Back to the complete issue
Wednesday, 11 January 2017

Raouf Ghabbour, CEO, GB Auto

Raouf Ghabbour is one of our favorite people. Brilliant, passionate and creatively (and wonderfully) profane when called for, he is the distillation of all that makes a great entrepreneur. He’s at ease with cross-border negotiations, has repeatedly proven his ability to deliver greenfield projects, and built a business in an active war zone (he’s the Hyundai distributor for Iraq). But his favorite business tool? That would be the old-fashioned calculator that literally sits at his right hand. Ghabbour, who began his career in his family’s automotive business and made his name in its tire division, has transformed his company from a one-trick pony — at the time of its IPO, it was (and remains) the sole Egyptian assembler and distributor of Hyundai passenger cars — into a diversified group that assembles, manufactures and distributes cars, buses, trucks, motorcycles, three-wheelers (tuktuks), tires and more in partnership with global OEMs. Whether it’s building the region’s the first fully robotic paint shop or launching a greenfield financing arm that works with everyone from the largest of corporations down to the humblest tuktuk driver, GB Auto has proven it can execute on its founder’s strategy. Edited excerpts from our conversation:

2017 will be the year of adaptation to a new reality. It’s as if we’re kicking an addiction — to subsidies, to cheap energy, to an artificially overvalued currency — and now, all of a sudden, we’re having withdrawal symptoms. There’s no more drugs.

The best-performing sector next year will be healthcare. Hospitals, not pharma — the pharma guys face too much pressure with price controls. I’d also keep an eye on education. And food.

The biggest issue our industry will face is without a doubt working capital. Across the industry, our working-capital requirements have more than doubled in EGP terms, our input costs are rising and we’re all going to have to increase payroll to ensure staff can cope with inflation: Medical, transport, cars, food — everything is rising in price. We see the business climate will be challenging in the first half of the year and that we’ll be facing cost pressure at the same time, so it’s going to be all about working capital.

If the average wage rise was 10% in the past, then we need to be looking at 15-20% this year. And the salary increases shouldn’t be across-the-board: You’re going to need to give larger raises to give protection to lower-wage earners, then it tapers down the more senior the person is.

2017 is going to be a year of opportunity. The opportunity to grab new representations, because weaker players won’t be able to cope. It will also be a great opportunity in terms of hiring. I believe there will be companies that won’t be able to adjust their salaries to ensure their people are comfortable, so you’ll see good talent looking for new opportunities.

What new business would I start today? I’m too old to think outside my business. [laughs] Really. As long as your business has growth opportunities, why would you look outside that? I’m passionate about what I’m doing. I would diversify — I’ll look at new segments within our financing business that serve the core business or in which we have developed expertise. I’ll definitely look at expanding into manufacturing to reduce my foreign currency needs. Just going into body-part stamping, rims and tire manufacturing would give me 20% of the cost of a vehicle right there.

Luxury products will underperform in 2017. Any product at the higher end of the price range is going to suffer. Listen, I am not that concerned. The hiccup we’re facing is less about “people do not have money” and more about “consumers need to mentally cope with price increases.” It’s more psychological than financial, and the more we can pull the gray economy into the formal economy, the faster consumer sentiment will improve. Consumers need six to eight months to adapt to the notion that what they used to buy for EGP 100k is now EGP 220k.

What am I tracking on the legislation or regulatory front? The automotive directive, of course. And taxation. The most anti-investment thing we could do right now would be a corporate tax increase. The government needs to grow the tax base by pulling-in the 95% of companies and white collar professionals who are not paying taxes and making them part of the system. I have confidence our Finance Minister is not looking at a tax increase. We also need a sensible investment law with solid tax and investment incentives for the industries we’re looking to attract, such as automotive manufacturers and pharma manufacturers in the Suez Canal Economic Zone.

There will definitely be an uptick in IPO and M&A activity this year. There are businesses out there that need financing, and they’ll look to sell equity rather than take on debt, because the cost of debt is simply too high. And there will definitely be M&A opportunities — there always are in stormy times.

It’s a question of timing: Do you buy in when an opportunity is on offer, or do you wait until it goes underwater and then take it? That’s a different question.

What’s my banker asking me? Nothing. If I was a banker, I would be the happiest person on earth. They make a fortune. Two institutions are making the money in Egypt now: The banking sector and the customs authority, with all of the demurrage and storage fees. For the past 24 months, banks are taking a 2% allocation fee and a 1.5% fee to open an LC. That’s 3.5% straight to them, and they don’t lift a finger. The central bank needs to interfere — we’re being strangled by the prices banks are charging their clients. And that’s before the impact of the interest rate hike.

My message to the rest of the business community is simple: We all need to think about local added value. We need to manufacture. It’s difficult, but I think the float of the EGP is the best decision a policy maker has made since I joined the business in 1977. I’m living a dream — I’ve literally been dreaming about a free float since the 1970s. It’s brilliant, because the only way out is to work harder, to cut imports and to produce more here. We were spoiled by relying on tourism revenues and remittances and Suez Canal revenues. It’s time we took responsibility for ourselves.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2018 Enterprise Ventures LLC.