Egypt is undergoing a major change of mood from the initial euphoria spurred by the revolution of January 2011. The initial stirrings of a ‘lost generation’ of disaffected and mostly educated, middle-class youth provided the catalyst for a public uprising that quickly brought in people from across different walks of life, united by their dismay with the government and its preferential policies. But, two years after the highs of the revolution, the initial optimism is now tempered by challenging developments. The country now faces escalating government debt, depleted foreign exchange reserves and decreasing inwards investment (see Figure 1).
The political transition has generated some desired outcomes, with an elected president taking office in mid-2012. However, political uncertainty remains high and the development of many of the institutions needed to stabilise the country has been held up by legal challenges. The unity of the uprising has given way to a widening rift between Islamists – who landed a majority in parliamentary elections and won the presidential race – and the more liberal and socialist movements. Change has not come as fast as people hoped and discontent is spreading among ever more groups of the population. In this volatile environment, it is difficult to anticipate how events will unfold and the implications thereof.
To gauge the business impact of this changing economic and political environment and the risks it is creating, we spoke with three MNCs operating in the business-to-consumer domain (automotive, personal care and soft drinks), and four local family-owned companies operating in the business-to-business area (facility management, printing, construction and automotive tires trading).
The interviewees were asked four questions1:
Despite the limitations of the small sample size, the responses provide useful insights about the business perspective on the evolving macro-context in Egypt. These can be used to draw some important lessons.
Before we look at the results, it is useful to compare the relative development and fortunes of the two sides of the economy.
Growth in the Egyptian economy during the period 2004–2010 reached as high as 6–7%, with strong impetus coming from foreign investment (see Figures 3 and 4). The increasing opening up of the economy in the wake of the 1990s structural adjustment programme attracted many more MNCs to start operations in the country.
However, the more sizable portion of investment and economic activity is carried out by domestic family-owned businesses and local enterprises, which range in size from small to large, with few achieving international status in recent years (Figure 5 provides an overview of the movements in private sector investment as a proportion of GDP).
These small domestic businesses have contributed significantly to economic growth despite red tape, lack of finance and inconsistent legal protection, as well as seeing many of the best opportunities still going to firms favoured by the previous regime.2 Many of the firms – but some larger ones as well – are managing their operations ‘informally’ in a lot of respects. They lack the formal organisational structure and systems of their corporate counterparts. Their tax and accounting returns may fall short of compliance and hence their contribution may therefore not be fully captured in official economic data.
MNCs can choose where in the world they operate, moving into a new market when the advantages outweigh the risks associated with doing business in that locality. In recent years, Egypt’s appeal to MNCs has increased as a result of certain measures. It is the largest market by population within the Middle East and North Africa region, and its youth represent half of its population3, with increasing aspirations and desire for global exposure. The cost of labour, capital and land is relatively cheap, and the government has offered multiple incentives in the form of tax breaks, privatised companies at attractive values and provided a relatively straightforward legal environment. Combined with the political stability of the country, it was an appealing choice for many, despite ranking rather low on measures such as ease of doing business or corruption.4
Family businesses follow a different trajectory, reflecting the ‘the unique bundle of resources created by the interaction of family and business’.5 These include human capital, social capital, patient financial capital, survivability capital and reputation capital.6 Family business success further depends on the elements of governance, structure and cost, and how these are deployed to manage the unique resources to create wealth for the organisations and the families.
The family managers and owners interviewed felt changes in the business environment generated risks and issues they had not experienced in the past, despite some being in operation for many decades.
The number one risk cited was uncertainty about where the country is heading. This had spurred many to put investment and expansion plans on hold, though some are now forging ahead, despite the risks.
The lack of clarity about economic policy, currency devaluation and interest rates is the second most important concern, directly affecting their cost of operation, size of demand and expectations about wage rises. The current discussion of subsidy removal is raising concern about increased inflation, and accordingly demands for higher pay. In addition, the depreciation of the Egyptian pound is raising the cost of imported material for some companies, although for others this might increase their ability to compete internationally.
Labour issues are the third important topic of concern for family-owned companies. Workers are now able to express their demands more freely, but the capacity to meet their demands for higher pay is curtailed by the squeeze on business.
The fourth recurring theme was the change in the level and nature of competition. One indicated that the ‘big players’ who prevailed during the past decades have started to decline due to the loss of their privileged position with the fallen regime. Others are seeing new competitors 39emerging, local or regional, as the market continues to attract new investors. A third indicated that they are being undercut by illegally smuggled goods, which are increasingly entering the country, due to loosening border controls.
In addition to these risk areas, the ‘Black Swan of Cairo’7 has had its implications on their businesses at a strategic level. Service companies have seen their clients reduce their expenditures, which is squeezing their profit margins, disrupting their cash cycle or pushing them to compete with a different set of players. For example, a company offering facility management and energy services suddenly found their strategic competitive advantage wiped away after the revolution. They went to market with the proposition of innovative, integrated solutions. Their clients are seeing this as a luxury now, and new clients are less willing to try. The company now has to sell services separately in order to win new business. This has, in effect, taken them ‘down the pyramid’ to compete with a completely different group of service providers offering individual services such as security and cleaning.
Other companies have seen the demand for their business shrink, or stop altogether. Government business is on hold with no new opportunities proffered until certain political issues are in place such as a valid constitution and a functioning parliament. The private sector has recently started to resume activity, in the construction sector for example, and work is starting to pick up. Some of these companies have closed shop for now, or are opting for regional business opportunities instead.
However, the future is expected to be brighter. All those interviewed agreed that once the current ‘transitional’ stage is over, things would be better and the prospects for their business are strong. They all felt positive about the future, and shared hopes of things eventually moving in the right direction. All were particularly keen for a more level playing field, improved regulations and better quality education that will provide better skilled human resources, hence cutting down on the need to ‘start from scratch’ when training staff.
MNCs interviewed saw the situation differently. Despite everything, they saw no fundamental change in the business environment and attendant risks. They are aware of some labour unrest and security concerns, but this has not spurred them to scale back investment.
The issue of greatest concern was the perception of ‘government paralysis’, making government officials wary of taking a stance on major decisions or even following through on decisions already in place. This is manifesting itself in areas such as prolonged product approval.
One company indicated that there is now increasing focus on Egypt from headquarters, though the size of their business is small in global terms. The bad publicity in the press requires them to extend more effort in convincing the executives in HQ that the business is resilient and the prospects are as good as before, if not even better.
Interviewed MNCs shared the optimism of local companies. They too strongly believed the market has significant growth potential and are proceeding with their plans including expansion and injecting more investment in the country.
Despite popular concerns and the gloomy image portrayed in local and international media, business remains resilient and confident. It is particularly interesting to note that the buoyant outlook cuts across local family firms and MNCs alike.
MNCs can in some ways be more resilient as they can offset risks in one market with opportunities in others. Indeed, some see the situation in Egypt as an opportunity. For example, security concerns are increasing demand for certain products such as four-wheel-drive vehicles. The government is also seeking new sources of investment and is likely to do more to support business, even if the policy paralysis may hold up some developments. All the MNCs we spoke with said they would continue with their planned investments at this time so as to be best positioned for the market when it rides up again, which they all expect it will.
The prospects for local businesses are more challenging and this is reflected in their investment plans. They are generally smaller in size, at earlier stages on the maturity curve, and are family-owned where the personal wealth of the owners is directly affected by the state of their business. They were used to a very stable environment and are mostly dependent on a limited customer base and the commitment of their workers.
As a result, they are seeing several new risks and challenges in the current economic and political instability.
Another factor behind the different perspectives can be the customer base. The interviewed MNCs happened to be serving consumers from mostly higher income groups. These had been least affected by the economic and political turmoil in Egypt. Local companies serve other businesses, of various sizes, which are facing a squeeze in demand. Those working with government had been most affected due to the government’s inability to take decisions on new projects in light of the political instability. This indicates that possible diversification of the customer base is a key factor of success especially for smaller local companies.
A third factor behind the differing perspectives is the companies’ strategic management maturity. MNCs are used to operating in highly competitive and fast moving business environments. Many of Egypt’s local companies are more familiar with the relatively unchanging and less than competitive environment that prevailed historically. As competition increases including illegal sources of goods, the challenge is how to develop the necessary efficiency and agility to vie with the new entrants.
Based on this, it may be possible to draw a few lessons for companies to be resilient in unstable conditions. Size and geographic diversification support global companies in minimising the impact of black swan events. For local companies, customer diversification will spread the risk of business stagnation among the various segments. Additionally, having a clear competitive advantage that is not easily wiped by external shocks is another lesson. As the example of the facilities management company highlights, the challenge for others is how to remain relevant when demand comes under pressure.
Lastly, it is important for companies, local and multinational, to focus on the longer-term prospects of their markets and plan accordingly. While turbulent conditions may affect the company’s performance in the short-term, they also present opportunities for better longer-term results when stability is achieved. Wiser firms with better clarity on their longer-term business strategy are more able to take investment decisions during high-risk situations, whereby they achieve a better market position when the market becomes more appealing to competitors in quieter times.
1 I would like to thank all the interviewed senior executives and owners/managers for their quick response and cooperation in providing their invaluable input for this analysis.
2 ‘From Privilege to Competition: Unlocking Private-led Growth in the Middle East and North Africa’, the World Bank, 2009.
3 About 25% of population are in the 18–29 years age group. Source: Egypt Human Development Report 2010, UNDP.
4 Egypt ranked 118 out of 176 in Transparency International Corruption Perceptions Index in 2012, and ranked 110 out of 181 in the World Bank’s Ease of Doing Business Index in 2011.
5 Sirmon, D. & Hitt, M. ‘Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms’, Entrepreneurship: Theory & Practice, Vol. 27, No. 4, pp. 339–358.
6 Sieger, P., Zellweger, T., Nason, R.S. and Clinton, E. (2011). ‘Portfolio Entrepreneurship in Family Firms: A Resource-Based Perspective’, Strategic Entrepreneurship Journal, Vol.5, No. 4, pp. 307–326.
7 Taleb, N. and Blyth, M. ‘The Black Swan of Cairo’, Foreign Affairs, May-June 2011, Vol. 90, No. 3, p. 33-39.