I. COMMERCIAL OVERVIEW - EXECUTIVE SUMMARY OVERVIEW OF IMPORT MARKET Egypt offers an import market exceeding $10 billion annually. The United States is the largest foreign supplier, capturing approximately 30% annually, hovering around $3 billion f.a.s. value for several years. In 1993 U.S. import market share rose nearly 10% because of competitive prices, Egyptians' preference for things American (if the price is right), and an overall drop in total imports. Egypt ranks seventh among countries with which the U.S. enjoys a healthy balance of trade surplus - $2.1 billion in 1993. Egypt is an important market for U.S. cereals (wheat, wheat flour, corn), a wide variety of industrial and consumer goods, and armaments, the latter paid by the U.S. military aid program. BRIEF SYNOPSIS OF COMMERCIAL ENVIRONMENT Egypt is a complex, large country of nearly 60 million. Although the business elite is only a fraction of that number, it is larger than typically found in the Gulf or in markets of the same size in the developing world. According to Egyptian Customs authorities, in 1993 Egypt had 8,500 registered importers, 12,000 exporters, 2,800 commercial agents representing 100,000 foreign firms, and 2,400 factories licensed to import components. Most of these are privately owned, but the government sector -- which produces two-thirds of manufacturing output -- includes 314 separate companies affiliated to 17 Holding Companies; nearly 30 military factories that also make civilian products; and 1,500 companies owned by one of the 26 provincial authorities (governorates). The Cairo Chamber of Commerce reports that in 1992 in Cairo alone the following numbers of companies were registered by type indicated: 1,921 limited liability companies, 1,906 partnerships, and 3,706 sole proprietorships. There are some 21,000 registered "civic groups" or non-governmental organizations throughout Egypt, some of which manufacture or import goods. EGYPTIAN BUSINESS ATTITUDE TOWARD THE U.S. Since former President Sadat's decision to turn to the West and free enterprise in the mid-1970's, known as the "Open Door" Policy, Egyptian-American relations have become close in business, economic and political spheres. Egypt is an important ally in the region, having been the first Arab state to sign a peace accord with Israel, and having helped achieve an allied victory in the 1991 Gulf War. Egyptian-U.S. relations are close at the human, every day-level as well. There are many well-educated Egyptians or Egyptian- Americans now living in the United States, and perhaps 12,000 American citizens living in Egypt. Egyptian business persons -- whether shopkeepers or industrialists -- flaunt American business and cultural linkages freely on billboard signs, names of shops, newspaper advertisements, trade shows and hotel food festivals, or in creating corporate names that include the word "American" as a reflection of perceived quality. Egyptians feel comfortable dealing with Americans because both cultures stress informality, openness, and friendliness. However, Egyptian business persons frequently are pained by the insensitivity of American firms that do not respond to inquiries, are slow, or sloppy. MAJOR BUSINESS OPPORTUNITIES Egypt's low-cost, relatively well-educated and highly-skilled workforce value (i.e. does not disdain) work, and offers a resource pool acknowledged by other countries in the region in their employment of over 2 million expatriate Egyptians. Egyptian workers have a history of skilled craftsmanship which still exists, although decades of a sellers' market atmosphere has made sloppiness all too common. This culture offers an opportunity to U.S. firms to employ such persons in manufacturing/assembly operations in Egypt with products aimed at export. The large affluent population (at least 2 million Egyptians, perhaps many more) offers many sales opportunities targeting status-conscious consumers. Wealthy Egyptians want the latest, best, and most fashionable products as soon as they become available in Europe or America. Peace between Israel and its neighbors offers the prospect of open borders, which makes Egypt a strategic location for distribution or manufacturing/assembly operations aimed at Eastern Mediterranean countries. The government's rejection of the socialist model and opening toward private investors offers build-own-operate-transfer (BOOT) and related opportunities in fields hitherto off-limits. Specific business opportunities include: franchised restaurants, clothing and personal care products; equipment to improve the rapidly improving infrastructure in the sectors of electric power, telecommunications, irrigation, highways and bridges and oil/gas development, tourism and sports equipment and projects. With regard to agricultural products, Egypt annually ranks among the top ten overseas markets for U.S. agricultural products, and the U.S. continues to be the largest single supplier to Egypt. Without question, as far as U.S. agricultural exports are concerned, this is still a bulk commodity market. Wheat and corn are the two most valuable commodities exported, for example, and raw cotton and tobacco exports are also important. Nevertheless, sales of processed U.S. goods like soybean meal and wheat flour each exceeded $20 million in 1993. Moreover, a diversification towards the use of more high value, consumer ready products is underway. In addition to Kentucky Fried Chicken (KFC) and Pizza Hut which have established local chains, TCBY Yogurt, Baskin- Robbins, and a subsidiary of Dunkin' Donuts all opened outlets in 1993. McDonalds, Arby's, and Chili's are due to open their first restaurant here by the end of 1994. MAJOR ROADBLOCKS TO DOING BUSINESS Finance is unobtainable unless one is well known and connected, and it rarely exceeds 5 years. Bureaucratic red tape is the major common complaint of all entrepreneurs in Egypt, native or foreign. Up to 30% of a manager's time is spent dealing with bureaucracy. However, U.S. firms that want to do business here can come to understand and overcome this red tape and make profits in Egypt. Moving from almost complete socialism in the early 1960's to a market driven economy has resulted in considerable legislative activity in the commercial field which sometimes creates inconsistencies between new laws and those still on the books from the socialist era. In addition, a number of older commercial laws have not yet been modernized which has resulted in some gaps in the legal framework. Finally, Egypt still relies too heavily on bureaucratic discretion in regulating commercial and business operations. The problem here is that bureaucrats know this and play on this fear to justify work and maintain their jobs. Fear of taking decisions drives the bureaucracy, forcing the simplest of issues to the top of any organization. This hesitation encourages committee decisions to cloud responsibility and prevent an individual from being blamed. Fear means that regulations are followed to the letter, with few persons willing to make "generous" interpretations of procedures for fear of criticism. One has to prod and push paperwork and decisions at every stage of approval in most government organizations. Fear also can be a positive emotion, preventing individuals from backsliding or breaking the law for fear of discovery or challenge. Corruption is no more a factor of business in Egypt than in other countries with low average incomes. Skilled government technical employees who evaluate bids or make routine decisions affecting the flow of paperwork make generally less than $100 per month. Senior staff in government do not make more than a few times that amount. Newspapers reported in 1993 that the Prime Minister's official salary is $1,500 per month, for example. Bid details are immediately available through friendship or are for sale to anyone. However, there are anti-bribery provisions in the Tenders Law, as well as a Socialist Public Prosecutor who prosecutes ethics violations by government employees. Research & development expenditures are minimal -- 0.06% of public sector expenditure in 1993 according to the World Bank and practically none by the private sector. Egyptian government agencies still dominate the industrial sector, and behind many a well-known name of a licensor or management firm lies a public sector owner. Thus, most of Egypt remains statist in practice, despite the country's tentative swing in favor of private enterprise. Americans will find, however, that many of the bureaucrats are "closet entrepreneurs" as frustrated as anyone by "the system" and eager to work with a firm that can help relieve their business problems. Government policies have been unpredictable and are usually determined with minimal to no input from affected groups including business. The legal framework overall is moderate (but improving in terms of intellectual property and securities law). Entry barriers to new business are significantly weak or personalized rule enforcement, because of overlapping ministry jurisdiction, over-regulation in many areas, and a slow, bureaucratic court system. If one accepts this, and works within this culture, one can succeed in spite of the roadblocks. NATURE OF EGYPTIAN AND THIRD COUNTRY COMPETITION France, Germany and Italy, in that order, are the United States' major competitors in Egypt, with 15 to 20% each of the market, compared to 35% or more for the U.S. Certain other countries are important for specific products. Europeans have a reputation for being expensive and sharp traders, but they are more responsive to Egyptian customers than Americans. Egyptians view European quality as equal to or better in some product lines - or from some firms - than that of the U.S. (In some products, they do not care about the quality distinctions.) Eastern Europe and the former Soviet Union are no longer significant trading partners, which is unfortunate for Egypt which used to trade its low-quality manufactures for different low-quality communist manufactures under clearing agreements. Japan is a very strong competitor in electronics and vehicles, and a somewhat weaker trader in other sectors. Trade with other Arab and African countries, and with Latin America, is minimal - although exports to African/Arab countries are steadily increasing. In the services area, legal and cultural sensitivities somewhat restrict opportunities for non-Egyptian firms in design, engineering, construction, and insurance, although joint ventures and creative agreements with foreigners are possible. Banking is largely free from discrimination against foreign investors, although the Central Bank makes entry difficult into Egypt's already over-banked financial sector.