Which regulation are encouraging industrial expansion in Dubai?

From 2007 to 2017 the UAE’s industrial sector (defined as extraction, manufacturing, utilities and construction) grew by approximately 31%. According to consultancy Oxford Economics, it is set to grow marginally faster — by another 34% — in the 10 years leading to 2027. At the emirate level, Dubai’s industrial sector has likewise emerged as a major driver of growth; the sector in Dubai grew by 6% annually in the ten years to 2017 and this rate of expansion is expected to surge to 51% in the decade to 2027.

Growth will continue to be fuelled by the emirate’s strategic location, which is within an eight hour flight of almost two-thirds of the global population; its comprehensive airport and seaport infrastructure; and the investment-friendly policies in place.

Structure & Oversight

For industrial and logistics companies, the traditional entry point to Dubai has been to set up operations in a free zone — a geographically defined offshore location that allows 100% foreign-owned companies to enjoy tax advantages, and Customs and excise duty exemptions. Companies operating out of free zones are not permitted to trade with the UAE mainland or to bid for onshore government contracts.

Until recently, foreign companies could only establish themselves on the mainland if they ceded majority control to an Emirati partner. However, this rule is slowly being loosened, and in late 2018 a federal law was introduced that allows for up to 100% foreign ownership of companies operating in certain onshore sectors. A list of these sectors is still being drawn up, with the level of foreign ownership set to be addressed on a case-by-case basis.

A number of ministries continue to be responsible for overseeing and regulating the industrial sector in the emirate. They include the Ministry of Economy, the Ministry of Labour, the Ministry of Public Works,and the Ministry of Environment and Water. They, along with a variety of other stakeholders, are represented on the Industrial Coordination Council and the Dubai Free Zone Council.

Policy

Dubai Industrial Strategy 2030 is designed to turn the emirate’s industrial sector into a key incubator of growth. The goal is to increase Dubai’s GDP from Dh410.5bn ($111.7bn) to Dh575.5bn ($156.7bn) by 2030. The industrial sector is expected to contribute Dh18bn ($4.9bn) of additional growth, as well as provide 27,000 new jobs and to contribute to overall levels of export growth.

The strategy has five key objectives: to increase value added in local manufacturing; to deepen knowledge and innovation; to make Dubai a preferred platform for global companies; to promote energy-efficient and environmentally friendly manufacturing; and to make Dubai a centre for global Islamic products. Policymakers say Dubai, which already has a range of dedicated plants located across 18 industrial zones, will also focus on optimising the use of digital production in order to increase its global competitiveness.

Hootan Yazhari, head of global research for the MENA region at Bank of America Merrill Lynch, explained the context in which Dubai is seeking to diversify its economy in general, and to develop the industrial sector in particular. A major point is that in recent years the emirate has reduced, but by no means eliminated, its dependence on the oil and gas sector. Oil and gas represent around 5% of Dubai’s GDP, but this figure reaches as high as 30% in the UAE, and even higher — 70% to 80% — in Abu Dhabi. “The region is reliant on oil, and Dubai is reliant on the region,” Yazhari told OBG.

As a result, the three-year slump in international oil prices from 2014 to 2016 negatively impacted economic activity in Dubai, and reduced consumption and investment flows linked to neighbouring oil-producing countries like Saudi Arabia and Iran. By the same token, economic sentiment in the emirate should be buoyed if oil prices continue recovering as they did in 2017 and 2018.

The second major point is that Dubai depends on the presence of a large and skilled expatriate workforce. According to official data, in 2017 the population was 2.9m, of which 92% were foreign born. Among the 8.3% of the population made up of Emiratis, unemployment is low, and it is virtually non-existent among expatriates, as the vast majority have residency through work-related visas. This means that Dubai is distinctly vulnerable to any sudden reduction in the expatriate workforce.

Although more detailed statistics are not available, Yazhari believes there has been a net reduction of foreign workers between mid-2017 and the end of 2018. “That is important because the business model in Dubai is hugely reliant on the expatriate population,” he told OBG, adding however, that this trend is likely to be reversed in the coming years, as the economy begins to rise again in line with increasing oil prices, and as measures like the proposed introduction of 10-year visas begin to shore up foreign investor sentiment.

Although details for the 10-year visa were still being worked out as of early 2019, it is expected that they will not be directly tied to employment, and therefore may encourage visa holders to consider longer-term approaches to living in Dubai. This follows the earlier introduction of five-year visas for retired expatriates, also seen to be encouraging foreigners to stay longer and spend more in the local economy. Initially, the 10-year visas were established specifically for specialists in scientific, medical research and technical fields.

Performance

The industrial sector represents an important part of Dubai’s economy. According to the Dubai Statistics Centre (DSC), manufacturing represented Dh36.8bn ($10bn), or 9.4%, of GDP in 2017. This makes it the fourth-largest sector in the country, after wholesale and retail trade (26.6%), transportation and storage (11.8%), and financial and insurance activities (10.4%). In 2017 manufacturing grew at a slightly slower rate than the economy as a whole, by 2.09%, compared to overall GDP growth of 2.8%. In the five years to 2017 manufacturing grew at an average rate of 3.4%.

Innovation

The government’s view is that innovation, and research and development (R&D) should be at the centre of the emirate’s future development. Dubai moved from traditional trading to oil-based revenue in the second half of the 20th century, though this was later complemented by, and almost completely replaced with, a largely knowledge-based and services-driven economy.

Trade, logistics, financial services, hospitality and tourism, real estate, construction and manufacturing are now estimated to make up approximately 90% of total business activity.

SME

While much of Dubai’s industrial strategy has been geared towards attracting large international companies to set up operations in the emirate, there has also been a growing focus on small and medium-sized enterprises (SMEs).It has become apparent that SMEs are good at innovation and at identifying new technology-based business opportunities and as such they are becoming an increasingly important part of the modern business ecosystem. A joint study by the DSC and Dubai SME concluded that SMEs contributed 47% of Dubai’s GDP in 2016, a significant increase on 40% in 2009. Their share of total employment also increased to 52.4% in 2016, up from 42% in 2009.

Half of all SMEs registered in Dubai are under five years old; one in five are between five and nine years old, and a quarter are between 10 and 29 years old. The smallest companies, technically classified as micro-enterprises, account for just over 9% of GDP; small firms account for 25.6%, while medium-sized firms represent about 12.1%.

Exports

According to the International Trade Commission, in 2017 the UAE as a whole had combined exports worth $308.5bn, an increase of 3.3% on the previous year. Imports, meanwhile, hit $269.7bn, a marginal decrease of 0.4% on 2016’s numbers. Separate data from the DSC for the same year showed that the emirate exported $39.1bn directly and re-exported goods worth $97.9bn. Meanwhile, total imports were worth $217.4bn. In the first nine months of 2018, the latest data available from the DSC, Dubai directly exported Dh83.7bn ($22.8bn) while re-exports amounted to Dh132.5bn ($36.1bn). Imports equalled Dh348.2bn ($94.8bn). Dubai’s top direct exports are industrial supplies, followed by consumer goods and capital goods.

Some of the emirate’s key export products include pearls, precious stones, base metals and prepared foodstuffs. Re-exports include machinery, sound recorders, televisions, vehicles, aircraft and vessels. Subash Mistra, an executive at Prime AC Industries, which manufactures fire and safety equipment at three plants in Dubai, described that the emirate is an ideal base for exporting to the GCC, Africa and other destinations. “Dubai is a perfect location for this,” he told OBG. “A lot of good workers want to live here, and we can hire them at reasonable salaries.”

FOREIGN DIRECT INVESTMENT: In the last decade Dubai has continued to attract large foreign direct investment (FDI) inflows, but with other jurisdictions in the Middle East competing to attract large companies, the market has become more competitive. In this context, recent changes such as the announcement of 10-year visas have been well received.

In June 2018 Yusuffali M A, chairman of retail chain Lulu Group International, described the new visas as “a landmark announcement, sure to further boost UAE’s image as the most investor-friendly economy in the region, and 100% foreign ownership is a revolutionary step that will generate huge interest among global investors”.

His view was echoed by Chavan Bhogaita, managing director, global markets, First Abu Dhabi Bank. “Many people had held back from investing here as they felt there was no long-term tenure and they were dependent on a short-term visa. Now, with a 10-year visa and 100% foreign ownership, investors and other people looking to establish and grow businesses here will have more confidence,” he told Bloomberg in early 2018.

One example of a global company investing in Dubai came in October 2018, with the announcement that Sika Switzerland, a manufacturer of chemicals and building materials, was opening a new $10.8m production facility at Dubai Industrial Park. The 240,000 tonnes per annum plant was built with the intention of supplying the wider GCC market and taking advantage of the regional boom in construction activity. Construction sector growth is expected to continue rising at a rate of around 7% per annum throughout the next several years.

Pharmaceuticals

As part of its industrial strategy, the Dubai government has been encouraging pharmaceutical companies to establish manufacturing facilities in the emirate. According to a report by BMI Research, the UAE’s pharmaceutical and health care markets are set to grow in value from Dh62.3bn ($17bn) in 2017 to Dh65.68bn ($17.9bn) in 2018 and Dh78.13bn ($21.3bn) in 2021. Many facilities have been set up within the established Jebel Ali Free Zone Authority (JAFZA) in Dubai, which currently houses 306 health care and pharma companies from 54 countries.

Mumbai-based Wockhardt is a pharmaceutical company that is currently invested in JAFZA. In 2018 it opened a $40m factory in order to manufacture new chemical entities used to develop antimicrobial treatments to fight superbugs. The 10,000-sq-metre facility uses fully automated manufacturing, warehousing, product testing and maintenance.

“Wockhardt conducted extensive studies for identifying a region in the Middle East to establish a strong manufacturing presence for its advanced patented drugs,” Murtaza Khorakiwala, the firm’s managing director, stated at the opening ceremony. “JAFZA was found to be appropriate for the factory premises for manufacturing patented, proprietary drugs for global markets,” he added.

UAE-based Pharmax Pharmaceuticals has similarly commenced production of affordable generic medicines at a Dh125m ($34m) facility in Dubai Science Park. The factory has the capacity to produce over 200m tablets and capsule dosages a year, a number which is expected to rise to 800m between 2021 and 2023. The factory is a joint venture with UAE distributor Al Ittihad Drug Store and two Morocco-based drug companies. The project is aligned with Dubai Industrial Strategy 2030, which along with other goals, aims to reduce the country’s reliance on pharmaceutical imports.

Free Zones

A key objective of Dubai’s free zones is to attract foreign companies to invest and in local manufacturing activities. All foreign-owned companies can register and operate in the geographically defined zones. The business model, which has been highly successful, is nevertheless adapting and changing to become more flexible.

The authorities have begun to develop a dual-licensing system, where under certain conditions companies are authorised to operate both in a geographically defined free zone and on the Dubai mainland. This was demonstrated with the announcement in November 2018 that the Dubai Department of Economic Development had issued permits to 163 free zone companies, registered with the Dubai Free Zones Council, to operate on the mainland.

There are currently 34,780 companies registered in over 30 free zones that are eligible to seek dual licences of this kind. In order to obtain the appropriate permit to operate on the mainland, companies must first arrange to receive a no-objection certificate from the relevant free zone authority.

Dubai Airport Free Zone Authority (DAFZA) reported an 8% increase in revenue in the first half of 2018, driven in part by growing licensing and the expansion of DAFZA Industrial Park. The number of registered companies has increased by 15%, and while registration of multinational companies grew by a more moderate 5%, the number of SMEs surged by 17%. DAFZA had earlier announced a 65% cut in business start-up fees as part of the strategy to make Dubai more attractive to foreign companies looking to establish themselves there. Licensing and staff visa fees were also reduced, by 33% and 20%, respectively. Other incentives were announced. According to the director-general of DAFZA, Mohammed Al Zarooni, “This is being done through a number of initiatives and incentives that aim to attract and promote FDI into the emirate, ensuring sustainable growth across all economic sectors and strengthening Dubai’s status on the world economic stage,” he told local media.

Dubai’s largest free zone, the Dubai Multi Commodities Centre (DMCC), has been looking to China to expand its activities. In 2018 the DMCC signed a memorandum of understanding with the China Council for the Promotion of International Trade to offer its services to Chinese companies. The DMCC said it was highlighting Dubai’s position as a global gateway and an ideal partner for Chinese enterprises seeking to access some of the fastest-growing markets in Central, South and South-east Asia, Europe, the Middle East and beyond. The DMCC took a road show to the Chinese cities of Wuhan, Beijing and Shanghai. Over 15,000 companies are registered to operate in the DMCC, covering energy, financial services, agricultural products, diamonds, and gold and base metals. Approximately 4000 Chinese companies are believed to be registered across the UAE.

Fourth Industrial Revolution

The seven emirates of the UAE have launched a strategy for the Fourth Industrial Revolution, which aims to improve the population’s ability to reliably employ advanced technologies, including digital production and distribution, automation and robotics.

Speaking at a ministerial meeting on the subject in September 2018, Sheikh Rashid bin Saeed Al Maktoum, vice-president and prime minister of the UAE, stated that the emphasis is on providing Emiratis with the technology and training to allow them to shape the future and promote the country’s position among the world’s leading nations.

As Dubai seeks opportunities in the emerging global digital economy, one early implication is that it may need to adapt and update its traditional free trade zone concept. A report by JLL MENA, a real estate and investment consultancy, asserts that new digital clusters may eventually replace the geographically defined free zones.

While Dubai has successfully attracted large and mature global companies to these free zones, in the future the emphasis may need to shift to attract younger SMEs. The strategy to date has been based on grouping similar businesses in the emirate’s roughly 30 free zones. Activity in these zones now represents around 30% of Dubai’s GDP.

However, the future may lead to a more flexible licensing framework that will spread the advantages associated with free zones more broadly across the whole city. Licensing is already becoming more flexible, with the authorities saying they will allow 100% foreign ownership of companies outside of free zones before the end of 2018. “With the government relaxing investment and licensing laws, the time is now here to level the playing field by reducing the distinction between free zones and onshore locations,” Craig Plumb, head of research at JLL MENA, said in a statement. “The expansion of the dual-licensing system should help create a greater diversity of occupiers and promote a more attractive digital ecosystem,” he added.

For some, Dubai is poised to take advantage of the global trend towards servitisation – the increasing provision of digital services compared to physical commodities and manufactured goods. Elements of this trend include falling costs for cloud data storage and the emergence of companies where intellectual property, rather than physical equipment and property, is the key asset.

However, one of the larger challenges will be to ensure the availability of the necessary digital skills, particularly in the field of automated manufacturing. One way to achieve this is through educational partnerships that help to bridge differences between the academic and commercial worlds.

Outlook

A number of related factors point to a positive outlook for the Dubai industrial sector. Improved oil prices and a resilient global economy are two of the key factors driving this optimism.

The introduction of legislation allowing for 100% foreign ownership, as well as the easing of doing business regulations and the proposed 10-year visa scheme will also provide a welcome boost to the sector, which is expected to continue expanding against a backdrop of overall healthy GDP growth.