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The Kuwait Petroleum Corporation (KPC) is a state-owned company and a typical Gulf business in Europe. It entered the market in 1983 through Kuwait Petroleum International (KPI), its downstream marketing and refining arm. KPI has 5,000 employees, with sales exceeding 75 million liters a day and a net turnover of US$10 billion a year.
European costumers know the Kuwaiti brand thanks to the fuel retailing outlets displaying a ‘Q8’ logo with the sails of two ships. Kuwait Petroleum International Lubricants (KPIL), an operating division of KPI, markets its non-fuel products under the Q8Oils brand. The majority of its business is in Western Europe, where Kuwait Petroleum has been active for more than 25 years, though recently it has expanded into Asia and North America.
Giuliano Franzi joined the Italian subsidiary of Kuwait Petroleum international in 1986 and now is managing director of Kuwait Petroleum International Lubricants (KPIL). At that time KPI was rebranding in Europe to its current well-known name of Q8. Italy remains the biggest European market for Kuwait Petroleum, in terms of volume and value for assets. The Benelux countries are the second largest market for Kuwait Petroleum because of its significant retail presence and the refinery in Rotterdam.
Providing perspective of a Gulf company operating in Europe, Franzi tells Arabic Knowledge at Wharton the best way for Middle Eastern companies to enter the European market is through acquisition. That way, Franzi says, the local knowledge to succeed is already there, rather than needing to be learned.
An edited transcript of the conversation follows.
Arabic Knowledge at Wharton: You joined Kuwait Petroleum in the beginning of its expansion in Europe. Was it difficult to enter into this new market?
Giuliano Franzi: Kuwait Petroleum International chose the easiest way to get into a new region. The company started in Europe where there were already activities in place. The starting point was to acquire the Gulf Petroleum Company rather than start a small business in Europe from scratch. The management continued with acquisitions such as BP in Denmark, Aral-BP in the Benelux, some independents in the U.K. and Mobil in Italy. And we grew by increasing market share. In addition, whenever you talk about growth, you should take into account that Europe is a mature market, so growth is long and difficult for every company. Without acquisition it goes too slowly. On the other hand, Europe is a more predictable and stable market, with less sudden changes which can affect the stability of a business.
Arabic Knowledge at Wharton: Was it easy for a Gulf company to acquire all these European companies?
Franzi: We didn’t have any problems. We got the approvals quite easily and without delay. The European authorities were friendly. We always had a good relationship with the European Union (EU) authorities but we didn’t receive any special treatment. We kept most of the employees of the acquired company, which helped for continuity. A small number of employees and management, around 1%, are from Kuwait. Usually these are young people, who are under development in Europe and at the top of their management group. But mostly people work where they live.
Arabic Knowledge at Wharton: Has business become more difficult with the EU’s enlargement and more centralized regulation?
Franzi: We’ve had a rise in regulation over the years, and more specifically with regards to the environment. But we have to sell our products in Europe, not to Asia. This means we are on the same level playing field with all other companies that want to get into Europe. There is no discrimination in the business.
Arabic Knowledge at Wharton: As an oil company isn’t it more difficult to get into Europe because of the numerous environmental regulations? Kuwait Petroleum has few ISO label recognitions [quality standards].
Franzi: Yes, the start-up without acquiring an established business could be a headache. But all companies have to respect this if they want to be able to do business in Europe. So there is no disadvantage in the competition. In addition, Europe is strong from an environmental point of view, and I believe the rest of the world will match their level. At the end, all countries will have similar requirements. So, actually, if you want to learn, Europe is tough, but the best place. After that you can go everywhere, since this experience gives you an edge when having to meet the highest environmental standards.
Arabic Knowledge at Wharton: The EU is also a combination of member states, currently 27. What challenge does this pose in terms of legislation and paperwork?
Franzi: This is the biggest challenge. The European community tries to harmonize all national legislation. But there remain enormous differences. You have taxes, rules, legislation and circulation rules that differ from one nation to another. Even on a country level, you could have different regulation by regions! This makes centralization and streamlining of activities difficult. In my office in Antwerp, we have centralized the activities for Benelux, France and Germany, but it was not easy and you need flexible and multi-lingual people.
Arabic Knowledge at Wharton: Are some European countries, like those in the south, more of a challenge in this regard than others?
Franzi: In terms of bureaucracy, there is no difference. Maybe the south of Europe is a little bit more bureaucratic. But I have a broad international experience that makes me say that there is more or less the same level between New York, China and the EU. Actually, the issue remains identical whenever you start in a new country from scratch. I had to deal with bureaucracy many times, from the visa to the operating license. I remember we wanted to get into Spain when authorities broke the older monopoly. I had to wait months. If you want to bypass this issue, you should do what Kuwait Petroleum did and expand by acquisition. The idea is, you buy a local company that already exists, and knows the local rules. Even a small company is good. Because when you start from scratch, you have to learn all local rules, accounting, taxes, laws, and so on. This is the same if you want to grow in such a competitive and mature market as Europe. It is very difficult in Europe to increase market share rapidly. An acquisition is a good means.
Arabic Knowledge at Wharton: On the side of regulation, business cultures across Europe are also different from each other. Spaniards don’t react as the British do. Isn’t this an additional challenge?
Franzi: I haven’t seen huge differences. But you have to take this into account an important factor. In Europe you have nearly as many languages as there are state members. It has an enormous impact on your cost. A company should absolutely take this issue into account. Just a simple example: If you want to make a product label, you should do it in different languages. You need all the translations to ensure you comply with the local regulations and this can increase the administration and number of stock keeping units.
Arabic Knowledge at Wharton: What are the advantages of the EU for foreign business?
Franzi: For us it is the common currency. It simplifies banking transactions and it gives a big advantage to the circulation of goods and persons. From a commercial point of view, it also eliminates risk of exposure to different currencies. Perhaps some countries struggle now with the crisis, but from a business perspective, the single currency is the most important positive impact of the economic common policy in Europe.
Arabic Knowledge at Wharton: Did the Schengen agreement [free circulation of goods and persons] also help Kuwait Petroleum’s operations?
Franzi: It makes life easier, yes. The only real borders now are those of the larger EU community. Our trucks aren’t stopped anymore at frontiers. This is really an improvement. But our trucks still lose time in traffic (laughs). Looking to the future, it is unlikely that you will have more freedom of circulation. European countries are becoming concerned about immigration and workers’ migration. They don’t want to be to open, even to other member states.
Arabic Knowledge at Wharton: You have worked at the headquarters in Kuwait for several years. What advice can you give to businessmen who deal between the two regions?
Franzi: I saw that relationships are important in the Middle East. Even in Europe you need good channels and connections, but in the Gulf, you really should be in touch with the right person, otherwise you will not be heard. Networking is essential. In Europe, networking is also important, but if you have a very good product, you will succeed in entering the market. This difference is more visible with the North of Europe, where you must first be very good technically. It is much easier to get an agreement, to talk about business, to go straight to the main topic. In the Middle East, it isn’t so important to achieve an agreement immediately, it is important to first build the personal trust. You can find yourself in very long discussions in the Gulf, sometimes on irrelevant details. That could be a culture clash for some. But personally, I have never had a problem. At the end, you learn to work together. In the Gulf, you could even be welcome for your know-how. But you need to become a friend.
Arabic Knowledge at Wharton: Are there differences among people in the Gulf?
Franzi: I wasn’t able to notice it. But Kuwaitis have told me that there are. I had to go to Dubai to get ideas for a rebranding project in Kuwait. And my boss asked my why I was going there as Emiratis are really not like Kuwaitis. Oh, you know, from a European point of view, I didn’t notice it (laughs). Because in the Gulf, they have a common language, a common culture, religion, environment, while in Europe, we can’t even talk together. We speak so many different languages. It remains a major issue. The spread of English is mostly on a management level. On the lower levels, workers talk their own language. So when you know languages, you definitely have more chance to succeed in Europe. In Italy it is a serious issue to find people who speak English! Benelux is instead a very good place. In the office in Antwerp, people speak at least three languages and they are not more expensive than others.
Arabic Knowledge at Wharton: But in Belgium, the labor taxes are very high.
Franzi: Yes, but the productivity is also higher. If you are looking for lower labor costs, perhaps you should go to the U.K. But once again, they only know English. The option of having several languages is a crucial asset in Europe. And all your competitors face the same issue.
Arabic Knowledge at Wharton: Which kind of progress in a common policy, do you think the GCC could make to benefit business? Can the construction of the EU be an example on some points?
Franzi: If I look at the history of Europe, the initial idea was to get together to improve their economies. Actually, the engine of Europe is the economy. And this led to the single currency and free circulation. The political union remains a dream. The enlargement of Europe in 2007 to 27 countries had its motivation in the economy but made political cooperation more difficult. If the GCC wants to achieve something, the six state members should first build economic ties. Local authorities like to keep their power on a national level. They don’t want to yield decision-making to someone else. All six countries are similar, but they remain different. It was the same for Europe too.