presents
BUSINESS INTELLIGENCE FOR INTERNATIONAL TRADE www.tradeandexportme.com
58 4%
Contents
8% 57% 74%
16%
9% 2%
56 ADVISORY BOARD Key personalities sharing their expertise to ensure that we bring you the latest trends and issues in the field of trade. Hospitality & tourism 58 Investment outlook Jones Lang LeSalle shares with us the latest data on – cross border investment.
22%
8% 87% 5%
Free zones encourage entrepreneurs to set up businesses by cutting bureaucratic red tape, reducing start-up costs, and generally rolling out the red carpet for investors. p68
TRADE AND EXPORT MIDDLE EAST
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68
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Trade & growth 62 The rise of Internet retailing The team at Euromonitor International gives us an overview on the key developments and the competitive landscape of the fast-growing market of Internet retailing. Business setup 68 Free Trade Zones roll out the Red Carpet for Investors In an exclusive feature, Peter J. Fort, CEO, RAK Free Trade Zone Authority, explains why FTZs remain at the core of the country’s appeal as a global centre of business.
As forecasts look sunnier for the greenback, however, uncertainty remains high, leaving the dollar vulnerable to setbacks. p76
Finance 72 Across the borders Hisham Farouk, Managing Partner of Grant Thornton UAE gives us an idea on what businesses should keep in mind when expanding overseas and dealing with international trade. 76 Currency highs and lows The Western Union Business Solutions team gives us their highly researched update on the currency movements for the month of August.
TRADE and export middle east
ADVISORY BOARD Trade and Export Middle East presents a dynamic group of industry experts and leaders as part of its Advisory Board. The following key personalities will help add value to our analysis and ensure that we bring you the latest trends and issues in the field of trade.
H.E Saed Al Awadi CEO, Dubai Exports, Department of Economic Development, Dubai
Dr. Adeeb AlAfeefi Director, Foreign Trade & Export Support International Economic Relations Sector, Department of Economic Development, Abu Dhabi
Khalil Saqer Bin Gharib Corporate Communications Director, Dubai Customs
Lakshmanan Sankaran Chairman, Regional Banking Commission (MENA)- ICC Paris
Moin Anwar Trade & Investment Commissioner (Middle East), New South Wales Government, Australia
Peter Fort CEO, Ras Al Khaimah Free Trade Zone
For more information, please visit www.tradeandexportme.com
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HOSPITALITY & TOURISM
Investment outlook THIS YEAR, GLOBAL HOTEL INVESTMENT WILL HIT A FIVE YEAR HIGH, REACHING $50BN, AND RISING 35% ON 2013 VOLUMES. ALSO ACROSS BORDER INVESTMENT FROM THE MIDDLE EAST IS RIDING HIGH. JONES LANG LASALLE SHARE THE LATEST DATA.
8%
74%
16%
9 2%
8% 87% 5%
The time of year for the Middle East’s largest investors and most famous family firms to travel to Europe with an agenda of shopping and business, is almost here. Mixing that business with pleasure, some return to the Middle East with slightly larger
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holiday souvenirs than the rest of us can afford. Taking a strategic look at the figures, as reported by Jones Lang LeSalle, Trade and Export ME looks at one key influencing factor on the rise in global hospitality transactions, cross border investment.
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HOSPITALITY & TOURISM
4% 8%
2%
57% 11%
9%
87%
22% 96% 4%
36% 34% 25% 5%
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North America
Africa
Latin America
Asia
Europe
Australasia
Middle East
Global
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HOSPITALITY & TOURISM
Middle Eastern investors, who accounted for US$4bn in outbound capital in 2013 are predicted to continue their current behaviour in addition to growing interest in portfolio acquisitions.
Cross border investment rising Opportunistic purchasing of assets – for example trophy purchases such as Katara’s recent snap up of iconic IHG properties in Europe, or the rumoured interest of Middle Eastern buyers in the original Scotland Yard HQ in London – will continue to fuel investment patterns. With cross-border investment accounting for 30 per cent of global hotel investments in 2013, driven by outbound capital from the Middle East and Asia, it is surprising to learn that this will increase in dollar values, but that monopolies in the number of buyers, will cap further growth. Middle Eastern investors, who accounted for US$4bn in outbound capital in 2013 are predicted to continue their current behaviour in addition to growing interest in portfolio acquisitions. Hotel demand: The drivers • 15 per cent increase in outbound travel from China, 2013, rising further in 2014 • Leisure demand up: driven by baby boomers • Corporate demand up: driven by Millennials • MICE • Development of secondary locations • Mid-market development
At a glance: global hospitality transactions 2013 retrospect
2014 snapshot
$46.7bn
$50bn
Transaction total up 35% on 2012
$24bn
$28bn
post 30% uplift witnessed Americas
target projection growth, the Americas
$13.2
$16bn
Transaction values up 17% on 2012, EMEA
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predicted global total of hotel deals
EMEA transactions, driven by debt restructuring
The most famous trophy purchases of Middle Eastern investors
Harrods bought from Mohamed AL Fayed by the Qatari Royal Family in 2010 for $2.3bn IHG Europe Qatar-based owners, developer and operator Katara last month snapped up InterContinental Carlton Cannes, the InterContinental Amstel Amsterdam, the InterContinental Madrid, the InterContinental Frankfurt, and the leasehold interest in the InterContinental De La Ville Rome Valentino another purchase of the Qatari Royal Family, the Italian fashion house was bought for $857m in 2012 Art reports last year estimated that Sheikha Al-Mayassa bint Hamad bin Khalifa Al-Thani and the Qatari Royal Family spend an estimated £600m a year on art. Groupe du Louvre Portfolio Constellation Hotels (part of the Qatar Holding investment vehicle that has invested in Sainsbury’s and Barclays) acquired the four hotels from Starwood Capital for $955m Marriott UK ADIA (Abu Dhabi Investment Authority’s) purchased of 42 Marriott hotels in the UK for $900m Malmaison and Hotel du Vin portfolio bought by private equity firm KSL for $319m.
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HOSPITALITY & TOURISM
The intercontinental comparison Hotel market cycle MEA
Hotel market cycle Europe Berlin
Muscat
Vienna
Moscow Istanbul
Amman
Bratislava Prague
Dubai Jeddah
RevPAR growth slowing
RevPAR falling
Cairo
Barcelona Budapest Brussels Munich, Krakow Frankfurt
Beirut RevPAR rising Kuwait CapeTown
RevPAR decline slowing
RevPAR growth slowing
RevPAR falling Madrid
RevPAR RevPAR Copenhagen rising decline St. Petersburg slowing Dublin Milan Sofia Paris, London Regional UK Lisbon Rome Geneva Zurich Amsterdam Warsaw Source: Jones Lang LaSalle
Riyadh Abu Dhabi Source: Jones Lang LaSalle
The region’s $180bn global real estate spree Looking to the future it is predicted the Middle East will continue its real estate reign, spending to the tune of $180bn over the next decade, according to research from CBRE. The focus will continue to fall on Europe, with interest also developing in America. Growing role of Middle east capital in global commercial real estate investment market, by type of capital 15 All other investors
Sovereign wealth funds
12
$ Billions
9
6
3
0
2007
2008
2009
2010
2011
2012
2013
Source CBRE Research, RCA, *All commercial real estate and hotels, cross regional capital flows only
For an online version, please visit: www.tradeandexportme.com/2014/08/investment-outlook/
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TRADE & GROWTH
THe rise of internet retailing Internet retailing continued to report a rapid growth in the UAE, as the convenience of being able to shop at any time drives consumers to utilize this industry. This being said retailers of all kinds are expanding their product offering and are immensely capitalizing on the benefits of the Internet. In the following feature, the team at Euromonitor International gives us an overview on the key developments and the competitive landscape of this lucrative industry.
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Jabbar Internet Group FZ LLC, (Souq.com) leads with a
14%
value share in 2013
Internet usage booms as consumers become more confident to shop in 2013
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TRADE & GROWTH
Housewares and home furnishings most significant category in internet retailing with
42% current value growth in 2013
20%
growth in internet retailing in current value terms reaching AED 2 billion in 2013
14% CAGR in constant value terms
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Market trends Internet retailing has increased in popularity, specifically across housewares and home furnishings, video games hardware, apparel as well as consumer electronics towards the end of the review period, storebased retailers’ value shares have eroded. One primary reason behind this is that consumers have grown in confidence to purchase online because of their increasingly busy lifestyles. Another is that many consumers cannot afford to pay up front, hence on average 60 per cent of electronic transactions online. A good example for this is Jadopado. com, wherein most transactions are made through credit cards, which has helped grow the electronics portal online. • Internet retailing grew by 20 per cent in current value terms to reach AED 2.0 billion in 2013, showing faster growth than the 11 per cent CAGR of the review period. The review period experienced a downfall in internet retailing during the economic recession, which then picked up towards the end as new players came into the market, such as Jadopado.com. This met growing online demand as did Souq.com acquiring Sukar.com in 2012, growing its resources, which all benefited the online business towards the end of the review period. Consumers also became more confident to shop online as the economy picked up and online retailers introduced safer payment systems through PayPal and other new security systems to encourage consumers to trust online retailers via warranty, and guarantee the products that they purchase. • There has been growing internet penetration with the number of broadband internet subscribers at 1.8 million in 2013, as well as 70 per cent of households owning a computer and 99 per cent of
households owning a mobile phone. Furthermore, there have been growing mobile internet retailing transactions, with 0.37 per cent of purchases carried out through smartphones, and 99.63 per cent carried out through other means such as PC and tablets. A lot of consumers go online to browse different product offerings as well as use social networking websites. Hence a lot of companies that do not offer internet retailing have targeted social media sites such as Twitter, Facebook and Pinterest to promote their products as another way to grow sales. • In value terms, housewares and home furnishings internet retailing grew by 42 per cent in 2013, although this growth stemmed from a very small base. Followed by video games hardware internet retailing with 21 per cent value growth and then followed by digital gaming and apparel internet retailing in 2013. • Despite this, consumer electronics and video games hardware internet retailing is the most significant in internet retailing in value sales terms. Through industry sources, 170,000200,000 people visit consumer electronic portals a month in the country. The reason for this is that consumers have grown to trust and be loyal to certain brands, and online retailers such as Carrefour, along with IC4UAE.com and Jadopado. com, have managed to build this trust through quick delivery, discounted prices or promotions and secure purchasing. Furthermore, consumers in the country are tech-savvy, very fashion-conscious and are keen to acquire the latest technological innovations in consumer electronics and video games. • Packaged food internet retailing, housewares and home furnishings, on the other hand, are the products least desired to be purchased
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TRADE & GROWTH
Internet retailing in the UAE is mainly dominated by local and regional players rather than international players, as these are the most known in the Middle East region.
online in value sales terms. This is because consumers seek fresh food and with home furnishing, consumers like to touch and feel the product before consumed. • Growth in internet retailing has affected manufacturers in the sense that more store-based companies are seeing the opportunities with the high customer base online, and are looking to grow further. Over the review period, some companies such as Géant (www.geantonline.ae) and Lulu (www.luluwebstore.com) took the opportunity to launch online, these online stores were mainly launched to compete with IC4UAE. com within the electronics field. Through this it can be seen that it is mainly grocery-based retailers that are impacted by internet retailing, and venturing out into multichannel development, which is seen to have wide product offerings as well as promotions, increasing their consumer base. • Through industry sources, UAE residents hold approximately one third of credit cards in the region, and at 59 per cent is one of the highest penetration rates in the world. According to Euromonitor International, electronic direct/ACH transactions grew by 13 per cent in 2013. Towards the end of the review period, online retailers gave options for consumers to pay via instalments
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as well as cash on delivery, with free delivery charges and free returns. This has encouraged more consumers to buy online however 40 per cent of them are still cautious about putting their credit card details online. • In regards to delivery options, towards the end of the review period some changes were implemented. The significant factors show that a lot of online retailers are using to differentiate themselves from store-based retailers include same-day delivery and customer service to build trust with merchants online, to help grow their business on an online platform. Competitive landscape Jabbar Internet Group FZ LLC leads the Middle East region, thanks to its brand Souq.com. • Souq.com has managed to build a regional network across the Middle East with its wide range covering various categories in internet retailing such as consumer electronics, video games, apparel, jewellery and watches, and beauty and personal care. It also operates both as a retail site and as a marketplace for third party sellers. It also acquired Sukar.com in 2012, which added to its continued leadership in the internet retailing category. Sukar.com was established to mainly target the Middle East with its name having a strong Arabic connotation. Amazon.com Inc. is the second top online store in the region. • It has built its reputation in the UAE through its name being known back in expatriates’ home countries, as well as providing products that are not easily available in the UAE. • Pure internet retailers led internet retailing by the end of the review period. They have performed better than multichannel players in the UAE. This is mainly because they have established a wide consumer base among
expatriates with their offerings. Consumers mainly know their brands through their experience online. Apparel internet retailers, however, are mainly pure online players such as Souq.com, Sukar. com, Namshi and Reebonz as they have been established to sell the products of a wide variety of top designers all in one online platform. They seek to provide the convenience that consumers want, and their competitive prices have also helped in establishing their presence. • Internet retailing in the UAE is mainly dominated by local and regional players rather than international players, as these are the most known in the Middle East region. Furthermore, the provision of free shipping and free returns is popular among Middle Eastern countries, and this has encouraged more consumers to purchase from online stores. By these sites offering these services, it gives them a competitive advantage over global internet players such as Amazon.com Inc. Certain European websites do not provide delivery to the UAE, or if they do they have expensive shipping fees. However, certain items such as media products and games are mainly purchased via Amazon.com Inc, hence this company still has a huge presence in the UAE. • Other leading retailer players have been absent from online retailing in the UAE, mainly because there are no set regulations when items are purchased online, so if a fraudulent transaction takes place, credit card holders have more rights than vendors. Furthermore, the law does not have set rules as to how to deal with returns or fraud through online transactions. Looking ahead • Over the forecast period consumers will become more confident in purchasing online as online retailers are expected to secure
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TRADE & GROWTH
As much as electronic purchases have grown online, the UAE is a very cash-driven society due to security purposes.
payment methods further. Also, their current payment methods of cash on delivery and PayPal for prepaid purchases will continue to help maintain security against fraud. Online retailers will also introduce product protection to ensure products have enough warranty, to give consumers that sense of security when they purchase a product online. Store-based operators are also seeking to go online, exemplified by Al-Futtaim Group’s IKEA launching in 2012, and Géant and Lulu Hypermarket launching online in 2013. This trend will help consumers embrace online internet retailing more. • The forecast period is expected to record promising growth of 14 per cent CAGR in constant value terms, in comparison with the 10 per cent CAGR of the review period. Internet retailing’s main growth is expected to be contributed by other media products, housewares and home furnishing and consumer healthcare, mainly driven by a small market value base. For bigger internet retailing markets, consumer electronics is expected to see 15 per cent constant value CAGR alongside with apparel internet retailing at 10 per cent constant value CAGR as fashion-conscious consumers increase in number in the UAE, and will have more purchasing power
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•
•
•
•
with the economic boom expected. More expatriates are expected to enter the country because of the political instability happening in Egypt and Syria, and the crisis in Europe, which will all contribute to value growth. Payment systems will become more secure, consumers are expected to build more confidence in shopping online. In 2016, m-commerce is expected to have a one per cent growth. This will be mainly due to expected increase in the number of smartphone purchases, at just under 100 per cent, as well as shorter product lifecycles increasing the number of product launches. However, as much as electronic purchases have grown online, the UAE is a very cash-driven society due to security purposes. Furthermore, banks were introducing schemes to give benefits for credit card users over the review period, and will continue to do so to encourage more consumers to use credit cards. There is also a portion of the population, mainly Emiratis and Arab expatriates, who seek Islamic credit cards for religious purposes and hence the availability of such cards has grown through marketing campaigns, and will help contribute to growth over the forecast period. According to industry sources 60 per cent of consumers purchase using credit cards, and this is a higher portion than cash buyers. This is mainly due to consumers trusting their merchants as well as being encouraged through secure payment methods. By 2018, 2.2 million people are expected to have internet subscriptions in the country, which is 25 per cent of the population. This growth will be primarily due to the increase in the number of tech-savvy consumers, which will influence online purchases positively. The growth in the number of smartphones and computer possessions by then will
also contribute to online purchases. • Apparel and personal goods and eyewear are expected to outperform other categories over the forecast period in value growth terms. Other product types that have been under-represented within internet retailing such as housewares and home furnishings are expected to see strong performance. This is because consumers will seek more deals and have less time to shop from furniture stores. • More players are also likely to penetrate the category as more store-based operators start launching online as they see online retailing grow. On the other hand, consumer electronics and video games hardware internet retailing are expected to see strong growth too of CAGR 15 per cent in constant value terms. Consumer appliances internet retailing will have the slowest constant value CAGR of nine per cent mainly as such products are hefty and require consumers to shop around and see the product. • Store-based retailers are expected to face price pressure as they will need to react to lower price offerings online. In this sense more store-based retailers will venture out online to take advantage of the wide consumer base, as well as to help them regain profit margins as prices remain competitive online. Store-based retailers will also need to introduce wider promotion offerings to help compete with online retailers.
For an online version, please visit: www.tradeandexportme.com/2014/08/ the-rise-of-internet-retailing/
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TRADE & GROWTH
Expert Insights Internet retailing has been one of the primary drivers for consumer goods sales over 2008-2013. However, in terms of personal accessories, internet retailing accounted for less than four per cent of global sales in 2013, representing its nascent nature in several key markets for the industry. A deeper dive into individual markets reflects a growing influence of locally-based third party websites as most manufacturers remain wary of operating internet retail portals.
Global exposure to online sales
With internet retailing accounting for a double-digit proportion of its sales in 2013, consumer electronics is an industry far ahead of the fashion world in terms of accepting online transactions. Within the latter, both apparel and beauty purchases are more likely to be completed online as compared to those related to personal accessories.
Relative Influence of Internet Retailing
Source: Euromonitor International
As of 2014, only a handful of online retailers dedicated to apparel and accessories have managed to establish a consumer following across multiple markets. These include Net-A- Porter, Neiman Marcus, Yoox and Asos, all of which have operations that focus on North America and Western Europe. Global internet retailing leaders such as Amazon, Tmall and Rakuten also
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offer substantial portfolios of personal accessories, as partnerships with them represent the foremost internet sales strategy for several global brands.
China
As the largest personal accessories market in the world, China’s retail landscape is of special interest to leading global manufacturers. Internet retailing in personal accessories is at a primitive stage in China, and accounted for less than two per cent of overall sales in 2013. While international retailers have found it extremely tough to operate in China’s bargain- driven internet marketplace, certain local retailers are successfully tapping the consumer demand. Over 2014 and 2015, Hong Kongbased jewellery retailers are expected to expand their respective portfolios offered through self- operated online portals. The willingness of local brands to explore the internet is evident in bags as well.
US
Despite being overtaken by China in terms of absolute value sales, the US remains one of the most evolved personal accessories markets in terms of brand communication and price segmentation. Internet retailing commanded over 10 per cent of retail sales in the US in 2013, representing one of the highest contributions in the world. In fact, internet retailing forms an integral part of the growth strategies for several US- based global players. These companies have evolved to focus on an omnichannel experience for the consumer, which includes sales and communication through brand websites, catalogs and social media. All of these are dedicated to provide a lifestyle experience rather than just serving as an additional retail channel. Apart from manufacturers’ own initiatives, online operations of major retailers such as Amazon and Macy’s are expected to be increasingly vital for mid-priced and accessible luxury brands in the US.
India and Brazil
India and Brazil both have immense growth potential in terms of overall personal accessories sales. However, the evolution of internet retailing has been
Sulabh Madhwal Analyst - Personal Accessories and Eyewear, Euromonitor International
rather stunted in both markets. This is expected to change over the next five years as local online retailers are starting to find consumer acceptance as well as willing investors. In May 2014, two leading internet retailers in India – Flipkart and Myntra – announced their plans to merge and focus on new brand partnerships across apparel and accessories. In Brazil, dedicated online fashion retailers such as Dafiti and Privalia have a steadily growing portfolio of international brands which is helping popularise the retail channel among the masses.
Local retailers set to lead the way
Historically, non-US based personal accessories manufacturers have been reluctant to explore self-run internet retail portals. Although certain Asian manufacturers such as Chow Tai Fook are keenly looking at its prospects, traditional industry leaders such as LVMH and Swatch remain skeptical as concerns about erosion of brand equity and increased possibility of counterfeit goods sales prevent them from committing to internet retailing. All the same, the sprouting of a number of third-party internet retailers in both developed and emerging economies indicate an existing consumer appetite for online fashion purchases. While manufacturers make decisions on retail partners, the key will be to gauge the market level preferences for various products. For instance, jewellery is more exposed to internet retailing as compared to bags and watches in France. Given the present circumstances, local third-party internet retailers are expected to be an increasingly popular route to market for brands across personal accessories. For further insight, please contact Sulabh Madhwal, Personal Accessories and Eyewear Analyst, at sulabh.madhwal@ euromonitor.com.sg
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Free Trade Zones roll out the Red Carpet for Investors
Peter J Fort, CEO, RAK Free Trade Zone Authority
Free Trade Zones have emerged to become hotspots of entrepreneurship, innovation and commercial success. In an exclusive feature for Trade and Export Middle East, Peter J. Fort, CEO, RAK Free Trade Zone Authority, explains why these Free Trade Zones remain at the core of the country’s appeal as a global centre of business… 68
The Irish businessman Brendan O’Regan had found himself in a desperate situation. As the owner of a duty-free merchandise shop in the Shannon, Ireland airport in the 1950s, he depended on the fact that flights between Europe and North America had to stop and refuel there, bringing with them a steady, reliable flow of customers. But after commercial airlines developed long-range fuelling capacity, allowing them to bypass the airport and with it Mr O’Regan’s business, he made a critical adaptation. He submitted a proposal to airport authorities for a special manufacturing zone that offered tax breaks, thus creating the world’s first free trade zone.
The Shannon Free Zone, still in effect today, generates commercial traffic that specifically comes to the airport because of its advantages and benefits to investors. The business that the free zone created helped to save the late Mr O’Regan’s company. The free zone was also a successful effort by the Irish government to promote employment in a rural area, make use of a small regional airport, and generate revenue for the Irish economy. It set the stage for other free trade zones around the world that use the same idea of offering tax breaks and other incentives to stimulate the economy in underdeveloped areas. Free trade zones are geographical areas where goods can be handled,
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Free zones encourage entrepreneurs to set up businesses by cutting bureaucratic red tape, reducing start-up costs, and generally rolling out the red carpet for investors.
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manufactured, and re-exported without the intervention of customs authorities, with fewer or no taxes, and with faster company set-up and support than can be found outside of these areas. Also known as special economic zones, free zones are usually set up around major seaports, international airports and national borders with geographical advantages to facilitate trade. They offer numerous economic benefits to the areas where they are established, such as attracting employers – thereby reducing poverty and unemployment – stimulating the area’s economy, and promoting the construction of offices, warehouses, shops and other buildings where businesses can thrive. Multinational corporations often use free zones to set up factories which produce goods such as clothing, electronics, toys, shoes and other products. Free zones clear the hurdles to foreign direct investment. For example, the Shanghai Free-Trade Zone, which was launched last year, allows certain kinds of products that are otherwise banned in China – such as the sale of video game consoles – to be sold only in the free zone. Free zones around the world also offer other benefits, including 100 per cent repatriation of capital and profits, 100 per cent free transfer of funds, 100 per cent exemption of import and export duties, fast-track visas and licences, low-cost labour, and easier recruitment procedures. In the UAE, free zones offer a particularly important advantage for entrepreneurs from other countries. There are generally two options for foreign investors to set up a business here. The first option, outside of a free zone, is to partner with a UAE National, who will own 51 per cent of the business. The other choice, one that most foreign investors prefer, is doing business in a free zone, where investors can own 100 per cent of their business, rather than just 49 per cent.
The Ras Al Khaimah Free Trade Zone (RAK FTZ) differentiates itself from other free zones in the region by offering the same benefits as other special economic zones, but at substantially lower cost. The cost of living and doing business in Ras Al Khaimah can be 25 to 50 per cent lower than in other emirates. For that reason, companies which want to take advantage of the economic opportunities arising from the World Expo 2020 in Dubai can set up shop for less money in RAK FTZ. Less than an hour’s drive from the Middle East financial hub of Dubai, RAK FTZ offers awardwinning services and world-class facilities that are on par with other free zones, but in a much more cost-effective way, allowing for a healthier return on investment. For business owners, every dollar that is not spent on renting business facilities, paying for workers’ housing, or purchasing a licence can go instead to the bottom line. What Mr O’Regan learnt back in 1950s Ireland still applies today: Free zones encourage entrepreneurs to set up businesses by cutting bureaucratic red tape, reducing start-up costs, and generally rolling out the red carpet for investors. In today’s rebounding economy – where costs and competition are steadily on the rise – setting up shop in a free zone can easily make the difference between failure and success.
Peter J Fort is the Senior Economic Advisor to the Government of the Emirate of Ras Al Khaimah and the Chief Executive Officer of the Ras Al Khaimah Free Trade Zone Authority.
For an online version, please visit: www.tradeandexportme.com/2014/08/ free-trade-zones-roll-out-the-red-carpetfor-investors
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FINANCE
ACROSS THE BORDERS LEADING EXPERT HISHAM FAROUK, MANAGING PARTNER, GRANT THORNTON UAE, SHARES HIS VIEW ON INTERNATIONAL EXPANSION, GROWTH STRATEGIES AND DIMINISHING TRADE BARRIERS.
Hisham Farouk, Managing Partner of Grant Thornton UAE
For local businesses, which are looking to expand overseas, what are key factors to bear in mind? The first consideration for any company expanding overseas is to ensure they identify the right market to suit their product, capacity, service delivery and target audience. These elements need to be considered at the preliminary stage given that doing business varies across borders.
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Barriers to entry are easing across the world given new markets are much more accessible, with the availability of logistics and technology, local businesses must choose wisely as to which is the right market for them in order to meet their growth strategy. There is an opportunity cost in every transaction and therefore they should analyze what suits them, their target audience and business the most. Research from the International Business Report, highlighted that Singapore (88 per cent) and the UAE (66 per cent) are two countries most interested in growing through cross
border transactions, therefore these factors must be considered when entering new markets and expanding overseas, which provide differing challenges and opportunities.
What countries and products, according to you, have potential for trade with Dubai in the coming years? This is dependent upon the product and service that the entrant would be marketing in response to local
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FINANCE
need and want for different products and services. It is a competitive market, which will continue to present opportunities in the years to come, however how you approach this market and target the audience for your specific business will be the reason for success or failure.
What role do you envision the Expo 2020 playing in facilitating international trade?
Overseas expansion is a very consuming project both in time and resources.
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market need and demand. The economy in the UAE has continued to grow throughout the years and has overcome the economic downturn rapidly. It has increased by more than six fold over the past 26 years to become the fourth largest economy in the Arab world. There are many options open to international companies seeking to establish a business in the UAE. Countries from the Far East, Africa, India and Western markets all have opportunities to trade with Dubai in the coming years, as the population continues to diversify so does the
Expo 2020 is a six month trading event that will allow global companies to interact under one roof. It also provides a great opportunity to identify other businesses and understand the global dynamics in your chosen market. It will allow companies to showcase innovation in their sector and align their business on a global platform. It is estimated that this win will create innumerable opportunities due to the increased demand in various sectors namely leisure and tourism (with an estimated 25 million visitors expected to arrive), construction and logistics. This win will see the emergence of entrepreneurial businesses and dynamic SMEs who will work collectively to deliver the ambition that the UAE has, which will inevitably facilitate international trade and truly position the UAE as a regional business hub.
What advice would you give to exporters from the UAE looking to expand overseas? Ensure your house is in order first. Overseas expansion is a very consuming project both in time and resources. Also ensure that you have studied your chosen market carefully. Understand rules and regulations, tax regime,
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Always seek the right advice and ensure you do your due diligence and conduct a feasibility study before taking any expansion action, as without this it could be a costly mistake.
ownership rights and expatriation of funds. You can also consider whether certain markets may be advisable to have a local partner to support your initiative. Always seek the right advice and ensure you do your due diligence and conduct a feasibility study before taking any expansion action, as without this it could be a costly mistake.
What are some of the biggest trade barriers local businesses face when expanding overseas? This is dependent on the goods or services but regulations on manufacturing and taxes are two key points of consideration. Some jurisdictions require local materials to be used or impose high custom duty. As Dubai is a non-tax enforced environment, it is critical to understand the tax implications for trading overseas and impact on margins you have achieved previously in Dubai.
Are SMEs in the GCC at a disadvantage when it comes to pricing, as compared to businesses in dominant markets, such as the USA? The SME eco-system is still at is primacy in the region and therefore the support they require is still very much developing as we speak. This support mainly comes from three key aspects, availability of finance, which is more expensive if accessible, supplier payment support and access to position themselves in the market. However, we must also consider that the UAE in particular along with other GCC countries provides a fluid market for SMEs, as opposed to the USA where there is no mid-market
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between the larger conglomerates and the start-ups who enter the market. Therefore, the GCC does present more opportunities for dynamic SMEs who have a distinct USP.
How can a business trading online ensure that it has a true USP, when it might have thousands of global competitors, whom anyone can access? Online trading is about identifying a gap and providing services or goods that fulfil it. Since there are thousands of online companies, and searching/marketing your product is fairly cost effective, businesses must position themselves effectively in the online space to ensure they are easily accessible (via SEO etc.). What is very true to any business is also true for online, which is consistency and quality of service which are the key ingredients to success. When a consumer/ customer shops online, they expect the same level of service and efficiency as with any transaction.
What kind of support/services does Grant Thornton offer to businesses looking to do international trade? Grant Thornton is one of the world’s leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist advisory services to privately held businesses and public interest entities. Clients of member and correspondent firms can access the knowledge and experience of more than 38,500 staff in over 160 countries and consistently receive a distinctive,
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Social media and technological solutions enable you to market and reach a significantly larger audience at a fraction of the price.
high quality and personalised service wherever they choose to do business. As a global professional services firm, we can advise on markets, assist with setting up, and introduce our potentials to stakeholders in chosen markets through our network. We are known as the advisors of choice for dynamic organisations.
How can local businesses ensure adherence to global standards and best practices? As stated earlier, due diligence is critical for this and local businesses should seek assistance from a qualified advisor to ensure adherence to all rules and regulations.
Is arbitrage another opportunity for businesses working in international markets? It may be, but it isn’t an immediate viable consideration in regional markets given the limitation of real timeliness of information.
Finally, what influence do you think social media and other technology solutions have on the world of international trade? It’s one of main reasons borders and barriers to entry are diminishing. If we take a simple example of Amazon and how it revolutionized online sale - today, you can practically order anything in almost any part of the world. Social media and technological solutions enable you to market and reach a significantly larger audience at a fraction of the price. With crowd funding and open source developments, you can effectively raise funds, R&D your product, find a manufacturer to lease a production line and sell your product all from your laptop in a coffee shop somewhere. Rules of engagement have completely changed with current and rapidly advancing technology and the use of social media which allows you to promote your product on a one to many basis as opposed to one to few - all at the touch of a button.
Trade finance and trade credit insurance are two crucial financial instruments that could help companies when doing business overseas. What are key trends you see in this sector? Do you think these areas have been utilised to their full potential? I believe there is great opportunity to expand in these sectors and provide more structured products which will inevitably increase and support trade.
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For an online version, please visit: www.tradeandexportme.com/2014/08/ across-the-borders/
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Currency highs and lows The team at Western Union Business Solutions gives us a preview of what to expect from the three major currencies in the market. Find out what’s in store for the USD, EUR and GBP for the month of August.
USD It’s been all year in the making but the greenback finally finds itself on the brink of a meaningful upturn. America’s buck is hot off a fruitful July when it powered to multi-week highs overall and multi-month peaks versus the Euro. Sentiment brightened on July 15 after Federal Reserve Chair Janet Yellen laid the groundwork for an early rate hike if the economy continued to show signs of improving health. Testifying before a congressional panel, Ms. Yellen said last month that if faster job growth led to a quicker decline in the jobless rate, the bank might have to move sooner and more rapidly to raise rates.
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At last check, the job market was on its best winning streak since the late 1990s. Through June, the US economy had added at least 200,000 jobs which drove unemployment to a 5 ½ year low of 6.1 per cent. Unemployment is now on the brink of tipping below six per cent, a level the Fed in June forecast wouldn’t materialise until next year. A jobless rate below 6 per cent would serve as a big vote of confidence in the greenback as it would bring the Fed closer to attaining its goal of maximum employment. Although the US economy continues to recover at an uneven rate, conditions look much brighter than they do in the Eurozone which continues to be restrained by high unemployment and low inflation. That adds up to Euro-weakening divergence for both growth and central
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As forecasts look sunnier for the greenback, however, uncertainty remains high, leaving the Dollar vulnerable to setbacks.
bank policy. The European Central Bank in June stepped up monetary stimulus while the Fed this year has increasingly dialed down on its monetary support to the improving US economy. Meanwhile, the Fed’s QE bond buying programme, which has been positive for growth but negative for the Dollar, is on course to end in October. Consequently, the recent foundation of strength the greenback has formed could have the trappings of a durable upswing. A stronger Dollar is a boon for American importers who buy their goods from overseas. As forecasts look sunnier for the greenback, however, uncertainty remains high, leaving the Dollar vulnerable to setbacks. Meaningful liftoff of the US currency may have to wait until the Fed sketches a more hawkish outlook and Treasury yields take notice and rise. Upcoming Critical Events August 1: US July Non-farm Payrolls August 1: US July ISM Index Manufacturing August 13: US July Retail Sales August 20: FOMC Releases July 29-30 Meeting Minutes August 28: US Q2 GDP revision
Economic Indicators 3-month deposit: 0.24% GDP: -2.9% (ann.) Q1 Inflation: 2.1% June Unemployment: 6.1% June Trade deficit: USD -44.4 billion May
EUR The fallout has happened, now what? The European Central Bank (ECB) threw the proverbial ‘kitchen sink’ at the markets in June and the fallout from that historic monetary policy
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announcement helped to take the Euro to eight-month lows against the US Dollar, two-year lows against sterling and five-month lows against the Yen during the month of July. So what comes next? The economic situation for August does not look too much altered from July. Monetary policy is not widely expected to be altered at the next ECB meeting on August 7th, despite calls from the IMF to embark upon quantitative easing measures. The central bank has been relatively clear in its policy communique and economic data from July is not generally seen as something that will have altered the outlook from policy makers. The ECB has said that it will wait until after the first tranche of lending has gone out at the beginning of December before assessing whether or not to embark upon additional extraordinary policy measures. That means investors will continue to cling to all economic data as they determine whether or not more policy measures will be required at the beginning of next year. With that in mind, growth remains uneven and weak. Surveys on the manufacturing and service sectors did show some signs of improvement in the month of July, but so far quarterly growth for Q3 is estimated at a poor 0.4% with the manufacturing sector in France still contracting. On inflation, the ECB hopes that the liquidity injections expected later in the year will increase demand and help lift prices. There have already been some signs of bottoming in HICP figures. So as long as consumer prices remain steady and potentially improve, there will be little reason for the ECB to take more policy action anytime soon. The rate of unemployment seems to have also steadied and in some places is even falling. On balance, the Eurozone economy seems to be treading water and it will take time for the Central Bank’s policy
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measures from June to impact real economic data. In the meantime, there are some external factors and internal events that could have a bigger immediate impact on the Euro. Clearly geopolitical risk has been heightened and the damage it could make on business sentiment figures has yet to be revealed. Given the degree of offsetting events and economic data in the Eurozone, the Euro’s direction over the course of August could be a matter of default, meaning it could be subject to movements outside of its specific realm as investors focus on the greater uncertainties of when the UK and US will embark upon tighter monetary policy. Upcoming Critical Events August 01: EUR July Manufacturing PMI August 04: EUR June PPI August 05: EUR July Services PMI and June Retail Trade August 07: EUR ECB Monetary Policy Committee Meeting August 13: EUR June Industrial Production August 14: EUR Q2 GDP August 17: EUR June HICP August 18: EUR June Trade Balance August 28: EUR August Business Climate Index
Economic Indicators 3-Month Deposit Rate: 0.11% GDP (annual rate): 0.90% Inflation (annual rate): 0.50% Unemployment: 11.6% Trade Balance: EUR 15.4 billion
GBP The Pound’s run to multi-year highs came to an abrupt end in July as the recent string of strong UK economic data began to fade. At the same time,
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signals from the US turned more hawkish. As a result sterling suffered its biggest weekly decline in months against the US Dollar to hit onemonth lows. The question for August is whether this is the beginning of a sustained fall or just a temporary levelling out. The Bank of England may hold the key to the answer. The Financial Policy Committee’s announcement regarding new measures to combat housing market risks was one of the key talking points of July but it was inflation data which really caught the eye. Sterling edged closer to six-year and two-year peaks against the US Dollar and Euro, respectively, helped largely by data showing a significant increase in British consumer price inflation – a rise which limits the room the BoE has to keep interest rates at record lows for longer. However, UK economic data on wage growth, manufacturing, retail sales and house prices painted a more dovish picture while minutes from the BoE’s July meeting confirmed that no members currently see the need to consider earlier rate rises. Perhaps the most significant development in July, however, came from the US where the Federal Reserve began talking about the possibility of raising interest rates sooner. The US Dollar strengthened putting pressure on the pound despite another strong UK GDP report. Data in the final week of July from abroad may dictate currency volatility in the early part of August. Markets will watch for US GDP figures and the latest US non-farm payrolls report as well as important inflation data from Europe. However, the BoE’s Inflation Report on August 13 could be the makeor-break moment of the month for the Pound. In November the report caused significant movement in the sterling exchange rate. In February BoE Governor Mark Carney used the report as the moment to launch
the bank’s second version of forward guidance which sent the Pound soaring to new highs. If the BoE uses August’s report as an opportunity to tell markets that over the coming months they will start to see some members of the Monetary Policy Committee voting for higher interest rates, then Sterling could potentially add yet another leg higher to its incredible climb since last year. New multi-year highs for sterling is a real possibility. But if a still dovish Mark Carney delivers a somewhat disappointing UK economic growth and inflation outlook, then the Pound’s slide in July may turn into a more sustained fall in August. Some analysts are already predicting that it’s now “game over” for Sterling. Upcoming Critical Events August 05: GB July Services PMI Survey August 07: BoE Interest Rate Announcement August 13: GB June Wage Growth August 13: GB June Unemployment August 13: BoE Quarterly Inflation Report August 19: GB Consumer Price Inflation August 20: BoE August Meeting Minutes
Economic Indicators BoE Interest Rate: 0.5% GDP: 0.8% Q2 (q/q) Inflation: 1.9% June Unemployment: 6.5% May Trade Balance: GBP -9.2 May
For an online version, please visit: www.tradeandexportme.com/2014/08/ currency-highs-and-lows/
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