Free trade zones and public-private cooperation to boost Dubai industry

 

A key driver of non-oil GDP growth, Dubai’s industrial sector continues to play an integral role in both its own diversification plans and those of the UAE. As a whole, the UAE is already the most diversified economy in the GCC, with only a third of its GDP coming from hydrocarbons activity. Recently, however, pressures from the oil price drop have driven a renewed push to further diversify the emirate’s economy. “Dubai takes pride in being a truly diverse city both demographically and industry wise; it is no surprise that the manufacturing sector’s contribution to the city’s GDP is growing year over year,” Vishnu Sankaran, head of strategy and business development for India, the Middle East, North Africa and Turkey at Dow Chemicals, told OBG.

Facts & Figures

According to preliminary data from the Federal Competitiveness and Statistics Authority, the UAE’s GDP grew by 3% in 2016, roughly in line with forecasts, with the non-oil sector seeing a 2.7% increase. Among the key drivers of UAE growth were the manufacturing and construction sectors, which grew by 6% and 3%, respectively. Only transport and storage saw a stronger growth rate than manufacturing, at 7.4%.

Meanwhile, Dubai’s economy grew 2.9%, according to the Dubai Statistics Centre (DSC), down from 4.3% in 2015. This was lower than expected: Emirates NBD, a regional financial services firm, had predicted a growth rate of 3.5%. Manufacturing contributed 9.5% of Dubai’s GDP in 2016, according to the DSC’s preliminary data, up from 9.4% in 2015 and reaching a value of Dh35.7bn ($9.7bn), up from Dh34.5bn ($9.4bn) in 2015. The number of Dubai businesses continues to hold steady despite a broader economic slowdown driven by lower oil prices: in 2016 some 2845 industrial business licences were renewed, with 205 new ones issued and 48 cancelled. This was down only slightly from the 2941 industrial licences renewed and 201 new licences issued in 2015.

Exports continue to play a vital role in Dubai’s industrial and manufacturing sectors, amounting to a Dh473.7bn ($128.9bn) including re-exports in 2016. Pearls, precious stones and metals topped the export list for 2016, with a value of Dh71.19bn ($19.4bn), accounting for 54.9% of all exports, with re-exports worth Dh62.1bn ($16.9bn), around 38.1% of the total. Meanwhile, base metal exports recorded a value of Dh23.1bn ($6.3bn), followed by prepared foodstuffs, which came in at Dh6.9bn ($1.9bn). Among re-exports, machinery, sound recorders, televisions and electrical equipment were the second largest segment, worth roughly Dh35.7bn ($9.7bn), or 21.7% of the total, followed by vehicles, aircraft and vessels at Dh27.1bn ($7.4bn).

Challenging Times

Dubai’s economy, like much of the Middle East, continues to be affected by the lower oil price environment that emerged in mid-2014. While the November 2016 agreement among members of the Organisation of Petroleum Exporting Countries to cap oil production is now set to run until at least March 2018, the hoped-for rebalancing of the oil market has not been as strong as many predicted. Going forward, Emirates NBD expects the deal’s upward pressure on prices to wane moving into 2018, saying there are few signs it has been successful in rebalancing markets, or that its effects will increase in the near future. Though oil prices continued to rise in the second half of 2017, to as high as $65 per barrel from a low of $28 in early 2016, the bank believes a resumption of production by major MENA oil producers is likely to ease prices, constraining the scope for expansion; the bank recently revised down its GDP growth prediction for the UAE for 2017 from 3.4% to 2%, on the expectation that its oil sector will contract.

A similar trend is expected to play out across the GCC. Developments in the non-oil sector could therefore be key to sustaining the country’s headline growth rate, with a recently released government industrial strategy likely to play a key role.

Strategy

As part of a development plan launched in June 2016 called Dubai Industrial Strategy 2030, Dubai’s government has identified 75 initiatives as well as six high-value segments – aerospace, maritime, aluminium and fabricated metals, pharmaceuticals and medical equipment, food and beverages, and machinery and equipment – to prioritise. The strategy expects to see some Dh165bn ($44.8bn) added to Dubai’s economy by 2030, with investment in research and development set to increase by Dh700m ($190.5m) over the period. Meanwhile, growth in the industrial sector brought about by these developments is expected to create 27,000 new jobs. “The Dubai Industrial Strategy aims to transform the UAE into a global platform for innovative industries and a destination of choice for international companies seeking an integrated and favourable environment for growth and sustainability,” Sheikh Mohammed bin Rashid Al Maktoum told local media at the document’s release.

Oversight

Various ministries are involved in the promoting and development of the industrial sector in the UAE. Chief among them are the Ministry of Economy, the Ministry of Labour, the Ministry of Public Works and the Ministry of Environment and Water. In April 2016 the UAE’s Cabinet launched the Industrial Coordination Council, which is tasked with developing a national strategy to boost the industry sector, as well as setting key performance indicators and following up on initiatives to boost cooperation. Meanwhile, at an emirate level the Department of Economic Development plays a central role, as well as the Dubai Export Development Corporation and the Dubai Chamber of Commerce and Industry. In addition, the Dubai Free Zone Council (DFZC), created to help cooperation between the free zones in the emirate, authorities and other relevant bodies, held its first meeting in October 2015. The council was created to represent the free zones’ interests at local, federal and international levels. In February 2017 the DFZC unanimously approved a new strategic plan designed to transform Dubai’s free zones into key destinations for international investment.

Free Zones

The development of Dubai’s industrial sector began in earnest in the 1960s, after the initial dredging of Dubai Creek opened it to global shipping. The creek was further enlarged after the UAE formed in December 1971, with other projects – including construction of a larger airport and investment in new roads and highways – helping to boost Dubai’s importance for regional and global trade.

Free zones offer companies a range of financial benefits and incentives, including 100% foreign ownership, exemptions from corporation and personal tax for a set period of time, as well as Customs and excise duties on import or re-export business, and exemption from UAE policy detailing the number of Emirati employees a company needs to employ. Free zones also offer a clustering model, grouping similar and related businesses together, or those belonging to the same industry, which creates various other natural advantages. Most of the free zones are strategically located near transport infrastructure, with streamlined Customs procedures in place.

Zone History

For over three decades, free zones have played a crucial role in the development of the industrial sector in Dubai and the UAE as a whole. The first free zone in Dubai was launched in 1985, after Sheikh Rashid bin Saeed Al Maktoum issued a royal decree in the early 1980s establishing the Jebel Ali Free Zone Authority (JAFZA). JAFZA became the first free zone in the UAE, and today is one of the world’s largest. Having grown exponentially from its initial base of 19 companies, there are now 7000 firms operating there, according to JAFZA, representing 135,000 jobs and more than 20% of the UAE’s foreign direct investment, as well as more than half of Dubai’s total exports.

In the decades since JAFZA was founded, a number of other major free zones have been established, many tailored towards specific industries or sectors of the economy. These include Dubai Investments Park, Dubai Airport Free Zone, Dubai Auto Zone, Dubai Internet City and Dubai Media City.

In 2016 Dubai Industrial City changed its name to Dubai Industrial Park, and has now been integrated with broader plans to build Dubai Wholesale City, which will see an overall planned investment of around Dh30bn ($8.2bn), and when completed is set to become the largest wholesale centre in the world (see analysis). According to a June 2016 report by Savills, a global real estate services provider, new manufacturing activity in Dubai is largely positioned between the industrial zone within Dubai Investments Park and Dubai Industrial Park, with the latter catering to light and medium manufacturing sectors. “I believe that free zones have been an integral part of the success story,” Sankaran, told OBG. “Dubai is a logistics hub, and processes are already in place to ensure that setting up a company is easy and Customs clearances are quick. Dubai is really investing a lot in transport and logistics services infrastructure with a strong focus on continued growth.”

 New Zones

Recent additions to the free zone landscape include Dubai Design District, being built for design and fashion-related companies and industries by TECOM Group, which launched its first operations in 2016. Phase II of the free zone, which will comprise 93,000 sq metres for designers, light manufacturers, workshops and showrooms, is now under way. Special events like Dubai Design Week will help to promote the industries based in the zone, according to Mohammad Saeed Al Shahi, COO of Dubai Design District. “This is a huge potential market for design, with a recent MENA outlook report saying there is $100bn worth of potential,” Al Shahi OBG. “A lot of big name international design companies and architecture firms are already setting up offices in Dubai to benefit from these opportunities.”

Additional industrial free zones could be established in future. Faizal Kottikollon, founder and chairman of Dubai-based KEF Holdings, which focuses on modular construction, told local media in December 2016 that Dubai should look to set up a specialised zone for aluminium and metal fabrication. “Smallscale industries are the backbone of any industrial economy,” he said. “There are a couple of high-profile manufacturers [in Dubai] but what we need is a development zone. We need to incentivise people to come.” However, the existence of so many free zones can also bring new obstacles. “One of the challenges facing new entrants is information overload,” Steve Mayne, managing director at Creative Zone Dubai, a business setup advisory firm mostly targeting foreign-owned small and medium-sized enterprises, told OBG. “There is so much available in Dubai that it’s hard to know what should be followed and what is necessary when opening up a business. Also challenging is to know which free zone to invest in. There are 22 and each offers different opportunities for investors. Offshore and onshore areas also offer different opportunities as well.”  

Aluminium

The aluminium sector has been a key part of Dubai’s industrial landscape since 1975, when Sheikh Rashid established Dubai Aluminium (DUBAL). Commercial production of aluminium began at the company’s first smelter in 1980, with an initial production capacity of 135,000 tonnes per annum (tpa). From there DUBAL has grown into one of the world’s largest primary aluminium smelters.

In June 2013 Emirates Aluminium (EMAL), formed through a partnership between DUBAL and Abu Dhabi-based Mubadala Investment Company, announced it would merge with DUBAL to form Emirates Global Aluminium (EGA). The resulting combined company became the world’s fifth-largest primary aluminium producer, with a total capacity of around 2.5m tpa. “The aluminium industry is one of the key economic drivers for the UAE, while creating job opportunities for a number of associated sectors of economy. It is estimated that for every job in the smelter, there will be four more jobs created elsewhere,” Mahmood Daylami, secretary-general of the Dubai-based Gulf Aluminium Council (GAC), told OBG, adding that EGA is investing $5bn to upgrade its older production facilities and power stations. 

Production & Profit

DUBAL’s Jebel Ali plant in Dubai, which began production in 1980, consists of a 1m-tpa smelter, a 2350-MW power station and other facilities, while EMAL’s Al Taweelah smelter in Abu Dhabi, commissioned in 2009, has a 1. 3mtpa smelter, a dedicated 3100-MW power station and other facilities, and is the world’s largest single-site primary aluminium producer. EGA also owns Al Taweelah Alumina, which is tasked with developing an alumina refinery next to EMAL in Abu Dhabi.

In 2016 EGA reported Dh2.1bn ($572m) in net profits, a 10% rise compared to a year earlier. This was despite an overall fall in company revenue, which dropped 9% to hit Dh17.1bn ($4.7bn) on the back of lower aluminium prices. Meanwhile, production rose to 2.5m tonnes, up from 2.4m in 2015. EGA has four main product lines: remelt ingot, with applications in automotives, electronics and aerospace; billet, used for construction, industry, transport and automotives; slab ingot, for lithographic sheets and food and beverage packaging; and liquid metal.

The UAE’s production of primary aluminium was expected to total 2.5m tonnes in 2017. GAC’s Daylami told OBG that 70% of EGA’s production is currently exported, but that “with the planned construction of new downstream facilities, it will reduce to 65% before 2020.” Even so, the UAE will remain a predominantly export-oriented aluminium producer: EGA currently supplies the metal to some 300 customers in more than 60 countries. Meanwhile the region as a whole saw aluminium demand growth of 5.8% year-on-year in the first quarter of 2017, the second highest in the world. Global demand for aluminium is expected to hit 70m tonnes per year by 2020, suggesting plenty of potential for future growth.

DUBAL has recently expanded its operations abroad. In May 2013 the firm completed its acquisition of Guinea Alumina Corporation, which owns and operates a bauxite mine in Guinea, in West Africa, from which EGA subsequently imports a large volume of bauxite and alumina inputs. In June 2017 EGA’s board then approved the construction of a bauxite mine with a capacity of 12m tonnes per year and an export facility in Guinea. According to media reports, EGA is now considering launching an initial public offering in both Dubai and Abu Dhabi, which could bring in as much as $3bn and make it one of the first companies to be listed on both exchanges.

Steel

With Dubai’s hosting of Expo 2020 fast approaching, steel consumption in the UAE is expected to increase by 10% in 2017. According to a 2016 report by RNCOS, a business consultancy, steel utilisation in the UAE will grow at a compound annual growth rate (CAGR) of 8% between 2016 and 2020, as significant infrastructure and construction work is carried out. Domestic production capacity appears to be capable of meeting this, with UAE steel production growing from a record 3m tonnes in 2015 to 3.1m in 2016 in line with demand forecasts.

Conares

UAE steel producers are benefitting from significant construction and infrastructure projects taking place across the region. However, they also face a number of ongoing challenges. In February 2017 Bharat Bhatia, CEO and managing partner of Conares, the UAE’s second-largest steel manufacturer, called for more support for domestic producers to prevent dumping of cheap steel onto the UAE market, suggesting tariffs or other measures be put in place. The inflow of dumped steel has put significant pressure on local producers over the last few years, especially as the share of global steel production coming from China has risen from approximately 20% in 2003 to 45% in 2015, according to the World Steel Association. “We are trying to address these challenges by providing quality certified items in conjunction with marketing ‘Made in UAE’ steel products, which we believe would help us avoid losing market share to foreign dumping,” he told local media. “The UAE is self-sufficient to cater to the current demand of 3.5m-4m tonnes annually.”

Conares, based in JAFZA, initially began as a steel trader in 1988, becoming a fully fledged manufacturer in 2011. Today its total manufacturing capacity has reached more than 1m tpa. The company’s rebar mill has a production capacity of 500,000 tpa, while its pipe mills can produce 210,000 tpa and its galvanising mill 40,000 tpa. The former accounts for around 20% of the UAE’s market share, while the latter supply roughly 25% of local demand.

Ducab

Other Dubai-based producers include Dubai Cable Company (Ducab), the largest manufacturer of aluminium and copper electrical cables in the UAE, and the second largest in the region. Ducab has four main business lines: wire and cables, high voltage, metals and, most recently, Ducab Aluminium Company (DAC). Jointly owned by the Industrial Corporation of Dubai and Senaat, Abu Dhabi’s state-owned industrial holding company, DAC saw a 25% jump in foreign sales in 2016. “I see considerable opportunities for export to countries across the region, as well as farther afield,” Andrew Shaw, managing director of Ducab, told OBG. “There is significant demand for copper wire in Saudi Arabia, India and Africa. The same goes for aluminium rod, which is more efficient to ship as it is less heavy. We also see substantial demand for the latter in North Africa.” Shaw said one issue is tariff disparity, with South African cable-makers paying a 5% tariff in the UAE, while Ducab pays 17.5% to sell to South Africa.

Star Steel, formed in 2006, is based in Dubai but has manufacturing facilities in neighbouring Sharjah. Privately owned by UAE conglomerate ETA Group, itself part of Al Ghurair Group, the company has an annual production capacity of 360,000 tonnes of rebar and 240,000 tonnes of structural sections.

In February 2017 Al Shafar Steel Engineering (Assent) announced it was investing Dh175m ($47.6m) to expand its facilities at Dubai Industrial Park, creating one of the largest steel manufacturing companies in the region. The company is set to invest Dh100m ($27.2m) on construction as well as Dh75m ($27.2m) on new machinery, expecting to finish the 2300-employee facility in late 2018.

Meanwhile, the largest steel producer in the UAE is Abu Dhabi-based Emirates Steel, owned by Senaat. With a total production capacity of 3.5m tpa, it witnessed sales of reinforcing steel bars rise by 4.5% in 2016 to 2.1m tonnes, alongside 423,000 tonnes of wire rods sold (up 20%) and 480,000 tonnes of heavy sections (down 8%).

Chemicals

Chemicals make up the second largest manufacturing sector in the GCC, worth around $108bn in 2015 and accounting for roughly 500,000 direct and indirect jobs. While most of this is related to petrochemicals, there are sizeable opportunities in other areas of the chemical sector, especially those related to the construction industry. According to Allied Market Research, the global market for construction chemicals used in areas like improving concrete performance and the lifespan of buildings should hit $40.2bn by 2022, achieving a CAGR of 5.6% between 2016 and 2022.

The significant infrastructure and construction projects planned or under way in Dubai and the rest of the UAE will likely lead to plenty of opportunities for the industry. “One sector that drives demand in Dubai is building and construction, so chemicals used in this sector will probably see increased demand,” Sankaran told OBG. “There is also an expanding food and beverage industry, hence packaging solutions will also do well. In Dubai, chemical companies that focus on specialty applications in the construction, packaging, and home and personal care sectors can carve a successful niche for themselves.”

Automobile

The UAE is the largest automotive market in the GCC after Saudi Arabia. However, according to Autodata Middle East, new car sales in the first quarter of 2017 dropped 21.5% y-o-y, less than in neighbouring Saudi Arabia, where the decrease was 27%. Car sales have recently been more muted across the Gulf, falling by 13% in 2016 and by 22.9% in the first quarter of 2017, according to AutoData, partly a consequence of straitened disposable incomes following the oil price drop.

Nonetheless, according to a December 2016 report by Alpen Capital, a financial services and research firm, new car sales in the UAE are projected to grow at a CAGR of 4.5% a year through to 2020, reaching around 267,000 units in that year. This is a little over half the CAGR of 8.8% experienced between 2010 and 2015, according to the report. Meanwhile, Alpen calculates that the number of passenger cars in use across the GCC will grow at a rate of 5% a year in the 2015-20 period, from roughly 10.3m to 13.2m. This forecast comes despite the probable impact on sales of a new GCC-wide value-added tax set to come into effect in 2018.

Dubai continues to act as a major centre for automotive imports and re-exports in the region. Direct trade of vehicles, vessels and aircraft in Dubai hit Dh107.7bn ($29.3bn) in 2015, accounting for over 13% of Dubai’s total direct trade value, Dh76.6bn ($20.9bn) being imports and Dh30bn ($8.2bn) re-exports. Of these, automotive parts and accessories accounted for around Dh40.5bn ($11bn). In September 2016 new regulations for automobile spare parts were introduced by the Emirates Authority for Standardisation and Metrology, aimed at controlling the entry and usage of counterfeit spare parts within the UAE. The regulation covers everything from manufacturing, packaging, transport and storage, and lays out standards and criteria to help ensure the safety, performance and technical soundness of products sold in the country.

While automotive sales continue to be largely import-driven, there are attempts to bring in more automotive manufacturers to the UAE. Heavy vehicle assembling units already exist, with Hafilat Industries and Ashok Leyland investing a further $10m in 2016 to triple its bus manufacturing capacity in Ras Al Khaimah, from 2000 to 6000 vehicles. In Dubai, Germany’s WiCHMANN group invested millions to establish Cardan Service Network in 2015 to manufacture custom shafts for trucks, light commercial vehicles and construction equipment, importing raw materials through its parent company.

High-performance car companies are also establishing themselves in Dubai. Zarooq Motors, initially founded in 2014, announced in June 2017 that its first car, the SandRacer 500 GT, was ready to start production, with the first vehicles to be delivered in late 2017. W Motors, established in 2012 in Lebanon, moved its headquarters from Beirut to Dubai the following year. The company’s first supercar, the Lykan Hypersport, officially went on sale in December 2014, and in March 2015 the company announced plans to move production from Turin, Italy to a Dubai facility in Jebel Ali. While no update was available as of late 2017, the plant is expected to make more than 200 cars a year, and will include a research and development department, training facility and test track. Meanwhile, Dubai-based Jannarelly Automotive unveiled the final prototype for its two-seat Jannarelly Design-1 in June 2016, with the sports cars to be built entirely within the UAE, and then shipped around the world.

Aerospace

While the aerospace segment is less developed than its automotive counterpart, in April 2017 it was announced that state-owned Dubai Aerospace Enterprise (DAE) would acquire AWAS Aviation Capital, creating a combined company worth over $14bn. DAE is involved in the aircraft leasing business and through the acquisition of AWAS Aviation Capital is set to further expand its market reach, with the latter company owning a fleet of 263 wide-body aircrafts and having 23 more on order. Combined, the company will have a fleet in excess of 390 aircraft, creating a regional giant.

Outlook

With a new sector strategy providing guidance for the government’s long-term goal of making the emirate a centre for global innovation, Dubai has plenty of opportunities to further develop its industrial sector. Its network of free zones, both established and nascent, together with a new focus on key sectors with high potential for growth, should contribute to substantial expansion of Dubai’s manufacturing and industrial footprint in the coming years, facilitating increased trade across the region.

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The Report: Dubai 2018

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