Back to basics

source Arabian Business

Mishal Kanoo, the Kanoo Group's outspoken deputy chairman, points to short-termism as the cause of current economic ills. But will the downturn prompt more firms to adopt his cautious approach?

Mishal Kanoo is holding up an issue of Gulf News with an exasperated look on his face.

The daily's front page is gloomy - more falls on the UAE stock markets, led by the Emirates' real estate sector. But what really concerns the deputy chairman of Kanoo Group is on the back - an advert from a supposedly ethical property firm declaring "What downturn?" and imploring the paper's readers to go out and buy homes.
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He is incredulous. "Have you seen this?" he asks. "How can you give people this type of false hope? Why would you have done that if you were an ethical company? If this is not unethical, I don't know what is."

Sitting in Kanoo's office, it's easy to grasp his sense of frustration with some of the business practices of other firms in the region. Situated in the heart of Bur Dubai, the group's headquarters has an old-world Gulf feel, rather than the clinical, minimalist style of newer commercial developments.

It is filled with paraphernalia associated with his outside interests, including rugby tournament souvenirs and a multitude of paintings; a passion that also sees Kanoo help run Dubai art gallery Meem.

Kanoo points to the "very conservative outlook" of the family firm, whose net worth, including interests in travel, hospitality, manufacturing and energy, is estimated at over US$6billion.

"As a company, we don't tend to take risky positions," he says. "We are 119 years old. I don't want turnover - I want consistency. It's a tortoise and hare type-of-thing. The tortoise doesn't make the big jumps, but it doesn't make the big falls either. The downturn isn't hurting us as much but it doesn't matter how good your business is, sometimes you get smacked with everybody else and you have to find ways to adjust."

While Kanoo says he avoided the temptation to over-invest during Dubai's boom years, and has long-since shifted the group onto a regional footing, he concedes that it is not immune to a downturn that some analysts expect to see the UAE's economic growth to slow to just over 3% this year.

He is critical of companies' tendency to over-extend themselves during the good times, as well as for the "knee-jerk reaction" of cutting staff costs now that things are more challenging.

He can't remember the last time he fired an employee. "It's been a while," he says. "I think it was two years ago, but even when we fire someone, we don't fire them like others do. We don't like the idea of firing people unless we really have to. We will find another position for them. We give them an opportunity to resign, which is better for them financially. Unless a person has stolen or done some sort of criminal act - leaked information or something - we try to give them the benefit of the doubt."

"Firing people, cutting advertising, cutting IT, cutting travel, and cutting training are the usual consequences of a downturn. But like most Islamic businesses, a person has to show us a significant reason to fire them, or their job has to become so redundant that there is no other option. It is not something we aspire to. It takes a long time to build people up to your standards and to understand the culture of your company. I would rather spend a bit more on training a person than hiring someone. With this person, you know what you have."

Despite this, Kanoo concedes he did have difficulties keeping a tight rein on staff costs during the past few years in Dubai, when competition between firms for talent grew alongside its economic expansion.

"We try to be careful with recruitment," he says. "Unfortunately, the last few years have been weird - because of inflation, you were hiring people at a higher rate. I kept mentioning to my managers not to do that as these people become really expensive. It becomes last in first out, and I really don't want to do that."

He continues: "Prior to this collapse, from mid-2006 onwards, [companies'] main concern was to have bodies on the ground. They were not looking long term. People would come in and say ‘I want a raise', but I resisted because when things turn down, they will be the first one on my list to say ‘Bye bye'. The young ones, especially, over-believe the hype. They think that if I don't give them a raise, someone will hire them, but they will hire them only for a short time. I am not going to compete with you if you want to go to ‘bank x' or ‘bank y', or a publicly-listed company. I can't compete with them because I don't generate the income they do, but at the same time I am not going to fire you as quickly as them."

Although Kanoo says his priority is now consolidating the group "from within", he says it is looking for takeover opportunities in the sectors in which it operates.

But he adds that external acquisitions carry significant risks: "This is an opportunity for those companies that have the access to finance to consolidate. We are definitely looking for companies to purchase within our fields."

"The problem is there are too many people hurting at the current time. You don't know what you are buying. We are a very conservative company and we don't jump in and take risks. I don't want to be burdened with someone else's baggage. It takes a long time to do proper due diligence on a company. While we are looking to buy, it's not something we will be looking at as a knee-jerk reaction."
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Although Kanoo says he is "extremely optimistic", and welcomes the difficulties now facing less scrupulous businesses, he concedes that the region could be in for an extended period of pain. Barring "any substantial global change", he points to the price of oil as the over-riding factor in any recovery: "How deep is this recession? I don't know. We will find out. Assuming no firecrackers it should start to recover somewhat in six months. This is based on the assumption that three things happen. The first is that monetary policy takes effect and banks start to trust each other. The second, more important factor, is that stimulus packages in Europe and Russia start to kick in."

"The third and most important aspect is the US economy. They are the main drivers, no matter what people say. No one will be taking the US' place for a while. For us, the region usually has a lag of three to six months, so whatever happens globally will take that amount of time to be reflected here."

Beyond that, Kanoo says the main variable in the regional economy continues to be the price of its main export: "You can argue about it till the cows come home, but let's face it, we are an oil industry. Our main export is oil and it is the main driver for economies here. If the price of oil tends towards the teens, and the recession is as bad as people are saying, then everyone comes to a shutdown and this recession becomes not a depression, but you will find a lot of people who are depressed."

"If it stays in the US$30s or US$40s [per barrel], some unnecessary projects will come to a standstill but the desalination and power plants will continue. If the price of oil tends to the US$50s or US$60s you won't have a boom, but you will have growth back again."

Kanoo says there are some sectors in the regional economy that "might never recover". "One is property," he says.

"Forget it. You will not see a boom like that for a long, long time. Banks are not willing to lend and unlike some people, they do have a long memory. The high-end luxury items will also start to tend lower and you will see that here as well. Go down to the second hand car market and look at the super luxury cars on sale. Another is advertising. There will always be people that advertise but the boom that happened on the back of the property boom will never happen again. You are never going to see people spending money that way."

However, he says things are unlikely to come to a complete standstill: "The industries that are going to be slightly affected, rather than majorly affected, are things to do with infrastructure, industry, manufacturing - heavy duty industries. Infrastructure needs to continue no matter what. I still need to build roads, but I don't need to build homes anymore because I have an abundance of homes coming up. I still need to construct warehouses. Dubai has not come to a standstill, despite all of this. There might be some pressures on freight forwarding companies, for example, because of over-capacity. But is Dubai going to stop becoming a logistics centre between Europe and the Far East? I doubt it."

So will the economic situation now encourage more caution among firms in the long term? Kanoo has his doubts: "My economics professor always told me that investors are rational. Really? Do you remember 2000? It was the last major crash. If you take the average age of a stockbroker on Wall Street as 30, they were at university when it happened. So as far as they are concerned it didn't exist."