Strong fundamentals underpin Dubai's industrial expansion

With a long-standing status as one of Dubai’s key economic contributors, activity in the industrial sector has been a major contributor to non-oil GDP for the emirate. Even as Dubai’s government has invested heavily in areas such as ICT in recent years, industrial activity has remained a central component of the emirate’s long-term economic diversification plan. While some figures from 2015 point to slowing growth in the sector overall – with manufacturing trade for 2015 down 3% year-on-year (y-o-y), according to Emirates NBD, a regional financial services firm – recent trends highlight several high performing segments. With higher lending rates to the sector recorded in 2015 and the launch of a new industrial strategy and investment plan by the government in 2016, there seems significant scope to continue to develop and diversify Dubai’s manufacturing base, which is currently highly focused in a few subsectors.

Challenges

The steep drop in oil prices that began in mid-2014 has impacted different segments in a number of ways. For example, aluminium manufacturers and other heavy industrial players have had to lower their sales prices. More broadly, low oil prices and regional geopolitical volatility have had a negative impact on domestic consumption, with car manufacturers, for example, preparing for a modest slowdown in growth rates in 2016. “Although the situation in the Middle East is generating fluctuations in the business environment, in 2016 the automotive industry will remain stable,” Mark De Haes, the president and CEO of Daimler – the German automotive giant – for the Middle East and Levant, told OBG.

Despite these issues, however, most local players are looking forward to continued expansion. In the years since the 2008-09 global financial crisis, Dubai has focused on shoring up activity in a handful of key sectors in an effort to diversify the economy and generate steady, long-lasting non-oil growth. According to the IMF’s mission chief to the UAE, Dubai’s economy will expand by 3.3% in 2016, having grown by 3.5% in 2015. Dubai’s diversified economy has helped it overcome the impact of lower oil prices, and the industrial sector has been central to this effort, with continued growth of industry in Dubai widely considered to be on the cards. This is buoyed by the emirate’s advantageous location, its well-developed transport infrastructure and the government’s ambitious development plans and implementation capabilities. As Daimler’s De Haes told OBG, “While activity will slow somewhat in 2016, by 2017 we will begin to witness a positive recovery.”

Beginnings

The development of Dubai’s industrial sector can be traced back to 1954, when Sheikh Rashid bin Saeed Al Maktoum, who ruled Dubai from the late 1950s until 1990, ordered a study of Dubai Creek. The study resulted in a project being undertaken to dredge the creek so as to improve access and boost trade. Through the 1960s the creek remained at the centre of the emirate’s economy, which relied largely on maritime trade. After the formal establishment of the UAE in December 1971, Sheikh Rashid instituted a range of new initiatives aimed at turning the young emirate of Dubai into a regional industrial powerhouse. Such projects included the further enlargement of Dubai Creek, the construction of a larger airport, as well as new road and highways, and major investments in desalination plants and aluminium manufacturing. Maritime-related activities also expanded considerably throughout the 1970s, culminating in the construction of Jebel Ali Port in 1979.

In the early 1980s Sheikh Rashid issued a royal decree establishing the Jebel Ali Free Zone Authority (JAFZA), which was charged with developing a free zone at the port of the same name. Launched in 1985, the subsequent development – also called JAFZA – was the first free zone in the UAE, and is today one of the largest in the world. In 2014 the number of industrial firms at JAFZA stood at 760 and industrial firms located there were responsible for Dh99bn ($26.95bn) in trade, according to Emirates NBD data. By the end of 2015, as per data from the free zone, the number of firms had increased to 765. “There seems to be more focus now in making the industrial sector play a larger role in the economy,” Tarek El Sakka, CEO of Dubai Refreshments (Pepsi Dubai), told OBG. “However, the challenge remains in that the UAE is a relatively small country in terms of population, so industrial companies need to have a broader regional focus – the GCC, Africa and Asia – to be competitive.”

Free Zones

In the decades following the establishment of JAFZA, Dubai successfully launched numerous additional free zones across a variety of sectors, including ICT (Dubai Internet City), media production and broadcasting (Dubai Media City, Dubai Studio City), and others. Industry, however, has remained a key area of focus. In addition to JAFZA, the emirate is home to Dubai Investments Park, the Dubai Airport Free Zone (DAFZ), Dubai Auto Zone and TechnoPark, all of which offer various services and incentives aimed at attracting industrial activity to Dubai.

Another of these zones, Dubai Industrial City, recently underwent a name change in 2016 and became Dubai Industrial Park. The renamed zone has been incorporated into a development that is set to become the largest wholesale hub in the world – Dubai Wholesale City (DWC). Launched officially in March 2016, the major complex will be developed over a 10-year period at an estimated cost of Dh30bn ($8.2bn). “The DWC project will boost the contribution of trade to Dubai’s economy,” Abdulla BelHoul, CEO of DWC, told OBG. “With this project we will create a global platform to connect manufacturer, buyers and sellers. The development will enable players to engage with a world-class service and use Dubai as a base from which to access new markets.”

In November 2014 Dubai World, a state-owned conglomerate with holdings in numerous free zones and related entities, announced that DP World – a Dubai World subsidiary and one of the world’s largest port operators – would acquire Economic Zones World (EZW), the owner of JAFZA and various other free zones, for a price of $2.6bn. The deal, which served to consolidate the emirate’s free zone holdings, is in line with a recent push to take a more strategic approach to free zone development in Dubai. In May 2015 Sheikh Mohammed bin Rashid Al Maktoum, vice-president of the UAE and the ruler of Dubai since 2006, issued a royal decree establishing the Dubai Free Zones Council (DFZC), a new oversight body for the emirate’s free zones (see analysis).

By The Numbers

According to data from the Dubai Statistics Centre, in 2015 manufacturing contributed Dh41bn ($11.2bn) of total GDP at constant prices, up 3.4% from Dh39.7bn ($10.9bn) the year previously. In 2014 and 2015 manufacturing accounted for 11.3 and 11.2% of GDP, respectively, making it the fifth-largest sector, ahead of the government services, construction, and restaurant and hotel industries, among others. According to Emirates NBD data, the manufacturing sector employs around 15% of the emirate’s total workforce of 3.3m.

The net number of manufacturing licences rose by 4% y-o-y in 2015, from 2973 to 3092, according to the Dubai Statistics Centre. Between 2011 and 2015, an average annual growth rate of 5% was recorded for net licence issuances, suggesting sustained levels of demand from industrial firms.

Dubai’s total manufacturing trade reached Dh730.1bn ($198.7bn) in the first nine months of 2015, which represented more than 77% of the emirate’s total non-oil trade. Imports accounted for Dh427.3bn ($116.3bn) – or almost 59% – of the total. While imports posted a 6.4% decrease y-o-y in the first three quarters of 2015, exports and re-exports grew by 1.5%, reaching Dh302.8bn (82.4bn). For imports, and exports and re-exports, electrical machinery and equipment made up 42.3% and 38.9% of the total value, respectively.

Other key subsectors also contributed significantly to both trade classifications, including pearls, precious stones and metals, which together with electrical machinery and equipment, represented roughly 70% of imports, and 72% of exports and re-exports. Therefore, with the emirate’s industrial activity focused in a few key segments, there is significant potential for diversification.

Bank lending to the sector grew by 17.6% across the first three quarters of 2015, according to Emirates NBD data, up from 12.2% in 2014. By the end of quarter three, manufacturing accounted for 5.3% of the financial sector’s total loan book. This figure is widely regarded as relatively low considering the sector’s economic output. As a result, Emirates NBD is not alone in calling for increased lending to industrial players over the coming years, with an eye towards both shoring up leading segments and further diversifying industrial activity throughout the emirate. “Dubai offers a very good business environment for the manufacturing sector,” Jay Andres, CEO of Mai Dubai, told OBG. “It is much easier to launch firms here than in other markets. Moreover, there is good regulation and good consumer protection as well.”

Oversight & Incentives

A wide array of regulatory entities and development organisations are involved in overseeing, promoting and expanding Dubai’s industrial sector. This is due to much of the emirate’s activities taking place within the various free zones. Some of the operators include EZW, DP World and the TECOM Group (a subsidiary of Dubai Holding, a government-owned investment firm).

These entities, most of which are government-owned to some degree, work with various federal ministries to set development goals and ensure transparency and international standards across a range of areas. Ministries involved in these decisions include the Ministry of Economy, which is responsible for long-term planning at the federal level, the Ministry of Public Works, the Ministry of Labour, and the Ministry of Environment and Water, among others.

At the emirate level, Dubai’s Department of Economic Development has taken on a central role in supporting the expansion of industrial activities in recent years, as have the Dubai Export Development Corporation – a publicly owned firm – and the Dubai Chamber of Commerce and Industry. The recent establishment by Sheikh Mohammed of the DFZC has the potential to streamline oversight and planning activities alike throughout the industrial sector. In addition to the new entity’s mandate to encourage increased collaboration among the authorities that operate the emirate’s various free zones, one of the council’s first objectives will be to design a long-term blueprint for free zone development.

Thus far, the development of the industrial sector has proceeded both as a result of investment by the government – as in the case of Emirates Global Aluminium (EGA), which is jointly owned by Dubai and Abu Dhabi – and by attracting industrial players to the UAE via various economic incentives. Incentive schemes tend to be tied to individual free zones. JAFZA, for example, offers 100% foreign ownership; zero corporate tax for 50 years and renewable after that; zero restrictions on capital repatriation and no currency restrictions; zero import and re-export duties; zero personal income tax; and no hiring restrictions in terms of foreign employees. Similarly, firms operating at DAFZA benefit from 100% corporate, personal and import-export tax exemption; 100% foreign company ownership; and 100% repatriation of capital and profits, plus no currency restrictions.

Additionally, JAFZA, DAFZA and other similar developments provide a variety of services, including dedicated on-site logistics, telecommunications, Customs and cargo-clearance facilities, office and real estate management services and, in many cases, one-stop-shop facilities for setting up a business. “There is demand for high-quality services, but also for cheap services,” Madhav Kurup, CEO of Hellmann Worldwide Logistics, told OBG. “The winning provider needs to create a balance between quality and price, as it is important to deliver on both.”

Key Sectors

As the export data suggests, many of Dubai’s leading export segments, such as pearls, precious stones and metals, rely primarily on the emirate’s status as a centre for trade and business, as opposed to the domestic manufacturing industry alone. Furthermore, re-exports – wherein a product is assembled or processed from imported parts and then exported again – constitute a substantial percentage of economic activity in Dubai, as evidenced by the high value of imports to the emirate.

Indeed, as mentioned earlier, in 2015 imports made up around 59% of total manufacturing trade. Given this situation, the highest-value industrial segments in Dubai include the manufacture of base metals (aluminium, steel and iron), automotive assembly, and food and beverage processing and production. Other key growth segments include maritime and aerospace manufacturing, plastics and rubber production, paper and related products, and textiles.

Industrial Strategy

June 2016 saw Sheikh Mohammed launch an industrial strategy for Dubai that is expected to add Dh165bn ($44.8bn) to its economy by 2030. “The Dubai Industrial Strategy aims to transform the UAE into a global platform for innovative industries and a destination of choice for international companies seeking an integrated and favourable environment for growth and sustainability,” Sheikh Mohammed told media.

The strategy blueprint outlines 75 initiatives and highlights six high-value segments as priorities for development, including aerospace, maritime, aluminium and fabricated metals, pharmaceuticals and medical equipment, food and beverages, and machinery and equipment. To this end, investment in research and development will increase by Dh700m ($190.5m) by 2030 under the plan. Ibrahim Al Janahi, chief commercial officer of JAFZA, said, “The Dubai Industrial Strategy has outlined policies to ensure a steady pace of growth in all sectors and has assigned specific tasks to every economic institution – whether free zones or industrial zones.”

Aluminium

The aluminium industry, which is a pillar of Dubai’s industrial sector today, dates back to 1975, when Sheikh Rashid established Dubai Aluminium (DUBAL). The construction of the firm’s smelter, which took four years, was the single largest basic industry development project in the world at the time. Located near Jebel Ali village, the construction project was carried out alongside the ongoing development of Jebel Ali Port and the Dubai Natural Gas Company’s first gas plant. When commercial production of aluminium began in 1980, the smelter had an initial production capacity of 135,000 tonnes per annum (tpa). From the beginning the plant was export-oriented, and the first annual production line was pre-sold to two firms in North America. Over the past 35 years DUBAL has grown into one of the world’s largest primary aluminium smelters. As of 2015, the company’s 4.75-sq-km site in Jebel Ali included a 1m-tpa smelter, a 2350-MW dedicated power station, a water desalination plant, a large carbon plant, various casting operations and a variety of additional supporting infrastructure. In February 2007 DUBAL partnered with Mubadala, an Abu Dhabi-based investment and development company, to launch Emirates Aluminium (EMAL). The first phase of EMAL’s smelter development was completed in 2010, and the second phase was wrapped up in 2014, at which point the firm oversaw a smelter with a 1.3m-tpa capacity and a dedicated 3100-MW power station. In June 2013 DUBAL and EMAL announced they would come together to establish Emirates Global Aluminium (EGA), which became the fifth-largest primary aluminium producer in the world, with a combined capacity of around 2.4m tpa.

State Partnership

EGA exports about 90% of its production each year, which it sells to clients worldwide. Key product lines include re-melt ingot, which has applications for electronics, the aerospace industry and automotive production; billet, which is used widely in industry, construction and the automotive segment; slab ingot, with applications for the automotive industry, and food and beverage packaging; and liquid metal. The firm sells aluminium products to clients around the world. In May 2013 DUBAL completed a five-year, 100% share acquisition of the Guinea Alumina Corporation, which owns and operates a bauxite mine in Guinea, West Africa. Since then EGA has imported a large percentage of its bauxite and alumina inputs from the mine.

In 2015 EGA reported gross revenues of Dh18.7bn ($5.2bn), down 5.5% from the previous year. This drop, which was accompanied by a near 50% decline in profit. The drop in the price of Brent crude that began in mid-2014 hit global aluminium markets in early 2015. Over the year aluminium prices fell by around 18%, with its price on the London Metal Exchange sliding to a six-year low of $1432.5 a tonne in November, which has had a negative impact on EGA. “The oil market is not helping out aluminium producers at the moment,” Mahmood Daylami, the secretary-general of the Dubai-based Gulf Aluminium Council (GAC), told OBG in mid-2015. “Of course people are still optimistic. This is a long-term industry – aluminium is a 40- to 50-year investment.”

As of 2016, EGA was in the midst of instituting a variety of upgrades aimed at shoring up supply chain integration. Much of this work is currently underway in Guinea, where EGA is undertaking the first phase of a project aimed at developing Guinea Alumina Corporation’s bauxite mine. Phase one involves boosting the mine’s output to 12m tpa by 2018, the construction of a dedicated export terminal at Port Kamsar and upgrades to existing rail infrastructure to facilitate export to the Middle East and Pacific markets. Phase two is set to be operational by quarter three 2022, and will see the Guinea Alumina Corporation house an alumina refinery with a capacity of 2m tpa.

Given rising demand for aluminium across the Middle East, EGA expects to see its regional exports grow in the coming years. With domestic demand on the rise, in 2015 the company announced that by 2017 it expected its aluminium exports to fall from 88% to 77% of its total production. The growth of domestic aluminium production in the UAE has largely fuelled a burgeoning downstream segment, which comprises companies in the construction, automotive manufacturing, packaging and ICT industries.

Region Coordinator

The GAC serves as a coordinating body among Gulf producers, power suppliers and regulatory entities. In recent years the council, which has worked to ensure the sector’s environmental outputs are in line with international best practices, carried out a study on the Gulf’s large aluminium scrap market and lobbied Europe to reduce aluminium import tariffs. “One key issue that currently concerns the aluminium industry globally is excessive aluminium exports from China.  This follows recent lower economic growth in China and over-capacity of their local market due to the rapid development of aluminium production in past years,” said Daylami.

Iron & Steel

Similar issues impacted the UAE’s iron and steel industry in 2014, leading to a drop in production levels y-o-y of direct reduced iron and steel, with both commodities posting an output of roughly 2.4m tonnes. In 2015, however, the country’s six major steel manufacturers produced a record 3m tonnes, with key domestic infrastructure projects leading to greater demand. A significant increase in iron production was also recorded, with 3.2m tonnes of output reached in the same period, according to the World Steel Association.

After Emirates Steel, a state-owned producer based in Abu Dhabi, the largest steel manufacturer in the UAE is the privately held, JAFZA-based firm Conares, which produced around 750,000 tpa as of 2015. Established in 1988 as a steel trading company, Conares began manufacturing in the mid-2000s and has since expanded rapidly. Since 2005 the company has produced steel pipes of various sizes and shapes. In 2011 it expanded its production facilities to include a rebar manufacturing mill, which has an annual capacity of 500,000 tonnes. As of 2015, output from Conares met around 20% of rebar demand in the UAE and 25% of regional pipe demand, according to the firm. It also started undertaking a Dh100m ($27.2m) expansion of its factory in Jebel Ali in 2015, which it hopes will open up more markets in Australia and Europe, and has earmarked an additional Dh200m ($54.4m) for continued capacity-building investments through to 2020. These expansions have been driven by rising construction demand in the UAE in the years leading up to Expo 2020, not to mention the large number of ongoing infrastructure investment projects throughout the Middle East. “The expansion is aimed at serving the domestic market as well as exploring export opportunities,” Bharat Bhatia, founder and CEO of Conares, told media in May 2015.

Other Dubai-based producers include Star Steel, which was established in 2006, and the Dubai Cable Company (Ducab). Star Steel, which is privately held by local conglomerate ETA Group, operates a facility with a production capacity of 360,000 tpa of rebar and 240,000 tpa of structural sections. Ducab, meanwhile, is the UAE’s largest producer of aluminium and copper cabling and the second-largest cable manufacturer in the Gulf region. Established in 1979, Ducab is jointly owned by Dubai’s sovereign wealth fund, the Investment Corporation of Dubai, and Abu Dhabi’s state-owned industrial holding company, Senaat. In addition to its main, 590,000-sq-metre manufacturing facility at JAFZA, the firm operates three factories in Abu Dhabi as well as AEI Cables, a UK-based cable manufacturer that was acquired by Ducab in 2014.

Copper Substitute

With demand for copper dropping by around 2% annually, Ducab is in the midst of a $60m project to build an aluminium plant – the Ducab Aluminium Company – based in Abu Dhabi. The facility, which will have capacity to produce some 50,000 tpa of aluminium rods and overhead conductors, is expected to begin production in 2016. The average global price of aluminium in the first quarter of 2016 was around 208% cheaper than copper, with projections from the IMF suggesting that the price difference will remain more or less the same through to the end of 2017. “Given the relative economics of copper versus aluminium, particularly in Saudi Arabia, they have tended to choose aluminium,” Andrew Shaw, Ducab’s managing director, told local media in June 2015. “We see a slow substitution of copper for aluminium, particularly in a country like Saudi Arabia, which is a very large market.” The Ducab Aluminium Company will source hot molten metal from EGA.

Road Ready 

As of 2016, the UAE was the second-largest automotive market in the GCC, with vehicle trade reaching $22.6bn in 2015, up 22% on 2014, as per International Trade Centre statistics. The industry is made up of a diverse array of products, including cars, trucks, trailers and semi-trailers, public transport vehicles, tractors, and vehicle parts and accessories. For new car and light commercial vehicles sales in 2015, the UAE accounted for 22.5% of the GCC’s total, according to Emirates NBD. The UAE is also one of the largest importers of new cars, used cars, and vehicle parts and components in the MENA region. As a result, it has become a hub for automotive re-exporters, who ship cars and other automobiles into JAFZA and other free zones before sending them on to other destinations in the Middle East.

According to industry data reported in local media, automotive sales in the UAE were expected to grow by 5% in 2015. However, despite a difficult start to the year – as global capital markets and currency volatility gave rise to flagging consumer confidence – the sector grew by 6% in 2015. “Between 2010 and 2014 we saw continuous double-digit growth, as did most automotive companies in the UAE,” Axel Dreyer, the president of Hyundai Automotive in the UAE, told OBG. Indeed, investors are now looking ahead to further development in the sector, with spending on infrastructure for Expo 2020 likely to boost demand for heavy and commercial vehicles.

A 2014 survey carried out by US-based market research company Nielsen found that more than 70% of active consumers in the UAE planned to purchase a new or used car in the next two years, with sport-utility vehicles (SUVs) and hybrids expected to be key growth areas. “Around 40% of buyers in the UAE purchase SUVs,” Karl-Johan Sandesjo, the general manager of Gargash Enterprises, a major Dubai-based automotive dealer, told OBG. “Hybrids appear to be increasingly popular, which is an encouraging trend given rising air pollution rates in the region.”

Indeed, the trend towards environmentally friendly practices will be an increasingly defining factor of the industry. “The sector will further move towards sustainability,” Johannes Seibert, managing director at BMW Group, told OBG. “The Dubai Electric and Water Authority opened the first charging stations in the emirate in 2014. The concept of smart cities is very interesting, and affinities to green and ecological city management are high. Hybrid cars may be more suitable than electric ones in that market, according to weather conditions in the region.”

In recent years two high-performance car companies have established themselves in Dubai – Zarooq Motors and W Motors. The former is currently preparing its Sand Racer for a release date in the near future, while W Motors, having moved to Dubai from its headquarters in Beirut in 2012, has already released its first model – the Lykan Hypersport – with a series of other vehicles in the pipeline.

Solar

With the high availability of solar energy in the GCC region, Dubai has not hesitated to embrace the sector. Records were broken in early May 2016, when a bid of $0.299 per KWh was made by Abu Dhabi’s clean energy company Masdar to develop the 800-MW third phase of the Mohammed bin Rashid Al Makotoum solar park, which will the largest single-site solar project in the world upon completion, with a capacity of 5000 MW. The bid marked the lowest-ever price for solar power and is one-third cheaper than the electricity that will be generated by a coal plant set to start generating power in 2020 in the emirate, according to Bloomberg New Energy Finance.

Outlook

With demand for many industrial outputs set to rise substantially over the course of the coming decade, Dubai’s industrial sector is planning for continued expansion. As of the end of 2015, the UAE was home to an estimated $28.6bn in ongoing industry-related development projects, which represented 9.4% of projects in the MENA region, according to data from MEED, a regional news outlet. This included projects taking place across a wide variety of areas, such as the construction, oil and gas, manufacturing, power, water, chemicals and transport sectors, among others. Rapidly increasing demand from outside the UAE is also expected to benefit Dubai-based firms, many of which are export-oriented.

Furthermore, after more than four decades of industrial development, Dubai has built up an array of strategic advantages in terms of supporting industrial development. For example, the emirate’s regulatory and tax regimes are aimed at encouraging foreign investment on a large scale, and the emirate’s transport and logistics links are well developed. While some segments have been negatively impacted by global oil market volatility, Dubai’s relatively diversified economy and strong government support for ongoing industrial development are a reason for optimism. “Dubai is a huge hub for the region at every level,” Thomas Milz, regional managing director of Audi Volkswagen Middle East, which is based at DAFZA, told OBG. “Despite a more competitive environment in the region as a whole, we expect to see continued growth in Dubai, not only in the automotive segment, but in the economy as a whole as well.”