Mci Case Study Part a Iimb

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Saudi Logistics Business Ideas

(Part A)

Case Study

IIM Bangalore

October, 2011

Miebach Consulting India Pvt. Ltd.

Bangalore, India


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Case files:

-

In the year 2009, Mr. Mohammed Al Farez, the owner of Arabian Transportation

Network (ATN) decided to expand his business. For years, ATN had operated three

lines of service in logistics with varying degrees of success; Cement transportation,

General transportation tending to conventional long distance cargo movement, and

Deliverex Express cargo delivery service.

Cement and General transportation had grown slowly and stably over the last 25 years

fueled by the captive demand from the various group companies of COSINE (Company

for Saudi Industrial Needs). These two lines of logistics service operated on healthy

returns (@10% ROCE levels) but with a stagnation in growth. Mr. Al Farez had little

interest in disturbing the ecosystem concerning these two. The story of Deliverex, on

the other hand, was akin to the various Bollywood masala movies, that occupy the

Arabic channels in the middle-east. The twists and turns and the potential offered for

success made a curious combination.

In the span of a decade, Deliverex had grown @ 10% p.a. to a revenue proposition of

30 Million SAR with an equal amount of capital infused, over the years, in vehicles, fixed

infrastructure, systems, people, and more. The brand had a loyal and steadily growing

customer base. Domestic marked offered immense unlimited opportunities.

Multinational freight forwarders, needing last mile support on the shores of Saudi had

found an able ally in Deliverex. But, the business had not cracked the code for

generating profits margins were low constituting returns of 4%, surge in business

volumes had given rise to growing customer complaints and claims, trusted long termemployees had started complaining of extended hours without pay, investments in new

vehicles had taken a heavy toll on cash balances, a heavy investment in ERP in 2009

had not made any impact on the business prospects, the problems were endless. The

board of directors of COSINE had critically questioned Al Farez on his capability to lead

the growing business. The appeal for further investments was met with denial and


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disdain. The Saudiization drive and the ensuing political turmoil of the Arab world had

made the situation more precarious regarding availability of skilled resources.

While Al Farez was bogged down by the current state of its existence, he knew the

immense possibilities that lay ahead of Deliverex. Saudi market offered opportunities

like no other. Avenues for growth were diverse Warehousing and Distribution,

Network expansion in express service, Freight forwarding and CHA services, FTL and

LTL services, to name a few.

The 60 year old astute businessman had built many companies from scratch in his

lifetime. While he had no concrete business plan to talk about, he trusted his instincts

and made a pledge to the board that he will not only turn the company around in 3

years, but double the revenues within the same time. Unfortunately, he did not know

exactly how he would accomplish the same

-

In the year 2010, Arabian Investment Management (AIM), had started exploring the

logistics space. AIM was one of the few public companies in Saudi. Established in early

1950s, AIM had gone public in the 90s. It had strategic investments in many businesses

in manufacturing and industrial logistics; water transportation, desalination plants,

specialized chemical transportation and storage, steel fabrication, plant maintenance

services, etc. AIM had always insisted upon taking majority stakes in the businesses it

invested in, and not getting involved in executive affairs of the company on a continuous

basis. The MIS of all AIM invested companies was centrally monitored and managed by

a specialized IT division of AIM. This allowed AIM to monitor and control the vitalparameters of its businesses. AIM had surplus expatriate VISAs owing to a centralized

system of VISA management and had been able to distribute and realign resources

across its businesses on need basis. AIM, in general, stayed invested and exits were

few and far in between.

While scouting for investment opportunities, logistics services in GCC had provided very

positive signals. Specifically, contract logistics segment warehousing and distribution,


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had indicated signs of long term growth, stable returns and options for

integration/diversification. On the other hand, a fully asset based line of service had low

asset turnover ratios that cast doubts on scalability. AIM knew that it could work around

such constraints.

After a brief period of scouting, AIM came to a conclusion that very few Saudi

companies met its expectations. In a change of convention, AIM decided to launch a

new venture in this space instead of investing in an existing company. The new venture

would be launched as a partnership firm with a multinational American/European

logistics player, specialized in contract logistics operations. The business will operate

out of the kingdom in its initial years and expand to other GCC nations. But, it was

easier said than done, to find the right multinational partner.

Historically, AIM commanded a return on investment, in excess of 16% in all its

businesses. Logistics business barely met this requirement. AIM knew it had to tread

with immense caution while involving itself here.

-

Meanwhile, Infrastructure services for Saudi Industrial needs (ISSIN), was on the look-

out for prospective investment opportunities. ISSIN built and operated state of the art

logistics zones in Saudi Arabia. It had a zone each in the three big cities of the kingdom.

ISSIN had struck upon an idea To invest in businesses that constitute the demand

segment of its core business, i.e., logistics zones. In line with this idea, ISSIN was

looking at attractive investment opportunities in the space of logistics service. On the

other hand, it had a minor market share in its core business, ~5%. The board wasmoving back and forth on what constituted the right investment.


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Problem statement:

The three organizations in the case files shared a unique relationship. Through a

complicated system of investments, cross holdings and ownership patterns, they all

reported to the board of directors of COSINE. While COSINE has a minority stake in

AIM, it constitutes the single largest share holder. COSINE has majority stakes in ATN

and ISSIN. Senior management of ATN and ISSIN were deployed by and on the payroll

of COSINE.

Mr. Abdul Al Saleh, chairman of COSINE, had taken stock of the growth plans of all the

three companies and was pleased to note the ambitions thereon. Nevertheless, he was

concerned regarding the lack of a concrete business plan to achieve the desired vision.

In particular, while he had always appreciated Al Farez for his business acumen, he

was also concerned regarding the fact that in the two years 2009-11, ATN had grown at

4%. This was belying the promises that Al Farez had made to the hawks in the board.

Time was running out!

Early 2011, he sought advice from Miebach Consulting to help each of these companies

draft a concrete plan for growth.

You are the team called upon for help!

Supporting information

Saudi economy has been growing at 8% p.a. with a consistency not seen elsewhere.

Saudi contributes two-thirds of non-oil GDP of GCC. Support infrastructure for logistics

in terms of road network and ports is highly developed. All administrative processes;

customs, licenses, registration formalities, etc. are a huge bottleneck for the movementof people and material alike.

There is an extreme dependency on expatriate resources, at all levels of business,

especially among the managerial staff. The drive towards Saudiization over the years

had made it even more difficult to get new resources on board.

Dammam, Jeddah and Riyadh constitute major demand centers accounting for ~ 80%

of people.


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Shashikiran PBCase Author

[email protected]

Abhishek Roy

Case Administrator

[email protected]

________________________________

Miebach Consulting India Pvt. Ltd

No. 5, 80 Feet Road

4th Block, Koramangala

Bangalore 560 034, India

Tel. +91 (0) 80-40 44 52 00 www.miebach.com

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