Well-oiled machine: Continually improving infrastructure and regulations support growth

In February 2007 the government of Dubai released a blueprint outlining its future economic, social and political development goals. Named the Dubai Strategic Plan 2015, this document has largely guided the government’s approach to economic development. Although the global economic crisis has presented obstacles to further development, the government is still pushing ahead with its declared goals. One of the farthest-reaching is the continued drive to diversify the economy and to continue expanding its strong services-based economy, unique among the region’s majority hydrocarbons-dependent economies. To that end, industrial development has played a critical role.

The history of Dubai’s industrial transformation is woven into that of its oil and gas production. Throughout the 1980s, after major discoveries at the Margham onshore field and the Rashid offshore field, output spiked. As petrol flowed out, windfalls flowed in, and leaders began directing a larger share of national wealth toward industrial investments. Metals, plastics and chemicals companies began to spring up. Many of these – like Dubai Aluminium (DUBAL), Dubai Natural Gas Company (Dugas) and Dubai Cable Company (Ducab) – still exist and prosper today, adding to the emirate’s diverse industrial base. The government continues to take an active role in supporting industrial development through its pro-industry regulations, ongoing infrastructure investments and favourable tax structure.

BY THE NUMBERS: Strong export growth has signalled relative health in the manufacturing sector. The total value of direct exports – as opposed to free zone exports – grew nearly nine-fold between 2005 and 2011, from $3.05bn to $26.7bn, according to the Dubai Statistics Centre (DSC). Direct export activities have proven especially resilient, even during the global economic crisis in 2009 and the Arab Spring in 2011. Although other economic indicators like free zone exports and reexports dipped slightly due to external economic conditions, direct exports clocked continuous growth throughout these periods. Indeed, a growing cohort of onshore exporters could do much to boost trade even in challenging times. Although free zone exports and re-exports did see temporary reductions in activity between 2008 and 2009, they quickly rebounded in 2010 and 2011, with year-on-year (y-o-y) growth rates of 27% and 20%, respectively. Indeed, excepting 2009, Dubai’s free zone export and re-export levels have been marked by steady growth. Between 2005 and 2011, their total value went from $21.4bn to $46.7bn.

EMPLOYMENT: Increasing export numbers have also correlated with growing employment numbers. The number of those employed in the manufacturing sector grew from 560,077 to more than 1.3m between 2000 and 2011, according to the DSC. Although the total number of employees working in manufacturing has increased, the ratio of industrial workers to the entire working population has fluctuated. In 2000 the ratio was just under 12%, but in 2005 it dipped to 4.6%, as worker numbers in other sectors, such as construction, moved with the economy. In 2011 manufacturing provided about 15% of jobs, according to DSC figures.

The number of new industrial licences has also been rising. The Department of Economic Development’s (DED) industrial licence issuance grew by an average of 17% per year between 2009 and 2011, according to DED statistics, with new licences rising from 137 to 188. Annual renewals also continued to grow, rising from 2285 to 2412 during the same period. Although licence cancellations grew from 38 to 111 between 2009 and 2010, that number came down to 77 in 2011, with each year’s cancellations outnumbered by new licences.

IN THE ZONE: Underlying industrial growth are the emirate’s free zones, where businesses can operate unfettered by taxes, and government regulation. These areas make up a large share of Dubai’s economy: a total of 22 free zones host 19,000 firms that employ 26,000 people, contributing nearly one-third of the emirate’s GDP, according to the Dubai Free Zones Council.

Regionally, Dubai has been a pioneer of free zone operation. The Jebel Ali Free Zone (JAFZ) came on-line in 1985. JAFZ and the linked Jebel Ali Port offer a degree of connectivity unique in the region and many parts of the world. In recent years, these factors have no doubt helped JAFZ continue attracting new companies, despite prevailing headwinds from unrest elsewhere in the region and global economic conditions. In 2011, 34 new industrial companies joined JAFZ (see analysis).

To better harmonise the policies of Jebel Ali and Dubai’s other free zones, the government created the Dubai Free Zones Council. “The key objective of establishing the council is to unify and standardise the measures and procedures of registering and licensing new businesses,” Mohammed Al Zarooni, the chairman of the Dubai Free Zones Council and director-general of the Dubai Airport Free Zone, said in a speech at the Dubai Chamber of Commerce in March 2012. As the organisation works toward unifying rules and regulations enforced across the emirate’s 22 free zones, it aims to create an increasingly attractive environment for investors looking to establish operations in the region.

In addition to free zones, a number of non-free-zone industrial areas operate in Dubai. These areas have many of the benefits that free zones offer, including a low-tax environment and business-friendly regulations. There are, however, some key differences between free zones and industrial areas. For companies within the UAE, ownership regulations stipulate that any company must include local partner with at least a 51% stake in the company. Duty payments are another key difference. Like other types of companies operating within the UAE, industrial enterprises are required to pay duties on most imports, the rate of which is set at 5%. The benefits of operating within the UAE itself, however, can sometimes outweigh these costs. Since products are manufactured within the emirates, they enjoy free access to the UAE as well as the greater GCC trade area. Dubai’s current industrial areas include Dubai Industrial City, Dubai Investment Park, Al Quoz, Umm Ramool and Ras Al Khor (see analysis).

WHILE THE IRON IS HOT: Aluminium is among Dubai’s largest industrial activities, accounting for roughly 15% of the manufacturing sector’s contribution to GDP in 2010. The history of aluminium production in Dubai is largely tied to that of its first and largest aluminium smelter, DUBAL. The state-owned company was established in 1979 to advance the government’s goal of economic diversification. Commercial production began in 1980, and in intervening years the firm has continued to expand. In addition to primary smelting, Dubai is home to a number of secondary smelters. These companies, like Emirates Recycling and Lucky Recycling, process scrap aluminium to create products for re-use.

Although the region’s construction sector – and therefore aluminium demand – was affected by the global economic crisis, smelters are increasingly optimistic thanks to a recent upswing in construction activity. At year-end 2011 DUBAL forecasted profit growth between 30% and 35% in coming years. In 2011 the company’s y-o-y net profits clocked a 65% increase from $579.8m to $966.3m. Sales revenue, meanwhile, grew by 28.5% y-o-y, from $2.36bn to $3.03bn.

Smelting is not new to the region. Aluminium producers have been appearing across the GCC since the late 1960s. Because electricity accounts for as much as 30% of aluminium’s production costs, GCC countries – with their access to plenty of gas at a low cost – have jumped at the opportunity to create a valueadded product from their hydrocarbons reserves. DUBAL, however, is a slightly different case, since it uses imported gas. Although the use of imports increases the company’s exposure to price fluctuations, it has also provided more incentives to develop energy-saving technologies. In 2005 the company introduced a cell pilot project to test its proprietary DX Technology, which allows reduction cells to operate at higher amperages for higher efficiency. An improved technology, called DX+, was fully commissioned in December 2010.

All aluminium stakeholders have much to gain from ongoing research in efficiency-boosting technologies. Chief among these is saving energy. Since electricity makes up such a large portion of aluminium production costs, boosting efficiency can lower outlays significantly. More efficient technology can also reduce emissions, an important factor given the local authorities’ ongoing efforts to reduce greenhouse gas production. Technology transfer and external partnerships are another key advantage, since they offer companies opportunities to monetise their research.

Perhaps the most visible example of technology transfer is Emirates Aluminium (EMAL). A decree by the ruler brought EMAL into existence in 2007 as a joint venture split evenly between DUBAL and Mubadala Development Company, an investment company owned by the government of Abu Dhabi. The idea behind the partnership was to utilise DUBAL’s aluminium experience and Abu Dhabi’s financial and energy resources. So far the company has made significant progress. Its Phase I smelter began operations in December 2009, hitting full production capacity by early 2011. In September 2011 Phase II came on-line. Upon reaching full capacity, EMAL’s aluminium production complex will be the world’s largest single-site producer of primary aluminium. Aluminium manufacturing developments demonstrate the domino effect that can occur from industrial investment. Although the industry started out by leveraging low-cost energy, ongoing research and development efforts could help the sector become a creator of not only goods but also of knowledge.

FLOATING DOWNSTREAM: In addition to becoming a successful industry in its own right, the aluminium sector has also supported downstream, value-added industrial activities. These include aluminium extrusion, the process of shaping aluminium into products like tracks, frames, rails and heat sinks. In Dubai, two extrusion companies – Gulf Extrusion Company and National Aluminium Extrusion – operate in Jebel Ali.

The UAE as a whole accounts for as much as 35% of GCC extruded aluminium demand, and that number is estimated to grow at an 8-9% CAGR in the 2011-17 period, according to a report released by Middle East consultancy Frost & Sullivan. Indeed, with demand set to rise, extrusion and value-added industries hold significant potential. “Smelters would like to explore more downstream industries,” Mahmood Daylami, the secretary-general of the Gulf Aluminium Council, told OBG. “In the long term this could lead to the production of more complex products like aviation and auto parts.”

Although it has enjoyed growth in recent years, there are a few challenges that could arise for Dubai’s aluminium industry. The growth of production across the GCC could mean more competition regionally, while fluctuating energy prices could squeeze margins. Stakeholders in Dubai’s aluminium industry acknowledge these challenges and have been working to shore up the industry’s strengths. These include lower shipping costs from Dubai’s transport infrastructure. Indeed, all levels of the sector, including downstream producers, benefit from Dubai’s ports and roads.

A BROAD BASE: Beyond aluminium, a number of other industries have arisen in the wake of the government’s push for greater economic diversification. Ducab, an entity established as a partnership between the former ruler of Dubai, Sheikh Rashid bin Saeed Al Maktoum, and British Insulated Callender’s Cables, has been producing cables in Jebel Ali since 1979. Over time, the company’s ownership structure has evolved, now split among Ducab (50%), Dubai Electricity and Water Authority (25%) and the Abu Dhabi Electricity and Water Authority (25%). The company operates five external production facilities located across Dubai and neighbouring Abu Dhabi. “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 Ducab, told OBG.

The food industry has also seen growth in recent years. Between 2006 and 2011 Dubai’s exports of prepared foodstuffs, beverages and tobacco increased from Dh2.5bn ($680.5m) to Dh5.4bn ($1.47bn), according to data from the DSC. Although Dubai’s arid climate is generally unsuited for agriculture, authorities have worked to play up its business-friendly environment and interconnectivity to a region with high food demand.

For materials arriving by sea, the emirate’s ports offer companies streamlined importing processes. For fresh materials that require more timely deliveries, Dubai’s two airports offer traders some of the best-connected air cargo terminals, regionally and globally. In addition, a growing network of highways and railways are set to continue improving links in the UAE and its GCC neighbours, making Dubai an attractive choice for businesses interested in local and international operations.

LOCAL SUPPORT: The government has also made capital available to support the local food processing sector, committing to invest $1.4bn in the industry. This combination of logistics connections and pro-business policy has helped make processed food and drink Dubai’s third-highest export category by total value, after precious stones, metals and base metals.

Developments in Dubai’s food sector are part of a broader trend in the region toward more value-added food industries. “Packaging and processing solutions have never been more important, particularly for the Middle East region,” said Trixee Loh, the senior vice-president of the Dubai World Trade Centre and organiser of the Gulfood 2012 conference. “With governments in the GCC promoting movement up the value chain by supporting domestic food processing, there are opportunities for raw material suppliers, food processing equipment providers and packaging manufacturers.”

More than 150 domestic and international firms operate in Dubai, and a number of major multinationals have already established regional headquarters there. In 2010 Switzerland-based Nestlé, the largest food company in the world by revenue, opened a $136m factory in the emirate. “By opening our new facility in Dubai we will be closer to our consumers in the region and can better adapt our products to their needs and preferences,” Yves Manghardt, the chairman and CEO of Nestlé Middle East, said. “With such a facility we will be able to meet the fast rising regional demand and eventually contemplate exporting to other regions.” Indeed, the combination of growing local demand and export potential have helped attract other major food processors to the emirate, including Kraft and PepsiCo.

In addition to global players, a number of local and regional players have benefitted from the growth of the food processing industry. Al Khaleej Sugar, established in 1992, exports to more than 40 countries in the region and has become the largest stand-alone sugar refinery in the world. Other food processors operating in Dubai, like Gulf Food Industries, Green Farms Middle East and Star Drinks, also sell products throughout the UAE and the wider region. In recent years, fluctuating commodity prices have created challenges. On one hand, the Consumer Protection Department strives to control price fluctuations and prevent increases. On the other, food processors could feel pressure on their margins if they are unable to pass on rising costs to customers. “Between 2011 and 2012 the cost of sugar jumped to $800 per tonne,” Tarek El Sakka, the general manager of Dubai Refreshments Company, told OBG. The ministry and stakeholders periodically meet to find ways to stabilise prices, including implementing cost-cutting measures and subsidies.

Dubai is also looking to leverage its location on one of the busiest shipping lanes in the world and the growing need for maritime support to develop its shipbuilding and maintenance industry. The flagship of Dubai’s maritime services industry is Drydocks World (DDW), part of the Dubai World group. A strategy was recently developed that will see the company repair, refurbish and build offshore vessels, with particular focus on the oil and gas industry. “Data indicates that the only industry that has a growth cycle up to 2030 in some cases is oil and gas and energy. That is where opportunities will reside for those operating in the shipbuilding, ship repair and offshore construction industries,” Khamis Juma Buamim, the chairman of DDW, told OBG.

OUTLOOK: In line with the goals laid out in the Dubai Strategic Plan 2015, industrial growth has done much to lead Dubai’s economic development and diversification. Although significant challenges like debt refinancing and regional competition could arise in the future, both the government and the private sector have proven their resilience. Successful debt refinancing like that of JAFZ in early 2012, for example, has showed that even companies affected by the financial crisis can obtain credit from global lenders and continue operating profitably. Indeed, Dubai has created an environment in which industrial enterprise can thrive, even during tougher economic circumstances. With its topnotch infrastructure already in place and continually expanding, the emirate’s companies are uniquely wellconnected to the world. This infrastructure, combined with the government’s consistently pro-business posture, could do much to help encourage further growth.