GOOD TO GROW

UAE, Dubai 2012 | INDUSTRY | REVIEW: INDUSTRY

As confidence returns, heavy investments in the industrial sector have triggered a comeback in automotive and retail sales, metals manufacturing, and FMCGs.

Having weathered a construction downturn that sent ripples throughout its industrial and retail sectors, Dubai is in the midst of an industrial revival, driven by surging consumer confidence, attractive thematic industrial zones, and demand for industrial materials throughout the Gulf. According to the Ministry of Economy, industrial investment grew by 12.8% over 2012. Industry represented 16% of the UAE's GDP in 2011, becoming the most valuable sector in the country after hydrocarbons. The government plans to increase industry's contribution to GDP to 25% in the medium term, an initiative supported by a host of incentives, industrial clusters, and free zones.

INVESTMENT

Thanks to its renowned business-friendly environment, Dubai is becoming a hub for the Gulf's light- and medium-manufacturing activities, with specific emphasis on mechanical equipment, chemicals, food and beverage, and mineral products. According to Abdulla Bel Houl, Managing Director of Dubai Industrial City, the Emirate's political stability in the midst of turmoil in other Arab countries is also helping to drive industrial investments. “[Dubai] has benefited from its 'safe-haven' status in the face of regional volatilities, with new FDI being re-diverted from other parts of the region into the UAE," he told TBY. As a result, an increasing number of industrial corporations are looking to Dubai as a production platform for the broader MENA region, a market characterized by its increasing purchasing power and a 424 million-strong population that the UN expects to grow 10% per year over the medium term.

Nestlé Middle East, which opened a new $136 million factory in Dubai in 2010, is one such company. Chairman & CEO Yves Manghardt told TBY, “we have a winning formula because we are manufacturing here, catering to the more specific needs of the region, and using the latest technology available."

Atmospheric gas manufacturer Gulf Cryo also moved its headquarters from Kuwait to Dubai in 2010. More recently, the KEF Company, a valve manufacturer and the latest venture of industrialist Faizal E. Kottikollon, opened its corporate head office at the Dubai International Financial Centre (DIFC). Dubai Refreshments, which manufactures and distributes Pepsi products, is also planning to move into a much larger space in the Dubai Investment Park in 2013. “This transition is driven by the future expected growth of the UAE and of Dubai Refreshments," said General Manager Tarek El Sakka of Dubai Refreshments.

Dubai has particularly distinguished itself as a hub for value-added services in the food supply chain. For example, Al Khaleej Sugar, the first sugar refinery in the Gulf region, imports raw sugar primarily from Brazil and uses the Dubai facility to produce a refined product that is then exported to consumers and food and beverage (F&B) manufacturers.

Having recently built a 1.5 million-ton capacity warehouse in Dubai, Al Khaleej Sugar's growth is in line with increased industrial activity throughout the F&B segment. “When we first commenced operations, our clients were 20% industrial and 80% consumers," Managing Director Jamal Al Ghurair told TBY. “Now we have reached a stage where these figures are 40% and 60% respectively. The industrial side of the business is growing rapidly."

DUBAI INDUSTRIAL CITY

The epicenter of Dubai's industrial activities is the Dubai Industrial City (DI), a 55 square-kilometer stretch of land that marks the second largest non-real estate project in the Emirate. According to Abdulla Bel Houl, Managing Director of DI, the area consists of six zones dedicated to key industries. “The synergy and interchange between the six zones is a vital component that attracts investors to the city," Bel Houl told TBY.

DI is home to 150 companies, including leading firms such as BASF and Ikea. In 2012, total investments in DI surpassed AED6 billion. Major new investments in 2012 include a Byrne Equipment Rental's new HQ complex, an AED15 million project scheduled for completion in 2013; a new headquarters for UAE-based Geoscience Testing Laboratory; and a full-fledged fledged perfume manufacturing and packaging facility by Rasasi Group.

In 2011, DI, in partnership with the Road and Transport Authority (RTA), completed a major infrastructure development covering power, water, sewage, irrigation, and telecoms across a 15 square kilometer swath of the city. In January 2012, DI launched the second phase of state-of-the-art warehouses occupying 3.5 million square feet of land. This includes facilities for cold storage specifically suited for the F&B and pharmaceutical industries. As of 1H2012, 30% of the new phase of warehouses was booked. To date, DI has invested more than $1 billion in infrastructure.

METALS

While light and medium industries are seeing the most investment, increasing demand in the region for iron, steel, and aluminum are spurring significant heavy-industry activity.

According to the Gulf Organization for Industrial Consultations, the number of steelworks operating in the GCC region has increased from 84 mills in 2000 up to 184 in 2011. This is matched by an accumulated investment increase of more than seven fold. Of those iron and steel mills, 31% are operating in the UAE, putting the Emirates second only to Saudi Arabia in the region. This represents 20% of total investment, amounting to $3.86 billion, again putting the UAE second only to Saudi Arabia. In 2011, Dubai Port handled over 900,000 tons of metal exports.

“Steel is very important in many countries, but owing to the fast development of the UAE, the demand for structural steel is exceptionally high here," says Amr Ali Ahmed, Managing Partner of Al Shafar Steel Engineering (ASSENT), which operates the largest steel engineering, fabrication, and construction facility in the Gulf. ASSENT, part of the Al Shafar Group of Companies, is focused on steel building materials for industrial, oil and gas, and water and power facilities.

Like nearly all of its competitors, ASSENT imports its raw materials and then engineers, manufactures, and adds value in Dubai before selling to both local and foreign markets. Ahmed told TBY that 80% of their products are used in the UAE while the remaining 20% are exported to Qatar, Kuwait, and Saudi Arabia, though he sees this ratio changing to 50/50 in 2012.

Dubai is also becoming an export hub for aluminum. Dubai Aluminium (DUBAL), a flagship industrial powerhouse in the UAE, exports nearly 90% of its production. Approximately 17% of that goes to Europe, which President and CEO Abdulla J.M. Kalban says will become an increasingly lucrative market if and when the EU decreases its 6% tariffs on aluminum. In the meantime, other markets are presenting major opportunities. “The newest market for us today would be South America," Kalban told TBY. “We started selling there last year, with 10,000 tons being shipped to that market. We aim to sell 25,000 tons there in 2012. By 2015, we expect to sell more than 50,000 tons to South America, mainly in Brazil, Chile, and Venezuela."

AUTOMOTIVE

While the UAE has no domestic automotive manufacturing industry, Dubai is a magnet for cars and as a result has developed a highly competitive base for parts and components, particularly in terms of re-export.

According to Business Monitor International (BMI), the UAE auto market contains 1.4 million vehicles and is growing annually by 10% on average. Within the UAE, Dubai represents half of the vehicles stock. Over 70% of the 150,000 four-wheel drive vehicles sold annually in the GCC region go to the UAE and Saudi Arabia alone. The major players are Nissan, Toyota, Mitsubishi, Mercedes, BMW, Volkswagen, Jaguar, Land Rover, Ford, and General Motors.

The parts and components segment is growing annually at a rate of 20%, and with nearly 65% of stock imported and then re-exported, they are among Dubai's top-10 re-export products. The lion's share of re-exports goes to the Middle East, Africa, and East Europe.

Dubai Auto Zone (DAZ), a cluster of the Jebel Ali Free Zone (Jafza), generated AED14 billion in trade in 2011, marking a 20% year-on-year rise and a 40% increase over the last three years. According to Talal Al Hashimi, Managing Director of the UAE region for Economic Zone World, this growth puts the sector back to pre-recession peak levels. “The physical and soft infrastructure of Dubai is the magnet for fast supply chain management industries like automotive," Hashimi said.

According to BMI, automotive sales are forecasted to rise by 49%, from 403,296 units in 2011 to an expected 600,672 units by 2015, largely as a result of growth in the luxury car market. Within this premium segment, Al Nabooda Automobiles commands a 65% market share. According to its CEO, K. Rajaram, Al Nabooda currently houses the world's largest VW workshop and is the world's largest Porsche dealer. The company is also currently in the process of building the world's largest Audi showroom. “The only way you can sell a high-ticket car is to invest in facilities," Rajaram told TBY in an interview.

Rajaram is excited by the sales growth of 2011, in which Al Nabooda set a record by selling 217 Porches in August, an all-time record in Porsche history. According to the CEO, the company is now back to 2007-2008 peak figures. “Dubai's import procedures are fantastic," said Rajaram. “We all have accounts with customs and nothing waits at the port. If a car lands at 11.00 am, it is in my workshop by 12.30 pm in the afternoon."

Likewise, Arabian Automobiles Company was the number one Nissan distributor in the GCC by sales volume in 2011. It also buys more Nissan spare parts than any other distributor in the world, and the company recently opened the largest Infinity showroom in the world.

According to Michel I. Ayat, CEO of AWR Automotives, the 12% growth in the luxury range “gives a strong indication that consumer confidence is returning to the UAE." Nissan's own sales grew 35% in 2011, outperforming the overall market three fold.

RETAIL

Dubai's broader retail market reveals a similar resurgence in consumer confidence. BMI's 3Q2011 UAE Retail Report forecasted retail sales would grow from $31.01 billion in 2011 to $41.22 billion in 2015. The anticipated 33% jump is a reflection of highly positive indicators—BMI sees GDP per capita rising by 18.7% to $74,484 during the coming period, coupled with an annual average GDP growth of 3.6%, and the population growing to 5.2 million by 2015.

Within this population growth, demographic specifics are also expected to play a vital role. In 2005, 30% of the population was in the 20-44 age range, considered as the most economically active segment for retail sales. According to the UN, this range should hit 56% of the population by 2015.

Growing household consumption is also coupled with an increasing acceptance of new retailing concepts. LOGTA, for example, has recently launched an e-commerce platform and has become one of the leading online shopping sites in the Middle East. “Recession hits old industries," says CEO Islam Zween, “but something new like e-commerce remains relatively unaffected as retail in general is doing relatively better than other industries in the Arab region."

Dubai's shopping landscape—physical and virtual—is a huge part of its tourism draw. According to A.T. Kearney's 2011 Retail Report, Dubai is now head-to-head with London as the most popular retail city in the world. This spells strong profits for a variety of retailers, particularly those such as Dubai Duty Free that are most closely linked with visitor consumers. Colm McLoughlin, Executive Vice Chairman of Dubai Duty Free, told TBY that in 2011 sales were up 15.7% to $1.46 billion, making it the biggest retailer in any airport worldwide.

Among the best-performing subsectors overall in 2011 were over-the-counter pharmaceuticals, which reached $300 million in 2011, automotive sales, which sold 403,296 units in 2011, and consumer electronics, which commanded $3.97 billion. BMI expects that by 2015, OTC pharmaceuticals, automotive sales, and consumer electronics will see increases of 40%, 49%, and 26%, respectively.

Noting that the UAE had the highest fashion clothing sales per capita in the developing world at $785, A.T. Kearney's 2011 Retail Apparel Index described Dubai as a “hotbed for upscale retailers." As long as per capita incomes remain on the up, retail demand across a variety of sectors is bound to continue.