaign in Kirkuk. With the Kurds divided along multiple lists, this meant that the Kurds lost three vital seats in the city as well as seats in Baghdad and Diyala among others. Earlier this year, the Turkish con-

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Prime Minister Recep Tayyip Erdogan becomes the first Turkish leader to visit Baghdad in 20 years

The Iraqi Oil Ministry gives approval for the exportation of oil from Iraqi Kurdistan to Turkey

A Turkish consulate opens in Erbil, the capital of the Iraqi Kurdistan region May 2010 | TRENDS 37

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Focus: Iraq

There are hundreds of Turkish companies in Iraqi Kurdistan ready to benefit from new projects sul in Mosul – another hotly contested city – said that, while his country seeks to help all Iraqis, it gives priority to assisting Turkmen “wherever they are in Iraq.” Meanwhile the rail link that runs between Iraq and Turkey via Mosul was reopened in February 2010 after a sevenyear closure following the American-led liberation, reinforcing trade links between Turkey and the south of Iraq. Bakir is quick to reject the interference of neighbors or other foreign countries in Iraq’s internal affairs. “We are part of Iraq on a regional level and federal level. The leadership at the federal level has made it clear that internal matters are Iraqi issues. We have said 38 TRENDS | May 2010

that we need assistance but for Iraqi issues, it is in the interest of Iraq that neighbors don’t interfere in internal affairs,” says Bakir. “Neighboring countries have followed these issues and made statements, but this is an Iraqi issue and there is a roadmap to solve it in the Iraqi constitution. A historic sign of our growing understanding is the opening of a Turkish consulate in Erbil.” There is no doubt the opening of a Turkish consulate in Erbil signals the consolidation of many years of mutually beneficial relations. Yet critics are apt to wonder whether this also means that Turkey will recognize the “Kurdistan Region” as such, or simply continue referring to it as

northern Iraq – a term that infuriates Iraqi Kurds, who believe it undermines their political achievements. “We in the KRG do not make the issue of the name ‘Kurdistan’ a problem. The essence is more important than the name. The opening of the consulate shows how far we have come,” says Bakir. The Kurds are keen to consolidate this progress. Nechirvan Barzani, former Prime Minister of the KRG and Co-Chairman of the Kurdistan Democatic Party (KDP), recently made a long awaited official visit to Turkey, where he had a meeting with the Turkish Foreign Minister and promoted the growing investment opportunities in his region. Meanwhile, hundreds of Turkish companies are mobilized in Iraqi Kurdistan, ready to benefit when the KRG launches $100 billion in infrastructure projects.

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Focus: Israel

Mind The Gap The prestigious OECD votes this month whether to include Israel as a member. But the country’s chances could be harmed by inequalities within its population. By Orly Halpern Jerusalem

arlier this year, two Israeli leaders prepared themselves for very important meetings with Jose Angel Gurria, chairman of the Organization for Economic Cooperation and Development (OECD), the association of the world’s 30 most developed countries. Gurria was visiting the country to discuss Israel’s potential membership in the prestigious club. In the week before the chairman’s arrival, Israeli President Shimon Peres took a busload of Israeli chief executives to the Arab city of Nazareth to show them the beginning of high-tech developments in Arab-Israeli society, and to encourage them to employ Arabs. And before his own meeting, Dr. Ahmed Tibi, a leading and vocal Arab member of the Knesset, Israel’s parlia40 TRENDS | May 2010

ment, simply armed himself with statistics of Arab poverty. Gurria arrived in January, OECD report in hand. Its contents were explosive, not because it revealed something new, but because both the information and the report were coming from an international organization that Israel very much wanted to be a member of. After praising the country’s rapid growth and development, the report went on to show Israel as like a Third World country with a variety of problems holding it back. The report focused on the enormous social and economic gaps between the general Jewish population and those of the Arab and ultra-Orthodox sectors. The statistics were appaling: “Israel’s deep socio-economic cleavages must

be given due priority … Poverty is concentrated among the 20 percent of the population who are Arab-Israelis whose poverty rate is around 50 percent and the (estimated) 8 percent who are ultraOrthodox Jews whose poverty rate is around 60 percent,” wrote the OECD. In other words, 50 percent of Arab families live below the poverty line, a rate three times higher than that among Jewish Israelis. The OECD understood that, although the ultra-Orthodox Jews’ poor lifestyle was one of choice because they prefer to study religious books than work, that was not the case for the Arabs. “The OECD’s review of Israel’s labor market and social policies documents econometric evidence comparing wages and employment rates

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May 2010 | TRENDS 41

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Focus: Israel

‘The ultra-Orthodox refuse to prepare for a life of work and the Arabs suffer discrimination’ that points to discrimination against Arab-Israelis,” wrote the OECD, putting the blame squarely on the shoulders of the state. The report shook the country, making headlines in all the media. Yaron London, an Israeli commentator from the Israeli daily Yediot Aharonot, called it a “sad report” and said it presented no new facts. “Were it possible, we could have fixed this long ago,” wrote London, lamenting that Israeli society itself prevents the change from occurring. “The obstacles: the ultra-Orthodox refuse to prepare themselves for a life of work and productivity, while the Arabs suffer institutionalized and un-institutionalized discrimination.” Yael Gviretz, another Yediot columnist, thanked the OECD. “Israel needed the humiliating report of the OECD, that 42 TRENDS | May 2010

ranks it as a Third World country in terms of social gaps, in order to act to fix the policies of neglect and discrimination towards the Arab sector.” It is unclear whether the 30 OECD members will unanimously accept Israel into their fold. If they do, Israel will be the prestigious group’s poorest member with the widest social gaps. But what excites Arabs in Israel and those who desire equality is that the OECD made it a criteria to membership that Israel close the social and economic gaps between Arabs and Jews. “This is the first time that an international organization is intervening and basically demanding from the government to close the gaps and to secure the rights of the Palestinian minority within Israel,” says Ali Haider, co-executive director of Sikkuy, a leading joint

Jewish-Arab organization that works for civic equality. Haider and others hope that this external pressure will have some impact because, in the 60-odd years since the founding of the state, little else has. Indeed, senior Israeli government officials have been aware of the need for reform. But no government has yet had the political will to implement the deep systemic changes needed to end discrimination against Arabs in Israel. “Experience shows us that the different governments of Israel have ignored the recommendations of a formal commissions on the situation of Arabs, and also the decisions and laws passed by the government itself,” Haider says. Now, however, Israel has a very strong outside incentive to end discrimination against Arabs in Israel. “It is important for us to join the OECD, the most prestigious organization from an economic point of view, but also because of our international status,” said Minister of

Reuters

Focus: Israel

There is no precedent of the organization rejecting a country once it has been invited to discuss joining Finance Yuval Steinitz. Membership in the OECD brings numerous economic benefits and also serves as a statement confirming the state’s levels of economic prosperity and democracy. In the case of Israel, OECD membership would raise Israel’s credit rating, which would in turn reduce interest rates for loans from international banks and encourage foreign investment.

The OECD was established on the foundations of the Marshall Plan, which was an American initiative to rehabilitate Europe after World War II. Israel was invited to open negotiations to join the OECD in March 2007, along with Russia, Chile, Estonia, and Slovenia. When Gurria met with Peres on Jan. 19, he told the president that social and economic gaps must be bridged before

The overall poverty rate of Israel, in percent, according to standard OECD measures

Percentage of elderly in Israel who are poor, against an OECD average of 13.5 percent

Public social spending in Israel as a percentage of GDP, against an OECD average of 21

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Israel can join the OECD. Peres was prepared for the meeting. He told Gurria about his efforts to improve the social and economic situation, such as the CEO bus tour he led to Nazareth the week before. When Tibi met with Gurria he simply asked the chairman not to accept Israel into the OECD until the state ends the discrimination against Arabs in budget allocations and reduces the high Arab poverty rate. “I explained that Arabs in Israel are 20 percent of the population, but we signify only 6.5 percent of the civil service employees,” Tibi said. “The state electricity company has 12,000 employees but we represent only 1 percent of them. Sixty percent of the Arab children are under the line of poverty.” Gurria showed understanding, said Tibi. “He handed me the report and said, ‘That’s exactly what we wrote.’” Despite the damning report, the Israeli finance minister was upbeat that Israel would be accepted when OECD votes in May. “The visit by the secretary general symbolizes the fact that 2010 is a decisive year for our integration. Our chances appear to be good,” Steinitz said. Indeed, there is no precedent of the organization rejecting a country once it has been invited to such talks, which means that Israel’s eventual acceptance as a member state is practically guaranteed. But it could take years. Already OECD deliberations have delayed Israel’s membership. Moreover, besides the social and economic gaps in Israeli society and other matters raised in the report, there are wider issues that could prevent a unanimous vote in May. Acceptance requires the vote of every single OECD member, but a recent diplomatic fall out with Turkey, one of those members, may very well work against Israel. The identity theft scandal linked to the assassination of a Hamas official in Dubai could also harm its chances. Ultimately it is in everyone’s interests – the Arab population of Israel included – that the state becomes a member. But only when it deserves to become one.

Reuters

Automotive

46 TRENDS | May 2010

Out of India The global automotive industry can be an unforgiving place, even for established players. But two new Indian entrants are taking their chances. By John Crawford Bombay

he emergence of India onto the global automotive scene may best be personified by two outstanding entrepreneurs. They are Ratan Naval Tata, Chairman of Tata Motors, the man behind the acquisition of Jaguar-Land Rover from Ford Motor Company, and Vijay Mallya, head of UB Group, who has spearheaded a new Formula One team called Force India. They are both remarkable men, with a strong bond to cars – and the car business. Both men touch different aspects of cars. Ratan Tata is a tycoon running a massive industrial conglomerate and car manufacturing business, while Vijay Mallya is a sports-loving business mag-

nate who lives the dream of Formula One and collects classic cars. RATAN TATA Analyzing the background of Ratan Tata, three aspects appear repeatedly – grace, integrity, and determination. Another three might be acuity, resolve, and humility. It is not unusual to see 73-yearold Ratan Tata driving himself, from his Bakhtawar apartment that looks out over the sea, to the Tata Group headquarters at Bombay House, in South Mumbai, in one of the company’s small blue Indicas. Tata is often seen walking his German Shepherds, Tito and Tango, in the Colaba Woods. A bachelor, he has a rep-

utation for being somewhat reclusive, but he is at the core a highly successful and much respected businessman who has consolidated and expanded the fortunes of his family-owned group of companies. A highly-qualified pilot, he flies his own Falcon jet, and in 2007 at Aero India he co-piloted an F16 fighter jet. But according to Tata it is cars that he is passionate about; he admires both their design and technology. And of course, he also likes to drive. After a distinguished academic career, including stints at Cornell and Harvard, he joined the Tata Sons in 1962, eventually becoming chairman in 1991, stepping into the shoes of his uncle, J.R.D. May 2010 | TRENDS 47

Automotive

With his degree in architecture from Cornell, Tata designed the apartment building he lives in Tata, who was by then a colossus of Indian business. Now, Tata Sons is one of India’s largest and most successful conglomerates, with interests in automobiles, steel-making, hotels, aerospace, technology, and telecoms. In March 2008, Tata Motors successfully acquired Jaguar-Land Rover from Ford for $2.3 billion, and now this understated and personable man must lead another renaissance for the British marques. He is a man of unique accomplishments and diverse interests. Reflecting his Bachelor of Science degree in architecture from Cornell University, he designed the apartment building he lives in. The music-loving Tata also enjoys friendships 48 TRENDS | May 2010

with people like conductor Zubin Mehta, and audio pioneer Amar Bose, who developed the Bose Surround Sound System. Ratan Tata now faces one of his most formidable business challenges in his role as benefactor and guardian to two of Britain’s most loved car brands. To spread the management load the former head of GM Europe, Carl-Peter Forster was recently installed as CEO of Tata Motors. It has been widely known for some time that Ratan Tata might retire in 2012, so the appointment of such an experienced automotive executive like Forster is vital for the success of the whole automotive division. However, just watching the body dy-

namics of Tata when he appears alongside the managing executives of his British car companies, it is obvious he has and will continue to have a ‘fatherly’ interest in these two cherished marques. VIJAY MALLYA When the Royal Bank of Scotland was looking for a way to create a global imprint, its ambassador, three-time world Formula One Champion Sir Jackie Stewart, brought the bank together with Sir Frank Williams’ racing team. Now, when the F1 circus travels the world, so does the RBS, its logo emblazoned on two high-speed mobile billboards. It’s the same for Indian billionaire Vijay Mallya, who has acquired a major share in a Formula One team renaming it, Force India. The cars carry the brand names Whyte & Mackay and Kingfish-

er, representing Vijay’s highly successful brewing, spirits, and airline companies. While Mallya seeks global positioning for the Kingfisher brand, the proud Indian citizen is also looking to create a twoway conduit to bring Formula One to India, and India to the world. Vijay inherited responsibilities for his father’s businesses when he was just 27. Labeled a playboy by the media, his pride and respect for the empire his late father created has seen him silence his critics by maintaining the success of the core businesses, and by creating a string of new and profitable enterprises. He is also a major philanthropist. Along the way, Mallya has acquired an impressive collection of vintage and historic cars. The Mallya Collection of some 260 cars is located in different parts of the world, with the major collection based in Sausalito, California. Vijay’s earlier participation in club motor sport and his love of cars made his move into F1 an easy choice of vehicle to expand his business globally, and to focus India’s youth on the sport. He plans to encourage young Indian drivers via karting and club level motor sport, and maybe one day a new Indian F1 driver may emerge. In an interview at the 2008 Australian Grand Prix, his team’s first event, Vijay was calm, and somewhat philosophical about the team’s chances. “I have a plan to get us to the front of the grid by 2010, and I will put in the investment and the support that the team needs to move forward. This is early days, and we have a lot of lessons to learn, but you have to start somewhere.” In 2009 the team scored its first championship points and a podium finish, and the 2010 season saw Force India finish in the points in the first event of the season in Bahrain. At the Australian Grand Prix Force India was among the top ten qualifiers, and scored more points with a seventh place finish. In Round 3 in Malaysia Force India again qualified in the Top Ten, and enjoyed a fifth place finish.

Vijay is pleased with the progress, but the competitive streak which infects both him and the team attests they are determined to achieve more. Vijay Mallya radiates the energy, confidence and drive of his Formula One team - so it’s reasonable to assume they will do better. Both Ratan Tata and Vijay Mallya reflect the influence and values of their eastern culture. There is a strong and genu-

ine philanthropic streak running through their individual personalities, while at the same time revealing determination, integrity and powerful impetus to consolidate and grow the vast empires for which they each have responsibility. It is interesting that for each, in their hearts, lies an interest and a passion for cars which seems certain to drive their destiny, and their achievements, to ever higher levels.

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Fortune magazine names Tata as one of the 25 most powerful people in business

Tata realized his dream of launching a low-priced mini car with the unveiling of the Tata Nano

Mallya joins the FIA World Motor Sport Council as India’s representative until 2013 May 2010 | TRENDS 49

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Automotive

View From The Fast Lane It’s been a wild half century for India’s industrial giants. Here’s how Tata Motors and UB Group have become global players on the automotive stage. By John Crawford Bombay

rom the beginnings of the Tata empire in 1868, it seems motor vehicles would be a logical development for the fast-growing Indian company. While there was little opportunity to sell cars, there was a huge need for trucks and buses. Tata Motors started in 1945, but it wasn’t until 1992 that it launched its most mainstream passenger car, the Indica. By1998 the automotive division had begun to occupy a lot of the Tata Sons management interest. 52 TRENDS | May 2010

Today, Tata Motors is India’s largest automotive company, and the fifth largest manufacturer of commercial vehicles in the world. Massive potential in the Indian domestic market led to the introduction of the Nano, a tiny four-door, four-seat passenger car, which is one of the cheapest cars in the world. It was, however, a big surprise when in March 2008 Tata Motors announced it had acquired Jaguar-Land Rover from Ford Motor Company, for $2.3 billion in cash. Generally speaking the acquisi-

tion has been well-handled by the Indian group, however, funding it has been a big concern. Just 12 months after JLR joined Tata, the Group had to refinance to the tune of $3 billion. Reports in the Indian media suggest $1 billion has been repaid to date, and the balance is due later this year. The performance of JLR in its global markets during 2009 was disappointing, but certainly in line with the savage erosion of the world automotive market due to the global crisis. This was especially so

UB GROUP he UB Group began in the late 1940s as Dr. Vijay Mallya’s father, Vittal, became chairman and the largest shareholder of United Breweries Ltd. Although founded on brewing, the Group expanded into spirits, agricultural products, and airlines, into today’s corporate structure that comprises six business divisions. In 1983, Vijay Mallya succeeded his father, who died later that year. At 27 Vijay Mallya exemplified the entrepreneurial traits of his father, but also showed great acumen and judgment. UB Group has continued to grow and now has significant market share in all areas of the Indian economy where it operates. For example, the spirits division sold just under 3 million cases a year in 1984; and this year will announce it is selling 100 million cases annually. Kingfisher beer, too, has lifted its sales to now hold 50 percent of the Indian market.

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in the luxury sectors where JLR operates. However, according to The Economic Times there is good news on the horizon. It reports that JLR finally became profitable at the end of 2009. The dramatic turnaround was powered by increased sales and margins in its key markets – America, Europe, the United Kingdom, Russia, and China. This year there has been a significant reduction in inventories (down 50 percent), and with the promise of rationalization of both plants and employee numbers, plus improved cost control, JLR could become an important contributor to Tata’s consolidated profits. Tata Motors is just one of Tata Sons’ 80 companies operating in seven business sectors, and while most economic experts agree that Tata Sons overall cash flow is both impressive and sufficient enough to sustain it, the Tata Motors division is high -rofile and attracts attention. Ratan Tata has said that Tata Motors has big plans to develop new products at JLR, and is therefore hoping that the current lift in sales and margins will prove sustainable, in order to realize the company’s potential.

Kingfisher Airlines, which Dr. Mallya started in 2005, has grown to be India’s largest airline with 400 flights a day to 70 cities across the country. In 2005 it carried 14 million passengers, and last year carried 50 million passengers. The divisions of UB Group enjoy strong financial positions. The brewing division is not currently leveraged, and a $600 million capital raising last year by the spirits division de-leveraged that operation significantly. The airline division has deferred delivery of aircraft ordered some years ago, and plans to raise capital in the next two years. But, according to Dr. Mallya, airlines suffer from punitive government taxes on both airline operations and fuel charges. However, as Vijay Mallya points out, with the choice of long distance travel in India limited to either overcrowded rail networks or air, then growth in air travel as the Indian economy matures would assure Kingfisher a bright future. Kingfisher Airlines introduced international services to London, Singapore ,and Hong Kong over the last 12 months, and plans further expansion of its domestic schedule as airports are upgraded.

One of Kingfisher’s most successful and boldest advertising promotions is a campaign for the Indian Premier League cricket competition, using the slogan “Divided by Teams, United by Kingfisher.” Vijay Mallya and UB Group own the Royal Challengers, based in Bangalore, and despite a wobbly start the team has enjoyed some thrilling victories in the wildly popular series. On the motor sport front, Force India also looks like benefitting from good timing. There will be a round of the Formula One World Championship in India in 2011, and by then UB Group’s plans to encourage young Indian racing drivers will have begun, all culminating in greater focus on the sport. All this following a promising start to the 2010 season for the team. Those UB Group divisional names that adorn the Force India cars enjoy a huge visibility not only in India, but on the world stage as well. Vijay Mallya says he has some global aspirations for his companies but, with India’s gross domestic product growing at between 8 and 9 percent a year, he says there is more than enough business potential at home. May 2010 | TRENDS 53

Philips Feature

Healthcare Marketâ&#x20AC;&#x2122;s Growing Promise Studies show that healthcare costs in the Middle East are expected to rise five-fold to $60 billion by 2025, making this sector even more appealing to healthcare companies like Philips. By Tamara Bukhari Dubai

By 2015, spending on medications and health care is set to increase to $8 billion in the GCC Cardiovascular diseases are a major cause of death in the U.A.E., second only to road accidents Companies like Philips provide the GCC population with quality healthcare products and services A study by the World Union for Diabetes indicates that Middle Eastern citizens are at high risk for diabetes Getty/ Gallo Images

Deaths among breast cancer patients in the U.A.E. amount to 44 percent (vs. 27 percent in developed countries) May 2010 | TRENDS 55

t almost goes without saying that the lion’s share of Middle East health sector spending goes to the Gulf Cooperation Council states and that the Saudi Arabian market is the largest and most developed, followed by the United Arab Emirates. While the total GCC spending on medications and healthcare is set to increase to $8 billion by 2015, that of Saudi Arabia is expected to rise to 13.09 billion Saudi Riyals by 2013, up from 9.94 billion Riyals in last year. This will be largely thanks to the increasing demand on healthcare services because of Saudi population growth, with improvements in living conditions and scientific developments turning the country into a main contributor to the regional healthcare sector. The medication market in Saudi captures around 65 percent of the total drug sales in the GCC, with an expected year56 TRENDS | May 2010

ly growth rate of 12 percent. The medical equipment market is estimated to grow by 7 percent annually until 2012. This growth prediction is partly attributed to the large government spending (this year, 61.2 billion SR were allocated to healthcare – a 17 percent increase compared to last year). The spending options include various large scale projects, including main healthcare centers all over Saudi, as well as 92 new hospitals with a total of 17,150 beds. The second most important market in the Gulf remains the U.A.E., which seems to take after Saudi’s market. The healthcare situation was even discussed in the National Federal Council, when its members raised questions two years ago to the Minister of Health on the rising rates of diabetes, cancer, and heart diseases. The Council wanted to know why these ill-

Arabian Eye

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Philips Feature

nesses affect more than 20 percent of U.A.E. citizens. Cardiovascular diseases were considered as the second main cause of death in the country. The debate focused on so-called lifestyle diseases. The Emirati society has witnessed a radical change in the quality of life in the last few decades, in terms of food quantity and quality, daily physical efforts, and risky health habits like smoking. And the situation is not limited to the U.A.E. Cardiovascular diseases may be a major cause of death in the U.A.E. (second only to road accidents), but one cannot help but notice that they top the list of causes of death globally, particularly in rich countries. The same goes for diabetes, some cancer types that have been proven to be food quality-related, and other harmful health habits. Further-

The sales of Philips quality healthcare products and services grew by 17 percent in 2009 the ground observations; the sales of Philips quality healthcare products and services grew by 17 percent in 2009. The Saudi Healthcare Exhibition 2010 has seen a 30 percent increase in display areas compared to 2009, allowing for a higher number of participants, mainly specialized foreign and international investment firms. The studies those enterprises carry out focus on certain aspects in the sector in view of their particular importance to the region, or their expected future benefits. Breast cancer, one of the major illnesses plaguing the Middle East, is one area of interest to companies that provide diagnosis devices and treatments. In Saudi, for example, 20 percent of can-

cer patients have breast cancer, while deaths among breast cancer patients in the U.A.E. amount to 44 percent, against 27 percent in developed countries. The need to promote preventive diagnosis and find new means for early detection seems more urgent than ever. The Middle East accounts today for the highest number of diabetes cases. A study by the World Union for Diabetes has shown that citizens in the Middle East are at high risk for diabetes, a key factor in cardiovascular diseases, incidences of which are expected to witness a sharp increase â&#x20AC;&#x201C; (419 percent) in the next 20 years. This can be put down to aging and lifestyle changes and shifts in eating habits. May 2010 | TRENDS 57

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more, the huge progress in the healthcare sector in the U.A.E. during the last few decades has been a relative cause for the incidence increase. With healthcare services becoming more sophisticated and widely spread, the number of successfully diagnosed cases has also risen, and they have rightly been added to the literature about disease prevalence. On a parallel note, the U.A.E. has expressed its strong determination to become a destination for medical tourism, and put in commendable efforts to this end. The country has thus become a key market for the health sector. Even more important than shortterm growth is long-term growth. In fact, studies have shown that demand for treatment will witness a 240 percent rise in the next 20 years in the GCC. This research seems to tally with on

Arabian Eye

Philips Feature

Thereâ&#x20AC;&#x2122;s a large market for creative cultures; Philips has already produced 75,000 patents of invention 58 TRENDS | May 2010

On a general note, a sharp increase has occurred in the demand of diagnosis and treatment methods beyond the traditional means, mainly in remote areas of low population numbers, where healthcare centers and hospitals offer limited scopes of service. The need also arises for easy and accessible means of diagnosis, monitoring and homecare. This suggests a continuous growth in the healthcare sector over the next 10 to 15 years before it reaches a stable situation, which places a great deal of pressure on governments (that used to provide around 75 percent of the investments in the past). It has therefore become sensible for them to reduce their healthcare allocations and increasingly rely on private sector clinics, hospitals, and companies manufacturing medications, medical equipment and material. This provides a large market for global companies that boast corporate cultures of creativity. Philips, for instance, has already produced 75,000 patents of invention. Other companies produce 6,000 to 7,000 new patents yearly as they seek to reinforce their competitive edges. Healthcare firms are not exclusively interested in diagnosis and treatment. In the future a fresh blast of air in the form of healthcare awareness among the public and its nutrition and living practices is set to blow through the region. That is why we see that the same companies that provide diagnosis and treatment equipment beginning to develop and promote food-making devices like the rice cooker, thermal toasters, juicers, blenders, breakfast makers, and steam cookers for healthy nutrient-retaining meals. Although 2009 was quite embarrassing for some commercial sectors, it was not the case for the medical business. And yet, the sector has not really attracted its worth of infrastructural investments in the last two decades. If not thoroughly examined, this situation will inevitably cause great pressure on its infrastructure.

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Energy

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Carbon Capping The Middle East’s cap and trade system could mean big money for regional companies, but first both they – and governments – need to embrace it. By Emily Meredith Abu Dhabi

hen the European Union announced that carbon emissions fell more sharply in 2009 than ever before, the news could have been a positive endorsement of companies in the region that make money selling carbon reduction projects to their European counterparts. Instead, the dramatic drop was largely attributed to decreased production created by the financial crisis. Both the economic downturn and legal uncertainties mean plans for a regional carbon exchange and for Middle East participation in the complicated world of energy related financial instruments have been delayed. In 2007, Doha Bank and the Dubai Mercantile

Exchange, working with EcoSecurties, both announced plans to debut a Middle East carbon exchange. Three years later, these plans seem to have passed from the public eye. A researcher at the Belfar Center’s Dubai Initiative at Harvard, Justin Dargin, completed a set of policy recommendations for the U.A.E. government on establishing a Middle East carbon trading platform. Dargin said he would ideally like to see a carbon exchange platform introduced in phases beginning in 2012, but concrete plans have been delayed, likely for another year or two. Using the E.U.’s exchange as a model, Dargin proposed an initial voluntary

phase during which companies and traders could become accustomed to the system. Europe is the only place with a mandatory cap-and-trade system, which limits a company’s carbon emissions and provides for the sale of any unused emissions to other companies. Yet voluntary markets, such as the one in Chicago, face criticism. “If you see voluntary schemes then it is much more up to the exchanges [to determine] the criteria for what is deemed environmental integrity,” the chief executive of Point Carbon, Per Otto Wold, says. “With the voluntary market in Chicago, there has been more criticisms towards the environmental integrity of what’s May 2010 | TRENDS 61

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Energy

Given the challenges with liquidity and regulation, it will still take years to implement an exchange traded there as opposed to the European Climate Exchange, which is mandatory.” A Middle East-based exchange for carbon emissions would undoubtedly face challenges, not least of all ones stemming from liquidity. In the Gulf, Saudi Arabia’s stock market is the most liquid, but a propensity for private family ownership and relatively small appetites for transparency mean that many stock exchanges have trouble with liquidity. Under the Kyoto Protocol, an exchange in a developing market can be voluntary, much like the one in Chicago. Dargin argues that an initial voluntary program would help resolve liquidity issues. “You want to have a liquid carbon 62 TRENDS | May 2010

trading system and the U.A.E. is not really that large. So you should start off initially with at least getting started with the carbon trading platform, to get industry internalizing the carbon trading platform.” says Dargin. Predicting how a voluntary market would function is particularly difficult, however, because some trading houses use the exchanges as a training ground in the event that mandatory caps are introduced. “Obviously it becomes much easier to set something up [with government mandates] because its supported by regulation and because companies would then have to comply,” says Otto Wold. Given the challenges with liquidity

and regulation, it will still take years to implement a local carbon exchange. The chief executive of the European Climate Exchange, Patrick Birley, emphasized the need for government regulation on carbon exchanges in order to create real business opportunities. “It’s probably misnamed as cap-and-trade,” he says. “By putting these caps on major industries, what one creates is essentially an artificial shortage. Without caps on emissions there’s no reason to have trading.” “I think one of our key success factors, a key reason why we have been really successful, is that our market has been well regulated, completely transparent, and open to scrutiny,” Birley says. He notes that a more opaque market could invite more criticism. Many make the argument that, if the spending for projects provided enough

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monetary incentive to companies, they would do it anyway and there shouldn’t need to be regulation mandating carbon reduction. But companies require payoff in the medium term and can’t always consider a program that will only see cost benefits in twenty years. A Middle East exchange would have other challenges, even if liquidity were easily achievable. The ultimate aim of an emissions trading cap is to reduce itself, and eliminating emissions means that the people trading emissions will not be able to make money from them. But Otto Wold says this is not a short-term enough concern to negate the reductions. “Setting those rules in cooperation with those who might participate creates a little bit more ownership,” he says. “[But] at the same time you need to set those rules so you have some environmental integrity, and the next step would be how do you create trading on a platform.” If a Middle East carbon exchange were voluntary, Otto Wold says, it would look more like the climate exchange in Chicago than the one in Europe. “You have municipalities participating or companies participating for public relations reasons and then you have trading firms,” he says. “So some kind of base or community that is looking to participate or willing to participate is important.” But the developing economies in the Middle East have been slow to take advantage of the business opportunities created by the cap and trade system. Established under the Kyoto Protocol, the system allows for companies in developed markets to gain carbon credits by paying for reduction programs in the developing world. The highly regulated cap-and-trade system in Europe is what creates the market for Clean Development Mechanism (CDM) projects in the developing world. “When people talk about CDM, it has to be remembered again that 95 percent of the buying of CDM projects is coming out of Europe,” Birley says. Without the regulated cap-and-trade systems in Eu-

rope, that market would dry up. But at first the system was largely ignored, the origination manager for Masdar’s carbon management unit, Carlos Ospina, says. “In the early stages, they were a little reluctant, but after they understood that this could be a revenue potential then they started doing it, but it took a very, very long time.” Masdar, the Abu Dhabi based energy company that is involved in a variety of construction, finance, and devel-

opment projects related to non-hydrocarbon energy production, has a division which helps develop CDM projects in the Middle East. Under the CDM program of the Kyoto Protocol, a carbon reduction program must be vetted by a U.N.-approved body in the country and then submitted. Some of the region’s countries still lack the infrastructure to support CDMs. “Every country needs to have a designated

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Energy

The timeline for project approval is 18 months, and the Kyoto Protocol will expire in 2012 national authority,” Ospina says. “These DNAs were not set up in the MENA region until very late. So we at Masdar have been providing development support here and in Oman, but this is more the work of the international organizations.” Ospina says Masdar is working on projects in Saudi Arabia, Libya, Algeria, Kuwait, and Lebanon. “Formally, they have not submitted anything to the United Nations,” Ospina says. “Companies like Masdar have developed business models to bridge this gap, but the official policy making process takes a long time.” The timeline for a project to gain approval is roughly 18 months long, and the Kyoto Protocol is set to expire in 2012. This leaves businesses with just a few months of guaranteed payoff from any CDM projects they may undertake now. 64 TRENDS | May 2010

But green efforts in the region are frequently seen as either the responsibility of ruling governments or a public relations stunt by private firms. Some companies in the U.A.E. have done things like creating swamps from treated sewage effluent, growing reeds that filter out the waste and then using the water to grow vegetables. “People are doing things for the environmentally right reason but they use the cost to sell it to their boards,” the director of EcoVentures, Armen Vartanian, says. Even when there are companies that comprise a community interested in making reductions to their carbon footprint, Vartanian says that they only have a few years to recoup its costs in order to get board-level buy-in. “Typically, the payback has to be less than four years, which removes the fancy stuff – the solar PV,”

Vartanian says, referring to the photovoltaic cells which generate electricity from the sun. “Look at how much infrastructure is needed to run these [CDM programs],” he adds, estimating that a company can spend $50,000 on administrative costs to ensure compliance. For businesses trying to make money on a carbon exchange, the money made from trading has to outpace the administrative costs. That limits the markets to large companies that have bigger gains to make. With such an uncertain system, businesses have little incentive to try to take advantage of CDMs under the Kyoto Protocol. It will take more than just corporate good will to establish the infrastructure for many companies in the region to profit from the CDM structure, Birley says. “I think you have to step back and remember that the system that we are part of exists because Europe is the only place in the world that has instituted the mandatory caps,” he says.

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Hospitality

66 TRENDS | May 2010

Stuck in the Middle Emotional connections mean regional hotel owners have largely ignored the opportunity to develop mid-market hotels. By Emily Meredith Dubai

he groundbreaking of a new hotel in the U.A.E. last month could have been mistaken for yet another overly optimistic play for the region’s high-end luxury market. Instead, the groundbreaking was for Premier Inn, a chain that describes itself as “value for money,” and which uses a logo featuring a crescent moon doing what most people actually do in hotels – sleeping. The managing director for the company in the Middle East, Darroch Crawford, says the chain will continue to expand in the region despite the economic slowdown. “For Premier Inn it is vital for us to take advantage of the increasing number of travelers seeking out the best value.” Premier Inn recently signed a deal with Strip ad 1-61x220mm.pdf PM Emirates, an airline4/26/10 which 6:26:07 has always Strip ad 1-61x220mm.pdf 4/26/10 6:26:07 PM emphasized luxury. But an executive vice

president at Emirates acknowledges there is an unmet need in the region. “I think Dubai needs more mid-market hotels,” says Ali Mubarak Al Soori. “That market is growing. It wasn’t there before.” A report from CB Richard Ellis indicates that building a mid-market hotel may have been a good move. “The continuing development of five-star deluxe hotels within the Emirate will place pressure on occupancy levels and thus the ability for hotels to charge high rates with many offering significant discounts,” it says. Prices in the four- and five-star markets fell in 2009, and the CEO of Rezidor, which operates the Radisson Blu and Park Inn hotels in the Middle East, Kurt Ritter, says he expects them to stay at their current levels for another year. “I think pric-

es will not increase with the availability of rooms,” he says. He advocates less growth and more control in the market. Rezidor is just a hotel operator. It owns no properties in the Middle East; it merely manages them. Ritter says he has never declined to open a Radisson, even though he advises companies to open mid-market hotels like the Park Inn instead. “Of course, if we get the chance to open one we do. I was asked, ‘If you have four hotels in the pipeline why would you open one more?’ And the answer is, of course it is enough, but if it’s not us who operates it it is somebody else,” Ritter says. “We don’t initiate projects, we are asked to cooperate with somebody and make a contract. We judge if it’s a good offer and if it is then we go for it because the hotel is coming anyhow.”

May 2010 | TRENDS 67

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Hospitality

‘In Europe and in the States they just look at the profit and loss, not the emotional side’

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Ritter says part of the reluctance to move to mid-market hotels has to do with perception. “I think it’s a pity that they only build this top line because if you take the United States or Europe, it was more than 20 or 30 years ago they [moved] to that bracket. But here owners are still very much luxury oriented. “ In Europe and in the States you have a totally different ownership. It’s pension funds, it’s insurance companies and they just look at the profit and loss, they don’t look at the emotional side,” he says. That emotion could be costing owners at a time when the appetite for luxury goods remains relatively low. The CB Richard Ellis study showed the percentage drop in occupancy in 2009 in Dubai was higher than in other global cities. The volumes in Dubai were down roughly 30 percent in 2009, according to Rezidor area vice president for the Middle East Marko Hytonen. Other markets have fared better. “Saudi Arabia has been very strong. Regardless of swine flu, Jeddah has been performing very well and Saudi in general has been very strong,” Hytonen says. “In other markets, Beirut has been doing extremely well for a number of reasons. It came from a low place though.” The CB Richard Ellis report predicts a slow market through this year. “Some markets will improve before this time but as a global perspective recovery will not be seen until 2011,” the report says. There are opportunities in these markets for all levels of growth, particularly at a time when demand for the luxury segment of the market is low. Regional

Luxury brands have been hit harder globally because people have less disposable income director for Starwood Hotels and resorts in the Middle East, Guido E. De Wilde, says five-star operators are still having trouble bringing their rates up. “For the price you get in this market the services are great,” he says. “We are Strip ad 3-61x220mm.pdf 4/26/10 6:28:49 PM seeing rate resistance.” He also Strip still ad 3-61x220mm.pdf 4/26/10 6:28:49 PM acknowledged that rate levels are falling off

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in the upper markets. De Wilde said Sheraton, which is the four-star hotel chain operated by Starwood, had 70 percent occupancy for the first quarter in 2010, which is down from 88 percent in 2009. In contrast to drops in the luxury sector, Hytonen says the Park Inn outperformed the high end hotels on Yas Island

last year, and outperformed his own expectations. “We closed Park Inn at 50 percent at the end of January. I was really very happy, of course, it was not expected.” In addition to suffering from an oversupply of up-market hotels, this region has encountered the same economic woes as everywhere else. Luxury brands have been hit harder globally because people have less disposable income. “In Europe the luxury, the top line, is the most hit right now. You have a lot of

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‘You have bankers who right now say they’re happy at a Park Inn, but they wouldn’t go near it before’

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bankers who right now say they are happy at a Park Inn but they wouldn’t go near it before,” Ritter says. And some of the largest opportunities lie in tourism from emerging markets. “If you look at all the emerging markets like India, Brazil and China – that fantastic, big amount of people who travel – they can’t afford to stay in a luxury hotel,” Ritter says. “They can buy an airline ticket but they don’t pay $300 or $400 hundred to sleep.” Indeed, part of the conundrum for the region’s hoteliers is how to cope with a new influx of consumers who hold extremely different views of lodging and vacation value. Dubai, for example, has based the bulk of its success over the past decade on marketing itself as one of the world’s most luxurious leisure and lodging destinations. It’s a strategy that’s largely paid off. In 2007, hotels in the emirate boasted an average room rate of $308. The next highest location was New York City, with a rate of $275. Dubai’s hospitality sector has always argued in unison – until now, that is – that the super-rich consumer’s lodging habits are less affected by the ebbs and flows of the economy than those of the average traveler and that the luxury hotel market, therefore, is far less volatile. A new study points to the fact that the latest wrinkles in the world economy have taken their largest toll on the high-end of the lodging market, however. Declining occupancy levels put Dubai’s strategy of being solely reliant on superluxury into question. Hoteliers like Ritter are now in the pole position.

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Retail

74 TRENDS | May 2010

Eastern Promises Luxury markets in America and Europe are showing signs of recovery now, but the long-term trend could be down. In the Middle East and Asia, they’re thriving. By Liz Peek New York

ome years ago, as I drifted into unconsciousness on an operating table, my doctor leaned in close, breathing heavily through his green surgical mask. He wanted to know: Where had I bought my red crocodile Birkin Bag? In a weakened state, I whispered the name of my Hermes salesman – a secret I normally guard as carefully as my birth date. Awakening in the recovery room, I thought I’d imagined the fuzzy exchange. Surely such snooping violated the Hippocratic oath, or possibly the Geneva Convention? Imagine my surprise a few weeks later when my salesman bounded across the floor to hug me for introducing an enthusiastic new client!

Such was the ardor with which the well heeled during the boom years pursued treasures from the fabled House of Hermes – and still do. The third largest global luxury goods producer reported a revenue gain of 8.5 percent in 2009 in spite of an almost unprecedented slide in industry sales. That makes Hermes nearly unique amongst high-end vendors, most of which got clobbered by the worldwide recession. Sales of luxury apparel, accessories and jewelry are only now beginning to recover from the worst falls ever experienced by the sector. In America, which in 2008 consumed about one-third of highend goods, sales plummeted an unprecedented 16 percent. Europe, accounting

for 38 percent of sales, saw a drop of 8 percent, and Japan (12 percent of sales) saw demand slide 10 percent. Overall, according to consultants Bain & Company, the $200 billion-plus industry fell an estimated 8 percent worldwide in 2009. As designer vendors and retailers plot their way forward, many must wonder: What makes Hermes so special? One answer is that the French firm has long purposefully limited the release of its most popular products, choosing “exclusivity over volume,” in the words of their chief executive. By doing so, they create “pentup demand.” Also, fashion-crazed socialites can reasonably argue to their incredulous husbands that spending $5,000 or May 2010 | TRENDS 75

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Retail

For the first time in a generation, conspicuous consumption was no longer a badge of honor even $20,000 on a Hermes handbag is an “investment.” The so-called Kelly bag, made famous by Hollywood’s true-life princess, is still as chic as the day Prince Ranier said “I do.” In other words, it’s rare and extremely valuable. It is especially valuable to today’s consumer in the developed world, who has been buffeted by wildly gyrating

stock prices and home values, changing social mores and a true upheaval in retail pricing. For the first time in a generation, conspicuous consumption became an embarrassment instead of a badge of honor. Online sales continued to take share as customers were ashamed to be seen staggering home piled high with pricey goods. Vast overstocking led even

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The drop in sales of high-end goods in America in the year 2009

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the toniest of boutiques to slash prices and then to slash prices once again. Access to high-priced goods emerged on Internet sites (like Gilt Group in the United States) that took advantage of extra-high retail inventories and created an online bazaar for once-scarce products. The U.S. first lady Michele Obama gave her blessing to high-low dressing – wearing pieces from J.Crew mixed in with designer labels. For the past year, makers and sellers of high-end goods have been trying to accommodate these zigs and zags. It’s not easy; changes in spending patterns are happening almost month-to-month. For instance, given the interest in durability, it was surprising that one of the worst-hit sectors in the recent downturn was fine jewelry. After all, no other category has the kind of lasting intrinsic value as gold or diamond baubles. It was also surprising in light of the continued expansion in emerging markets,

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Retail

For years the number of players in fashion, jewelry and accessories proliferated as sales beat GDP where an expensive watch is usually the first luxury item bought. Nonetheless, high-end bling suffered an estimated 18 percent fall-off in worldwide sales during 2009. Exports of Swiss watches fell 22 percent, the worst decline since the 1930s. LVMH reported that, in 2009, sales of their watches and jewelry tumbled 19 percent while fashion and leather goods at the firm rose 2 percent. In part, the drop in jewelry sales reflected a sudden distaste for ostentation. Also, baubles are the easiest of purchases to postpone. But not to postpone forever. Swiss watch exports rose 14 percent in February; shipments to Saudi Arabia increased 157 percent and to China 50 percent. Other vendors have recently seen at least the beginnings of a turnaround. LVMH reported a surprising jump of 34 78 TRENDS | May 2010

percent in its first-quarter watch and jewelry business. Top brands like Cartier and Van Cleef are also reporting a significant pickup in business. As luxury suppliers scramble to reposition themselves after an unprecedented period of turbulence, they aim to transcend, like Hermes, the bewildering crosscurrents of the past two years. While in former downturns wealthy buyers would simply temper spending, during the past 24 months even the most prosperous shoppers went on strike. “Shopping the closet,” a term bandied about by those with overstuffed wardrobes and guilty consciences, struck a chill in merchants’ hearts. Not only were wealthy people concerned about their finances, it became unchic to turn up in a new dress – especial-

ly in financial centers where bankers had overnight become enemies of the state. All this was new to producers, who had to adjust to a shocking drop in sales and a possibly permanent change in culture. Such self-control on the part of the worlds’ well-to-do set already appears to be waning. Bellweather brand Louis Vuitton announced recently a better-than-expected 13 percent bounce in first-quarter sales. The upturn began to be visible in the fourth quarter of last year, with some producers – Hermes among them – reporting better-than-expected Christmas results. A rising stock market in the U.S. calmed the panicky investor class, while economies around the world regained their footing. Also, the shocking draw-down of inventories which produced massive discounting came to an end; consumers can no longer bet that holding off will bring everlower prices. Some industry analysts claim the downturn actually strengthened the underpinnings of the luxury trade. For the top brands, the recession brought a welcome reduction in the number of solvent competitors, as houses like Ungaro, Escada, Bill Blass, and Christian Lacroix declared bankruptcy or disappeared altogether. For years, the number of players in fashion, jewelry, and accessories had proliferated, as sales consistently sped ahead of GDP growth. Celebrity-sponsored newcomers sprang up, while old brands like Givenchy were reborn. During the peak of the financial boom, even private equity investors began buying up fashion houses. This development was doomed from the start, since success in private equity investing requires solid and predictable cash flows to pay the higher financing burden demanded of increased leverage. Fashion is anything but predictable. The leading companies in the industry have thus enjoyed an opportunity to make use of their solid balance sheets and wide geographical reach by judiciously building their brands and going after market share. As noted, many are pushing the notion that their goods offer lasting value. In

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Retail

Reports claim that 94 percent of Tokyo women in their 20s carry a Louis Vuitton purse discussing their plans, chief executives of companies like Tiffany and Harry Winston use words like “enduring” and “classical” to describe their new products. Tiffany’s Michael Kowalski, in a recent conference call with investment analysts, emphasized that Tiffany goods offered “style, not passing fashion.” Some industry observers agree that the recession was a blessing in disguise for luxury houses, since it made them respond to an inevitable downturn in U.S. demand stemming from demographic changes. Pam Danziger, who heads a consultancy called Unity Marketing, claims the sharp fall-off in buying was a godsend, since it forced retailers to make speedy adjustments that would otherwise have dragged on and proven more costly over time. Her take is that the imminent 80 TRENDS | May 2010

retirement of so-called Baby Boomers will cut sharply into demand for luxury goods over the next several years. American boomers, of course, form a demographic pig-in-a-python. Numerically the children born after World War II have always dwarfed the generations that follow, and have thus had a disproportionate impact of the economy. According to Danziger, people in their sixties begin to eschew material possessions (the “how many cashmere sweaters can I possibly need?” lament) and turn their attentions instead to life experiences. In short, they would rather travel to Jordan to visit Petra than buy yet another designer coat. She says, “The next bulge in the luxury shopping demographic is still several years away.” In the meantime, the declining number of buyers may mean lean

times for luxury producers. The anecdotal evidence seems to back this up, with boutiques in Manhattan like Louis Vuitton saying they are seeing a large number of shoppers from Brazil, Venezuela, and China. Hermes is welcoming crowds from China as well, and also the Middle East – especially Kuwait. So while retail sales may be rebounding in the States, the buyers are not necessarily home-grown. High-end stores like Saks Fifth Avenue and Neiman-Marcus are playing it safe in the U.S. by emphasizing the very bottom of the market – opening more outlet stores this year than high-end shops in a bid to service the newly-thrifty customer who still desires brand name merchandise but also insists on bargains. Of course, the United States is not the only country to experience either a deep recession or an aging of the population. A number of European countries and also Japan face the same issues. Navigating the shifting shoals of developed world tastes will be essential for the luxury producers going forward. So will being in the right place at the right time. The past two years have emphasized the importance of China, India, Brazil and other fast-growing countries; in 2009, China saw demand for luxury goods expand by some 12 percent. That was on top of a 30 percent rise in 2008, and an acceleration is likely again this year. In Hong Kong, retail sales in February rose 36 percent, driven largely by mainland visitors. For diamond vendor Harry Winston, for instance, less than 5 percent of sales in 2007 went to Asia excluding Japan. In the past year, that region accounted for 18 percent of total sales; the area’s revenues rose more than 200 percent in the past year over the prior four quarters. In response, the more forward-looking merchants are moving overseas. Bloomingdale’s has opened its first-ever overseas store in Dubai. One designer house describes demand in the Middle East as “more consistent than elsewhere,” and says that customers from the Gulf countries have helped prop up sales in the

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As countries like China grow and mature, a budding middle class become “aspiration” buyers U.S., Europe, and the U.K. In particular, Middle Eastern shoppers have been important buyers of jewelry and watches. Rising oil prices are expected to boost activity in the Gulf states. Longer term, the young populations of most Arab countries will favor luxury purchases. Every company is moving aggressively into China and Hong Kong, where demand is described by industry insiders as “explosive.” In their annual review last fall, Bain predicted that of 300 so-called “directlyoperated stores” expected to open last year, 15 percent would be in Mainland China, 25 percent in other Asian markets, 30 percent in the Middle East and 15 percent in Eastern Europe and Central Asia. As countries like China grow and mature, a budding middle class become “aspiration” buyers – looking to famous brands to show off their wealth. Not every merchant approaches these markets in 82 TRENDS | May 2010

the same way. Chanel, for instance, is expanding in Asia more cautiously than Louis Vuitton. Chanel wants customers to buy into the entire brand, considering Chanel a lifestyle. They want to offer shoppers their full line of clothing as well as their iconic handbags. In doing so, they are seeking the more sophisticated buyer; the newcomer’s first purchase tends to be costume jewelry or a handbag. Louis Vuitton, on the other hand, is content with selling only accessories; this approach is quicker and less expensive. To sell a clothing line requires more space and a considerably bigger investment in inventory and trained salespeople. China is an especially appealing market because the Chinese have not yet latched onto one particular brand. By contrast, the Japanese are famous for their devotion to identifiable logos and especial-

ly to Louis Vuitton. It has been reported that over half of Japanese women over 20 years old own a Louis purse; an astonishing 94 percent of Tokyo women in their 20s are said to carry bags with the signature LV print. This leaves the door open for “dark horse” brands, and will doubtless lead to tough competition as well as creative marketing. Near the Place Vendome in Paris, Chinese tourists arrive by the busload, and file politely into a specially-designed showroom (known as the China room) at jeweler Buccellati. They are welcomed and encouraged to buy key chains and other inexpensive objects that will serve as entry-level introductions to the brand. Buccellati, maker of exquisite silver pieces and fine jewelry, is certainly not a household name in the U.S. But give them ten years, however, and they may become the must-have accessory for those strolling Shanghai’s Bund or Dubai’s Burj Al Arab. After the past two years, almost nothing would surprise players in this turbulent industry.

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International Trade

84 TRENDS | May 2010

Rating the Exchange The debut of the Bahrain Financial Exchange is another step in the tiny country’s efforts to diversify itself from its neighbors. But is there a demand? By Emily Meredith Dubai

he Bahrain Financial Exchange, several years in the making, will finally debut in October of this year. Bahrain has had a stock exchange for years, of course, but the financial exchange will be internationally accessible (one of the most common complaints against the region’s exchanges is the difficulty foreigners have accessing local investments). The exchange has been in active development for a year, and will feature products and services for both the conventional and Islamic financing sectors. Members of the multi-asset exchange will be able to trade cash instruments, structured products, derivatives, and Shariah-compliant products.

While an exchange could be deemed necessary in order to trade instruments that are more sophisticated than traditional equities, the Bahrain Financial Exchange will introduce yet another level of complexity into the Gulf’s already saturated exchanges market. It is, however, another development in Bahrain’s long history of differentiating itself as a center for finance in the region. For years Lebanon served as the international gateway to the Middle East. But after the civil war, international players wanting to access Gulf money needed a calmer hub. The tiny country of Bahrain seized the opportunity to fill the gap created by the security threats posed by

the Lebanese civil war. And in the 1980s, information technology did not play near the role it does now in finance; the Middle East needed a healthy exchange with people on the floor in order to keep round the clock trading going. But as technology grew to play a bigger role, Bahrain lost its advantage. It remained a gateway into the sometimes complex Saudi market, but turned to Islamic financial instruments in order to attract a different kind of business. It now dominates that field. According to recent report from the Oxford Business Group, 27 of the 140 banks operating in Bahrain were Shariah-compliant lenders, as were 18 out of 177 insurance May 2010 | TRENDS 85

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Critics have long asserted that ministries are not nearly as efficient as they could be policy writers. In order to support the field, the Central Bank of Bahrain established the Waqf Fund for Research, Education and Training to further advance education and knowledge in the Islamic financial industry and to encourage people to seek careers in that industry.

Bahrain also hosts the Accounting and Auditing Organization for Islamic Financial Institutions, a non-profit organization that sets standards for Shariah investments and institutions. Investment has been further encouraged by institutional reform in the country. In the re-

2006

2008

The United Nations finds that Bahrain has the fastest growing economy in the Arab World

Index of Economic Freedom names Bahrain as the most free economy in the Middle East

Global Financial Centres Index names Bahrain the world’s fastest growing financial center

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gion’s traditional governance-as-a-formof-patronage system, critics have long asserted that the ministries are not nearly as efficient as they could be. But because of the political implications of ministerial reforms, change often comes by establishing a second, parallel institution, according to Steffen Hertog, a professor at France’s Sciences Po and author of The Political Economy of Institutional Reform in Saudi Arabia. Bahrain’s reformers have been more aggressive in the kinds of reform that open the economy, Hertog says. The country’s legacy has made it an attractive hub for financial entrepreneurs and in recent years regional players such as Unicorn Investments and Gulf Finance House chose to set up in the area. But whether Bahrain can maintain its status as the international hub may depend

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With the exception of Saudi Arabia, the region’s exchanges have difficulty producing liquidity more on the action of its neighbors than on the new institutions Bahrain sets up. The announcement that the exchange will not open until in October masked potential bad news; after all, the exchange was originally set to open in the first quarter. Perhaps most telling was a statement from the company in which the CEO Arshad Khan said its business development managers had “been engaging with the market to build up a solid base of membership across the MENA region.” Even though the exchange is the region’s first, it will make its debut at a difficult time. The continued attempts to build 88 TRENDS | May 2010

up a membership base could mean the management wants more customers in order to begin operations. With the notable exception of Saudi Arabia, the region’s exchanges have long had difficulty producing enough liquidity. Last month, international exchange titans NASDAQ and London Stock Exchange waited as Dubai and Abu Dhabi discussed a possible merger of their respective exchanges. Borse Dubai, the largest shareholder in the London Stock Exchange, also owns a large stake (28.6 percent) of Nasdaq OMX. Abu Dhabi’s potential acquisition of the exchanges could shift the balance between the Lon-

don Stock Exchange, Nasdaq and NYSE Euronext, which sold its trading system to the Doha Securities Exchange after a 20 percent acquisition. The real motivator for a merger would be to increase regional trading volumes. Foreign ownership rules and a reluctance on the part of family-owned companies to increase outside ownership means that the exchanges have all had trouble with liquidity. With two exchanges in the UAE and exchanges in every other market, the region is crowded. Bahrain, then, has the first mover advantage. The multi-asset exchange will capitalize on its history of differentiating before its neighbors do, but if another country’s markets make a play for the same business, Bahrain could find itself needing to differentiate yet again.

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90 TRENDS | May 2010

Liquid Assets Are U.A.E. banking woes testing the limits of federal power, or is there plenty of cash to go around? By Emily Meredith Dubai

hen the government of Dubai announced that it would pump a fresh infusion of $9.5 billion into real estate firm Nakheel and its parent company Dubai World in March, the news must have come as relief to the owners of certain construction firms whose cranes were at a standstill. Dubai’s politicians said their announcement was meant to relieve months of nervous waiting by bankers and contractors hoping that cash in the U.A.E. would start flowing again. Despite that momentary cash relief, however, tight liquidity persists throughout the small Gulf nation. These cash flow problems are steadily trickling down,

with small firms either directly or tangentially linked to the emirate’s real estate sector now saying they’re in big trouble. Stories of small architecture and consulting firms asking employees to go without payment are widespread, and companies that aren’t funded by larger international operations are closing down. Then there’s the comparison between New York City’s Empire State Building and the tower formerly known as the Burj Dubai. The former was unveiled as the world’s tallest structure as the United States was sinking into the Great Depression. The latter was re-named in honor of Abu Dhabi’s ruler, the one man who can make Dubai’s debt problems vanish with the stroke of a pen. So is the U.A.E. flat broke? Will all

those heady construction projects bankrupt the country? Or are liquidity issues simply the result of secretive squabbles among the ruling families as to who will bail out what, and when? Such tight liquidity is indeed puzzling. The governments of the U.A.E. at both a federal and emirate levels have made substantial contributions to the country’s cash situation. “There’s been a lot of liquidity support [already],” the sovereign analyst for Standard & Poor’s, Farouk Soussa, says. “If capital support were required where would that come from? A lot of capital has already been provided.” The answer to the liquidity question is complex: In a country with already limited options, the central bank appears to May 2010 | TRENDS 91

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Banks are reluctant to own up to non-performing loans, hoping they will be repaid at some point be trying to force banks into maintaining greater transparency. Many suspect that, reluctant to admit problems to shareholders, the banks may not be fully disclosing non-performing loans. On paper, none of the banks should have problems with liquidity. According to an exclusive source who has held high-level discussions with banks, the balance sheets of the nation’s establishments – which were heavily exposed to the real estate boom and subsequent bust – should allow for cash flow. The issue, then, is the lack of transparency. Banks are reluctant to own up to nonperforming loans, either hoping loans will begin to be repaid at some point or hoping that they can delay any announcement of nonperforming loans until after they’ve recovered more. 92 TRENDS | May 2010

The ministry of finance injected AED70 billion into the country’s national banks in three states, a move central bank governor Sultan Bin Nasser Al Suwaidi said in a speech last year should have improved the banks’ capital positions in case the ratio of nonperforming loans should rise. And that figure did rise. Gulf-wide, the ratio of nonperforming loans increased to 5.4 percent in September 2009 as compared to 2.7 percent in 2008, according to Emmanuel Volland at Standard & Poor’s. “At the same time, the coverage by loss provisions reduced sharply to 87 percent by September from more than 150 percent by yearend 2008,” he says. Soussa is careful to say that the ratings agency believes Abu Dhabi has the capac-

ity to provide support, but noted that the “U.A.E.’s balance sheet is limited.” As great as the wealth is, it is not boundless. Meanwhile, the extent to which the U.A.E. government can increase the cash flow in its banking system is determined by the country’s peg to the dollar. The fixed exchange rate is severely limiting. Countries usually have two ways of influencing the supply of money in the economy: through monetary policy and fiscal policy. In countries without a fixed exchange rate, the central bank can lower the prime lending rate, increasing the amount of cash in the system. But in the U.A.E., the central bank is constantly buying and selling dollars in order that the supply of money matches that of the United States. If the bank took measures to increase liquidity, the dirham would be devalued relative to the dollar. That devaluation would cause people to sell their dirhams to buy dollars, cancelling out any currency

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action taken by the U.A.E. central bank. In terms of fiscal policy, the governments can tax and spend to add to their coffers or increase money in the economy. However, the U.A.E., like many Gulf economies, is mostly tax free. The government does not have the option of raising funds for a specific purpose. The only tool government has is to spend its own money in order to spur cash flow. Government support has improved liquidity in the Gulf in recent months, according to Standard & Poor’s. “Gulf banks appear to have become more cautious about loan approvals. Most banks have lowered their growth targets and, in some cases, their balance sheets have shrunk,” says a report. The rating agency also called the U.A.E. central bank’s approach “interventionist.” Though certain loans have yet to be classified as non-performing, many are not being repaid. The sensational stories of cars left at the airport hide a slightly less exciting issue – if those cars were bought with loans, no one is making repayments. If the banks are as highly leveraged as their customers and people stop making loan payments, the institutions become cash constrained. In what could to be an effort to force banks into transparency, the central bank does not appear to be making any more loans just yet, even though liquidity remains tight. And the banks that are publicly traded have another consideration: fearful shareholders who have already lost confidence in the local market may be further deterred by more losses. Both Abu Dhabi and Dubai based banks had significant exposure to Dubai World. The IMF estimates that half of Dubai World’s interests lay in Nakheel and Limitless World, which focused on overseas real estate investment. When global demand for real estate fell off in 2008, cash stopped going into the highly leveraged companies. The IMF says that U.A.E. domestic credit growth from 2004 to 2008 was some of the fastest in emerging markets.

But over the same period, liabilities owed to foreign banks doubled as a ratio of GDP. Dubai World played a major role in the economic health of the emirate’s economy. As part of the “Dubai, Inc.” network of commercial companies and investments either owned by or associated with the Dubai ruling family or the government, it received considerable support. The heavy investment in the oversaturated local real estate market, often through debt financing, put the companies in a precarious position. Du-

bai World largely used short-term debt to finance the mega-projects. When it announced the standstill on loan repayment in November, it effectively froze the local economy. In the boom, some banks had loan-to-deposit ratios over 100 percent, meaning that banks were overstretched – they’d lent out more cash than they had in assets. The central bank gets its funds from the other emirates, including cash-rich Abu Dhabi. Any requirements on the parts of the banks can still be met by the central

$850 million

$1.1 billion

4 percent

The senior unsecured debt issuance by the National Bank of Abu Dhabi in 2009

Abu Dhabi Commercial Bank’s senior unsecured debt issuance in 2009

The leap in the Dubai stock market following the promised $9.5 bn for Dubai World May 2010 | TRENDS 93

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‘The average client was someone who had a lot of wealth, but largely tied up in family businesses’ Bank’s current reserves. Money from Abu Dhabi came to Dubai’s rescue when the central bank fully subscribed to $20 billion bond from the government of Dubai. The S&P report predicts a slowdown in retail lending (citing expatriate layoffs in the real estate and financial services industries, and that non-performing loan ratios should peak by midyear 2010. The country remains wealthy though, and a recent report from Booz & Co. says that resource rich Gulf countries will recover faster than the rest of the world, The news is not all negative. After statements that S&P needed more explicit reassurances from the government, its April announcement reflected renewed confidence in government support. The agency upgraded Mashreqbank and affirmed its ratings for Abu Dhabi Commer94 TRENDS | May 2010

cial Bank, National Bank of Abu Dhabi and Dubai Islamic Bank, removing its negative watch status from the banks. While the central bank governor Sultan Bin Nasser Al Suwaidi said last year that liquidity noticeable eased by April of 2009, the effects had persisted. Construction companies and consulting firms were not the only ones hurt. According to a principal at consultancy Booz & Co., Daniel Diemers, private banking and wealth management saw the dramatic effects of the liquidity crunch peak from September 2008 to May of 2009. “The average client of the Middle East in the U.A.E. was someone who had a lot of family wealth, yes, but that wealth was largely tied up in family businesses that needed capital,” he says. “If you own a family business you can literally take

cash from the business to [to make investments]. Of course, you can indirectly leverage.” Families with enormous wealth are under pressure to create and sustain the lifestyles of large families with dependents and to maintain viable businesses. Many families, like their banks, were highly leveraged and were reluctant or found it difficult to sell their investments when prices dropped. “Some people have very nice investments, like the $30 million villa, but this is not a commodity,” Diemers says. “You cannot just throw it on [the Web site] Dubizzle, it is so customized and bespoke.” But Diemers says that private banks in the U.A.E. and Middle East were less affected than those in developed markets. And many in banking have acknowledged the advantages of the Nakheel restructuring. “Although the recovery of the property sector is likely to take some time, we expect a timid recovery in construction, albeit from a low base,” the Japanese bank Nomura wrote in a recent report. “The Dubai World restructuring, which will settle many outstanding liabilities to contractors (even if for less than total amounts due) should help revive activity in the sector since many construction projects have been stalled by a lack of liquidity.” The restructuring of one company, though, does not resolve the problem. In October 2008, the federal government said it would guarantee deposits in all U.A.E. banks for the next three years. Gulf-wide, governments have spoken openly about introducing new regulations such as increased loan to deposit ratios, something that will affect the private banks as well as retail and commercial banks. “Any liquidity rule on the banks with deposit ratios of x amount, this clearly will affect the private banks,” Diemers says. “They will fall under the liquidity regimes.” The U.A.E.’s central bank is a net saver, and sources say that it has significant resources to draw on if banks demonstrate that they need the loans. But the lack of liquidity can only be resolved permanently if the banks are open about their losses.

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Top Arab Cities 2010

96 TRENDS | May 2010

Top Arab Cities 2010 Where should you live, work, and play? Our exclusive rankings pit the region’s major cities against one another to identify the best urban areas in the Middle East. By the TRENDS Editorial Team Abu Dhabi

o, where’s the best place in the region to hang your hat this year? For the fourth year in a row, our sister publication, Saneou AlHadath magazine, has released its exclusive rankings on Arab cities, and TRENDS is the only place you can get these rankings in English. Our team spent weeks studying indexes produced by international statistics boards and top-notch research institutions in order to create the rankings. Our aim was to identify which cities in the Arab world are best to call home. In the rankings business and economic conditions take highest priority, particularly this year, in light of the world economic crisis and its far-reaching im-

plications. Every year competition for the top position is fierce, and as much as we appreciate the efforts of active cities, we deplore the high level of inaction of others, who seem to stand still. One important conclusion we’ve reached – and we’ve reached many of them – is that the availability of development funds is not the only factor for development, as many like to believe. Equally important are organization, sense of responsibilities, and the rule of law. The Emirati cities of Abu Dhabi and Dubai have alternated in the first two positions for four years. Dubai ranked first in 2007, while Abu Dhabi grabbed top spot for the next three years, leaving Du-

bai in second position. The differences between the two are not great; Abu Dhabi out-ranked Dubai last year in health services while both obtained the same score in that sector this year. While Dubai outranked Abu Dhabi in the sectors of entertainment, telecommunications, and security, Abu Dhabi outranked Dubai in business, considered the key sector. This puts Abu Dhabi first yet again in 2010. For the purposes of this ranking system, we collected and analyzed indexes in six sectors: economy & business, health, culture & entertainment, telecommunications, security & human rights, and education. We then ordered leading cities in each of these sectors. Our exclusive study May 2010 | TRENDS 97

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Top Arab Cities 2010

The spirit of competition should be nurtured at the city level to incite them to develop successfully also includes two other classifications: one for Top Arab Cities in the Levant and one for Top Arab Cities in North Africa. While the purpose of this annual study is not to provide cities with bragging rights, we do believe that it is right for cities which rank first to enjoy the spotlight. The spirit of competition should be nurtured at the city level and among its people; it incites them to look after their cities and to succeed in their development programs, whether civil or governmental. Top Arab Cities Countdown: 10. Amman came tenth in our global ranking, with fourth position in education, and seventh in security & human rights. 98 TRENDS | May 2010

9. Tunis came ninth in our global ranking, fourth in entertainment & culture, fifth in education, and ninth in business. 8. Jeddah came eighth in our global ranking, seventh in business, sixth in health, and fifth in telecommunications. 7. Kuwait came seventh in our global ranking, third in health, sixth in telecommunications, and eighth in business. 6. Riyadh came sixth in our global ranking but fourth in business, sixth in health, and seventh in telecommunications. 5. Muscat came fifth in our global ranking, fourth in the sectors of security & human rights, sixth in business, ninth in entertainment & culture, and eighth in the telecommunications category.

4. Manama came fourth in our global ranking but third in the sectors of entertainment & culture and telecommunications. 3. Doha came third in our global ranking but scored high in the economy & business sector and in education and ranked fourth in telecommunications and health. 2. Dubai came second in our global ranking but first in the sectors of education, entertainment & culture, health, and telecommunications. 1. Abu Dhabi takes top spot, with high placings in most categories and table topping results in both health and education. Top Arab Cities The city of Abu Dhabi in the U.A.E. was ranked as Top Arab City this year, as it took the lead in most sectors used in the study. Gulf cities hold the first positions in this yearâ&#x20AC;&#x2122;s study thanks, of course, to

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their oil wealth. Oil equals wealth, and wealth equals a high ranking; that means oil equals a high ranking. With a whopping 45 percent of the worldâ&#x20AC;&#x2122;s oil reservces and 20 percent of its gas reserves, the Gulf countries have a central role in the world economy. The situation enables them to reach economic growth rates even under the gloomiest of economic conditions. According to a study released by the global research organization the Conference Board, Gulf countries have witnessed a high economic growth in the past few years with an average of 5.1 percent yearly in the energy sectors. As for the growth of non-oil industries, the IMF indicated that GDP growth reached 3.2 percent in 2009. This yearâ&#x20AC;&#x2122;s study of Top Arab Cities included 19 metropolitan areas. We reached the final ranking by calculating the average points achieved by the 19 cities based on their sub-rank order and the weight given to each of the sectors. On top of the list came the business and economy sectors, under which lie eight sub-indexes: the ease of doing business, transparency, economic freedom, competitiveness, cost of living, per capita income, economic inflation, and unemployment rate. In calculating points for each city, we resorted to a number of reports and data such as the Doing Business 2010 report, which is released by the World Fund Organization and the World Bank, the Heritage Foundation, and the Mercer Human Resource Consulting index, which compares the cost of 200 goods and also compares items such as the cost of living, food, clothing, goods, telecommunications, and entertainment, in addition to Fact Book data from CIA (the Central Intelligence Agency). In the business and economy sector, Doha ranked first, taking the lead in the transparency index (which Transparency International releases since 1995 and which investors rely upon when making investment decisions in a country). The per capita income in Doha ranked first among the Arab cities, reach-

ing $121,400. Doha also preceded other Arab countries in the competitiveness index (which was developed in 2004 by a Columbia University professor, Javier Slay Martin, for the World Economic Forum). It positioned 22nd worldwide. These are impressive results for a city that came in third overall. Despite the rise of unemployment rates in the Arab world, which are considered the worst worldwide accord-

ing to the Arab Labor Organization, Qatar scored the lowest rate among Arab countries, reaching 0.5 percent based on Fact Book, thus increasing its points in the business sector. Doha lagged behind Saudiâ&#x20AC;&#x2122;s jewels, Riyadh and Jeddah, according to the Doing Business report, which examines governmental procedures that promote business activities, and those which impede them, such as bureaucracy and routine.

$26 billion

1,022

0.9

The volume of education expenditure in the GCC countries in 2009

The number of premeditated murders in Tunis for every 100,000 people

The average number of hotel rooms for every 100 people in Manama May 2010 | TRENDS 99

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Top Arab Cities 2010

Abu Dhabi and Dubai were best Arab cities in terms of health as the number of doctors has increased This index also covers reforms aimed at simplifying trade regulations, promoting intellectual property rights, opening credit opportunities and enforcing contracts, starting commercial business, issuing construction permits, recruiting staff, registering property, protecting investors, paying taxes, transnational trade and liquidating businesses. As for Arab cities’ ranking in the health sector, we resorted to a combination of indexes ranging from those which measure medical equipment and health services, to other effects on health such as environmental pollution and cities’ responsiveness in terms of the power of laws enforced. Among the indicators we set to select the model Arab country in the health sector were the mortality rate for every 1,000 100 TRENDS | May 2010

infants, the expected infant mortality rate, the number of doctors for every 10,000 persons, the prospects of not reaching the age of 60, expenditure on the individual’s health, pollution and environmental laws. The reports which we collected health data from are numerous, including the U.N. Human Development report, the World Health Organization, the World Economic Forum’s Tourism Competitiveness Report and the World Resources Institute. Abu Dhabi and Dubai were selected best Arab cities in terms of health as the ratio of expenditure on the individual’s health reached $1,409 and the number of doctors reached 4,960 between the years 2000 and 2007, while the mortality rate reached 12.7 for every 1,000 infants. In the sectors of security & human rights, we had to calculate the points

reached by each city according to Vision of Humanity reports (which measure stability and the level of security in countries), an ONDD organization specialized in researching investment risks, the Human Development Report, the Tourism Competitiveness Report, Reporters Without Borders, and the U.N. Crime and Drugs Bureau’s bulletin. This year’s report in the sectors of security & human rights witnessed several changes in the ranking of Arab cities. While some cities’ performance declined, others’ significantly improved. The most dramatic change came from Tunis, which moved back from the first to the tenth position, with the second highest number of premeditated murders (1,022 for every 100,000 persons). It also ranks 154th worldwide in the press freedom index and 44th in the security index. While Algiers held last position in the sectors of security & human rights, Doha moved from the fourth position in last

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Top Arab Cities 2010

Gulf countries have seen substantial development in the communications and technology sectors year’s report to the first position this year. Among the indicators we selected in the sectors of security & human rights: murder crimes for every 100,000 persons, freedom of the press, safety, road accidents for every 100,000 persons, women’s development, war risk, police services’ reliability, organized crime, drug dissemination, and terrorism threats (which reached the highest rate for Algiers).

While Cairo and Alexandria registered the highest ratio of road accidents among Arab countries, the Reporters Without Borders Report listed Damascus and Aleppo as the two Arab cities that put the highest restrictions on freedom of the press. The war risk was highest in Khartoum. In order to select the best city in the sector of telecommunications, we included indicators that measure the spread of mo-

88.6

$121,400

10.4

The basic education enrollment ratio, in percent, of Amman

The per capita income in Doha, which ranked first among Arab cities

The illiteracy rate in Beirut, in percent, according to the CIA World Fact Book

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bile telephones, Internet and landlines, the availability of the most advanced technologies, traffic, road infrastructure, and air telecommunications infrastructure, based on figures from World Internet Stats Web site and the Tourism Competitiveness Report. Gulf countries are very well positioned in this sector in view of the substantial development of the communication and technology sectors in this region. It is the fastest growing market in this sector as the volume of spending on information technology in Gulf countries is 50 percent higher than the world average according to Booz & Company. It seems that the future of Gulf countries in this sector is promising, as governments are keen on pumping billions of dollars into related infrastructure projects. The most recent study from Proleads for research projects expects Arab Gulf countries’ expenditure to reach $5.4 billion in providing goods and services related to IT infrastructure for civil projects currently being executed until 2011. Dubai ranked first in the telecommunications sector as the Internet dissemination ratio in the U.A.E. reached 60.9 percent and the number of Internet users in the U.A.E. reached 2,922,000 according to World Internet Stats Web site. In the telecommunications sector’s sub-categories, Dubai and Abu Dhabi shared the first position with best road and air transport infrastructure. They also ranked fourth worldwide in terms of airport equipment and adherence to international standards. By hosting a number of sports and cultural events, specialized conferences and world exhibitions, Dubai ranked first in the sector of entertainment & culture. It has also positioned itself as an important location on the world tourism map; in addition it has advanced infrastructure, high standard tourism facilities, and entertainment festivals such as the Dubai Shopping Festival and the Dubai Summer Surprises. Abu Dhabi ranked second and is assertively progressing in tourism development by investing huge amounts into

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Top Arab Cities 2010

Education plays a key role in economic growth and is a solution to the obstacles facing development the industry. It has also recently begun to stand out in international cultural activities with projects such as Saadiyat Island. And it has hosted major sports competitions such as the Formula One Grand Prix and the FIFA Clubâ&#x20AC;&#x2122;s World Cup. Education plays a key role in economic growth and is a solution to the obstacles facing development and a basis for progress and integration in the world economy. We therefore used this indicator to rank Top Arab Cities, which acknowledge that, more than any other time, education is a priority in their economic policies and programs. This is illustrated by the increase of expenditure in this sector. According to a study released by the Madar Center for Studies, the volume of education expenditure reached $26 billion in the GCC countries last year. 104 TRENDS | May 2010

To be able to determine the Top Arab City in education, we calculated the performance of each city using the following indicators: enrollment in basic education, GNP/expenditure ratio on education, enrollment in higher education, quality of educational system, internet dissemination in schools, classification of literacy ratio, and availability of specialized training and research centers. Abu Dhabi, Dubai, and Doha shared the first position in education as they are witnessing a global educational revival and pioneering initiatives in this vital sector. They are undisputedly taking the lead. Amman held fourth position, outranking all cities in the ratio of higher education enrollment, followed by Tunis, which ranked second based on the quality of its educational system, then Manama and fi-

nally Khartoum, which lagged behind in all indexes with the exception of the literacy ratio, in which it preceded Casablanca and Rabat. By unveiling the results of this, the fourth annual report on Top Arab Cities, this study is aimed at bolstering competitiveness among Arab cities, nurturing the spirit of development, and pushing for modernization in the various business sectors. Weâ&#x20AC;&#x2122;ve achieved the highest levels of accuracy and objectivity in the evaluations we used, and we wish more success and prosperity for all cities in the future. Cities can be great places. Top Arab Cities in Economy & Business The positive performance of economies driven by oil wealth positioned Gulf cities on top. Doha ranked first with high results in the indexes of competitiveness, economic freedom, per capita income and unemployment rate, while ranking 22nd worldwide in the transparency index

Top Arab Cities in Health The cities of Abu Dhabi and Dubai held the first position in the ranking of Top Arab Cities in the provision of medical and health services, followed by Kuwait (in light of its good performance in infant mortality rate, expected mortality rate and environmental laws). Doha ranked fourth while Manama took the lead of Arab cities for the number of doctors for every 10,000 persons. Riyadh and Jeddah held the sixth position, preceding Amman which ranked seventh. Muscat ranked ninth while ranking first in environmental laws. The tenth position was held by Beirut which preceded Tunis, while Cairo and Alexandria both ranked 12th, Damascus and Aleppo both ranked 14th and Rabat and Casablanca both ranked 16th, although they outranked Arab cities in the pollution index according to the Tourism Competitiveness Report. Algiers and Khartoum came in the 18th and 19th positions as these two cities suffer from a high rate of infant

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released by Transparency International, a key indicator in gaining the confidence of any city markets and an essential pillar in the investment climate pyramid. Manama ranked second while Abu Dhabi ranked third and Riyadh fourth after ranking fifth last year. Dubai ranked fifth and Muscat sixth while ranking fourth in the transparency and economic freedom index and second with its unemployment ratio. Jeddah ranked seventh, followed by Kuwait, which ranked first in economic inflation and cost of living, tenth in the transparency index, and seventh in the ease of doing business index. Tunis ranked ninth followed by Amman then Beirut which held the 11th position. Rabat preceded Casablanca (ranking 12th) while the 14th position went to Cairo, followed by Alexandria which preceded Algiers. Damascus and Aleppo respectively held the 17th and 18th positions, and Khartoum was on the bottom of the list in all indexes except for unemployment and cost of living.

Khartoum was on the bottom of the list in all economy & business indexes except two mortality, decrease of expenditure on individual’s health and weakness and rigidity of environmental laws. Top Arab Cities in Security & Human Rights Doha came 16th worldwide in the indexes of safety and stability according to Vision of Humanity’s Report and ranked first among Arab cities in the sectors of security and human rights. Dubai moved to the second position this year after having ranked seventh in 2009 because of its good performance in the following indexes: freedom of the press, safety, war risk, and reliability of police services. Abu Dhabi moved to the third position, followed by Muscat which ranked fourth and then Kuwait (which ranked first in the freedom of the press index and

second in the women’s development index). Manama registered good results in road accidents mortality and women’s development indexes, placing it in the sixth position before Amman. Casablanca and Rabat held the eighth and ninth positions respectively as they registered a decreasing number of premeditated murders. Tunis ranked tenth because of its bad record in murder crimes, freedom of the press, organized crime and road accident mortality. Beirut ranked 11th followed by Damascus and Aleppo, while Jeddah and Riyadh ranked 14th and 15th after holding the last position in the previous report. Khartoum moved to the 16th position, followed by Alexandria, then Cairo, and finally Algiers, which ranked 110th worldwide in the safety index. May 2010 | TRENDS 105

Dreamstime

Top Arab Cities 2010

Dubai topped entertainment & culture for the fourth year thanks to its leisure activities and events Top Arab Cities in Telecommunications Dubai ranked first in this sector thanks to the dissemination of mobile telephones and Internet, its roadsâ&#x20AC;&#x2122; infrastructure, the availability of the latest technologies, and its air transport infrastructure. It ranked fourth worldwide in terms of airport equipment and adherence to international standards. Dubai was followed by Abu Dhabi and then Manama, where the Internet dissemination ratio reached 55.3 percent according to World Internet Stats data. Doha held the fourth position, with a wide dissemination of mobile telephones (reaching 196.6 for every 100 persons according to the Global Competitiveness Report), and the 25th position worldwide for availability of advanced technologies. Jeddah ranked fifth, followed by Kuwait, Riyadh, 106 TRENDS | May 2010

Muscat and then Tunis, where the landline dissemination ratio reached 11.8 percent. Amman ranked tenth followed by Casablanca and then Rabat, which ranked fifth in the Internet dissemination index and 93rd worldwide in PC dissemination (with an average of 3.5 computers for every 100 persons). Alexandria moved back to the 13th position, followed by Aleppo, Damascus, and Cairo, which ranks first in the road traffic index. Beirut did not register good results in mobile phones dissemination, road traffic or Internet dissemination. It therefore ranked 17th, followed by Algiers and then Khartoum. Top Arab Cities in Entertainment & Culture For the fourth year in a row, Dubai maintained the lead as Top Arab City in en-

tertainment and culture thanks to the large number of leisure activities on offer. Throughout the year it also hosts a wide array of sports and cultural events, in addition to conferences and specialized world exhibitions. Abu Dhabi ranked second and is standing out as a new world tourism destination with a unique infrastructure and large amounts of money invested in tourism development. It has also recently stood out in implementing international cultural projects and has hosted international sports competitions. Manama ranked third while ranking fourth in the index of competitiveness in tourism and travel as the average of hotel rooms for every one hundred persons reached 0.9. Tunis embraced more than 26 world cultural heritage sites and accommodated the highest number of hotel rooms among Arab countries, thus ranking fourth in this sector followed by Qatar which ranked fifth. Beirut ranked sixth and Cairo ranked seventh followed by Alexandria, Muscat and Casablanca, which ranked first among Arab cities in view of its world cultural heritage sites. However, it did not score high in the index of price competitiveness in the sector of tourism and travel. Jeddah ranked 11th followed by Amman, Rabbat, Riyadh, Kuwait, and then Damascus in 16th position. The last positions were held by Aleppo, Algiers and Khartoum which scored low in all indexes except for price competitiveness where it held the second position among Arab cities. Top Arab Cities in Education Three cities ranked first in education: Abu Dhabi, Dubai, and Doha. They have all witnessed a global renaissance and pursued pioneering initiatives in this vital sector. Amman took the lead with the highest education enrollment index, ranking fourth in this sector. As for its basic education enrollment ratio, it reached 88.6 percent according to the World Economic Forum Report.

Weâ&#x20AC;&#x2122;re two years old and already part of the landscape In this short time we have attracted some of the best talent from around the world to join our editorial and design team, helping us raise journalism in the region to a new level. With more than 250 reporters based in the UAE and our bureaux around the world, The National tells the story of the Middle East from a unique perspective. And we are clearly getting it right. Our audience has grown 100 per cent year on year (Ipsos NMA 2009). We could not have hoped for a better start.

Corbis

Top Arab Cities 2010

Tunis was Top Arab City in North Africa for the fourth year in a row, Casablanca was second Tunis maintained its fifth position this year compared to last yearâ&#x20AC;&#x2122;s report as it enjoyed the second best Arab educational system. It also ranked third as per the number of its specialized training and research centers. Manama ranked sixth followed by Beirut, where illiteracy reaches 10.4 percent according to Fact Book. Then Riyadh and Jeddah are in eighth position, followed by Kuwait, which ranked first in the Arab world in the literacy ratio index with an illiteracy ratio not exceeding 5.5 percent. Muscat ranked 11th followed by Cairo and Alexandria. Damascus and Aleppo moved back to the 14th and 15th positions respectively after ranking ninth according to last yearâ&#x20AC;&#x2122;s report. Casablanca and Rabat respectively ranked 16th and 17th, while Algiers ranked second to last followed by Khar108 TRENDS | May 2010

toum, which lagged behind in all indexes except for the literacy ratio where it preceded Casablanca and Rabat. Top Arab Cities in North Africa Tunis was selected Top Arab City in North Africa for the fourth year in a row. It ranked ninth in the Arab world in the sector of economy & business and moved up to fourth position in the sector of entertainment & culture. It also ranked fifth in the education index and ninth in the sector of telecommunications. Casablanca is the second Top Arab City in North Africa, followed by Rabat, Cairo, and Alexandria. Algiers ranked sixth following poor scores in all indexes and the worst track record in the sector of security & human rights in the Arab world according to this

study. As for Khartoum, it held the last position on the list of Top Arab Cities in North Africa and had the worst ranking among Arab cities in all sectors except for security & human rights. Top Arab Cities in the Levant Ammanâ&#x20AC;&#x2122;s good performance in a number of indexes placed it in the tenth position among Arab cities and in the first position in the Levant; it ranked fourth in education, seventh in security & human rights, eighth in health services, tenth in business & economy and telecommunications, and 12th in both entertainment and education. Beirut ranked second place in the Levant. It ranked seventh in education and sixth in culture & entertainment, and moved back to 17th position in the telecommunications sector. Damascus ranked 16th among Arab cities and third in the Levant, moving up two levels in global ranking this year after having ranked 18th last year.

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James Hogan

CEO, Etihad Airways - United Arab Emirates

FLYING HIGH

The airline industry has had a difficult couple of years, from the financial crisis and H1N1 fears to an Icelandic volcano. But Middle Eastern carriers remain bullish.

ow do you find Davos compared to last year? The banks have returned. There are more NGOs than last year. And people obviously focused on the recession, the timing of the recovery. They focused on the risk of the bubble bursting, some economies going into recession in the back of the year, a double dip. Now we are talking about a global view. I’m here as the chair of the travel and tourism group which is made up of airlines, hoteliers, of a cruise company, of distribution organizations. We focus on three areas. The environment impacts hotels, it impacts cruising, and airlines. It has risk of putting the airline industry and other service industries into a very complex environment in regard to charging if there is a global approach.

The second area is security, security again just in airports, just in airlines, any place where there is a body of people. So again, whether it’s hotels, whether it’s events, whether it’s sporting arenas. And with the recent incident on Christmas Day, I’m concerned that people are looking at a different way to breach security. We have developing countries that need to invest not only in infrastructure and security assistance, but also to train people. The third area is competitiveness. Looking again as the industry recovers, we still get hit by taxes, we work by lateral processes. Aviation and logistics can tie up. So those areas are where we touched on and we come out of Davos and the WEF to look to report on these areas.

The airlines industry passed through huge trouble last year. Is that easing? Talking about 2009? That was an extraordinary year. Because not only did we have the global financial crisis, we had the pandemic. I think sometimes people forget that stopped people from travelling. Corporate travelers where companies cut back on travelling expenditures. Then we had the leisure travelers concerned about the pandemic as well. Most people stayed at home. When you look at the statistics for 2009, the only area that was strong was, in fact, the Middle East. Passenger growth was 10 percent over the previous year when all of the other regions in the world were negative. So last we saw good traffic numbers. May 2010 | TRENDS 113

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Interview: James Hogan

Time and new technology gives us a competitive edge, and that’s what I am seeing in our growth We saw last year that American airlines and European airlines applied realistic baggage charges. And I think Middle Eastern and South East Asian airlines will also need to achieve profitability across the board. So this means an interesting couple of days at Davos. What challenges will you face in 2010? There are always challenges in any business in a global environment. Let’s hope that coming out of this European cold snap that we don’t see the pandemic repeating. Obviously, we watch carefully. We continue to push governments to open up markets like Canada. We are not working in one country or one region, but in the world. So we are having to manage risk and competitive impacts every day on a global basis. 114 TRENDS | May 2010

How did Dubai’s economic troubles impact Etihad Airways? I think one of the great advantages for Gulf carriers is that we are closer to everywhere else in the world. And it’s one stop. It’s more that the corporate crowd slowed down their travel and people due to the pandemic were apprehensive about going to Australia, Europe, or America. Between Gulf Air, Etihad, Emirates, aren’t there too many Middle Eastern carriers? If you look at South East Asia 30 years ago, Singapore created a fantastic airline with a small economy. Technology meant you can go two stops to Europe versus three or four stops in the past. Markets started to deregulate.

Three hours from Abu Dhabi, there’s the rest of the Middle East and the Indian subcontinent, a huge population, that is still under-serviced. If you look at the secondary cities of Europe, cities like Brussels, Dublin, Milan, they are taking traffic that use to go over the main European hubs. So you are seeing a shift of traffic from Asia hubs and European hubs to the Gulf. As you saw 30 years ago when the Asian hubs created. So I would argue that time and new technology gives us a competitive edge and that’s what I am seeing in our growth. In regards to low cost airlines, that’s business. The low cost model is not the same as the low cost model in Europe or in the U.S.A. What you see in the low cost carriers in the Middle East is that they are going to India, they are going beyond, so they target different markets. So you are not comparing apples with apples. At the end of the day, the consumers decide how they travel. But we had consolidation even in bigger markets like Europe: Iberia, Air France, etc. So why not Etihad and Emirates? It’s not only about Etihad, it’s about the supply in the Gulf. You are talking about Qatar, you’re talking about Kuwait, you’re talking about many more.... I think what I have made clear is that the Gulf carriers have proven a new model. We can move traffic flows across the Gulf. For example, we can move passengers from the U.S., which is filled with a range of ethnic markets, to the Middle East. Then we can take Indians, for instance, into the secondary cities of India, instead of Bombay or Delhi. That is the opportunity. One criticism by some European airlines is that Gulf carriers are being heavily subsidized. I don’t have to respond to those criticisms. And what about the other airlines in the region? You need to ask them that question.

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Interview: Jong-Hoon Kim

116 TRENDS | May 2010

Jong-Hoon Kim

Minister of Foreign Affairs - South Korea

SHELTERED SEOUL

Thanks to its position in Asia, South Korea has weathered the global downturn better than most. Now the country could be well placed to accelerate its development.

ow has South Korea reacted to the global crisis? Last year was difficult for all countries. But in Korea we were successful for several reasons. Number one, we took several measures, a very preventive approach. And that worked. Number two, we are heavily dependent on foreign factors, but if you look at our investment and trade, almost half is with Asian countries including China, and those are countries that were less affected by the financial crisis. Korea was the only country which recorded positive growth. Although it was 0.2 percent economic growth, this year we project almost 5 or 5.5 percent economic growth. What about the banks in the country? After the financial crisis, there was a flight of American dollars out from our country and back to the U.S. because those are multinational business tycoons bringing their home money back. Maybe there are

too many U.S. dollars in the market. Of course, exchange rates should be decided by market forces but we tried to strengthen the mark, trying to avoid deep kinds of fluctuations. Our banking sector is quite good. I think the number one reason dates from 10 years ago. We experienced the Asian financial crisis and we really restructured a lot and in terms of regulation, we improved a lot. We don’t see any good reasons why we have to tighten the regulations for the time being because they are good. To what do you attribute Korea’s recent success? Korea is a success story because first we focus on labor-intensive industries in the early stage of economic take-off. But another good thing we’ve done is to have a timely move over to heavy industry, such as shipbuilding, electronics, steel mills, and automobiles. And we set our visions for the future not in the same are-

as. The paradigm will be changed. If we respond right, then there can be another blue ocean for industry. We still claim developing country status in certain areas. Maybe Korea is one of the early movers, but we still claim developing country status. So what we can do is to try to bridge the gap between developed and developing countries. Korea is in a rare situation for that. What’s the relationship between Korea and the Middle East in terms of trade and commerce? As a trade minister, I’m now engaged in our negotiation for future agreements with the GCC. I really tried to conclude that agreement last year, but it has been a little bit delayed. There are not many remaining issues. The GCC consists of very important countries. We are heavily dependent on those countries for our energy resources. And the GCC market is a big market for Korean products. May 2010 | TRENDS 117

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Interview: Phillip Thorpe

118 TRENDS | May 2010

Phillip Thorpe

CEO, Qatar Financial Center Regulatory Authority - Qatar

BE THE CHANGE

The global financial services industry needs to understand the new political landscape, and make pre-emptive changes accordingly.

hat has changed this year? Well, in terms of Davos, I’d like to say that from the financial perspective, we were hearing more constructive things from the financial services industry. I’d like to say that but I don’t say that. I have not seen the kind of change, heard of the kind of change that I would have expected. I still see denial, I see people unable to move from their previous positions. I don’t see understanding on the part of a lot of the financial services sector, and I suppose in particular, I failed to see the alignment of understanding in the financial sector with the public view. And that is the critical point. Public opinion has moved on in 12 months, and the financial services sector needs to move on as well and respond. We are seeing it at a political level, but not at an industry level. So that’s a big point for me which so far is disappointing. We’ve heard some very strong statements from politicians who’ve been

here; Sarkozy continuing a theme that we have seen from Obama and we’ve seen echoed in the U.K. Those are leading statements and I would have hoped we received a more positive response from the industry and from regulators. What would it take for the financial services industry to do what they have to? It’s a matter of understanding firstly the political environment operating and the public levels of concern. There is genuine anger about what has happened and it’s no good assuming that business can continue as usual. They need to understand that this will convert into political action, then convert into regulatory action which will be limiting on business. Because there will be a great nervousness in the next few years about risk and that is going to be more costly in terms of capital. It’s going to be more restrictive in terms of types of activities. My hope is that the industry will see the sense in leading the

change, not waiting to have it delivered to them but thinking constructively about the matters that are concerning the public and therefore the politicians. I think changes will come about in terms of size of businesses that will happen. President Obama has talked about it; others are now talking about it. In the U.K. it’s been spoken about. Separating commercial banks from propriety trading. I can see the cost of capital increasing because any regulator anywhere is going to say, “I’m not willing to rely upon money that might be offshore and unavailable to me if something goes wrong. I want the money here in my own backyard.” We’re already seeing this. These will be pretty critical changes and should encourage the industry to proactively meet the political agenda. What is Qatar doing in this direction? In Qatar, it’s a little bit quieter. We have been very fortunate to be at some distance from the issues in terms of the economic May 2010 | TRENDS 119

Interview: Phillip Thorpe

Corbis

normal growth problem which is population increasing at a very rapid rate. Some say about 1 percent per month. Housing stock, it has not been keeping pace, so pressure on prices was considerable over 2007, 2008, and 2009. We’re now reaching to a point where some of the construction that was occurring in ’08 and ’09 is coming on the market and prices are coming down. To my mind, that’s a natural adjustment, that’s something to be welcomed, not to be worried about. And we are not really looking at the same scenario on property as you may be seeing in Dubai. We may have an over-supply for a short period, but I think with the basic population growth, prices will stabilize again.

What happens in Doha is not the same as Dubai, but we all receive a little bit of the influenza crisis. The banks have had some concerns about the quality of their lending book but they had not been involved in talks of assets, they’ve not really seen the subprime – those are not big issues. They have generally been well capitalized and more conservatively run. The government is undertaking a number of interventions to strengthen the local industry, and that has helped in terms of liquidity. Most important of all, we’re sitting in an economy that is growing at a great rate and which is robust and will grow even more in 2010 and 2011. That’s a very good place to be. We know the cash flow is good and we support a continued expansion in most sectors. But what happened in Dubai will definitely affect Qatar also. It’s impacted perceptions about the region broadly. It’s quite annoying because people aren’t actually making a thorough examination of the different states. If you’re 120 TRENDS | May 2010

in Dubai, that’s one thing, but what happens in Abu Dhabi isn’t the same. What happens in Doha is not the same, but we all receive a little bit of the influenza from the infection in Dubai and that is unfortunate. That said, in Qatar, we saw the government go out with a bond issue very successfully, it was well received by the market, always subscribed, well priced. We see continuing interest in investment into Qatar. There are plans by the government to help the issue of liquidity in the country. So there are distinctions and we think there’ll be lessons learned from Dubai, but perhaps they’re not that complicated. We are seeing a little bit of the consequence of a major property price adjustment in Doha, but for us that’s actually turning out to be both good and bad. Bad in the sense that property values are coming down, but good because we had quite significant inflation problems from rising property prices. In Doha we have a

What kind of changes are you seeing as a regulator? We’re doing well. I suspect most regulators all around the world are doing well, which is why we’re examining whether the assumptions we made are still good. We’re very fortunate we’ve not seen any significant consequences from the economic crisis, but that hasn’t stopped us looking at the way we treat capital. It hasn’t stopped us focusing on whether firms have good risk management systems. It certainly made us look very closely at the quality of human resources, and we are watching very closely the changes that are being proposed in other jurisdictions. One of our points of existence is that we are benchmarking the world’s best standards. If those standards are changing we need to consider what we need to do ourselves and make the changes that will follow. That’s a full-time job these days. But so far our analysis said we have a very robust financial services sector, the QFC environment has proven to be relatively immune. I think one of our pieces of good fortune is we are still at a fairly early stage of development. We have taken a very close look at the institutions we regulate, we’re very pleased with what we found in general, but we are very much aware that more change will be required as international standards change.

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Interview: Maurice LĂŠvy

122 TRENDS | May 2010

Maurice Lévy

Chairman & CEO, Publicis Groupe - France

REALISM TAKES SHAPE

A changed mood at Davos reflects a will to do things differently from now on, says the head of one of the world’s big four media and advertising companies.

hat are your impressions of Davos this year? I have found the atmosphere much more positive. Last year the whole event was slightly depressing. Secondly, most of the people here are discussing the real issues. They may not have the solutions, but they are working very seriously. I have just finished a meeting with a lot of ministers and IMF representatives, and I can see that these issues are of much importance to them. Also, we feel a sense of responsibility. You have many bankers, many CEOs, who consider that it’s important that we should not only

think about profit but also take into account all the stakeholders.

ed that by so doing we are creating more jobs. So that is very interesting.

What other sacrifices do Davos participants seem willing to make? Well, we should also take into consideration the fact that we have a responsibility to create jobs, and this is something that is really taking shape now. And I have been really surprised by what I heard at the international business counsel, where it was being asked if we are ready to sacrifice part of our profit margins in order to create more jobs. Some 57 percent of the CEOs said they are ready to defend lower margins provid-

2009 was a bad year for the media. How do you see 2010? The industry has faced one of the toughest years in its history. We have a decrease in the global market of 12 percent or so. Print has been hugely damaged, with decreases that were in the region of 20 percent, although digital has continued to grow. If you look at 2010, we are starting to see some signs of recovery, and we expect that this year will be slightly more positive. Which is a big difference compared to last year. May 2010 | TRENDS 123

On the Road

A Walk in the Park Dan Scanlan tours a facilicty where cars aren’t aging – they’re waiting. Cars serve a variety of purposes. Some are simply the means to get from point A to point B. Others are meant to display one’s taste. There are those that thrill, and still others that help us remember where we’ve been and how far we’ve come. The greatest cars tend to bind together all these elements. No matter what makes them special, unusual cars present a number of challenges when it comes to giving them the care necessary to make sure they last. This is especially true for the antique or specialty car. The elements of nature and the hazards of urban traffic are no place for a rare specimen of automotive excellence. Yet for the enthusiast, the whole idea of owning a car is to drive it, so it’s senseless to lock it away in a garage as if it were a museum piece. Fortunately, a group of true car lovers has thought about this problem and come 124 TRENDS | May 2010

up with a solution. They call it “a marina for cars.” On a recent crisp, spring day I navigated the twists and turns of some New England roads to travel to a small town near Newport, Rhode Island. My destination was Park Place, a facility designed to answer the needs of the specialty automobile owner. Situated on a hill overlooking wind turbines that catch the steady winds blowing off the Atlantic, it’s an impressive operation. The general manager, Wayne Lee, showed me around the 49,000 square-foot space. With 24hour surveillance and climate control, it currently houses about 85 cars on surgically gleaming floors. The business was started about four years ago, and uses its reserve capacity to store boats, including two America’s Cup-class yachts that tower over a few shrouded antiques awaiting restoration. An affable fellow, originally from

New Zealand and with a passion for cars, Lee espouses the philosophy that cars are meant to be driven. “It’s not just about show; it’s about driving them,” says Lee. “Get out there, get some stone chips and have some fun. That’s what it’s all about.” And when those inevitable stone chips happen, or engines break down, Park Place can help with that too. The on-premise staff performs anything from regular maintenance to ground-up restorations and engine overhauls. They are even able to fabricate sheet metal for cars whose parts are no longer available. An array of vehicles is warehoused here, and from some of the most storied marques, among them Rolls Royce, Ferrari, Aston Martin, Lamborghini, Austin Healey, Packard, and Cadillac. One that caught my eye was a 1958 Rolls Royce limousine on only its second owner, the first having been Fred Astaire. Another

was a spectacular 1953 Austin Healey 100 Roadster, in the signature Healey Blue. Alas, no test drives on the inviting country lanes for the visiting non-owner. Park Place’s clients are drawn from both sides of the Atlantic, with a nearby private airfield providing convenient access for some owners. Others make the trip from Boston, New York, or other East Coast cities to trade their everyday conveyance for something that quickens the pulse. The facility also provides clients with seasonal flexibility, allowing them to keep the convertible safely tucked away until the weather is right. While I was visiting, a BMW Z8 built for the European market – one of only a few in North America – was warmed up and waiting in the showroom for its owner to take it out for the first drive of the season. Park Place does its part to help the local automotive community as well. They open their doors to local clubs for meetings, and serve as a resource for car shows, especially when participants from out of town need expert repairs and as-

sistance on the fly. Park Place’s reputation has grown accordingly. In fact, while I was there I overheard Lee take a call from an MG owner in distress, who had heard mention of their capabilities. “You just get it here,” Lee calmly assured the motorist, “and we can take care of whatever’s wrong with it.” I ask Lee the inevitable question: Does he have a favorite car among those under his roof? Reluctant to play favorites, he says that they so vary from era to era that it’s impossible to pick just one. I scan the specimens on view in the showroom and can’t help but agree. Wayne Lee is clearly a man who enjoys his job, and I can understand why. As he modestly puts it: “Any day I can come in and look at tin like this is a good day.” Yes, tin. But so much more. As I made my way out of town, I noticed an old MG with its hood propped up, parked off one of the side roads. I thought about stopping, but realized that he was already in good hands. That tin would be moving again in no time. May 2010 | TRENDS 125

Shoptalk Motorola milestone

ove over, C-3PO. The latest chatter on android technology involves the Motorola Milestone, the first gizmo in the Middle East running on the uber-trendy Android 2.1 system. Besides using multiple applications simultaneously, the Milestone’s a “slider” – the non-hamburger kind – with a high-resolution screen and a pinch-and-zoom display that boasts twice the pixels of its nearest competitor. This phone comes with a flexible windshield mount that transforms it into a navigation device for the car; drivers can also use the hands-free feature while they’re navigating, YouTubing, and Tweeting. -Jay Akasie

panasonic 3-D viera

arents can thank Panasonic for making it even harder to get their children to finish their homework: It’s just introduced the Middle East to its latest line of Viera plasma high-definition televisions (including a 50-inch, 3-D monster set). The company gave us a demonstration of their new flagship TV, during which we felt a bit goofy at first, thanks to the 3D glasses we had to wear in order to watch a Blu-ray movie featuring The Incredible Hulk. But the home theater that Panasonic created for the occasion, which included surround sound and a bucket of very tasty popcorn, helped us forget the 3D glasses pretty fast. One thing’s for certain: We’ll never look at our 15-inch black-and-white set with rabbit ears quite the same again. -Jay Akasie 126 TRENDS | May 2010

THE NATIONAL

ho says print is dead? Abu Dhabi’s upscale daily newspaper, The National, celebrated its two-year anniversary last month with a media summit at the futuristic Yas Hotel. The newspaper’s executives said they’re bucking the region’s credit crisis partly thanks to a steady stream of advertisers who have come to relish the publication’s affluent readership. Such readers, of course, are attracted to The National’s high-quality writing and layout. That’s what you get when you hire top journalists and designers from newspapers like the Daily Telegraph, the New York Sun, and Canada’s National Post. The fete on Yas Island also revealed that The National’s Web site is one of the most popular sources of Middle East news for consumers in England and on the eastern seaboard of the United States. With that kind of growing global presence, perhaps they’ll rename it The International. -Jay Akasie

2010

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LETTER OF THE MONTH Men At Work? Re. last month’s story on the region’s young yet unemployable workforce: Perhaps getting rid of the free electricity, water, property, etc., might help. There’s not a lot of incentive to bother going into the workforce when you’re supported by subsidies and freebies from the government. Removing or lowering the quota system for hiring Emiratis would probably help, too. Talk to many U.A.E.-based business owners and you’ll hear plenty of stories about Emirati employees who do little more than turn up, collect their checks, and go home again. Some Emiratis are wonderful and capable workers and they are like gold dust. Make getting a job harder and more competitive and you’ll force modern kids to up their game.

T.B. (by email)

‘You say Persian, I say Arabian…’ As Juliet kept on wondering: What’s in the name? Let’s put it this way. What if the China Sea will be named the Vietnam Sea? Or Thailand Sea? How about calling the Indian Ocean the Ceylonese Ocean? Or Arabian Ocean? Or African Ocean? I can understand the sentiment of each, but I used to call it the Persian Gulf and known it as Persian Gulf and was surprised in the 1970s that it was called the Arabian Gulf. Says who?

middle-aged man in poor health. Does anybody seriously believe that? I would say few believe it was Mossad. Dubai police were exemplary? They did not know he had been assassinated for a week until somebody thoughtfully rang them and told them to look for traces of a muscle relaxant. Nor did they initially know the passports were forged. The whole thing shouts ‘set-up.’ My guess is that Iran was behind it.

Johan (by email)

Aquilles Catiempo (by email) Kurdistan’s Burj Al Arab Islamic Gulf can be used as a neutral and more meaningful name that must satisfy both sides, avoiding a conflict in the name of Persia and Arabia.

George (by email) We could just name it The Puddle.

Andrew (by email) Dubai Murder Mystery Twenty-seven operatives from one of the best intelligence agencies in the world to kill one Have something to say? Email us your thoughts at editor@trendsmagazine.net; send a letter to: The Editor, trends, s.c.c. arabies,18 rue de Varize, 75016 Paris, France; or a fax to: +(33) 1 4380 7362. Be sure to include your name and location

128 TRENDS | May 2010

If anybody in any part of the world wants extraordinary building structures and styles they have to go to the United Arab Emirates. If one goes to Sheikh Zayed Road, Dubai’s main thoroughfare, he will find all kinds of fascinating buildings in various shapes and styles. So no wonder they found the team for this Iraq project in Abu Dhabi. The Indian government has banned their citizens from going to Iraq due to the war and terror that made this Arab country one of the most dangerous places on the planet. Still, Indians go there to work, risking their own lives for the hefty remuneration. My question is why do they have to build a seven-star hotel in a war zone? Is it necessary, at least now? There are places in Iraq still struggling without drinking water and medicine.

O. Firoz (by email)

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The Last Word with Yousef Tuqan Tuqan Remember the good old days, when finding movie listings meant flipping through the morning newspaper? Well times have changed, and the fact is that the lion’s share of motion picture fans are now closer in age to your grandchildren than they are to you. What’s more, they’re so technologically savvy that they don’t need to get ink on their hands – they find movie times on their mobile phones. The chief executive of Flip Media, Yousef Tuqan Tuqan, tells the curmudgeonly TRENDS editor Jay Akasie about his company’s new app, and what’s wrong with his iPad.

ell me about the application for the iPhone that Flip recently unveiled. Naviflix is a one-stop movie guide iPhone application, a first in the U.A.E. The concept behind Naviflix came from our everyday lives. As movie buffs, we found ourselves increasingly frustrated by the lack of a simple on-the-go guide to what’s playing in cinemas. So we developed our own user-friendly application that‘s optimized for mobile users. Naviflix gives users quick access to film synopses, photos, video trailers and cinema showtimes, all from an iPhone. The app reached number one in the U.A.E. iTunes Store in its first week, making it something of a smash hit in the U.A.E. community. We’re now extending the interface to other platforms (Android, Blackberry and Nokia N-Series). It’s an elegant and simple platform and in just a few weeks we’re going to let it loose overseas, to other markets in the GCC and beyond. It’s the second app Flip has released into the market. We were one of the first Middle Eastern developers to create an app; the first was Mumbaikar - a guide to Mumbai. I notice you have a new iPad. What do you like about it? Is there anything that doesn’t cut it for you? It’s an amazing device and it’s worth the hype. I think it’s the first genuine alternative to books and newspapers (and tra130 TRENDS | May 2010

ditional computers). The screen is gorgeous, and the initial crop of applications from free content providers like BBC and NPR is great. I’m also spending a lot of time playing X-Plane and playing my touchscreen piano. My main issue with the iPad is the lack of access to the legitimate content that’s available in the U.S., like music and video in the iTunes Store and free episodes playing on ABC. An integrated video camera would also be nice. What is Flip’s next big project? We’ve always believed it’s better to show our abilities than tell people about them, so we’re investing heavily in the development of new applications (like Naviflix) and platforms across multiple devices to showcase what the Web can do for advertisers and governments. Right now, we’re focusing on creating new ways to develop brands across multiple platforms. Digital marketing is no longer just about having a Web site. The rise of multiple screens (mobile, interactive TV, kiosks, tablets) has made it much more challenging – and exciting – to reach audiences. You’ve spoken about combining software development with social networking. Tell me more about that. The social media revolution is having a profound influence on how Arab brands

and governments interact with users and it’s essential that we make it easy to facilitate that conversation. Users are growing increasingly demanding in terms of how and where they access content and Flip believes it’s important to find the optimal interaction between culture, strategy, design, and technology to build things that people want to use. Too often, digital brand strategies in the region are mired in fruitless discussions about IT instead of focusing on the most important element: the end user. If you weren’t running Flip, what would you be doing? I grew up in a computer nerd’s house (my dad worked for IBM for 20 years in the Middle East), so I’ve always been fascinated by technology and its impact on our lives. If I weren’t working at Flip, I’d be working with the nonprofit sector and using technology to improve people’s lives. There’s so much that needs fixing in the region and I’m convinced that if the finest minds in the Middle East communications industry applied themselves to creating social justice and peace instead of just selling products, we could make real progress. I’m hopeful that one day, I’ll be able to apply everything I’ve learned to help address poverty and injustice in the Arab world.

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