Industry in Dubai is driven by local procurement goals and investor incentives

 

Fuelled by public infrastructure investment and attractive incentives for foreign investors, Dubai’s industrial sector – defined as manufacturing, electricity and gas – continues to be a major driver of the emirate’s economic growth. While industrial output has been historically built on low-tech but high-value-added segments such as base metals and chemicals production, the emirate is pursuing a diversification agenda under its Dubai Industrial Strategy 2030. This policy appears to be achieving results, with 2019 seeing growth in priority areas including the food and beverage (F&B) segment as well as emerging industries such as auto manufacturing. Furthermore, with the reform of foreign ownership laws and the reductions in fees for businesses operating in the emirate’s free zones in 2019, foreign direct investment (FDI) inflows are expected to rise in the coming years.

Structure & Oversight

Various regulatory bodies, state-owned entities and government-backed development funds oversee and regulate the emirate’s industrial sector. As in the wider UAE, much of Dubai’s industrial activity takes place in the emirate’s free zones – geographically defined offshore locations that allow 100% foreign ownership.

These zones are managed by state-owned operators such as DP World, investment group TECOM and Dubai Airport Freezone Authority, among others. These bodies provide infrastructure to support investment, including transport and telecommunications, cargo and Customs clearance facilities, and real estate management services. Dubai has 18 industrial areas, some eight of which are within free zones, which make up approximately 30% of the emirate’s total industrial area.

Free zone operators work with both national and emirate-level government entities in order to identify and achieve development targets, as well as to ensure transparency and enforce international standards across all industrial segments. At the UAE level, government entities involved in regulating and guiding the sector include the Ministry of Economy (MoE), the Ministry of Public Works, the Ministry of Labour, and the Ministry of Environment and Water. These ministries, along with a variety of other stakeholders, are represented on the Industrial Coordination Council and the Dubai Free Zone Council.

At the emirate level, Dubai’s industrial policy is directed by the Dubai Department of Economic Development (DED), working alongside other agencies such as Dubai Exports and the Dubai Chamber of Commerce and Industry. Together, the bodies are tasked with supporting the objectives of the Dubai Industrial Strategy 2030, a government policy framework published in June 2016 which aims to raise the sector’s value to Dh59bn ($16.1bn) and increase manufacturing exports by Dh16bn ($4.1bn).

Performance & Size

Dubai’s government is prioritising the industrial sector – particularly the manufacturing – to drive non-oil GDP growth and support diversification. The sector as a whole accounted for 13.7% of Dubai’s GDP in 2017, with manufacturing contributing the highest share of output, at 68.5%, followed by electricity and gas (19%), and mining and quarrying (12.5%), according to the latest government figures. In 2017 the total value added by the industrial sector was Dh53.7bn ($14.6bn), a 2.5% increase from Dh52.4bn ($14.2bn) the previous year. Manufacturing has grown significantly, with its value-added contribution to Dubai’s GDP rising by 2% in 2017 to reach Dh36.8bn ($10bn), up from Dh36bn ($9.8bn) in 2016; the segment now accounts for around 9.4% of GDP.

Manufacturing

The Dubai government expects manufacturing output across the UAE to rise by 34% by 2027, with the emirate’s own industrial growth anticipated to exceed the national average at 51%. Overall, the UAE government expects manufacturing to contribute 25% of the country’s GDP by 2025, an ambitious though feasible target given that the industrial sector expanded by 31% over a 10-year period between 2007 and 2017.

Preliminary 2018 data on producer price index trends for Dubai’s manufacturing segment showed encouraging signs of expansion, as average prices rose by 6.3%, according to the Dubai Statistics Centre. While increased prices for refined petroleum products accounted for some 70% of this change, prices in other manufacturing segments such as electrical equipment (4.5%) and non-metallic products (3.7%) also demonstrated growth. These dynamics appear to be having a positive knock-on effect on business confidence. According to the Dubai Business Confidence Index for the first quarter of 2019, those surveyed were found to be most optimistic about the manufacturing segment in terms of volumes, profits and employment, with larger companies having stronger expectations compared to small and medium-sized enterprises.

The manufacturing segment is still dominated by low- and medium-low-tech industrial activities, such as basic metals and consumer goods production, which are characterised by low wages and labour-intensive production. This segment accounted for around 36% of all production in Dubai in 2017, compared to an average of 29% for other emerging industrialised economies, according to the most recent government figures. Low-tech production employs more than two-thirds of the total workforce in Dubai’s manufacturing sector. In 2016 manufacturing of basic metals and metallic products accounted for 26% of manufacturing value added, followed by the manufacturing of machinery and transport (16%); food products, tobacco and beverages (13%); basic chemicals and pharmaceuticals (11%); and wood and paper products (11%).

Metals

Major infrastructure investments and rising demand from the construction industry – particularly in the build-up to Expo 2020 Dubai – have supported significant growth in domestic aluminium and steel production. As of late 2018 the UAE had a construction pipeline of 11,334 projects with a shared value of $272.7bn, according to construction intelligence firm BNC Network. Steel consumption is projected to grow at a compound annual growth rate of 8% between 2016 and 2020. “Our project pipeline in 2019 is more than double what we anticipated,” Ramesh Iyengar, CFO of Dubai Metal Industries, told OBG. “Dubai is a trendsetter, and will always be trying to do something bigger or better than other markets.”

Dubai is home to the second-largest steel manufacturer in the UAE after the state-owned Abu Dhabi-based Emirates Steel, namely the private firm Conares, which operates out of Jebel Ali Free Zone (JAFZA). In order to meet rising demand, the company has made a series of major strategic investments in its facilities, including a $27m new steel pipe mill which opened in 2018. The company expects its annual production capacity to almost double from 525,000 tonnes in 2016 to 1m tonnes in 2020.

Meanwhile, aluminium is the UAE’s biggest export after oil and gas, and accounted for 1.4% of the country’s GDP in 2018, with a total value of Dh20bn ($5.4bn), according to consultancy Oxford Economics. Emirates Global Aluminium (EGA), owned jointly by Dubai and Abu Dhabi government-investment funds, dominates production in the segment. Importing raw materials from mines around the world, EGA’s smelting plants produce around 2.6m tonnes of cast metal, contributing 4% of global output some 90% of production is exported to overseas markets.

In 2018 EGA recorded profits of Dh1.2bn ($326.6m) and its revenues increased by 14% to Dh23.5bn ($6.4bn), up from Dh20.5bn ($5.6bn) in 2017. The company supports growth in the wider aluminium sector, which employs around 61,000 workers across the UAE. The segment plays a significant role in the economy as a whole, supporting downstream industries such as vehicle production. Indeed, every Dh1 ($0.27) generated in the aluminium sector is estimated to create an additional Dh1.26 ($0.34) in the wider economy, according to local estimates.

Automotive

While relatively small by international standards, the vehicle production segment has seen a recent uptick in activity. In May 2019 Sandstorm Automotive, a Dubai-based car manufacturing firm, announced plans to manufacture 13,000 four-wheeldrive vehicles at a newly constructed assembly facility in Dubai Investment Park. The factory – the first of its kind in the country and the broader GCC – is set to procure 30-40% of its components from local producers, with the aim of increasing this to 80% by 2023. The first batch of these vehicles is expected to leave the production line by the end of 2019.

The main challenge that automotive firms need to overcome in order to expand is the lack of access to market data. “Companies in the segment need data on Dubai’s automotive industry,” Ahmed Al Habtoor, chairman of Al Habtoor Motors, told OBG. “Compared to other countries in the region, such as Turkey, the UAE lacks up-to-date information on car registrations, which means companies struggle to get a sense of demand and competition in the market.”

Food & Beverages

Due to its importance for food security, along with its high-value-added component and role as a generator of employment, F&B processing and manufacturing has been earmarked as a priority segment under the Dubai Industrial Strategy 2030. The emirate already has a well-developed F&B ecosystem, with many companies in operation since the 1970s. According to the most recent data from Dubai Exports, there were 218 registered F&B manufacturers in Dubai as of 2017.

From January to September 2017 F&B exports from Dubai reached Dh12.6bn ($3.4bn), or 12% of total exports, while re-exports reached Dh12.9bn ($3.5bn), or 5% of the total. The marks a considerable expansion, with total food exports having stood at Dh9.7bn ($2.6bn) in the first nine months of 2014.

In 2017 approximately 111 F&B products, including vegetables, dairy products, cereals, dates, pasta and nuts, were exported from Dubai to around 191 destinations, with Asia being the leading destination market, according to Dubai Exports. Dubai’s F&B segment has achieved consistent growth built on both domestic and foreign investment, as well as successful government efforts to position the emirate as a centre of global trade and logistics. Furthermore, Dubai has hosted Gulfood, the world’s largest annual F&B trade exhibition, since 1995, with the 2019 event attracting over 100,000 attendees from around the world, including various trade missions.

Chemicals

Chemical manufacturing, another of Dubai’s major industrial segments, plays a crucial role in supplying the local construction industry, as well the UAE’s oil and gas sector. Production reached Dh10bn ($2.7bn), or 8.4% of Dubai’s total manufacturing output, in 2016, according to the most recent figures from Dubai Exports. Exports from the segment increased by 10% to Dh2.2bn ($598.8m) in 2017. The segment is also a major contributor to value added in manufacturing at 11%, behind F&B, which stood at 13% in 2016. Demand for chemicals, particularly from the local oil and gas sector, is expected to continue to rebound over the coming years, driving increased production. Indeed, in November 2018 the Gulf Petrochemicals and Chemicals Association forecast that the industry in the UAE as a whole would grow by 4.4% per year between 2017 and 2027.

Reforms & Incentives

Dubai’s industrial sector is set to benefit from wider UAE reforms designed to boost FDI inflows and support economic diversification. In November 2018 a new law allowing 100% foreign ownership of companies operating in certain onshore sectors came into effect. Prior to the passing of the new legislation only industrial firms operating in the various free zones could retain 100% ownership, alongside other benefits such as tax advantages and exemptions from Customs and excise duties. The new law is expected to encourage investment in the industrial sector, and increase the number of multinationals establishing operations in Dubai and the wider UAE. According to estimates from the MoE, the new law is expected to see FDI to the UAE increase of 15-20% by the end of 2020.

As part of this broader effort to attract foreign investment and boost competitiveness, the Dubai government has been working dramatically reducing business and start-up costs. Since 2018 there have been moves to reduce fees and operational costs for businesses in Dubai’s 28 free zones. These include registration fees, licence fees and visa fees for foreign employees. These efforts are bearing results; Dubai Airport Free Zone, for example, achieved up to a 65% reduction in costs associated with establishing a business in mid-2018. In a similar move, DP World announced in May 2019 that it would refund Dh1.3bn ($353.9m) in cash and bank guarantees to investors in JAFZA in an effort to boost activity.

Free Zones

While the law on foreign ownership has opened up the onshore market to international investment, most of Dubai’s industrial activity still takes place in the emirate’s free zones. The emirate had 28 free zones as of March 2019, the largest number in the UAE and accounting for 17.5% of all the zones in the Middle East. JAFZA, which is owned by DP World, is one of the largest free zones for industrial companies. It is home to 7500 multinationals and employs more than 135,000 people, or 16.2% of the emirate’s total workforce. Companies operating in JAFZA contributed approximately 23.8% of Dubai’s GDP in 2018, generating trade valued at $93bn.

Dubai Industrial Park (DIP), which was founded in 2004 under the name Dubai Industrial City and is operated by TECOM, is another major industrial centre in the emirate. Strategically located with access to transport routes via air, land and sea, the free zone has seen its client base increase from 259 companies in 2012 to 700 companies in 2019, including 250 factories. DIP specialises in light to medium manufacturing and is key to the government’s industrialisation efforts. In February 2019 DIP signed an agreement with domestic firm Lootah Real Estate Development to establish a 92,903-sq-metre purpose-built industrial manufacturing development on its premises. In June 2019 the project started offering manufacturing companies lease-to-own industrial warehouses in Dubai, providing cost-effective solutions for businesses looking to expand.

Investment

As the primary centre of industrial activity in the emirate, free zones continue to attract the bulk of Dubai’s inbound FDI. Indeed, JAFZA accounted for 23.9% of the emirate’s total FDI in 2017. Nevertheless, manufacturing accounts for a relatively small share of Dubai’s FDI inflows, at 4% in 2016, according to the most recent available government figures. However, with free zone operators reducing fees and start-up costs, investment in these areas is primed to increase significantly. Dubai’s economy has seen record FDI inflows in recent years, rising from Dh27.3bn ($7.4bn) in 2017 to Dh38.5bn ($10.5bn) in 2018. Changes to foreign ownership laws are expected to continue to drive this trend, attracting more investment to onshore locations.

The F&B segment holds particular growth potential, with 62% of domestic F&B demand met by local industry in 2017. This figure is expected to rise as the government seeks to increase domestic food production. International firms are already entering the market: Nestlé opened a new Dh530m ($144.2m) factory in Dubai in May 2017, and Dubai Food Park signed a Dh1.35bn ($367.5m) agreement with China-based Ningxia Forward Fund Management in September 2017 to build a food production cluster.

Local Procurement

While the government’s policy of encouraging domestic production of manufactured and processed foodstuffs will benefit the F&B industry, other industrial segments are benefitting directly from increased state investment and tariffs. Dubai’s construction sector grew by 4.5% in 2018, stimulated by a 32% increase in government expenditure on infrastructure, driving domestic demand for steel and aluminium. The UAE government has also intervened to actively support local suppliers, doubling import duties on steel rebars and pipe rods to 10% in January 2019, in a move welcomed by domestic producers. Local manufacturers are also reportedly seeking tax support on other building materials. Speaking to local media in April 2019, Bharat Bhatia, CEO of local steel company Conares, stated, “The MoE understood the need to support local steel manufacturing that has invested billions in the industry.” According to Bhatia, local producers have a competitive advantage in that most projects are demanding quicker delivery times and therefore opting for locally produced products.

Outlook

In line with the Dubai Industrial Strategy 2030, the government is taking proactive steps to position the emirate as an attractive global centre for industrial production and innovation. While efforts are being made to boost metals, chemicals and F&B output – which remain the mainstays of Dubai’s industrial sector – the emirate is also targeting more specialised segments as it seeks to support growth in high-tech, high-value-added manufacturing industries and boost non-oil and gas growth. Long-term goals include establishing localised manufacturing clusters to support the maritime, aerospace and solar power segments. Though important steps have been taken to encourage foreign investment, lower business costs, support local producers and boost the start-up ecosystem, there are still challenges that need to be overcome in order to unlock the emirate’s industrial potential and meet the ambitious objectives laid out in the Dubai Industrial Strategy 2030. For example, the absence of local content laws outside of the UAE’s oil and gas sector remain a concern for industry players.

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