For several years, I have been engaged in Golden Cost Trading Partners, a venture to source, negotiate, and purchase western goods, principally American made, for export to Middle Eastern countries. The shrinking value of the US dollar has made high quality US products more attractive to foreign buyers.
However, almost all requests from Middle Eastern “businessmen” prove that there are many obstacles to overcome in doing business with these folks. Let me cite some of the business facts of life and embedded cultural problems that must be addressed by those considering selling to the Middle Eastern countries.
The countries and their heritages
The Middle East is a patchwork of many different countries, mostly of Arab descent, language, and culture. Almost all share a heritage of centuries of totalitarian control. Two notable differences are the countries of Israel and Iran.
Surprisingly to some, Israel a westernized democracy the geographic size of New Jersey but with the GDP of Alabama, has a 20% Arab population; Jews and Arabs are of common Semitic origins. Iran is primarily of Caucasian extraction although predominantly of Islamic culture but which has an ancient history of trade and commerce.
There are relatively wealthy countries like Saudi Arabia which is renowned for its petroleum deposits. Yet other GCC -6 or Gulf Cooperative Countries on the Arabian Peninsula like Qatar and Bahrain have a much higher per capita GDP than many western countries including the US. The other GCC-6 countries are Kuwait, United Arab Emirates, and Oman.
These countries are far from democracies but they have embraced limited capitalism as a way to free their citizens from third world status and provide other revenue streams besides petroleum exports to fund their emerging economies. Unfortunately, a law intended to encourage their citizens to become entrepreneurs has created the opposite effect.
The 51% Rule
The GCC-6 wants to attract businesses of all kinds from big box retailers to franchise food and beverage to broad scale manufacturing, to locate to their countries. The problem for the western investor is two fold:
- The venture must be sponsored by a GCC-6 citizen who must either own 51% of the operation or 51% of the profits
- The re-locating business faces the monumental problems of lack of commercial infrastructure, reliable demand, and doubt about creditworthiness of customers.
Most of the GCC-6 “entrepreneurs” fail to understand that because o f the 51% factor, the locating company must double its sales or margins just to match what it already has in the west – and this says little of the 20% to 30% factor for doubt, risk, local culture issues, etc. Given these impediments, the prospect of doing business in the GCC-6 tends to lose it luster.
Other countries in the lesser developed Arab world have little concept of business. An ideal example is Iraq. It has been free but moments compared to its centuries of dictatorial domination. As such, there is very little understanding of routine commercial practice. Citizens are so eager to sell that everyone wants to touch the deal. Here is how the process usually works.
- A specification for Product A typically consists of ten or so spoken words
- A “purported” buyer (who is never identified, credit checked, and may not even exist in reality) asks four or five confederates for a price (nothing else) to buy Product A
- These four or five confederates seek prices from another four or five confederates, and many others across the internet, and so forth
- Each middleman hopes to get rich on every deal so Product A, with a $50,000 value may be priced at $250,000 by the time it is proposed to the end buyer
- Moreover, there may be many prices for different products because the specification is insufficient
This fools’ game collapses inward of its own weight because no Iraqi buyer able to spend $50,000 would ever pay $250,000. Further, the logistics of payment are not understood so never discussed. How the first middleman will get the money to pay the seller, and the second middleman to pay the first, and so on, is ignored making this a game of charades. Western business pros soon tire of this gerbil in a cage game of chase.
Foreign Corrupt Trade Practices Act
Another challenge for foreigners, particularly Americans, is the engrained cultural practice of bribery. Bribery is illegal under the federal Foreign Corrupt Trade Practices Act but not illegal, and expected as part of doing business in many Iraqi transactions.
For Americans trying to help Iraqis do business, be aware that there are at least 100 deals talked about for every one completed. A good piece of advice to observe is that if your Iraqi contact talks a lot, it is because he has never done anything but talk. This is no joke. In the same way that the dog chasing the car would not know what to do if it caught it, they prefer just to talk – they do not know how to do.
So what can you do?
Most of the western world ignores under developed country markets because of these many reasons. You will save yourself much time, money, and frustration if you get a trusted partner in that part of the world. My partner is a Middle Eastern born US citizen who has temporarily relocated back to the Middle East to address these problems.
Doing so has improved our business but has not been the great success that we envisioned. The only way we have found to prove a customer’s sincerity is to have them pay a retainer. This practice separates the 1% real customers from the 99% pretenders and saves enormous amounts of wasted time and energy.
We use this retainer to source, negotiate, buy and export on their behalf. Further, we credit the amount of the retainer toward the sale. Those involved in foreign trade understand that they must pay before the goods leave. In our case of services, we demand the same. In all cases, we are able to substantially reduce their costs.
For those interested in selling for export or potential customers of western product for import to the Arab world, contact me at RobertMenard@RobertMenard.com