Dubai: Going for growth in manufacturing

Dubai’s economy is expected to post solid growth in 2012, with the emirate’s manufacturing industry tipped to be one of the key contributors. The rate of growth, however, will likely depend on how international markets withstand the fallout from the European debt crisis and other external destabilising factors.

The manufacturing sector has become increasingly important to Dubai’s economy over the past few years, more so now that some of the other industries long seen as locomotives of growth, such as construction and real estate, have taken more of a back seat.

According to data issued by Dubai Exports, an agency of the Department of Economic Development (DED), the manufacturing sector contributes just over 13% to GDP, ranking it fourth after wholesale trade, retail and repair, which represent 30% of the local economy; transport, storage and communications, with 14%; and real estate and associated activities, also with about 14%. In total, Dubai’s industrial production is estimated to be worth $54.4bn, with the manufacturing sector averaging growth of 8% per annum since 2007, Dubai Exports reported recently.

For 2012, the sector is expected to post growth of more than 6%, well above the forecast for total GDP, which is anticipated to rise between 3.8% and 4.1%, up on the 3% estimated for 2011, Mohammad Lahouel, the chief economist at the DED, said at the Dubai Economic Outlook Conference in February.

Marios Maratheftis, the regional head of research at Standard Chartered Bank, said that while growth will remain below that of pre-2008 levels, the quality of the expansion is improving and growth is more sustainable.

“The fundamentals of Dubai are pretty healthy and strong,” Maratheftis said in February. “Construction will continue to be negative, but I think it is good news because focus is shifting toward productive sectors.”

“When you take into account that we and our suppliers operate in a tax-free environment; that we have access to an eager, flexible and affordable workforce; and that we are in close proximity to one of the most efficient global access ports in the world, Dubai is extremely competitive and should not be overlooked as a centre for manufacturing,” Andrew Shaw, the managing director of Dubai Cable Company (Ducab), a local company, told OBG.

Though the industrial sector is best known for some of its major players, such as Ducab, with its annual manufacturing capacity of more than 110,000 tonnes of low-, medium- and high-voltage cables and wires, and aluminium producer Dubal, which recently announced sales of $2.7bn for 2011 and output of more than 1m tonnes for both primary aluminium and casted products, most of Dubai’s manufacturers are smaller in size and profile.

According to the Department of Economic Development (DED), 3% of Dubai’s industrial companies have investments exceeding Dh50m ($13.61m), while 84% of firms have a staff of 100 employees or less. This is not surprising given that 95% of companies in Dubai are considered small or medium-sized enterprises (SMEs), which account for around 40% of employment and 42% of GDP.

While Dubai’s manufacturing sector has expanded its role within the economy, largely due to its solid export performance, the continuing debt crisis in Europe and the potential ripple effect throughout global markets could weaken demand for locally produced goods and materials.

A downturn in the global economy could see automotive production and construction tail off. Production of aluminium, one of Dubai’s chief exports, could be affected, as the automotive and construction segments are two of its main markets. Similarly, widespread recession could also eat into exports of chemicals, processed foods, plastics and metals.

However, some analysts, including Sean Dougherty, a senior economist with the Organisation for Economic Cooperation and Development (OECD), have said that while Dubai may experience a drop in trade with older partners in the West, this will easily be made up for with new relationships in the East.

“There are growing trade and investment relations between Dubai and the world’s fastest-growing economies, such as China, India and other emerging economies,” he said while attending the Dubai Economic Outlook 2012 conference. “This should help Dubai to make up for declining trade and investment opportunities linked to Europe.”

Another factor that could reduce the export of locally produced goods is the recent tightening of international sanctions on Iran. With increasing restrictions on money transfers to Iran, and a lengthening list of materials and products that cannot be shipped to its neighbour across the Gulf, a number of Dubai’s manufacturers can expect to have their export trade clipped this year.

According to Hamad Buamim, the director-general of the Dubai Chamber of Commerce and Industry, trade with Iran was trending down sharply.

“Iran is a major market for Dubai businesses,” he said in an interview with The National on February 17. “A quarter of total volumes of exports and re-exports go to Iran. But with the further measures taken during 2011 and early this year, this share is shrinking down day by day.”

Though some manufacturers will be more affected by the sanctions on Iran − particularly those firms that have developed their lines to meet the specific demands of the Iranian market − the increasing pace of economic recovery at home and in the GCC region as a whole should offset a significant portion of any losses, indicating the sector might well achieve its growth forecast this year.