News Focus Freeing Taxpayers The ruling NDP cut personal income and corporate taxes in half, but the emergency law is here to stay High Times Bankers expect higher interest rates to heat up the investment climate and cool inflation Mastering Law A new law program at the American University in Cairo seeks to get students serious about law Until the Cows Come Home Consumers are still waiting for Sudanese beef to hit the market AloAchoo! The next generation of viruses has hit mobile phones Star Power The 2004 Olympics created some unlikely national icons and a powerful lineup of marketing potential Below Par The World Bank says Egypt is handicapped by the high costs to start a business and the difficulty of firing people, to name a few Corporate Bonding Orascom Telecom and Telecom Egypt have made a splash in the bond market, but rising interest rates may damper enthusiasm Unmaking Monopolies Opposition MPs say changes to a proposed anti-trust law defy the purpose of the law by protecting monopolies On Topic The Euromoney conference put an exclamation point on the liberalization efforts of the government Investment Matchmakers Egypt Invest 2004 seeks to convince foreign investors that the country has finally turned a corner ’Dish’ing it Out Satellite TV stations are set to give the state-run channels a run for their advertising revenues during Ramadan Cargo Crunch As exporters complain about skyrocketing airfreight prices, the government seems to be turning an unsympathetic ear Star Power The 2004 Olympics created some unlikely national icons and a powerful lineup of marketing potential Olympic CFO Hossam Mestikawy says that in addition to being an exclusive distributor of Electrolux brands, OG is likely to be a major supplier of appliance components. By Mohsen Allam Olympic CFO Hossam Mestikawy says that in addition to being an exclusive distributor of Electrolux brands, OG is likely to be a major supplier of appliance components.

By Megan Detrie

Struggling in the European market, Swedish-based home appliance maker Electrolux has announced a partnership with the regional leader in white goods manufacturing, Olympic Group (OG, bt100 number 15, OLGR.CA).

It has been a rough year for Electrolux’s European operations, which reported a 22% drop in their 4Q2007 profits. Despite losses from closing two factories in Western Europe, as well as an announcement that it would cut 400 jobs from its appliance unit in 2008, the global giant might be looking to OG to lower manufacturing costs and gain access to the Middle East and African market.

Europe’s loss may be Egypt’s gain: The partnership with OG will mean significant expansion of manufacturing facilities in Egypt, an extended product range and further reach into the regional market. With LE 2.18 million in revenues for 2006, OG has already asserted market dominance. According to Hossam Mestikawy, OG’s chief financial officer, an alliance with Electrolux is ideal.

“From our side this is the best option [OG] can ever have. For them, we are equally a good choice because we are the number one player in the region and we’ve put [the two companies] together,” he says.

OG’s operations in the region are already huge; it manufactures its own brand name and IDEAL products as well as distributing Daewoo, Philips and Sony. The company has nine factories, 32 distribution centers and 45 service centers in Egypt as well as corporate and retail outlets in Saudi Arabia and Dubai. The group launched its own B-Tech stores, which sell a range of Olympic brands and account for a large portion of the company’s 59 retail and consumer credit outlets.

OG — a publicly held appliance company — acquired state-owned IDEAL in 1998 and by 2005 had a stake of over 90% in the company. The IDEAL Zanussi automatic washing machine (co-branded with Electrolux in 1982) is now the top-selling home appliance in Egypt. The brand will add to its line gas and electric cookers, refrigerators and electric water heaters.

Every year OG manufactures up to 450,000 automatic washing machines, 900,000 refrigerators, 900,000 electric water heaters and 650,000 ovens. According to a June 2006 bt article (“The Heat is On”) Olympic-owned IDEAL, produces 600,000 washing machines and 500,000 refrigerators per year.

Egypt’s booming consumer sector earned OG a net income of LE 212.93 million in 2006, a 40% increase in operational growth from 2005. (The percentage excludes a LE 60 million non-operational profit made in 2005 from a swap in IDEAL shares.)

Electrolux posted a net profit of $458 million (LE 2.5 billion) for 2007, down from $605.7 million (LE 3.33 billion) in 2006, and has undergone major restructuring in Europe. Its employees number over 56,000, and its sales extend to over 150 countries.

With annual sales of over 40 million products, Electrolux is one of the largest producers of professional equipment, such as food-service equipment for hotels, institutions and restaurants, as well as equipment for mass-scale laundering.

Despite being a leader in hotel and restaurant appliance sales, consumer goods account for 93% of sales, and are sold under several brands, such as EG-Electrolux, Zanussi, Eureka and Frigidaire. While Electrolux’s largest markets are in Europe and North America, the company expanded its reach in the 1990s, acquiring Repripar, the second largest white goods manufacturer in Brazil, and Email Limited, Australia’s largest appliance maker.

“When you have a group vision, as we are building today, you normally have to invest in new operations, new production lines, new facilities. The potential we see with the partnership — and what we’re talking about is still under planning — but we expect this partnership will be coupled with investments in new facilities and generating new jobs, local jobs that will come from manufacturing and industrial operations,” Mestikawy says.

While there has been no official statement about shifting production to the Middle East, Electrolux has suffered in the European market. The 4Q2007 financial report cites extra costs for new products launched as a reason for the drop in profits, as well as the rising price of raw materials. In December 2007, the company shut down a stove plant in the United Kingdom, phasing out approximately 500 employees, and moved production to Poland. In April, another stove plant in Denmark was closed, cutting 150 jobs. As production is moved to areas outside of Western Europe, the alliance with OG could help cut production costs, as well as give Electrolux brands a solid distributor in the MENA market. Mestikawy says they are looking to expand both horizontally, in terms of their manufacturing capabilities in Egypt, and vertically — that is, into other markets.

The partnership is laying the groundwork for expansion across the region, including refrigerator-manufacturing operations in Sudan. “Right now the priority is the Arab and African region; this is the main goal, together with Electrolux, for the coming three to four years,” says Mestikawy. They also have plans to export OG’s finished products to Europe, to be sold under the Electrolux brand name.

But perhaps the biggest opportunity stems from the manufacturing of Electrolux parts. OG is expected to act as a major supplier of components for Electrolux products, particularly automatic washing machines, fridges and gas cookers.

Extending the local benefits, OG will also be able to utilize Electrolux’s state-of-the-art research and development center, as well as exclusively distribute Zanussi, Electrolux, AEG and Frigidaire brands.

Mestikawy says the benefit of the partnership extends beyond his company alone. “We are happy and proud, being an industrial player in a country like Egypt. Reform is driving the economy and there is a new ability to generate jobs. Actually, expansion and growth in industrial operations is the right means to beat issues like unemployment,” he says.

With an improving economic forecast and growing disposable income among the Egyptian population, Mestikawy is confident of the future: “Considering growth expectations involves two issues. Normal growth is quite promising in view of the reform and economy in Egypt, the improving per capita income and the changes in the banking sector. Now banks can provide financing for the consumers — and I’m talking about consumers traded and mortgage and leasing, these are all concepts that never existed in the Egyptian market. I think with changing of banking sector and the [increased] competition all this is moving now to improve the purchasing power and the ability for consumers to finance the type of products we have.”

Secondly, Mestikawy says it is difficult to estimate the growth of operations at Electrolux. “A company the size of Electrolux is another element that should be considered in the local market and in the region. Electrolux, which has sales of something like $15 billion (LE 82.5 billion) over a year, would not come into this alliance unless they have a strategic vision for growth — and the magnitude of the growth cannot be measured in the range of $50-60 million (LE 275–333 million), because that is not the size of business, so it has to be much more.”

It is clear that growth is inevitable. In response, OG is preparing to change the shape of its operations. “Usually when you come together in a partnership you must take into consideration the magnitude and propulsion, you have to do a lot of restructuring. Most of the restructuring is technical but sometimes manpower is affected as well. You have to be technically prepared, with the right human resources and right management to lead the team in the life cycle of the company,” Mestikawy says. “The challenge is to move the alliance in the right direction. I would say time is a challenge. To upgrade the technical capabilities of Olympic Group to meet the requirements of a company the size of Electrolux will be a challenge. We will be able to meet it: We’ve done it before and we have the capabilities to do it again, especially with the open strategies and support from the Electrolux management and technicians.”

Though uncertainties remain, such as growing signs of an economic recession, the road ahead looks promising. Electrolux is planning a major product launch into the United States market for 2008 and there’s likely to be a few Egyptian-made parts in those washing machines. With a long-term strategy in mind, OG is happy enough to be working out the details. “It’s a good model for the Egypt economy that should be followed by other players,” says Mestikawy. “Let’s wait and see. I’m optimistic.”  bt