Abu Dhabi taking industry to the next stage with diversification drive

Encompassing everything from petrochemicals to food processing and aerospace to automotive parts, Abu Dhabi’s industrial sector has branched out significantly in recent years. Guided by the Abu Dhabi Economic Vision 2030 and the broader 2016 Abu Dhabi Plan, along with its own sector-specific development strategy, industry is now at a key turning point, as it begins to implement the next stage of its development.

The year 2017 will see the public unveiling of a new 2016-20 plan for industry, which promises to increase the focus on private-sector development, furthering the integration of the major corporations of Abu Dhabi’s industrial world with the raft of micro-, small and medium-sized enterprises (MSMEs) that form the backbone of manufacturing – and employment – in the emirate.

Economic Headwinds

The macroeconomic environment has, however, been more challenging of late, with many firms having to face up to the recent slowdown in global growth and increase in regional uncertainties. At the same time, the sustained slowdown in oil and gas prices has affected government revenues, with public expenditure very much a driver of local economic growth. Recent hikes in utilities tariffs have also had an impact on margins. Nonetheless, the year ahead promises to bring continued expansion, with the structural and strategic changes now being undertaken likely to begin reaping future rewards.

Strategic Thinking

On the government side, several different ministries, departments and agencies have a vital role in Abu Dhabi’s industrial sector. In the petrochemicals subsector, the Ministry of Energy is a key policy-making body at the federal level, while the Abu Dhabi National Oil Company and joint ventures such as Abu Dhabi Polymers Company, known as Borouge, and FERTIL have key roles at the emirate level (see analysis), as does the Mubadala Investment Company, which was formed from the consolidation of the International Petroleum Investment Company and Mubadala Development Company in May 2017.

Meanwhile, important players in the metals sector include Emirates Global Aluminium, which is co-owned by Mubadala and Investment Corporation of Dubai, as well as Emirates Steel, which is owned by industrial holding firm Senaat – the largest industrial conglomerate in the UAE (see analysis).

Oversee & Implement

For the Abu Dhabi industrial sector as a whole, the Abu Dhabi Department of Economic Development (ADDED) has been charged with overseeing the implementation of a number of key elements of the Abu Dhabi Economic Vision 2030 and the Abu Dhabi Plan, while the Industrial Development Bureau (IDB), which falls under the purview of ADDED, is responsible for overseeing and implementing polices, plans and programmes related to the industrial sector specifically. Also under the jurisdiction of ADDED is the Competitiveness Office of Abu Dhabi, which looks at enhancing the emirate’s business environment, with an eye to achieving greater innovation and productivity.

In 2016 the UAE government also established the Industrial Coordination Council (ICC), which takes an emirates-wide view of industrial development. Around 13 bodies, representing both federal and local industrial outfits from each of the seven emirates, are on the ICC, which is chaired by Sultan bin Saeed Al Mansouri, the UAE minister of economy. The new body will be looking at the implementation of the UAE Vision 2021 and the National Agenda, which are the two main strategic parameters guiding the country’s overall development.

Sustainable Growth

For the development and diversification of the Abu Dhabi economy specifically, the Abu Dhabi Economic Vision 2030, the Abu Dhabi Plan and the 2016-20 industrial strategy are important elements of the current policy framework. Abu Dhabi’s economy has been highly dependent on oil and gas for many years – at the time of Economic Vision 2030’s writing in 2007-08, the mining, quarrying and energy sector (which includes oil and gas) accounted for some 59% of its GDP, a figure above the GCC average of 46%.

This has long been recognised as a strategic long-term weakness, with the growth of the services and industrial sectors essential to the future of the emirate’s economy. Economic Vision 2030 and Abu Dhabi Plan both stress that this growth must take place in a sustainable way, while maximising value added. A drive to higher-tech industries and services is therefore also very much part of these plans.

Economic Vision 2030 singles out 12 specific segments as engines of future growth. Among them are four that come under the traditional industry rubric: petrochemicals, metals, aviation, aerospace and defence, plus pharmaceuticals, biotechnology and life sciences. The other specific sectors also all have some tie in to industry; health, for example, is to drive growth, with the manufacture of medical equipment one of the key components in the sector strategy. Likewise, oil and gas continues to be a growth engine, and has a whole range of industrial manufacturers feeding into it, from specialised pipe producers to shipbuilders.

Economic Vision 2030 lays the groundwork for a series of industrial development strategies, the most recent of which ran until 2016. The new industrial strategy, due to be officially unveiled in early 2017, will build on the work of its predecessor, with few strategic changes, but with a significant focus on the enabling environment and plan implementation.

The previous strategy identified 13 target industrial sectors for the emirate, including constriction materials, petrochemicals, engineered metals, iron and steel, plastics, aluminium, food, renewable energy, gas, semiconductors, packaging industries, aviation and transport equipment. To assist in the development of these industries, the IDB has been charged with providing land, infrastructure and a range of support services at attractive rates to companies in those subsectors wishing to locate in Abu Dhabi.

Improving The Business Environment

At the same time, the IDB and the government at both the federal and emirate level have sought to streamline procedures and boost the ease of doing business. These measures appear to have been paying off, too. In the World Bank’s ease of doing business index 2017, the UAE rose eight places in the global rankings, from 34th in 2016 to 26th. Particular improvements were made over the 12 months in the starting a business and protecting minority investors categories, reflecting overall improvements in the country’s legal framework. The rankings placed the UAE ahead of countries such as France, the Netherlands and Japan, and far ahead of its nearest GCC rival, Bahrain, which was 63rd. A new UAE-wide bankruptcy law, which was passed in September 2016 and came into force the following December, could further improve the UAE’s position in the World Bank’s rankings. Drafted by the Ministry of Finance, the bankruptcy law draws on the best insolvency practices of a number of European countries, as well as Japan. It will remove one of the most long-standing barriers to doing business in the emirates, namely the difficulty faced by companies that run into financial trouble when it comes to restructuring their debts. A new body, called the Committee for Financial Restructuring, which will oversee procedures that fall outside the scope of the courts, is to be established. It is hoped the law will offer a way for companies in difficulty to avoid bankruptcy through financial reorganisation or restructuring, pre-emptive settlements or the raising of new funds.

Facts & Figures

The most recent official statistics from the Statistics Centre - Abu Dhabi (SCAD) released in 2016 show that in 2014 GDP stood at Dh960bn ($261.4bn) at current prices, up from Dh931.8bn ($253.7bn) in 2013, representing a growth rate of 3%. The oil and gas sector contributed around 50.9% of this, demonstrating the impact of the diversification strategy on the emirate’s economy. SCAD figures also show gross output from industry outpaced GDP growth in 2014, rising by 3.2% from Dh183bn ($49.8bn) to Dh189bn ($51.5bn). In 2014 manufacturing made up a total of 5.7% of GDP overall, and 11.6% of non-oil GDP, with 12.6% growth in the value added of the manufacturing sector, according to SCAD. These figures are set to increase considerably, however, with the government announcing plans in May 2016 to double the size of the emirate’s industrial base, with contribution to GDP targeted at around 10%. This will also form part of a wider plan to boost the share of the private sector in the economy from around 27% at present to some 40% by 2030. The UAE as a whole, meanwhile, plans to increase the share of manufacturing in the economy from 11% to 25% by the year 2025, with the UAE minister of economy stating in early 2017 that $75bn in industrial investments were being targeted.

Large & Small

According to the most recent available SCAD data, in 2013 MSMEs accounted for some 94.6% of all businesses registered in Abu Dhabi. MSMEs also provided 24% of all jobs and contributed 10% of total production – 13.6% of non-oil and gas sector production. In 2014 some 51.2% of the total number of MSMEs were micro-sized (less than five employees), 34.8% were small (5-19 employees), 8.8% medium-sized (20-49 employees), while businesses classed as large (50 employees or more) but still within the overall MSME category, accounted for the remaining 5.2%. In terms of economic activity, in 2014 the largest proportion of MSMEs were involved in the wholesale and retail trade and vehicle repair industries, accounting for 41.8% of the total. The second-largest were active in manufacturing at 13.6% and the third construction at 11.2%.

The majority of MSMEs in Abu Dhabi are expatriate-owned and staffed. A recent report by Global Entrepreneurship Monitor noted that 5.3% of business owners in the emirate were Emiratis – higher than the UAE average of 3%, but still relatively low. Moreover, some 82.5% of Emirati business owners in the UAE had another job elsewhere, often in the public sector.

There is a range of reasons why the rate of Emirati participation in the MSME sector is low. One is that public sector work offers a wide range of benefits as well as a relatively risk-free environment. Indeed, private sector job security is much lower, with many start-ups facing closure within a few years. The failure rate for UAE-based MSMEs is 30-40%, according to the Khalifa Fund for Enterprise Development in Abu Dhabi.

Furthermore, in the past penalties associated with business failure presented another hurdle, although the new bankruptcy law should help address this. Salaries can also be an obstacle, with these generally expected to be higher for nationals. In any case, human resource factors remain an issue for the industrial sector as a whole, with the government keen to increase the percentage of Emiratis employed and the number of Emirati employers. Indeed, a key indicator covered in the UAE National Agenda targets raising the number of nationals working in the private sector 10-fold by 2021. To this end, Emiratisation rates have been set for different industries in the UAE, with the Ministry of Human Resources and Emiratisation in charge of implementation. Dovetailing with this is an initiative being carried out by the Khalifa Fund, which endeavours to help businesses develop their entrepreneurial skills.

Funding & Support

Set up in 2007 with Dh2bn ($544.2m) of capital, the Khalifa Fund provides a range of services, including mentoring, capacity building and assistance securing funding and support services, such as helping find and secure business premises and permits, and negotiate administrative hurdles. In 2014 the fund launched a loan guarantee scheme with Arab Bank, whereby the bank supplies loans of up to Dh5m ($1.4m) to MSMEs approved by the fund. A similar scheme was set up with the Abu Dhabi Commercial Bank in 2011, which has led to Dh1.4bn ($381.2m) being awarded to Emirati-run start-ups around the UAE to date.

Nonetheless, MSMEs continue to face challenges recruiting Emirati staff. Securing bank loans and financing is also a major concern. However, this could be about to change as, in recognition of the importance of MSMEs to diversification and the promotion of innovation and entrepreneurship, the segment is set to become a focus of the forthcoming 2016-20 industrial development strategy. “What we would like to see is increased communication with small and medium-sized manufacturers in the private sector,” Amer Kakish, CEO, Ittihad International Investment, told OBG. “In this respect, a business association made up of industrial companies would be very valuable to advance the interests of manufacturers operating across Abu Dhabi’s industrial zones.”

Key Sectors

Many of Abu Dhabi’s industries are located within specially tailored free zones, clustered around the emirate’s capital and second-largest city, Abu Dhabi City and Al Ain. These zones generally offer a range of advantages for businesses, from the possibility of 100% foreign ownership and repatriation of profits, to one-stop-shop facilities to ease the negotiation of the regulatory and administrative landscape. Businesses in the zones are generally exempt from Emiratisation requirements and are well connected to transport and logistics networks, with highways, ports and airports all close to hand (see analysis).

ZonesCorp is currently in charge of the largest group of free zones. Its two flagship offerings are the Industrial City of Abu Dhabi (ICAD) on the outskirts of the capital and the Al Ain Industrial City (AAIC).

Food Processing

Both ICAD and AAIC recently saw an expansion in their FoodZone clusters, demonstrating the dynamism of this particular subsector. Indeed, demand for food products within the GCC region is reportedly set to grow 3.5% per year on average between 2014 and 2019, to reach some 51.9m tonnes.

Some 24 food-production facilities are currently housed in ZoneCorp’s properties, with these now organised into dedicated areas. Food and beverage manufacturers include international outfits, such as Nestlé Waters, which signed an agreement in April 2016 to build a new water factory at ICAD at a cost of a Dh100m ($27.2m). “Abu Dhabi is the perfect location to establish a new water plant,” Walid Zamamiri, managing director at Nestlé Waters for the Lower Gulf, told local press. “...It offers many advantages for the smooth-running of the facility, and a strategic location for distribution within the wider UAE and other Gulf countries.”

Indeed, Abu Dhabi’s food-processing sector contains many companies that supply markets across the MENA region, which benefit from the emirate’s logistical advantages. For example, Emirates AquaTech, also an ICAD resident, is an aquaculture business that now supplies caviar and sturgeon both around the region and internationally, utilising air links to export its products to Asia and North America, as well as to closer destinations. Meanwhile, the Khalifa Industrial Zone Abu Dhabi (KIZAD), adjacent to Khalifa Port, is another significant and developing free zone. In February 2016 the National Food Products Company (NFPC) broke ground on a new 752,000-sq-metre production facility at KIZAD. Scheduled to begin operations in the first quarter of 2018, the new facility will feature Oasis Water, Milco dairy products and Lacnor juices among its portfolio. Additionally, in late 2016 Al Dahra Holding announced that it would be building a Dh140m ($38.1m) facility there. Capable of processing up to 120,000 tonnes of rice per year, the 100,000-sq-metre site will produce a 30,000-tonne reserve of rice, as part of ongoing plans to enhance food security in Abu Dhabi. The plant will also export around the GCC region.

Pharmaceuticals

Abu Dhabi’s industrial zones are also home to a burgeoning pharmaceutical industry, which includes Neopharma, Abu Dhabi’s foremost manufacturing facility. Established by the New Medical Centre, the company has manufacturing deals with Merck and Wyeth, a Pfizer unit. With recent reports suggesting pharmaceutical expenditure in the UAE is expected to increase at an average of 8% per year through to 2019 to reach Dh14bn ($3.8bn), this particular segment expects to see substantial expansion in the years ahead. Indeed, the UAE Ministry of Health and Prevention expects the number of pharmaceutical manufacturing plants in the country to double over the next five years. This follows an earlier doubling in market size between 2004 and 2014 thanks to an expanding population, mandatory health insurance and growing regional medical tourism.

R&D

The pharmaceutical industry also hopes to continue leveraging the major investments going into science and technology in the UAE to establish itself as a research and development (R&D) hub. On a federal level, the UAE authorities are strongly committed to the development of more high-value-added industries, and R&D is a vital component of this.

At the same time, the Abu Dhabi government is also placing an emphasis on R&D. For example, the Masdar City project offers a test bed for renewable-energy-focused industries, with the formerly titled Masdar University of Science & Technology specialising in this fast-growing global business. In 2016 it was announced that Masdar Institute would merge with the Petroleum Institute and Khalifa University of Science, Technology and Research. The move is expected to encourage greater collaboration across disciplines.

At the same time, the combined entity is likely to play a significant role in the development of the health care equipment industry, which is a highly specialised subsector and has been identified as an area of specific focus in the emirate’s new industrial strategy.

Security, Aerospace & Defence

Other sectors of considerable interest in terms of investment, which are strongly supported by Abu Dhabi’s development plans are security, aerospace and defence. Mubadala Development Company was established to be a driver for economic diversification in the emirate. Over the years it has developed a significant aerospace portfolio which, following Mubadala’s landmark merger with International Petroleum Investment Company in 2017 to form Mubadala Investment Company, has been brought into its Aerospace, ICT and Renewables Division.

Mubadala’s aerospace assets include composite aerostructures manufacturer Strata; maintenance, repair and overhaul (MRO) business Turbine Services & Solutions; turboprop aircraft manufacturer Piaggio Aerospace; aviation financial solutions company Sanad Aero Solutions; Switzerland-based MRO business SR Technics; and the Nibras Al Ain Aerospace Park, which Mubadala is developing jointly with the Abu Dhabi Airport Company. The park covers 25 sq km and brings together on one site an aviation academy, MRO businesses, manufacturers and administrative units, as well as residential complexes for aerospace company employees. Strata recently expanded its presence at the park, too, where it will manufacture vertical fins for the Boeing 787 Dreamliner, among other projects.

Defence, meanwhile, is dominated on a local level by the Emirates Defence Industries Company (EDIC), with Mubadala a 60% shareholder. EDIC has a wide range of subsidiaries, stretching across the defence industry supply chain, from ammunition manufacturer Caracal to the Advanced Military Maintenance, Repair and Overhaul Centre. Another subsidiary is Nimr Automotive, which manufactures the N35 and Ajban-class special operations vehicles. Both of these were also designed in the emirate and have been ordered by the UAE’s armed forces – a major purchaser of weapons systems and military equipment.

Shipbuilding

Abu Dhabi also has an advanced naval construction sector. Central to this is Abu Dhabi Ship Building (ADSB), which is part of Mubadala’s aerospace, ICT and renewables division. Notably, ADSB’s Dh3.9bn ($1.1bn) Baynunah programme, designed with France’s CMN, has delivered six 72-metre corvette-class Baynunah vessels to the UAE Navy. The vessels have a manufactured steel hull and aluminium alloy superstructure. A quad MTU engine installation and triple Rolls-Royce waterjet configuration enable maximum speeds of 30 knots. They are also capable of handling a five-tonne naval helicopter, with design schemes enabling each to be fitted with a hangar and HELO deck. Furthermore, in January 2017 ADSB inaugurated a new floating dry dock in Zayed Port. The dock began servicing vessels in July 2016, and has allowed the company to service larger ships and find new customers.

Construction

As for another of the main focus areas for industrial development – construction equipment and materials – this sector is well placed in Abu Dhabi, as demand continues to be high both locally and regionally. This has, however, been affected by the recent downturn in oil and gas prices, which impacted local budgets and caused a series of project delays, along with a global over-supply of many basic materials. Nonetheless, the volume of projects in the emirate and the UAE continues to be high.

In cement, Senaat, one of the UAE’s largest investment holding companies, has a majority stake in the Arkan Building Material Company, which in turn owns the Al Ain Cement Factory. This is the only integrated plant in Abu Dhabi, drawing raw materials from Al Ain and over the border in Oman, to provide Arkan with a total capacity of 4m and 5.7m tonnes per annum (tpa) of clinker and cement, respectively.

The broader UAE is home to a large number of competing cement manufacturers, however, with other Abu Dhabi players, including National Cement, which has a 2m-tpa-capacity clinker plant based in Al Ain that is 44% owned by Holcim and Nael Cement. The GCC as a whole has excess supply, with the UAE alone estimated to have a total 41m-tpa capacity to meet a 21m-tpa demand. This, alongside the recent modification to utilities, continues to put pressure on margins. These also affect the steel and aluminium sectors, which are also key suppliers of construction materials (see analysis).

Outlook

The slowdown in global economic activity and the drop in oil and gas prices has meant that the macro environment for industry in the emirate has not been at its most favourable in recent years.

Deteriorating prices for commodities, such as steel and aluminium, have also impacted margins at the heavy industrial end, and with so many of the emirate’s MSMEs associated with those trades, or with the oil and gas sector, they too have often been challenged.

At the same time, the cost of labour and utilities has been advancing, with 2017 likely to see a further hike in gas and electricity charges for industrial units, which should impact heavy consumers, including the aluminium, steel and cement subsectors. Meanwhile, the strong dollar – to which the dirham is pegged – also affects export competitiveness.

Nonetheless, despite adverse headwinds, the emirate’s industries have done remarkably well, especially those that have kept a close eye on costs, while also moving into higher-value-added production. The aerospace industry, for example, has not seen any of the market deterioration of other sectors.

Better use of systems, mechanisation, and the use of other new technologies and processes is key. The introduction of a new industrial strategy, in addition to the new investment and bankruptcy laws, will also have a positive impact, as will the government’s determination to back up new innovation.

Efforts to encourage entrepreneurship and make the private sector a more attractive proposition for Emiratis are also likely to continue. The near future should, therefore, see the industrial sector continue to grow, particularly as global commodity prices pick up again, with projects being restarted across the UAE. Abu Dhabi stands well placed to take advantage of a more positive industrial environment.