Manufacturing and industrial activity account for a growing share of Dubai's GDP

Recent times have seen Dubai’s industrial sector emerge from the downside of the 2008-09 global crisis, with order books growing and confidence returning. The expectation of major future business is also strong, particularly since the emirate was awarded Expo 2020. Though there is an underlying mood of caution among many, this new conservatism has been generally positive, with industries large and small guarding against pre-crisis bubbles.

Meanwhile, the emirate is acting as the essential go-between in the global trans-shipment trade, while also capitalising on its youthful, dynamic and internationally connected population to build solid local businesses in manufacturing, assembling, repair and maintenance, logistics and other trades. Dubai’s heavy industries – principally aluminium – have also reported success in recent years, on the back of the regional infrastructure building boom.

Challenges remain, of course, with the cost of utilities, rents and the availability of skilled labour the three most pressing. Indeed, rising costs have seen some industry relocate. “North African countries are playing an increasingly large role as lower-cost manufacturing destinations used by GCC industrials,” Khalid bin Kalban, managing director and CEO of Dubai Investments, the largest investment companies listed on the Dubai Financial Market, told OBG. Nonetheless, with the government behind schemes to help small and medium-sized enterprises (SMEs) and a loosening of prior credit squeezes, the year ahead is likely to be a bright one for Dubai’s industrial sector.

Facts & Figures

The emirate’s total population of 2.27m in the second quarter of 2014 swells to some 3.3m working individuals during the day, as Dubai pulls in workers from surrounding emirates and from other countries. Many of these work in the industrial sector, with data from the Dubai Statistics Centre (DSC) showing that in the first three quarters of 2014, a total of 2171 industrial licences were renewed, while 207 new licences were issued. This totals some 2378 industrial enterprises operating in the emirate, with fourth-quarter totals likely to push the actual number of such businesses up towards 3000.

Indeed, in 2013, 2648 industrial licences were renewed and 216 new ones issued, an increase from 2519 renewals and 203 new issues in 2012.

Looking at the most recent available statistics from the DSC for economic activity, the manufacturing sector contributed some Dh11.45bn ($3.1bn) at constant prices to GDP in the first quarter of 2014, up 6.8% on the Dh10.72bn ($2.9bn) of the first quarter of 2013. The percentage contribution of the sector to the emirate’s total GDP also rose year-on-year ( yo-y), from 13.2% to 13.5%. This made manufacturing the fourth-largest contributor to GDP, behind wholesale, retail and repair, transport and logistics, and real estate and business services.

In 2013 manufacturing made a 13.7% contribution overall to GDP, at Dh44.74bn ($12.2bn), a value itself 8.1% up on the total for 2012, which stood at Dh41.38bn ($11.3bn). In 2011 the contribution was Dh39.95bn ($10.9bn), showing 3.6% growth between 2011 and 2012. The DSC data further shows the sector contributing Dh38.7bn ($10.5bn) in 2010 and Dh35.18bn ($9.6bn) in 2009, when its contribution to overall GDP was 12.5%. The 2008 figure was Dh33.18bn ($9bn), or 11.3% of GDP, and the 2007 numbers were Dh30.07bn ($8.2bn) and 10.6%. Thus, the trend in recent years has been one of manufacturing value growth, with the sector responsible for an increasing share of Dubai’s overall GDP.

Exports

In terms of exports, the industrial and manufacturing sector is key to the whole emirate. DSC figures for the first half of 2014, for example, show that the leading export segments were topped by the pearls, precious stones and metals category – with Dh23.08bn ($6.3bn) in exports and Dh31.65bn ($8.6bn) in re-exports – followed by vehicles, aircraft and vessels, with Dh1.3bn ($353.9m) in exports and Dh14.64bn ($4bn) in re-exports. A long way behind that follows processed foodstuffs, tobaccos and beverages, with Dh3.3bn ($898.3m) in exports and Dh1.72bn ($468.2m) in re-exports.

Fourth place went to plastics, rubber and articles thereof, with Dh2.43bn ($661.4m) and Dh2.07bn ($563.5m) in exports and re-exports, respectively. Other leading segments were mineral products, pulp, paper and waste paper, textiles and textile articles, base metals and articles of base metal.

With the pearls, precious stones and metals sector in Dubai largely capitalising on the emirate’s place as a trading hub, rather than as a manufacturing one, in terms of leading industries, the base metals sector and the vehicle, ship and aircraft manufacturing and assembly sectors are the largest, with re-export accounting for a great deal of the emirate’s economic activity. Indeed, in some trades, the re-export and export quantities are matched or exceeded by imports, showing the processing nature of much of the emirate’s industry. The market is very much a global, export-oriented one.

In The Zone

Dubai’s industrial development began in the years preceding its accession to the UAE Federation in 1971. Sheikh Rashid bin Saeed Al Maktoum, Dubai’s ruler at the time, had the foresight to invest in the dredging of Dubai Creek, to allow the development of a deeper water port and therefore not only of better trade links, but also of a maritime repair and maintenance industry.

Post federation, Sheikh Rashid likewise invested in a larger airport, as well as aluminium and desalination plants – all of which were aimed at growing the wider economy and attracting other industries to the emirate. Oil wealth also played a role in this industrial lift-off in the 1970s, helping fund the beginning of a key move in Dubai’s industrial development, the establishment of free zones – industrial parks offering a range of incentives to firms that set up in them.

Indeed, it could be said that much of the industrial pattern of modern Dubai owes its very nature to these parks, with the Jebel Ali Free Zone (JAFZA) opening in 1985 – six years after the port of the same name – and dramatically accelerating the emirate’s economic expansion. Under Sheikh Rashid’s successor, Sheikh Mohammed bin Rashid Al Maktoum, the free zones concept has been widened further. Now including sectors such as media and IT, the free zones are a concrete pillar of Dubai’s economic diversity.

For the industrial sector, one of the key outfits is Economic Zones World (EZW), which has within its portfolio JAFZA, the Dubai Auto Zone (see analysis) and TechnoPark, an industrial free zone focused on research and development (R&D).

In November 2014, EZW was the subject of a major asset reshuffle by state-owned conglomerate Dubai World, which owns both EZW and DP World – one of the world’s largest port operators, with Jebel Ali port under its remit. DP World bought EZW at that time for some $2.6bn, with the re-shuffle expected to boost earnings for the new owners.

JAFZA started out in 1985 with 19 companies, according to the free zone’s own data, with this now standing at more than 7100 businesses. Among these are some 100 of the Fortune 500 too, demonstrating JAFZA’s global status and reach.

Various Benefits

The free zone set up means that companies at JAFZA benefit from the possibility of 100% foreign ownership, exemption from corporation tax for 50 years – with this potentially renewable – and exemption from personal income tax, Customs and excise duties on import or re-export business, and no currency restrictions. The 100% repatriation of profits is also allowed. Other benefits include the exemption of free zone businesses from Emiratisation – the policy in the UAE under which the number of Emirati employees in a business is set according to a quota. In JAFZA and other free zones, a firm may hire whom it likes, regardless of their nationality, provided they meet normal visa requirements. The free zones also offer one-stop-shop services for companies to use when dealing with the administrative and regulatory issues around setting up and doing business. They benefit from the geographical synergies of such clusters – benefits that range from the ability to share logistical services through to the intangible advantages of working alongside other outfits engaged in similar work. Madhav Kurup, CEO of Hellmann Middle East, told OBG, “Dubai has built a strong hub for warehousing and distribution activities in the region, but there remains a need for the creation of specialised solutions for some of the more prominent segments, such as automotive, health care, chemicals and fashion.”

Focus Areas

This kind of synergy is particularly important in the TechnoPark, which includes some 20m sq metres of land earmarked for industrial development. Currently under construction, engineering is one of the five key focus sectors for the park, along with water, energy, health, logistics and mobility. The central idea behind TechnoPark is one close to the heart of the emirate’s overall development plans – to produce a high value-added, innovation-based economy, within the Dubai Smart City (DSC) framework (see IT chapter). R&D is a central focus for the park’s activities, with this hooked up directly to industrial and commercial districts to enable rapid commercialisation of new research and technology. Elsewhere, the Dubai Industrial City (DIC) is home to over 150 companies, with a special focus on manufacturing SMEs.

Established in 2004, DIC is a non-free zone industrial park, located on some 55 sq km of land. The park is one of nine such business zones owned and run by TECOM, a Dubai Holding company, which also has Dubai Media City, Internet City, Studio City and others in its portfolio. DIC includes companies that are active in food processing, perfume manufacture, paints, fibreglass pipes, metal coating, the auto trade and dozens of other lines of business.

Another zone of interest for industry is the Dubai Investments Park (DIP). Built on 500,000 sq metres of land, it is the first industrial cluster built in the UAE that is open to foreign investment, yet outside a free zone. This mixed-use industrial commercial and residential complex offers high-yield investment opportunities, even if it does not provide the same tax and ownership benefits as free zones – companies setting up in DIP must have a UAE partner, for example. Leases of 85 years are available on industrial property for foreign outfits, while part-rental and part-ownership of land and facilities is also possible.

Going Airborne

Also key to the industrial sector is the Dubai International Airport Free Zone (DAFZA). It offers the same incentives package as JAFZA and other zones, while also being located next to Dubai airport, a big logistical advantage for manufacturers there. While certain cargo services have moved down the road to Al Maktoum International Airport – such as those provided by Emirates – DAFZA is still very much a major hub for airborne imports and exports.

At the same time though, a huge new free zone is under construction around the new airport. The Dubai World Central (DWC) development at Al Maktoum has been billed as an “aerotropolis”, with industrial, commercial and residential areas all built-in to a 140-sq-km area – twice the size of Hong Kong Island.

“Dubai freezones are the growth drivers for the emirate’s economy, adapting to fast-changing smart technologies, with world class specialised infrastructure clusters to support global industries and focused, customer-centric strategies. The emirate’s freezones are ideal gateways supporting trade flows along the east-west corridor,” Mohammed Alzarooni, the director-general of DAFZA, told OBG. The new zone is so large it will be divided into several sub-zones, including a residential city, logistics and enterprise parks, an aviation city and a golf city. It will also include the new airport itself and integrate it into the zone’s very structure. With Al Maktoum becoming the world’s busiest airport in terms of passenger numbers in 2014, the aviation city in DWC hopes to leverage this to establish itself as the world’s largest maintenance, repair and overhaul centre in the world. Costing $12m, the aviation city will cover an 80,000-sq-foot area and include a hub for aircraft component and parts supply, as well as training areas and an industrial zone.

DSC figures for the first half of 2014 demonstrate the importance of the free zones. Some Dh101.7bn ($27.7bn) of goods and services were re-exported through the zones during this period, along with Dh7.65bn ($2.1bn) in exports and Dh135.9bn ($37bn) of imports, compared to the full-year totals for 2013, which stood at around Dh251.9bn ($68.6bn), Dh12.9bn ($3.5bn) and Dh202bn ($55bn), respectively.

Industrial Portfolio

Elsewhere in the emirate, one of the oldest industries is aluminium. In 2014 the founding company in this sector, Dubai Aluminium Company (DUBAL), celebrated its 35th anniversary, making it also one of the founding businesses of the independent UAE. Construction of DUBAL’s smelter complex began in 1975 at Jebel Ali, with commercial production starting in 1980. At this time, the plant had a 135,000-tonnes-per-annum (tpa) capacity.

Nowadays, the plant is a 1m-tpa facility, alongside a combined-cycle 2350-MW power station, a carbon plant, a casting area with a 1.2m-tpa capacity, a 30mgallons-per-day water desalination plant and a major complex of storage tanks, laboratories and offices. The plant produces foundry alloy, billets and high purity aluminium for high-tech uses. DUBAL now has some 300 customers from around 57 countries. One of the company’s main advantages is that it has developed its own process technology, DX and then DX+. This is now also being used by Emirates Aluminium (EMAL), a joint venture between DUBAL and Mubadala, the Abu Dhabi government-owned investment firm.

EMAL began a two-phase development in 2010 and is now one of the world’s largest smelters, with a 1.3m-tpa capacity. EMAL and DUBAL have also now combined to form Emirates Global Aluminium (EGA), and when EMAL’s facilities are added to DUBAL’s total, the UAE will be a major challenger for the title of world’s largest producer, with the current leading nation, Russia, on 4m tpa. EGA announced that by mid-2014, its capacity would have reached 2.4m tpa, with the combined company already producing around 50% of all the aluminium manufactured in the GCC.

An integrated supply chain is also part of the success story, with EGA importing bauxite and alumina from the Guinea Alumina Corporation, a wholly owned outfit in the Republic of Guinea, for refining at its UAE plant. Some 70% of EGA’s production is exported, with some 1.5m-1.6m tpa consumed in the GCC region, out of a regional capacity of around 5m tpa, according to figures supplied by DUBAL. This makes the industry very much a part of global trade – and thus susceptible to global prices. Recent declines in these have impacted the aluminium sector worldwide, but Dubai has managed to avoid the worst aspects of this due to its high-purity and high-tech products, plus its low costs. Both DUBAL and EMAL have their own combined-cycle power plants, supplied with natural gas in a country still rich in hydrocarbons.

DUBAL and EMAL have also engendered a major downstream sector, with companies such as Gulf Extrusions (Gulfex) producing industrial and architectural applications in extruded aluminium. These go on to provide raw material for companies such as the Royal Engineering Fabrication Company, owned by the Al Ghurair Group, which opened a new plant in Jebel Ali in 2013 manufacturing sun roof parts for the auto industry. According to the group, the aluminium industry in the UAE will represent about 5% of global capacity in 2015. Gulfex’s market share in the UAE stands at 45%, according to the group, with some 13 other players currently in the downstream sector. In the UAE, 80% of production goes to the construction sector, although oil and gas is also significant.

Steel & Iron

Steel is also an important part of the emirate’s industrial portfolio. Key to this is Conares, initially a steel trader, but since 2011, a fully fledged manufacturer with around 750,000-tpa capacity. Based in JAFZA, the company focuses on steel rebar and pipe production, with a 500,000-tpa capacity for the former product, while in pipes, Conares has a 200, 000-tpa capacity tube mill and a pipe galvanising capacity of 36,000 tpa. The company is also building a new piping facility, due to be completed in 2015, which will boost total capacity to 1m tpa. Most of Conares’ output – particularly rebar – is sold within the GCC. Another outfit principally supplying this regional market is the Dubai Cable Company (Ducab), which is the second-largest manufacturer of aluminium and copper electrical cables in the region and the largest in the UAE. Owned jointly by Abu Dhabi’s state industrial holding company, Senaat, and the Industrial Corporation of Dubai, Ducab has one of the longest CCV lines in the world for the manufacture of high-voltage cables at its JAFZA location. It also has a PVC compounding and dedicated high-voltage and extra-high-voltage cable manufacturing facility nearby. In 2014, Ducab bought the UK’s AEI Cables, as part of an international expansion, while also seeing ground broken on Ducab Aluminium, a new $60m aluminium rod venture in Abu Dhabi’s Khalifa Industrial Zone.

Conares is currently working with the Ministry of Economy on a project to boost awareness of Dubai as a steel manufacturer – and of the “Made in Dubai” brand more generally. This, the company hopes, will help Dubai’s metals products gain an edge in an increasingly competitive market, both locally and internationally. Indeed, the decline in oil prices has had a particularly negative impact on steel pipe manufacturers, with demand from the oil and gas industry for these products in stark decline, as many new projects have been either delayed or cancelled altogether.

At the same time, a glut in iron ore had pushed down input prices – this basic material lost 47% in value during 2014, according to Bloomberg Business – while maturing former high-growth economies, such as China, have begun to see slowing steel demand. Indeed, Conares, which does not sell to end users, makes most of its non-GCC sales to traders in North America these days, as opposed to East Asia, where they sold most in the past. This creates challenges for manufacturers of steel and aluminium, although with company officials telling OBG that 60% of Conares’ business is in the GCC, and 100% of its rebar is sold there, the continued rollout of so many projects in the region will likely keep the sector in good shape.

Small Is Beautiful

While giant operations like DUBAL often grab the headlines, the vast majority of Dubai’s industrial enterprises are micro, small and medium-sized enterprises (MSMEs). Indeed, according to Dubai SME, a division of the government’s Department of Economic Development (DED), these outfits account for some 95% of all enterprises in the emirate, along with 40% of Dubai’s nominal GDP – 60% of the UAE’s – and 42% of the emirate’s workforce.

Dubai SME is the umbrella organisation for a variety of programmes aimed at MSME and entrepreneurial development. These include Intelaq – which encourages businesses that are set up and run from home, with a three-year service offering advice and training, as well as guidance through the legal and regulatory challenges facing new MSMEs.

Dubai SME also offers a network of successful entrepreneurs that can act as mentors for new start-ups in the emirate. Virtual incubation services, facilitated access to seed capital and other services are also provided by the agency. SMEs in Dubai tend to cluster around a variety of sectors, such as media, IT, tourism and hospitality, and transport and storage. In manufacturing, one of the largest groups is in fastmoving consumer goods (see analysis).

For many SMEs across these subsectors, however, challenges present themselves if they are to fully take advantage of these opportunities. One major challenge is rising costs. Data from the DSC showed the consumer price index (CPI) in October 2014 standing at 121.85, up from 117.48 at the start of the year. In August 2014, Dubai recorded its highest level of price hikes in five years, with the first half of 2014 inflation level at 2.74%. “As inflation re-enters the market, the cost of operation is becoming a major concern amongst industrialists in Dubai, particularly for labourintensive activity,” Mohamed Al Hazza, director-general of the Emirates Industrial City in neighbouring Sharjah, recently told OBG.

A big cost is utilities, which along with rent, account for about 44% of household expenses and were up 6.2% between first-half 2013 and first-half 2014. This impacts labour’s pockets by pressuring wages, as well as the costs of business inputs.

To encourage continued SME development, there are strong calls being made for government assistance in reducing some of these charges, enabling firms to invest more in developing higher-value processes and thus contributing more to the emirate’s longer-term economic development.

Outlook

With the economy set to see continued growth in the year ahead, along with regional growth that will likely outstrip global averages, industry in Dubai broadly expects expansion to continue in the next period. There is growing confidence that a repeat of the sharp downturn of 2008-09 is unlikely, with future projects such as Expo 2020 likely to stimulate the local market considerably. In the longer term, many of the emirate’s businesses will bring greater innovation into their processes, expand their export and re-export markets, and move their local market portfolios. Given the government’s continued commitment, the emirate’s future looks to be a busy one.