Finding a niche: A wide variety of opportunities exist for investors

With industry accounting for more than 30% of GDP in 2010, Ras Al Khaimah has positioned itself as an increasingly significant manufacturing centre within the UAE and the broader region. By making efficient use of its resources, such as the limestone deposits in the Hajjar Mountains, and investing in connectivity – the emirate has five ports, its own airport, and enjoys good road links to the rest of the UAE and the GCC, with Dubai’s Jebel Ali port an hour’s drive away – RAK has built up substantial cement, glass and pharmaceuticals sectors. Perhaps the most successful industry is ceramics, with RAK Ceramics being the world’s largest ceramics producer.

Although the global credit crunch of 2008 did affect some of RAK’s industries, especially those catering to the UAE’s real estate boom, the emirate’s industrial base continued to grow, both by value and in terms of the spread of industries, which has made for a more diverse, and therefore more resilient, economy. Moreover, the emirate survived the downturn without a single factory closure.

In 2010, the latest year for which figures are available, manufacturing accounted for some 22% of GDP, compared to 23% in 2009, according to the RAK Department of Economic Development (RAK DED). The value of manufacturing output rose from Dh3.87bn ($1.05bn) in 2009 to Dh3.9bn ($1.06bn) in 2010. Non-oil exports were worth Dh4.01bn ($1.09bn) in 2010, and re-exports amounted to Dh1.92bn ($524m), compared to figures of Dh3.23bn ($879m) and Dh1.2bn ($326m), respectively, in 2009.

EXPORTS: In terms of exports, the leading sectors by value in 2010 were machinery, worth Dh227m ($61.8m), followed by ceramics, stone and glass products, valued at Dh87m ($23.7m).

Food and beverages and machinery were joint leaders in the re-export sector, at Dh519m ($141m) each, followed by textiles, worth Dh217m ($59m). The GCC states took 74.7% of exports by value in 2010, followed by Asian countries with 21.1% and other Arab countries with 2.3%. In terms of reexports, Asia accounted for 45.2% by value in 2010, followed by the GCC at 37.3% and Europe with 7.9%.

IMPORTS: RAK imported Dh2.1bn ($572m) worth of goods in 2010, up from Dh1.93bn ($524m) in 2009. By value, machinery led imports, worth Dh991m ($270m) in 2010, followed by mineral products worth Dh674m ($183m) and base metals (Dh142m, $38.7m). Asia was the leading source of imports, accounting for 33.4% of the total value in 2010. Africa was responsible for 19.4%, while GCC countries accounted for 8.8% by value. The remaining 25.8% was provided by a variety of countries.

REGULATORY ENVIRONMENT: Although certain economic matters, such as trade policy, are dealt with at the federal level, in general the individual emirates of the UAE have a great deal of flexibility in framing economic policy to suit their particular needs. RAK, as an emirate with low levels of oil and gas revenue, has had to take a long-term view and be prudent about the projects it supports.

Advancing industrial development has been a government goal for many years, and it has invested with an eye firmly fixed on the long term. The RAK Investment and Development Office (RAK IDO) acts as the government’s strategic investment arm for such investments, with stakes in over 120 entities, covering sectors from manufacturing and tourism to retail and transport. The government’s strategy has been to form partnerships with foreign investors with a view to developing RAK’s industrial capacity.

RAKIA: RAK Investment Authority (RAKIA) is a government body responsible for attracting foreign funding, having brought more than 900 factories to the emirate since 2005, with total investment of approximately $3.5bn. In addition to providing facilities, RAKIA also offers investment advice and equity participation in selected projects.

The RAK DED is responsible for licensing onshore companies, monitoring their economic activities, implementing consumer protection action plans, producing and publishing official statistics, and contributing proactively towards the emirate’s strategic vision together with economic partners.

INCENTIVES: One of the main ways in which RAK has attracted industrial investment is by maintaining a business-friendly environment. The emirate offers a one-stop shop for businesses wishing to set up, with licences available within 24 hours, in some cases. The emirate levies no income or corporate taxes and imposes no restrictions on repatriation of capital and profits, on hiring expatriate labour, or on foreign exchange movements.

In addition to these incentives, RAK benefits from good infrastructure connections with the rest of the UAE, with fast highway links to all other emirates (including the major urban centres of Abu Dhabi and Dubai), its own airport, which has a capacity of around 250,000 passengers a year, and five ports: RAK Maritime City, RAK Khor, Al Jazeera, Al Jeer and Mina Saqr. The latter is the largest bulk handling port in the Middle East, and handled 27.4m tonnes in 2009. The cost of living is less than that in Abu Dhabi and Dubai, which means lower operating costs for investors, and lower wage rates generally. Indeed, workers’ accommodation is often built on site at projects, enabling significant time and cost savings.

Given the small population in RAK, most industries are export-oriented. RAK has access to the affluent GCC market, with a total population of around 40m, which has continued to experience rapid economic growth in recent years. Moreover, the emirate’s location is convenient for exports to the Indian subcontinent, East Africa and East Asia.

RAKIA INDUSTRIAL PARKS: RAK has a number of industrial parks and free zones, which have been carefully tailored to attract investment that fits with the emirate’s economic development vision. Currently, RAKIA operates two industrial parks at Al Ghail, in the interior of the emirate, and Al Hamra, near the coast, bordering the emirate of Umm Al Quwain. These zones are very much geared toward manufacturing. Al Hamra, which opened in 2005, covers an area of 4.8m sq metres and occupancy stands at almost 100%. Al Ghail, which opened in 2007, is larger, with an area of 22m sq metres. Each zone has its own power plant, with respective capacities of 84 MW at Al Ghail and 45 MW at Al Hamra.

RAKIA set up its own industrial parks in 2005, following the establishment of another free trade zone, RAK Free Trade Zone (RAK FTZ), in 2000. The idea was to catalyse diversification. To establish its competitive niche in the Gulf region, RAKIA has tailored its zones to develop an offering that would meet the needs of manufacturing clients.

The result has been regional and international companies’ continued interest in the parks, even during the recent recession. Alex Thomas, the general manager of marketing at RAKIA, told OBG, “We have witnessed a migration of new companies from other GCC countries and the Middle East into RAK, and they are conscious about the total costs of operation. Such companies have identified RAK as one of the cheapest destinations to do business in the UAE – costs are lower by about 15-20% – and they make up roughly 20% of all RAKIA licences.”

RAKIA’s industrial parks have continued to attract foreign investment, with new factories opening, notably in building materials and metals. In 2011 the single biggest segment in RAKIA zones was the steel and steel products industry, at 25%, followed by building materials at 17%. A total of 1415 companies held licences, up from 1108 in 2010.

In 2011 RAKIA granted 101 industrial licences, 77 commercial licences, 433 licences in consulting and services, 765 in trading and 39 in media. In terms of the investor profile, the single biggest investor country was India, which accounted for 28% of total licences granted, followed by Europe (20%) and the rest of the Middle East (18%).

FREE TRADE ZONES: In addition to RAKIA’s industrial parks, the emirate has a number of free zones, the oldest of which, RAK FTZ, was set up in 2000. In 2011 the Financial Times ranked RAK FTZ in the top five free zones in the Middle East, coming fourth out of 115 such zones surveyed.

In addition to the incentives available to investors in RAK generally, foreign firms investing in the free zones can hold up to 100% ownership. Potential investors into industrial estates can obtain a licence to set up an office in RAK FTZ within 24 hours, allowing them to conduct more detailed assessments of the market before committing to opening a factory. In 2011 RAK FTZ was home to over 5000 firms from 106 countries. In the same year, a total of 2033 licences were granted, an increase of 17% on the 1740 recorded in 2010. Most of the firms in RAK FTZ were small and medium-sized enterprises engaged in services. RAK FTZ has its own industrial park and technology park where clients can set up warehouses and manufacturing facilities.

In addition to RAK FTZ, RAK Maritime City, a free zone founded in 2011, is geared to meeting the needs of companies working at the adjacent Mina Saqr port. Total investment in building the zone was $142m, and it is expected to boost throughput at Mina Saqr by 25% in the first year. RAK is also considering setting up a free zone at RAK Airport.

CEMENT: One of RAK’s biggest industries is cement, which is based on the abundant local limestone deposits. As such, the industry is not dependent on the import of raw material, and has become a significant export-earner for the emirate, supplying customers across the GCC and beyond. RAK is home to five cement firms: Union Cement Company, with an annual clinker capacity of 4.25m tonnes and cement capacity of 4.27m tonnes; Gulf Cement Company, with annual clinker capacity of 3.72m tonnes and cement capacity of 2.73m tonnes; Pioneer, which was taken over in 2011 by Omani producer Raysut Cement and has annual clinker and cement production capacities of 1.23m tonnes and 2m tonnes respectively; RAK White Cement, with total capacity of 450,000 tonnes of cement; and RAK Cement, which had clinker capacity of 1.11m tonnes and cement production capacity of 1.23m tonnes in 2011. The latter firm announced in September 2011 that it had received certification from the American Petroleum Institute to make oil well cement.

Taken together, RAK’s cement factories account for a substantial proportion of the UAE’s total clinker and cement capacity of 23.4m tonnes and 36.2m tonnes, respectively. Production capacity in the UAE has expanded substantially over the past decade, driven by the rise in demand for construction materials sparked by the oil and real estate boom of the mid-2000s. Now however, the industry is generally acknowledged to suffer from oversupply. The UAE construction market was one of the hardest hit by the global recession, with value of the construction backlog in the country estimated at 113% of GDP in 2011, according to figures from Global Investment House, a Kuwaiti bank. Cement prices in the federation remain the lowest in the region, standing at $50.10 per tonne in the first half of 2011, down 5.1% on $53.10 per tonne over the same period in 2010. Prices and demand have yet to regain their 2008 peak, and cement players feel this is unlikely to happen for some years. As such, a number of companies reported losses in 2011, including RAK Cement, which posted a loss of Dh3.94m ($1.07m) for 2011, with revenues falling 19.7% from Dh277m ($75.4m) in 2009 to Dh237.5m ($64.7m) in 2010.

CERAMICS: Another industry based around RAK’s limestone deposits is ceramics. RAK Ceramics is the world’s largest producer of ceramics, turning out 360,000 sq metres of tiles and 12,000 units of sanitary ware a day, of which 228,000 sq metres and 8500 units a day are produced in RAK. Some 85% of the company’s production goes to export, meaning it was relatively unaffected by the real estate slump in the UAE, new export markets having more than made up for the loss of domestic demand. In 2010 the company, which is listed on the Abu Dhabi stock exchange, posted a net profit of Dh270m ($73.5m), up 3.2% on 2009. Net revenues for 2010 were Dh3.3bn ($898m), down 11.5% on the previous year. The company attributes its success to innovation, with over 8000 product lines available.

GLASS: Another large industrial segment in RAK is glass. The emirate is home to a number of firms in this industry, producing a broad range of products for different markets. Of these, one of the largest is Arc International, a French group which produces a variety of items, including drinking vessels, kitchenware and tableware under the well-known Luminarc and Pyrex brands. The group, which has been in RAK since 2004, expanded its production facilities by opening of a fourth furnace at its existing site in September 2011. The facility doubles annual production capacity at the site to 16,000 tonnes of clear and opal glass and to 48,000 tonnes of clear glass, and will allow the company to capitalise on growing demand in emerging markets in Asia.

A more specialised producer is Ghani Glass RAK, a joint venture between Pakistan’s Ghani Glass Group, RAKIA and a number of private investors. It makes 100,000 units a year of amber glass, which it sells as containers for use in the pharmaceuticals industry. The firm exports across the GCC, and in 2012 received the green light to enter the EU market.

Guardian Glass, which is backed by a number of Saudi investors, was established in 2006 and began production in 2007. It is one of the largest glass manufacturers in the region, with annual production at its RAK site of 225,000 tonnes a year, or 700 tonnes per day. Production is geared mostly to the construction and real estate industries, and the company has supplied architectural free-float glass to such big names as the Burj Khalifa hotel in Dubai and the Mecca Clock Tower.

As of early 2012, this side of the industry found itself oversupplied, as a slump in construction projects led to stockpiles building up and prices dropping correspondingly. However, given the generally buoyant outlook for Gulf economies over the medium term, the industry appeared relatively confident about prospects over a longer time frame. G.S. Raju, the executive general manager of Guardian Glass RAK, told OBG, “With the rise in population and substantial growth of various economies achieved among countries in the GCC, we believe new construction projects will continue to be undertaken in the medium term – positively sustaining the glass manufacturing industry.”

QUARRYING: In addition to these industries based on processing of RAK’s deposits of limestone, quarrying itself remains a significant industry in the emirate. The biggest producer is Stevin Rock, which commenced operations in 1975 as an export-geared operation backed by Dutch investors before being purchased by the government of RAK in 1996. Upon acquisition of rival firm RAK Rock in 2007, it became one of the largest quarrying companies in the world, producing 56m tonnes a year of limestone, concrete and aggregates in 2010.

Exports of mineral products were worth Dh1.01bn ($274m) to the emirate in 2010, according to figures from the RAK DED. Much of this is transported out of the country via the company’s facilities at Khor Khuwair, where it has its own harbour capable of handling barges with capacities of 25,000 tonnes, although the UAE’s two largest cities, Abu Dhabi and Dubai, are also significant markets. While RAK’s own construction sector remains in robust shape, it accounts for a small part of demand. In the longer term, the coming of the Etihad Railway, a project to link all seven emirates by 2017, with connections beyond to Oman, Saudi Arabia and the northern Gulf, will help bring down freight costs and allow for export of aggregates from RAK at lower cost.

PHARMACEUTICALS: One of the biggest firms in the emirate is Gulf Pharmaceutical Industries, better known under its trade name, Julphar Pharmaceuticals, which recorded sales of just over Dh1bn ($272m) in 2011 for the first time, compared to Dh920m ($250m) in 2010, and made annual profits of Dh170m ($46m), compared to Dh154m ($42m) in 2010. Founded in 1980 by Sheikh Saqr bin Mohammed Al Qasimi, the former ruler of RAK, the company is listed on the Abu Dhabi stock exchange, but the government of RAK retains a 23% stake.

The group operates 10 plants, of which nine are in RAK and one is in Bangladesh, and produces over 180 products, mostly generic drugs. Exports account for approximately 90% of production, with Julphar products to be found in over 40 countries across the Middle East, Asia and Africa. The company is moving to develop new product lines, notably insulin, for which demand is high in the UAE and across the GCC. According to a study from Imperial College London, the UAE has the second-highest incidence of diabetes in the world, with more than 40% of people over the age of 60 reported to be diabetic. The Ministry of Health estimates the incidence of obesity at 25% for men and 40% for women among the national population in the UAE.

The Gulf region as a whole suffers from some of the highest rates of diabetes in the world, due to genetic predispositions to the disease and high rates of obesity. As such, Julphar has invested Dh500m ($136m) in a facility to produce 1500 kg of insulin a year, equivalent to 50m phials. Production at the plant is due to commence in 2012.

NEW INDUSTRIES: In addition to these major players, which are among the biggest in their fields in the Gulf region, RAK has continued to widen the range of products it makes, from basic industries to ones producing more finished products.

One of the biggest investments of 2011 was a joint venture between RAK’s government and Swiss mining group Unifico to develop a copper smelter in the emirate, the first of its kind in the region, capable of supplying up to 500,000 tonnes a year once production is up and running by 2014.

Another metal venture is a partnership between local conglomerate Union Holding Company and TriStar Resources, a UK-listed mining group, to set up a 20,000-tonne-capacity plant to process antimony, a rare earth, at Al Ghail industrial park. Saudi group Zamil Steel has been present in RAK since 2006, producing pre-engineered buildings and latticed towers. New factories producing articles such as steel pipes, batteries and electric cables also opened in 2011. In early 2012 armoured vehicle firm Streit opened a factory in RAK, the first phase of a $54m investment programme which will see the second and third phases arriving by 2014, taking the number of employees from 400 to over 2000.

HIGH-TECH: In addition to finished and semi-finished products, RAK is starting to produce higher-value goods. The emirate is investing in high-tech industries and promoting the local research and development sector. One success story in this regard is Falcon Technologies International, which manufactures optical data storage media as well as providing archival solutions. The company was founded in 2004 and its Blu-ray discs and storage media can be found in markets across the world.

Two more Swiss research institutes, the Centre Suisse d’Electronique et de Microtechnique (CSEM) and the Ecole Polytechnique Fédérale de Lausanne (EPFL), maintain research bases in RAK, focusing on solar technology and smart electricity grids, respectively. Although the development of a high-tech industrial base in the emirate remains in its infancy, companies such as Falcon have the potential to act as seeds, stimulating a cluster effect, especially as RAK’s government is prepared to take the long-term view that such investments usually require.

COMPETITIVENESS: RAK may be relatively industrialised, but part of the key to its success has been specialisation. As a small emirate with limited hydrocarbons and financial resources, the authorities in RAK recognised early that the way for the emirate to thrive was to complement, rather than compete head on with the major projects taking place elsewhere. Thus, RAK has succeeded in avoiding reduplication with projects in other emirates and other Gulf states, instead concentrating on niches not currently served elsewhere in the region.

Moreover, the emirate benefits directly from its proximity to the Jebel Ali port in Dubai, and the aviation hubs at Abu Dhabi and Dubai, home to Etihad and Emirates airlines, respectively, while promoting its own ports for very specific markets, such as Mina Saqr for bulk, Khor Khuwair for aggregates, and Al Jeer, the only specialised livestock port in the region. RAK has targeted its investments very carefully to ensure that it only goes in for projects that will be viable and ultimately produce value for the emirate.

POWER CONSTRAINTS: This is not to say that the progress of industrialisation has always run smoothly in the emirate – in recent years, the availability and cost of electricity for industrial users has emerged as a significant concern for the business community, and particularly for industry.

The Federal Electricity and Water Authority (FEWA), which supplies utilities to the Northern Emirates, prioritises residential over commercial customers, which has led to several factories relying on their own generators. Moreover, FEWA’s rates tend to be more expensive than in neighbouring Abu Dhabi, which has greater energy resources, and operates a separate power system.

However, with RAKIA’s own power stations coming on-stream at Al Hamra and Al Ghail industrial parks, an extra 120 MW of capacity has been added, and RAKIA is currently connecting these two plants to form its own private grid, with work expected to be complete by the end of 2012. Over the short term, this has largely solved the power supply problem, but if industrial growth continues at the present rate, a new power station – or equivalent output – is likely to be needed to meet demand.

FEWA is expanding its network, with the federal government having committed $1.5bn to improving utilities in the Northern Emirates and RAK’s first integrated water and power plant (IWPP) – a 70-MW, 245,000-cu-metre-a-day plant – under development by Utico, a subsidiary of Abu Dhabi construction and contracting group Ghantoot, which invested Dh2bn ($544m) in the project over the course of 2011. Other possible options are to buy power from Abu Dhabi, which currently has spare capacity, and to promote efficiencies among domestic users to free up supplies for industry, for instance, by supporting the uptake of solar energy.

OUTLOOK: RAK’s attractive investment and regulatory environment means that interest from foreign investors should continue. The industrial base appears to be set for strong growth and wider diversification, with a trend towards value-added products, although building materials are likely to remain one of the biggest sectors for the foreseeable future. Improvements in connectivity to the rest of the region and an ability to compete on international markets mean exports should continue to account for a major share of industrial production. While the availability and cost of power may continue to an issue, over the medium term these concerns are likely to subside as further capacity comes on-stream.

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