Saturday, November 28, 2009

A PR disaster

On Thursday, the morning after Dubai World's bombshell announcement that payment of the Nakheel bond due on December 14 was to be delayed, I said it was "badly, badly handled all round".

An understatement.

It was actually a classic of mishandling. Business schools should use it as a case study of exactly what not to do. Of how to turn bad news into a disaster.

There's inevitably been over-reaction, with bond and stock markets plunging from Europe to Asia to the US to Australia, bank shares hammered, a flight to safe havens, damning stories all around the world.

"Nervous traders, trying to understand what it meant, caused havoc across global markets. Shares plunged, currencies were battered and billions of pounds were wiped off the value of all companies with Middle East connections. British banks, considered to be among the most exposed to Dubai, were at the centre of this new maelstrom and collectively shed £14bn in value on Thursday alone."
Daily Telegraph

An overreaction of course but panic is the natural reaction of markets to bad news. After a short period it settles down as people think rather than just act but blind panic is always the first response.

To put it in perspective the amounts involved (about $60billion) are tiny in relation to what's been going on in the world. Companies like Lehman Bros ($613billion liabilities), banks by the dozen, countries like Iceland were leveraged multiple times more than DW, making Dubai World's debts almost petty cash.

But Dubai's reputation is taking a battering because of the way the thing was handled.

Statements in the months leading up to the maturing of Nakheel's bond were that the finances were all in order, then came the terse announcement on Wednesday that payment due on December 14 would be deferred at least six months. The timing of the announcement minutes before the ten day holiday added immeasurably to the problem, causing the doubts and panic, increasing the fallout. An obvious attempt to dodge the hard questions that were bound to be asked.

The problem isn't only the admission that the commitments couldn't be met - there's still belief that Abu Dhabi will come to the rescue. The way it's been handled leads people to believe that Dubai's much-vaunted business acumen is a myth. If they can't even handle something like this competently...

I've been glancing through some of my regular reads and I'm finding:

"Released after the markets shut, ahead of the 10-day Eid holiday and the Thanksgiving break in America, the notice was designed to have minimum impact. It wasn't the Dubai government's first miscalculation.amateurish...botched messaging...episode of incompetence...the biggest debt-market cock-up...this week's events have damaged its reputation for economic competence"

The Nakheel bond has been the subject of much speculation for a year at least. It was the big test of Dubai's ability to service its debt, of Dubai's ability to run businesses effectively. In a wider sense it was also taken a representative of Islamic bonds in general.

Past months have seen senior government figures reassuring the markets. Dubai could and would meet its commitments they said.

Even earlier in the day of the announcement statements were released about Dubai raising another $5 billion from Abu Dhabi banks.

So everything was under control.

What happened?

They decided to make the announcement of what is being seen as a default at close of business.

At close of business on the eve of a ten day holiday.

Drop a bombshell as you leave for holiday.

"Dubai’s authorities have acted badly....This week’s revelations were not only unexpected; they were also delivered just as the Gulf states shut up shop for an extended holiday. This is the action of a company that seems to think that it can operate in a globalised marketplace only when it suits its purposes."
The Times

I seems it's not only investors and traders who were caught by surprise. More than one report suggests that even Abu Dhabi wasn't aware that the announcement was going to be made.

"Thursday's market turmoil appeared to take federal officials in the capital Abu Dhabi by surprise. One person familiar with their thinking said there was dismay over the reaction to the handling of the announcement."
Wall Street Journal

There are also reports that 'frantic phone calls' to government officials and business leaders were unanswered.

Naturally. Everyone's on holiday. Try again about December 6. No problem, that's not even two weeks away and everything's under control anyway.

It was carefully planned, according to the statement issued late on Thursday.

I like the column by Alistair Osborne in the Daily Telegraph on the subject:

"Why we must consider Dubai's 'careful planning' a work of pure genius

Let's be generous here. Maybe Dubai was just trying to set another record.

It's already given us the biggest building, biggest indoor ski slope, biggest shopping mall and biggest theme park. Surely, it was only a matter of time before it went for another biggie: the biggest debt-market cock-up.


The Wall Street journal says:

"For Dubai to now claim it had anticipated the market reaction to its "sensible business decision" is preposterous. Dubai stands accused of irresponsibility, incompetence and bad faith. Few will trust now anything it says."

So, a PR disaster of the highest magnitude. Unbelievably badly handled. I can't imagine what they were thinking, it shows a complete unawareness of the real business world.

It's astonishing from a city that owes its very existence to commerce. A city that's been a successful trading, commercial centre from its beginnings. Where business is the culture.

It really should, and probably will, be required study at business schools.

But it won't be the end of Dubai, in spite of what some commentators will now be saying. We've already seen some of that, plus highly critical pieces using the announcement as an excuse to come back into print, such as the latest Johann Hari piece in The Independent.

The sky won't fall in. The desert won't reclaim the city. It won't be a ghost town.

Think of it terms we've grown accustomed to over the past year. Think of it as toxic debt. It's separate from the real economy. It's like the financial markets and the real economy, they're very different from each other.

This is about the ability of one company in particular, and associated companies, to repay its loans.

Dubai has two sectors, the most important is the real economy where tens of thousands of generally SMEs are still trading, still doing profitable business. Dubai Chamber of Commerce has over 100,000 members for example, and Jebel Ali Free Zone alone has over 6,000 companies registered there.

Other large government-related companies such as Emirates Airline, Dubal, Ducab, Dubai International Airport, Dubai Duty Free are all producing excellent profits.

And of course the old established merchant family conglomerates are still going strong - Al Ghurair, Al Futtaim, Al Majid, Al Habtoor, Galadari and the others.

So business goes on much as usual in the real world. It's always been there, trundling along quietly and profitably out of the news. Dubai's history since the early eighteen-hundreds has been about being commercially successful and going on into the future that will continue.

The other sector is the fantasy world of unsustainable development. But that was a blip in the grand scheme of things for the last five or six years, for other parts of the world too, not just for Dubai - although Dubai's was more outrageous, more unsustainable than probably anywhere. That's what's dead, the fantasy world, the parallel universe, to which Nakheel was the worst contributor.

I said earlier that Dubai's culture was business, which is what I've long argued with people who've said there's no culture. People are here to work, to do business, and always have been. It's the focus of just about everyone here and it's the reason for the city's existence.

But another part of the culture is 'I must have it now' and that's been a large part of the problem. Wanting to build a city the size of Singapore in a decade.

What's actually been achieved is amazing but Nakheel in particular went far too far in too many grandiose developments at the same time. Reality went out of the window and they were off in the land of the fairies. Reality always reappears as it has now.

It's a pity the old established merchant families weren't in charge. In fact it seems with the recent sackings and sideways transfers of some big-name rising stars that the old guard is being brought in to get things back onto a more sensible level.

A huge PR disaster, damage to Dubai's reputation, damage that will take some time to repair, and a setback for Dubai's growth. But not its collapse.


You can read some of the international press I've quoted from here:

The Times.
Daily Telegraph.
Wall Street Journal.

18 comments:

Anonymous said...

This whole announcement reminds of an cartoon that appeared in an HBR (Harvard Business Review) write-up many years ago. That article was titled 'Pygmalion in Management'. And that cartoon went like this:

'Instead of my usual report, I have composed a song listing all attributing factors, mismanagement, et al and why our business is going down in a handbasket. Feel free to join me in the chorus'.

That just about sums up Dubai's predicament owing to mismanagement.

Tini said...

Of course but it's also a toxic symptom of business here as a whole especially in locally managed and owned ones. The culture will not admit to anything being wrong. Saving face is all. Things are only ever varying degrees of 'perfect'. And this makes it hard for Western Educated managers to help. It's as big a clash of culture as between the cliched brash Arab Boss and his cliched timid Indian staff.

Dubai will pay the price though it won't go under. But Abu Dhabi will get some of the gems it would like to help make it so.

Perhaps the Northern Emirates can learn from the debacle as they develop more slowly but on a firmer footing? With more sensible management not afraid to face problems and deal with them.

Keefieboy said...

And, ultimately, who's in charge of Nakheel?

They still haven't repaid the deposit on my Media City office since I left over two years ago. Don't suppose I'll ever see it now. Thieving, grasping bastards.

Anonymous said...

Tini,

Are you talking about the same Western educated Managers that couldn't foresee a financial meltdown in the first place?

This isn't about Western educated Managers or Arab Bosses or Indians.

This is about Dubai trying to reach for the sky; an impossible task.

expatriatelife said...

Or is this a devilish ploy to get more support/better terms out of Abu Dhabi? In other words show them how bad it will be if they don't play ball. Let us fail and we'll take you all down with us.

Anonymous said...

Expatriatelife,

That's a good one. Theory, I mean. It could be, it could be not.

Abu-Dhabi will bail out Dubai, but -- and this is the but that Dubai will have no choice than to accept -- all future shots starting yesterday will be called from Abu-Dhabi.

And here comes the sweetner. This is not a take it or a leave it offer to the bigwig in Dubai. It's practically a done deal to keep this Union of Emirates United period.

Seabee said...

Tini, I'll add to Anon's comment that it's far from being one-way traffic. Many of us know plenty of 'western educated managers' who aren't up to the (highly paid) job. When it all goes wrong they blame the owner for the results of their own shortcomings.

I've yet to hear someone admit the disaster they created was all their fault. It's always someone elses.

Anon@6.11 I tend to agree with you. I don't believe for one minute it was the fiendishly clever plot Expatlife suggests. I think AD will come to the party if they have to but they'll demand much more say over what Dubai does in return.

Robert said...

That is a realistic assessment in your blog.

I agree that it is not a crisis. But sensible investment money will now go elsewhere. And it will stay elsewhere until Dubai and the business owners here start to be honest and open with their customers, their investors, their employees and the media.

The trouble is that it is hard to take medicine when you cannot admit you are sick. A cowering media does not help.

Highlight of the week was Emirates Business 24/7 on Thursday 26 November.

Headline on the front cover - Mohammed felicitated by Arab-UK chamber.

In the body of the text - "Sir Roger Tomkys, chamber Chairman, described the UAE as a solid economy which was not affected by the global financial crisis due to the wise policies if its leadership and government."

What will creditors eventually be offered - maybe 60 to 75 cents on the dollar. There are going to be some significant write downs?

Hajra Amjad said...

Hello....i really lyk ur 'a lyf in dubai' cz iv been born n brot up in dubai, n so i love ds city......since im nt in dxb at present (due to my higher studies) n i dnt kno whts ds uproar about dubai world being unable to pay its debts, also im a medical student n dnt ave much knowledge bout commerce, i wd b vry vry vry grateful if u cud plz explain all ds dat is happening
Will b vry thankful to u
Hajra

Seabee said...

Hajra, the best way to find out is to read the newspaper business stories. I've given links to some of them.

AdelDu2 said...

Hi Seabee,

From your post:

"Think of it terms we've grown accustomed to over the past year. Think of it as toxic debt. It's separate from the real economy. It's like the financial markets and the real economy, they're very different from each other."

I have to disagree that such debt is separate from the real economy. The reality is that Dubai government controlled entities cannot make payments on loans. If they cannot make loan payments, they will also be unable to pay contractors, sub-contractors and suppliers.

What does this mean to the hundreds or thousands of sub-contractors and creditors whom have been suppliers to such Dubai government controlled entities? Perhaps a poll/survey needs to be taken amongst these businesses to ascertain exactly what this will mean to them. I know from my own experience during discussions in February of this year where such government controlled entities had not paid contractors, sub-contractors and suppliers for at least 6 months (and possibly longer - 6 months is only what they would openly admit to).

Sub-contractors and suppliers whom are not paid are in turn unable to make payments to their suppliers, or worse still, possibly not even pay their employees - what does this do to the local economy? People losing their jobs, therefore less disposable income being spent in the economy, etc, etc. There is definitely a flow-on effect.

It is terrible to see the impact that Dubai is now having on world financial markets as a consequence of its' financial position and handling of same. However, I have long held the view (and others no doubt) that Dubai authorities have kept denying publicly that they have problems and it is only when the crunch comes that they will say anything - and only what is necessary and carefully timed and engineered.

Seabee said...

AdelDu2 I agree, there's always a ripple effect from any action. I've posted about just what you've said several times, as I have about the problem of non-payment of invoices by the big government-related companies.

However, this latest problem is specifically about Nakheel's bond due for payment on December 14. The investors in that are the ones who may be at risk and they're banks and financial institutions. There's been a run on their shares in many markets as a result.

Cash flow to pay invoices from companies in the real economy is something else, and the $5 billion from AD banks which was announced on Wednesday is said to have been given on the condition that it's used to pay contractors. There's been a lot of bad publicity about the non-payments and I suspect AD is getting very tired of the bad publicity for the country that Dubai's been attracting, hence the condition.

alexander... said...

Great post...

Anonymous said...

Seebee, two massive posts in the last few days and maybe the biggest topic area you have discusses this year. Question, how do you think this will impact Dubai in the next 3 months and also, if this has just come out now, what other stories do you think will start to 'appear' that have remained hidden so far?

Secondlly, do you know anything else about Waterfront, Jebel Ali Palm and Plam Deira projects?

Seabee said...

Anon@6.37, I started to try to answer your questions and it got far too long for a comment so I'll answer in a new post. I'll try to do that later in the day.

As for Jebel Ali and Deira Palms, what's being said around town is that the projects are on hold. I know nothing more than that.

purple said...

Nice post ! I used to live in Dubai.. ...pity this turned out the way it did.. I really miss Dubai of the 80's...

what were they thinking?

ARR1058 said...

I think your excellent piece has hit the nail head on, unlike some of the hysterical reactions we have seen in the british media. I have lived in dubai on and off since the early 80s and much of what has been done to the place is nothing short of unmitigated disaster. However dubai's salvation has been and always will be as a trading hub. This is what the place was always meant to be, not this fantasy megapolis that was dreamt by the developers. I sensed trouble as early as 1995 whilst having lunch with a lebanese acquaintance. Soon as he mentioned the words "development" and "projects" alarm bells started to ring in my mind. If there is one race of people that can smell a fast buck across the 7 seas, it is our friends the lebanese. He was telling me of these wonderful idea of turning dubai into the singapore/manhattan of the middle east and how his company had already started to bid for "projects". My heart sank. The Singapores and Manhattans of this world have been built over many centuries by people who have a real, vested interest in the place, a vested interest that goes beyond "off plan selling" and "flipping". Those places have real communities with deep roots and real people who live, die, get married, have kids, fall out, make up, move out and move back. Dubai does not have that and never will. The place is made up mainly of expats from all over the world whose sole interest in the place is to make a few tax free dollars. Ir should have been allowed to remain that way. As you correctly pointed out, the old merchant families are still there and still doing rather well. I doubt if any of them invested any money in some of the weird and wonderful that has cropped up in dubai over the years. They have quietly carried on trading much as their forefathers did over the past 300 years or so.

Dubai will not disappear into oblivion, quite the contrary. But some of those hair brained developments will and sure, let the sea reclaim the artificial islands and let the desert reclaim some of the ugly developments. And then let the place move on. Abu Dhabi will probably rescue their brothers with lots of strings attached i am sure, but i have a feeling that this time they will also make sure that "little brother" dubai does not get ideas above its head for a very long time.

rosh said...

Nicely said ARR1058.