Raouf Ghabbour's GB Auto dominates the local car market with a 30% share, but continued growth will hinge on how it uses the cash injection from its recent IPO to shore up its after-sales and distribution networks. A look at how the industry's number one claimed pole position and plans to keep it.
Six months into his life as head of one of the nation's newest publicly traded companies, GB Auto CEO Raouf Ghabbour's days aren't marathons run at a set pace, but a series of 100-meter dashes run one after another. It wasn't always this way. One of Egypt's top car and bus assemblers, GB Auto in its pre-IPO incarnation weathered the slow sales that accompanied the miserable economy of the late 1990s with comparative ease. But with the customs reforms of 2004, which slashed or eliminated duties on vehicles with engines 1.6-liters or smaller, GB Auto has gone from assembling 7,000 passenger vehicles per year three years ago to more than 30,000 per year today.
Indeed, GB Auto is straining to keep pace with demand for its popular Hyundai models, the nation's top-selling brand. Hyundai, for which GB Auto is the sole importer and assembler, commands a 27.5% market share in Egypt, according to figures from the Automotive Marketing Industry Council, an independent industry body to which most Egyptian car assemblers belong. It's an advantage Hyundai enjoys in no other market outside its home base in South Korea.
In 2006, GB Auto reported net profits of LE 304.5 million, up from net losses of LE 344.7 million the previous year. For the first half of 2007, net profits stood at LE 150 million. Its stock price has followed suit: From a debut of LE 37 in early July, shares were trading at LE 52.97 at press time.
Little wonder, then, that when we recently visited Ghabbour at GB Auto headquarters in Abu Rawash -- a sprawling complex off the Cairo-Alexandria Desert Road that includes corporate offices, showroom, service center and factory -- the 54-year-old self-described entrepreneur was demonstrating his ability to multi-task.
Ghabbour was able to simultaneously debate third-quarter results with his finance department, address a crucial human resource issue and field questions from his lawyers (who are still finalizing the restructuring of GB Auto into a single holding company) all while conducting an articulate interview.
"A lot has changed," says Ghabbour as he catches his breath. The flurry of pressing issues that clutters his morning routine is the norm these days as he maneuvers to anticipate the demands of a rapidly growing market while simultaneously transforming his company to meet those demands.
"Today it's a completely different environment, but I can't say that it has caught us by surprise," he continues. "For years, I have been preparing the company for this. I have always put challenging and aggressive goals in place to raise the benchmark for my staff. If they managed to achieve 90% of what I asked, it was okay when we were a private company. Today, that is no longer acceptable. The company has changed its practices and management style across the board. We are taking things very seriously. I still maintain over 70% equity in the company, but I have stopped looking at it as my company I am just the manager."
But the fact of the matter is GB Auto which traces its roots to a diverse set of family business interests, the earliest of which made its first sale more than half a century ago is still very much Ghabbour's company.
History
In the late 1940s, Sadek and Kamel Ghabbour Raouf's father and uncle, respectively opened a small trading company that dealt in automotive parts and products as well as construction materials, electronics and sanitary ware. The company somehow survived Nasser's nationalization program, but it wasn't until President Anwar Sadat's Open Door Policy of the 1970s that the business started to grow significantly in the automotive segment in which Raouf would later make his name.
In the mid-1970s, the firm added service and maintenance facilities to its existing line of automotive products, establishing Egypt's first professional after-sales centers. By 1980, the company was manufacturing trailer superstructures and was starting to dip its toes into manufacturing bus bodies, a product line that would make it famous by decade's end.
As an ambitious young graduate from Cairo University's Faculty of Medicine in 1977, Ghabbour did not have to think twice about what he wanted to do with his future. Rather than pursue a career in medicine, he went to work for the family business.
"Medicine was not my true calling," he recalls. "I have always wanted to become a businessman. In fact, I have been doing business since I was seven years old. When I got my first allowance of 15 piastres per week, rather than spend it, my first instinct was to try and figure out how to increase it. I wanted to invest at the age of seven."
After walking the streets for a couple of days in search of an investment opportunity, the young Ghabbour decided to go into the sweets business. He borrowed another 15 piastres from his housekeeper and bought half a tray of aish saraya from a street vendor for 30 piastres. He then divided the dessert into 12 portions and sold it to his friends in the Gezirah Club for 5 piastres a slice.
In five minutes, he had doubled his investment and ran back to the vendor to reinvest the profits. By week's end, he had repaid his debt and made a hefty profit of more than LE 5.
Why study medicine, then, instead of commerce or economics? The environment wasn't exactly welcoming to budding entrepreneurs when Ghabbour graduated from the Jesuit School in 1969.
"This was during the Nasser era, very dark times. No one knew what the future held," he says. "I had good grades that could get me into medical school, so I decided to go after a degree that would allow me to travel and work abroad if I needed to. It was really just a safety net."
After 12 years with the family business, Ghabbour became CEO of the group in 1985. A risk-taker by nature, he decided that being at the helm of a successful company where he was only a 12% equity shareholder along with a jumble of family members and siblings didn't afford him the autonomy -- or speed he needed to chase the opportunities he figured were on the horizon.
In the late 1980s he quit and started his own company, which became Egypt's Hyundai distributor in 1992. When his father passed away in 1996, Raouf bought out the rest of the family business and merged the two companies to form the nucleus of what is today GB Auto.
"The Hyundai relationship is really the foundation on which we built the success story that so many investors are anxious to buy into today. It was something that I am very proud to have initiated," says Ghabbour, whose IPO was the darling of foreign investors looking for a way to cash in on Egypt's retail boom.
A Winning Partnership
Things haven't always been so rosy, though. "We took a real hit during the recession. Between 2000 and 2004 we lost huge amounts of money as well as market share," Ghabbour says. "But in 2004 we began to regain our market share and have been the number one seller of automobiles again for three consecutive years."
Asked why Hyundai enjoys the local edge it does, Ghabbour says he thinks it has a lot to do with both value for money and the services GB Auto offers buyers.
The company is aggressively investing in its own distribution network, with 10 branches that cover most of Egypt and plans to open 10 more, the first of which has just launched in Maadi. Ghabbour is also searching for new dealers to expand its presence beyond the 40 showrooms that market Hyundais today.
GB Auto has always prided itself on high-quality after-sales service, but it's now struggling to expand service capacity to reflect the hundreds of thousands of vehicles it now has on the streets. With just four workshops two in Cairo, one in Alexandria and another in Sharm El-Sheikh GB Auto is simply selling more cars than it can service. Hyundai owners are now faced with daunting delays delays measured in weeks; even one- and two-month waits are not unheard of for minor repairs that should normally be completed within days.
The strain has also taken its toll on customer service, with some Hyundai owners complaining quite vocally.
"Management has admitted that this is a problem and they are doing their utmost to cope with it," says Menatalla Sadek, an analyst who covers GB Auto at Beltone Financial, a leading regional brokerage based in Cairo. "Given the recent jump in sales figures, the delays are not surprising. Even if they were able to forecast the surge in sales, there was little that they could have done to prepare them. They were unable to expand because they were constrained by liquidity issues. That is no longer a problem.
"The main announced use of the proceeds from the GB Auto IPO is to expand the service networks, and this is exactly what they are in the process of doing. By next year we expect that the situation will be much better," she adds.
By the end of 2008, GB Auto will have invested in excess of LE 500 million to build eight new service centers for its passenger cars, all on plots of land the company already owns. Ghabbour says that two more will crop up in Cairo and one more in Alexandria, while GB Auto will build new facilities in Suez, Damietta, Hurghada, Assiut and Luxor.
Sadek notes that had Ghabbour not already purchased the land on which the service centers are now being built, the venture would never have worked: With real estate escalating in price almost 600-fold in some areas, the business model for a service center would not have made as much sense if the land were being purchased today.
"We are willing to make this investment because we know that this is the driving force for the future success of the company," says Ghabbour.
"Even with just the four existing service centers, Ghabbour is already the largest service network in the country, which has given him a very big advantage," Sadek says. "We are not downplaying the role of the competitors, but we think that by 2008 when he has 12 service centers, others will have difficulty catching up given the high cost of land and infrastructure. We believe that he does have a strong competitive advantage."
According to Beltone research, "supporting the business through after-sale services is actually a way to hedge against cyclicality, in the sense that when you have the rise of a consumption boom, people are buying cars and when the economy goes down, people are buying less cars and because they are doing so they are compelled to maintain their existing vehicles. Maintenance is, in fact, a substantially higher margin business."
To grow market share even further, Ghabbour is about to launch a new car loan scheme he's dubbed the GB Auto Loan.
"The most important thing about this loan other than its flexible terms of payment and reasonable pricing is that it will be a complete package," the CEO explains. "I am not just offering a car loan; I am offering a loan together with membership in the 'elite card' which will give members the opportunity to get after-sale service at home. When you have a problem, you don't have to come to the workshop, the workshop comes to you. In 90% of the cases, they will fix your car at home, but in cases where they can't, they will deliver the car to and from the workshop for you."
Clients financing their cars through GB Auto will also have a service contract offering a lifetime discount on spares and service rates; the deals will also specify trade-in price.
"If you are financing your car over three or four years for example, I give you the right to trade in the car at a 10% discount each year. After three years, you know that we will buy back the car from you for 70% of the price that you originally paid provided that there have been no serious accidents and that all maintenance and repairs have been done in our workshops," Ghabbour notes. "It's a beautiful plan that allows you to trade in and refinance your car every few years.
"These kinds of services cannot be given by any player unless he is heavily invested with the right management and infrastructure to support them," he adds. "The car loan is actually a fully integrated package of services which will, in my opinion, give Hyundai an even bigger edge in the market."
Recent research completed for GB Auto by Saatchi & Saatchi found that five-year-old Hyundais have higher resale values than any other car in their segment.
"In absolute terms, the quality of the Hyundai may not be the highest on the market," Ghabbour says, "but the fact that it enjoys the highest resale value is a pure indication of consumer confidence and the credibility that the brand has with the Egyptian car buyer."
Other Lines of Business
GB Auto's growth in recent years has come from the passenger car market but there is much more to the company than just Hyundai. The company is the Middle East and North Africa's largest bus manufacturer under licensing agreements with Volvo, Mitsubishi and Hyundai. They are also market leaders in light, medium and heavy trucks with Mitsubishi and Volvo and have a line of top-selling construction equipment and forklifts in partnership with Volvo and Linde, respectively.
"The commercial vehicle end of the business has also grown quite nicely. Our sales volume is now up to LE 60 million per month," Ghabbour notes. "We have 50% of the total minibus market, 34-35% of the medium bus market and 32% of the tourist bus market. We are very aggressive on trucks as well with 35% of the medium truck market, and we are number two rather than number one with heavy trucks simply because Volvo, our partner, is unable to supply the demand in the market.
"The Tok Tok market, which we also supply with approximately 4,000-5,000 units per year, is small but today the three-wheelers are spreading faster than the California wildfires."
Beltone researchers note that "the growth in commercial vehicles lags behind passenger sales because the first thing that changes when the economy turns around is consumption patterns. What typically lags around two years is the heavy side of the economy and in this business, things like heavy trucks and buses."
The IPO
The man who claims that he started out as a tire salesman is now reaping the benefits of perseverance. The market outlook was not always bright for Ghabbour, who originally planned to IPO eight years ago.
"We were planning an IPO in November '99, but by the summer, while we were in the middle of preparations, it became clear that Egypt was heading into a recession. International investors were not interested, and the local market was going through a liquidity squeeze, so we postponed," says Ghabbour.
According to Beltone which took GB public, but offers independent research on the company through its Research Division GB Auto was one of the companies hardest hit when the government stopped paying contractors during the recession. Bank debts escalated as their balance sheet continued to be weighed down by receivables estimated to be around LE 1.2 billion.
"Neither our company nor the economy allowed us to move forward until this year," Ghabbour says. "The market actually began regaining power in 2005 and that's when we made the decision that we could go public. It took around 17 months of preparations on our part. We did the road show in April and IPO'ed in June."
The market reaction was overwhelmingly positive. GB Auto's private placement, which constituted 70% of the offering, was seven times oversubscribed by institutional investors and high-net-worth individuals; the public offering was oversubscribed 4.5 times.
"We were very glad to see this kind of response," says Ghabbour. "Whether we are talking about European, US, Saudi or Gulf investors, the reaction was the same: They wanted to have exposure to Egypt and they saw GB auto as a good opportunity. Retail investors from Egypt were also comfortable enough with the company and had enough confidence in the brand to ask for more than what we had to offer, which makes us quite proud."
Shortly after the IPO, however, allegations of financial impropriety began cropping up. The weekly financial paper Al Mal claimed that the valuation of fixed assets that was reported pre- and post-IPO did not match. Pre-IPO fixed assets were valued at 1.22 billion, the newspaper noted, while post IPO that figure went down to LE 414 million.
What, Al Mal asked, was behind such a destruction of shareholder value?
"Before the IPO, the market value of the fixed assets was estimated at LE 1.22 billion, while the book value was about one-tenth of that," Ghabbour explains. "This occurred because we are a company that was established 60 years ago, and as such you could have a situation whereby the book value of the fixed asset depreciates to approximately one-tenth of the market value.
"A revaluation was conducted through an independent party which was approved by the Capital Market Authority (CMA) and the Cairo and Alexandria Stock Exchange (CASE), and the new valuation was put in the pro forma financial statements before the IPO," he adds.
The law, however, prohibits reporting the revaluation from the pro forma statements on the company's actual financial statements until the mergers and acquisitions that have transpired to create the current GB Auto Holding Company are complete.
"The restructuring, which included so many companies all being merged into one, has taken time, but in essence everything is complete. The only things that are pending are some technical procedures with the CMA," says Sadek. "By the end of the year the pro forma figures will prevail."
A senior member of the Beltone's investment banking team that took GB Auto public explains that what most people don't realize is that "GB Auto is a newly established holding company. Right before the IPO, they had acquired all the automotive operations of the Ghabbour group. What we had to represent in the pro forma financial statements is what the financials would look like had we bought all these investments three years ago. Otherwise it would look like the company had no history, which is not the case because it had just bought a lot of companies with decades of history. By nature, pro forma statements entail making certain assumptions."
Ghabbour attributes the newspaper's coverage to miscommunication.
"The CMA has very strict regulations and they would not have let something like this slip," he notes. "Anyhow, it is irrelevant. My share price is appreciating at an approximate rate of 12.5% a month. Even while those allegations were being made, there was no negative impact on the stock's performance."
The Future
Given the speed at which the Egyptian car market is now growing, Ghabbour predicts that within five years, Egypt will be selling anywhere between 400,000 and 500,000 cars each year, which is comparable to the current size of the Turkish market.
"This year, the passenger car market is going to be 175,000 to 180,000 cars. It will double in the next five years. When this happens, we can start considering the viability of investing serious money in manufacturing automobiles: engines, transmissions and body parts. If I have 27.5% of a market that sells half a million cars, it will be economically feasible for me to do so," says Ghabbour.
For now, without the economies of scale to support the investments required for manufacturing, Ghabbour is happy to quietly continue doing what he has been doing for the past 15 years. Unsurprisingly, he disagrees vehemently with those who claim that the planned elimination of customs tariffs on imports of fully assembled cars -- or "completely built up" units, as the industry calls them -- will eventually render "local assembly" obsolete.
"The decrease in customs has thus far impacted me in a very positive way. The more affordable cars become, the bigger the market gets and consequently the bigger our share in that market becomes," says Ghabbour.
He does however admit that there is a breaking point when it comes to how low the government can go with reducing tariffs on automotives without hurting the assembly business. Should that happen, though, he believes that the size of the market will save the industry.
"I look at this company as a distributor of passenger cars," Sadek adds. "The company is in the business of assembling because there exists what we can call an arbitrage opportunity because of the differential in tariffs. It wouldn't be wise not to take advantage of that opening. However, GB Auto is mainly a distributor and provider of after-sales service, so regardless of where the government stands on further customs reductions, the company is on solid ground.
"The bulk of Ghabbour's investments are now going into expanding service centers and not capacity," she adds. "They have announced that they are introducing a new paint shop to cope with an existing bottleneck in the assembly process. This is really a safe bet at this point because it will allow them to expand their capacity by around 80,000 units without incurring significant costs."
The number-two best selling car on the Egyptian market behind Hyundai is Aboul Fotouh's Daewoo, with 16,850 units sold in 2006. Creeping up slowly but steadily on the market leaders are new Chinese models.
Does the competition from China worry Ghabbour?
"The Chinese will come; it's just a matter of time," says Ghabbour. "Currently they have 200 different producers of cars. It's a jungle. I expect that in the next five years, somewhere between two and five Chinese automotive manufacturers will survive to become global players. But today I wouldn't bet on joining with the Chinese. Even after they reach maturity, the success of the Chinese in car manufacturing doesn't mean that the Japanese, Korean, European and US manufacturers will go out of business. Thirty years ago, Japan was in the same situation. Did this mean that Volkswagen, Mercedes or BMW closed?
"I am very proud to be partnering with Hyundai Motors," he adds. "My personal vision is that Hyundai, which is currently holding sixth position as a global car manufacturer, will become number two or three in five years time. The factories that they are building today will give them the capacity to make 7.5 million cars by 2011, which will rank them first or second globally. When I first joined Hyundai 15 years ago, they were manufacturing 800,000 cars. Today, they are up to 4.5 million. So I will not be getting into the Chinese automotive market. I am with the best."
His ultimate dream is to create "a hundred billion pound company just like Orascom and to teach the Middle East that in Egypt things can happen." Crucial to his future success will be finding the right human resources and he is willing to invest heavily in order to attract and retain the right calibers at GB Auto.
"We realize that getting the right person for the job can be costly, but I know that if I invest millions on human resources it will allow me to save hundreds of millions and grow my business much more efficiently," says Ghabbour, who defines growth as going beyond Egypt's borders.
"I am very anxious to replicate the success that we have experienced at home in other markets in the region. I have seen how other automotive companies manage their business in the Middle East and while some of them might be very wealthy they may not be able to manage their relationships professionally. Others are short of management know-how and financial expertise. We have a good opportunity to join forces with some of these companies [in] either North Africa, the Gulf and the Levant."
By Hadia Mostafa
© Business Today Egypt 2008
