Ford's tough UAE battle

Consider it a victory for the forces of change. Ford, the American automaker, and Galadari Automobiles, the company's exclusive distributor in the UAE, agreed in November to sever all commercial ties. Under the terms of the out-of-court settlement, Ford will pay Galadari $4 million and, in return, Galadari will formally de-register its 16-year-old commercial agency agreement with Ford.
Within hours of the announcement, Ford named a pair of new distributors for the UAE - Al Tayer Motors and the Omeir Bin Youssef Group - while Galadari stated that it would continue to represent Mazda, which is partly owned by Ford. Everyone claimed to be satisfied. It appeared to most observers to be a straightforward settlement, just another day in global business.
Hardly. This case could prove to be a watershed - not just for the UAE but for all the Gulf Cooperation Council (GCC) states. It may mark the end of the old, strictly regulated order and the beginning of major economic liberalizations. The UAE will overhaul much of its economy in 2005, a World Trade Organization (WTO) deadline for many reforms. And the Ford settlement now looks like the shape of things to come.
Ford was one of the first multinationals to pitch its might against the Commercial Agency Law, which is the bedrock of nearly every business activity conducted in the UAE. In the simplest terms, the law ensures that any UAE-based company or sponsor that handles any product or service of overseas origin has exclusive control. The legislation effectively prohibits any foreign company from controlling its own operations in the UAE. And if a foreign firm wants to terminate a partnership - on the grounds of non-performance or unmet expectations - the legal battle will be expensive and time-consuming. As Ford learned all too well.
High ground. The automaker spent two years presenting its case before the local courts before finally reaching a settlement. During that time, Ford stopped all vehicle shipments to the UAE. 'Ford could afford to take the high ground and fight for what it felt were its best interests,' commented a senior executive with a German carmaker. 'But the costs, financial and otherwise, are usually way too high.'
Under the WTO regime, there will be no restrictions on commercial representation within a particular market. If, for instance, Ford wants to have two - or three, or four or 50 - distributors in Dubai, it is free to do so. Mohammed Alabbar, the director general of Dubai's Economic Department, has said that the Commercial Agency Law should be withdrawn even before the 2005 deadline. The high-profile Alabbar has insisted that withdrawing the legislation is crucial to developing competitiveness in the local marketplace.
Some senior government officials in Abu Dhabi have hinted that new laws will be framed to allow foreign companies to own a majority stake in any UAE-based venture. Despite all the talk, however, no change has yet taken place. 'States such as Bahrain have gone a long way down this particular road,' says a manager at a leading consumer goods manufacturer. 'What is preventing the UAE from doing the same? So much is being done to promote the UAE as a destination for overseas businesses that waiting until 2005 would be a glorious opportunity lost for the UAE. The Commercial Agency Law as it now stands rewards non-performance by the local company - if they are intent on doing nothing.'
In the Gulf, Bahrain is the leader in dismantling its protectionist laws. Qatar and Oman, too, have recently made great strides. Bu in the UAE, some fear that major changes could spell doom for local businesses. And the creeping global recession may be another factor that could slow the pace of change.
Analysts also say that rather than increasing competition, a repeal of the Commercial Agency Law might be used by overseas companies to simply drop their current sponsor for another, offering better terms. ''If you don't do as I say, you're gone.' This will be the new language of the multinationals,' according to the chairman of a local trading group.
The few multinationals - including Ford and Kenwood, the Japanese electronics maker - that have challenged the status quo have had to contend with the UAE courts. The Dubai courts are, by common consent, seen as more lenient than their counterparts in Abu Dhabi. This has led to inevitable delays and conflicts. 'There is no uniform interpretation of the Commercial Agency Law in the UAE, which is to the singular disadvantage of the overseas company,' says a lawyer specialized in local commercial laws. 'The two-tiered legal process ensures that such cases will drag on for years.'
While the current system protects local businesses, it has clearly dissuaded some foreign companies from setting up shop in the UAE. And others, already present in the country, are frustrated with the pace of change. 'It is unfortunate that the UAE is the sole Gulf market where we cannot have a second distributor,' says one senior executive in Dubai. 'We are just waiting for WTO rules to come into effect to make the changes we feel are necessary to expand our presence here.'
For the Ford Motor Company, however, 2005 proved too long to wait. And $4 million may have seemed a very small price to pay to get back in business in the UAE. 'This is part of a whole new beginning,' says Jim Benintende, the managing director of Ford MENA. 'It's full-steam ahead for Ford here, from now on.'