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Since its founding in 1948 , the SCHMIDT Group has developed into one of the leading service provider of bulk logistics and has since gone global . ince Since its Since Since founding its its its founding founding founding in 1948 in in 1948 in 1948 1948 , , the the , the , SCHMIDT SCHMIDT the SCHMIDT SCHMIDT With over employees in , 44 Since 1,800 its founding in 1948 the locations SCHMIDT Group Group has Group Group developed has has has developed developed developed into into into one into one one of one of the ofthe of the leading leading the leading leading worldwide, than 1,150 Groupmore has developed intotrucks one ofand the 5,500 leading ervice service service service provider provider provider provider of of bulk of bulk of bulk logistics bulk logistics logistics logistics and and and and has has hashas containers 1,275of silos, the SCHMIDT serviceand provider bulk logistics and has ince since since since gone gone gone global global global gone global .. . . Group at over all major production sites since gone globalhas be- . With over With With 1,800 over over 1,800 employees 1,800 employees employees inin44 in44in 44 locations 44 locations locations With 1,800 employees locations With over 1,800 employees intrucks 44 locations comeworldwide, themore representative for dry bulk and worldwide, worldwide, worldwide, than more more than 1,150 than 1,150 1,150 trucks trucks and and 5,500 and 5,500 5,500 more than 1,150 trucks and 5,500 worldwide, more than 1,150 trucks and 5,500 packed petrochemical logistics ontainers containers containers and and 1,275 and and 1,275 1,275 silos, silos, silos, the the SCHMIDT the SCHMIDT SCHMIDT containers 1,275 silos, the SCHMIDT

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The Global Supply Chain Yearbook 2016 Welcome to our annual publication. This year we have 140 pages of fresh content focussing on various aspects of our industry - GCC Industry Reports, Management and By Air, By Sea, By Land. This year, content is varied and focusses on industries that contribute in all aspects of the regional economies; mainly related to logistics but beyond as well. When starting off, 140 pages seemed to be a lot to fill, but once content started showing up, a lot even had to be left out. We would like to thank our partners - AT Kearney and Oxford Business Group - for their contribution towards a lot of our content. Their detailed analyses and expertise is highly valued at Signature Media. We hope you enjoy the magazine as much as we enjoyed putting it together. And here’s to many more successful years of reporting on matters at the pulse of our industry.

Munawar Shariff Managing Editor Signature Media munawar@signaturemediame.com

Publisher: Jason Verhoven jason@signaturemediame.com Director: Deepak Chandiramani Deepak@signaturemediame.com Managing Editor: Munawar Shariff munawar@signaturemediame.com SIGNATURE MEDIA FZ LLE P. O. Box 49784, Dubai, UAE‚ Tel: 04 3978847/3795678 Email: info@signaturemediame.com Exclusive Sales Agent Signature Media LLC‚ P.O. Box 49784, Dubai, UAE

Art Director: B Raveendran ravi@signaturemediame.com Sales: Peter Dass peter@signaturemediame.com Production Manager: Roy Varghese roy@signaturemediame.com

Contributor’s opinions do not necessarily reflect those of the publisher or editor and while every precaution has been taken to ensure that the information contained in this handbook is accurate and timely, no liability is accepted by them for errors or omissions, however caused. Articles and information contained in this publication are the copyright of Signature Media FZ LLE & SIGNATURE MEDIA LLC and cannot be reproduced in any form without written permission.

Printed by United Printing Press (UPP) – Abu Dhabi / Distributed by Tawseel Distribution & Logistics – Dubai GSC YEARBOOK 2016 3


07 GCC Industry Reports 08 Bahraini economic zones Benefits to attract tenants Bahrain’s success at attracting dozens of new businesses to the country

14 Upgrades all round The country’s airport and national carrier receive a boost

18 Greater focus on trade and logistics Kuwait has a growing segment of private sector firms providing trade and logistics services

20 Infrastructure investments The Kuwaiti government has energised the national economy by outlining major investments

32 Boosting industrial productivity Oman’s current economic strategy is focused on achieving high-value-added growth

40 Stability attracts investment and growth Omani retail sector continues to experience stable growth

44 QAFCO adapts to a changing market Qatar is now one of the international leaders in fertiliser products

46 Railways running on solar Under the aegis of Qatar National Vision 2030 (QNV 2030), the government has pledged to generate 2% of energy needs via renewable sources by 2020

50 KSA’s focus on non-oil growth The non-oil private sector is expected to lead to economic expansion

60 Advantage F&B The fast-moving consumer goods (FMCG) sector has come in for special focus in recent times

64 Benefits galore at industrial zones Abu Dhabi’s most attractive opportunities for industrial investment exist in the industrial zones

67 Automotive - inventory It’s time for a new view on lean inventory, one that is sustainable and healthy

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71 Salaries outlook 2016 What can you expect this year? Will you get a pay raise, will you not?

74 Digital Supply Chains Supply chain managers expect major improvements to result from high digital investments

88 Digital Lean: The Next Stage Traditional lean needs a turbo-boost from digital to manage rising complexity

92 Overcoming supplier risk Because you’re not ordering enough, costs are going to more than double next year

98 Changing the landscape Dr John Gattorna talks to GSC Yearbook about the future of technology and SCM

105 A connected GCC and more Faris Al Mazrouie, CEO, Etihad Rail, gives a few insights on the progress of the rail project

108 Port report Cliff Brand, General Manager, RAK Ports Group shares his insights into the progress of the emirate’s ports

112 Linking up the various networks Abu Dhabi links different forms of freight and passenger transport

118 Ras Al Khaimah better connected Geographical location, well-developed infrastructure and free trade within the GCC are among the top logistical advantages offered to businesses locating in Ras Al Khaimah

128 Enhancing connectivity Qatar is seeking to boost domestic and regional connectivity

132 Oil Supply and the End of Iran’s Sanctions Lifting Iran’s international sanctions will add yet another supply source to the market

138 Rail ready Abdulrahman Al Hatmi, Director, Oman Rail, is confident about government strategies to enhance the country’s connectivity through rail

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GCC Industry GSC YEARBOOK 2016 7


Bahraini economic zones Benefits to attract tenants In 2010, King Hamad bin Isa Al Khalifa inaugurated the Salman Industrial City designed to attract foreign direct investment into Bahrain. Four years later, the city includes three separate industrial areas and a logistics centre, and has succeeded in attracting dozens of new businesses to the country.

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ocated near the community of Al Hidd, its three main parts consist of the Bahrain International Investment Park (BIIP), the Bahrain Investment Wharf (BIW) and the Al Hidd Industrial Zone. Built with room for 200 companies and 34,000 employees, when full occupancy is reached it will have contributed up to $8bn in direct investment to Bahrain. Of the 10 areas Bahrain has designated as industrial zones in this way, the Salman Industrial City in particular is designed to take unique advantage of the country’s infrastructure. It is only five km from Bahrain International Airport, and an interchange completed in 2013 now allows swifter access to the King

Fahd Causeway with minimal traffic interruptions. It is also near the Al Hidd Power Station; the Arab Shipbuilding and Repair Yard Company, Bahrain’s dry dock facility; and the dockside of the Khalifa Bin Salman Port, which was finished in 2009.

Regulatory Structure The management of these industrial zones falls under the purview of the Ministry of Industry and Commerce. Although in some respects the entire


BAHRAIN

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BAHRAIN

and in many cases businesses exceed nation can be considered an industrial them easily – indeed, we have adapted zone – the tax structure is low and a and amended the law to ensure it does number of regulations are designed not hamper businesses investing in the to attract investment – in the zones kingdom.” the terms are even more favourable. There is no corporate income tax (new businesses are guaranteed this for BIIP 10 years), and no personal income One industrial zone that has garnered tax, capital gains tax or withholding much investor interest in recent years tax. There are no restrictions on is the BIIP, a business park of 247 ha. repatriation of capital, whether What sets this zone apart from profits or dividends, and 100% the others is that its mandate foreign ownership is allowed. explicitly focuses on exports and More Special incentives for value-added projects. warehousing is quality manufacturing include a range Launched in 2005, it offers needed to serve tenants 50-year leases with of rebates that can be used for raw materials or production competitive rates on utilities – the special equipment, and exemption from electricity costs $0.04 per KWh economic zones. and water $1.05 per cu metre. any recruitment restrictions for the first five years.“In some “There is clearly As of December 2014, the sectors there are Bahrainisation was home to 63 operational a need for more BIIP quotas, and the exact level companies employing more than warehousing varies by sector,”Vivian Jamal, 4500 people, according to Ministry executive director of business capacity in the of Industry and Commerce. development at Bahrain’s After 30 new projects were country,” Economic Development Board, approved in 2013, the number of a semi-private autonomous companies with commitments agency, told OBG.“However, these in the park reached 111, totalling $2bn quotas are designed not to be onerous in investment, of which 80% comes 10 GSC YEARBOOK 2016

from foreign firms. Once it is fully developed, the industrial site is expected to generate an additional 5500 jobs. Major tenants at the BIIP include Mondel e z, JBF India, Saudi Arabia’s Saleh & Abdulaziz Abahsain and Singapore’s MTQ Corporation. The largest of these by employment is Mondel e z at 250, whose facility received an award from the Ministry of Labour for having among the highest health and safety standards of all industrial facilities in the kingdom. Although clients looking to build their own facilities are welcome at the BIIP, the management remains selective: since 2005 there have been more than 630 applications, 22% have been approved. As of mid-2014, only 20% of space at the BIIP was available, with rental rates at $1.33 per sq metre a year.“BIIP is down to the last 20% of real estate available for development,” Gerry Sharkey, the park’s project director, told OBG. “While there is still some 300,000


RHS Logistics. Everything Logistics. The Rais Hassan Saadi (RHS) Group have been at the very forefront of the emergence of Dubai as a Shipping and Logistics hub since they started operations in 1910. Now over 100 years later, the company has evolved into the regional powerhouse it is today with diverse interests across the region. RHS Logistics, the 3PL and supply chain systems integrator, operates from the Middle East, but with a truly global vision. Utilising the latest of technologies, and with a wealth of experience in diversified product handling, in high quality sophisticated environments, it has cemented its status as an innovative market leader within the Logistics industry. With cutting edge facilities in Dubai South, Jebel Ali Free Zone, Dubai Airport free Zone adjacent to the Sea and Air ports, housing a total of 106,000 pallet locations spanning in 162,000 sq:m plot size, RHS have and will continue to invest in first class infrastructure, ensuring they remain leaders in their field. How can RHS Logistics help your Logistics business? Call us on (971-4) 8810007, (971-4) 8082300 or visit rhslogistics.com


sq metres of space available, the sites larger than 25,000 sq metres are currently at a premium. This shows the park’s continuous strength and speaks to both the interest in BIIP as a business platform and to the growth of Bahrain’s industrial sector.” Six German companies also operate in the BIIP, including Siemens and BASF. The latter in many ways reflects the sort of tenant the zones are designed to attract. Since BASF’s chemical plant opened in 2012, it has worked to ensure that 70% of the employees are Bahraini nationals, investing in employing the nation’s engineering students One industrial and furthering their training, either on-site or zone that has in Germany. It currently garnered much produces 16,000 tonnes investor interest of antioxidant blends in recent years for export to GCC manufacturers. is the BIIP, a While BASF has business park chosen to build its own facilities, BIIP also offers of 247 ha. What pre-built ones. Another sets this zone tenant that decided to apart from the custom build is MRS Fashions, whose plant others is that of 8454 sq metres has its mandate an annual capacity of explicitly 3.6m items on eight sewing lines. With a total focuses on investment of $20m, exports and the company expects quality valuethe new facility to boost their turnover to added projects $40m in 2014/15. While importing raw materials from China, Pakistan and Thailand, MRS’s primary export target is the US. For companies not wishing to develop their own greenfield facilities, the Baytik Industrial Oasis within BIIP offers 53,000 sq metres of pre-built units for rent, with a size range of 2000-9600 sq metres. Currently, some 80% of the business activities in the park focus on manufacturing and industry. Yet the BIIP’s vision is also to become a centre for trade services. The remaining 20% of its space is dedicated to the International Services 12 GSC YEARBOOK 2016

Programme, which has managed to attract French power conglomerate Alstom, as well as American Express.

BIW Another major zone at the Salman Industrial City is the BIW. Not only is the wharf one of the largest development projects in Bahrain – when completed it will involve investment of more than $2bn – it is the only one that is wholly privately owned and operated. The BIW is also unique in Bahrain for its inclusion of industrial, commercial, logistics, hotel and worker accommodation. It covers an area of 1.7m sq metres, of which some 900,000 sq metres is designated specifically for pre-serviced plots of land, with integrated utilities and IT

infrastructure for industrial use. The wharf also includes a services park, a logistics and supply chain park, and a business park with conference facilities. Another feature is its“labour town”, an on-site housing area for workers and middle management. The first phase of the $75m project was completed in 2009 and a second is planned as demand grows. The current 12 buildings have a capacity to house 7000 residents, and as of April 2014 occupancy was at 50-60%. The site had nearly reached full occupancy in 2013, but the completion of the nearby Mina Salman interchange led to a drop in occupancy. Another reason for this is that companies often


BAHRAIN

house their workers in Manama, where accommodation can be found for BD15-20 ($39.75-53.00) a month per person, compared to the BIW’s BD27-30 ($71.55-79.50). Nevertheless, the town’s location is a competitive option for projects in the Mina Salman area, due to savings on transport.

Warehousing More warehousing is needed to serve the special economic zones.“There is clearly a need for more warehousing capacity in the country,” Sharkey told OBG. “We often hear from tenant companies that there is not enough of such space in the kingdom, and we would like to see more

competition in this area and in the supply chain generally.” One key player in warehouse development in the industrial city is Majaal, a wholly owned subsidiary of Kuwait’s First Bahrain Real Estate. Having originally built a series of warehouses targeted at smaller enterprises, Majaal’s involvement in the BIW deepened significantly in November 2013 when Kuwait’s Al Mazaya Holdings hired it to develop and eventually oversee the leasing of a $20m industrial facility. The company is currently conducting feasibility studies related to the project, which when completed will offer another 15,500 sq metres of industrial space for rent. With 28 tenants currently, the project’s three phases when finished will total $45m.

New Possibilities The success of the Salman Industrial City has led Bahrain to explore similar possibilities for its long-term future. In June 2012 the country announced plans to build a $3bn Economic Industrial City on 95 sq km of reclaimed land. With special zones designated as industrial, commercial, residential and recreational, the city would provide nearly a quarter of a million jobs, the bulk of which, given Bahrain’s small population, will likely be expatriates. Though still in the early planning stages, the project will be funded through a public-private partnership and would be designed to reach full commercial occupancy by 2040, boosting GDP by 20%. -www.oxfordbusinessgroup.com GSC YEARBOOK 2016 13


BAHRAIN

Planned Upgrade

Upgrades all round Of the six GCC states, Bahrain has the longest history of international air travel and Bahrain International Airport (BIA) is the region’s oldest airport. Today BIA receives 9m passengers a year. The airport currently serves 31 commercial and 10 cargo carriers that in total operate 921 flights per week to 45 global destinations. The next chapter planned in Bahrain’s aviation history is a major upgrade to BIA

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The move corresponds with a reshuffling of national carrier Gulf Air, designed to make the firm more competitive. The BIA expansion consists of a three-tiered development project, known as the Airport Modernisation Programme. Preliminary expansion plans call for an additional 13 gates and 40 more check-in counters, as well as four more baggage reclaim belts. Additional Customs desks for both GCC and non-GCC visitors will also be built. In late 2013 the Bahrain Airport Company bought the 50% stake held by Hochtief Facility Management in their joint venture to manage the airport. Later in early 2014, Hill International won an $18m contract from the Ministry of Transportation and Telecommunications (MTT) to oversee the ongoing airport modernisation. The upgrade will also include some less visible enhancements. For example, the fuel storage facility used by the Bahrain Petroleum Company is located in an area that has seen urban encroachment over the past two decades. Part of the

works will relocate all refuelling and storage facilities within the confines of the airport. The tender for the consultancy to oversee the land use and zoning infrastructure was awarded to ADPI by the MTT during the Bahrain International Airshow 2014 in January. Also during the airshow BIA reached an agreement with AMA Motors Group to spend BD1.3m ($3.45m) for the purchase of two 8x8 rapid aircraft intervention vehicles in addition to technical support, repair and maintenance services. The cost of the airport’s immediate refurbishment work is expected to be BD30m ($79.5m), and BD330m ($874.5m) has been allocated for the intermediate phase of the project. Funding for the project will come from the government. When finished, the upgrade will both increase services available and the overall number of passengers handled each year to 14m. The last major upgrade of the airport occurred in 1993 when the total capacity of the airport was expanded to 3.5m passengers per year. BIA projects the number of passengers passing through the


BAHRAIN

airport to grow by 6% in 2014. These numbers will continue to rise as part of changing patterns in regional airline travel. “Regular travellers who used to travel just once or twice a year have changed their routine,” Husain Rasool, corporate communications manager at Bahrain Airport Company, told OBG.“It is now very common in the Gulf to have more short-term travel and weekend travellers as well. This increase is as a result of both changing business and leisure travel patterns. At the Bahrain Airport Company our projections for the new airport have taken these new patterns into consideration.”

A New Hub Gulf Air, Bahrain’s national airline, is currently undergoing a number of structural and strategic changes to increase its competitiveness and to take advantage of the airport renovation. In 2014 the airline moved to cut routes to Copenhagen, Rome and Colombo, where demand was low. Other important changes show the company taking up modern IT

business solutions. Over the last two years, Gulf Air has embraced“Big Data”through a programme known as Cloud Arabic Sentiment Analysis, allowing the company to analyse Arabic-language social media. The company has won five innovation and business computing awards for its Big Data programmes since April 2013. Gulf Air was also the first in Bahrain to introduce private cloud computing in its IT operations. This new data innovation is already showing results. In 2013 Gulf Air’s online call centre raised sales 12% and frequent flyer enrolment was up by over 118%. In April 2014 the Bahraini parliament gave preliminary approval for a move to grant a 30% subsidy to the airline on the fuel it uses. These moves will help ensure the carrier remains competitive as construction work is carried out at its main hub.

Long & Short BIA continues to attract interest from international carriers.

Czech Airlines used the Bahrain International Airshow, held in January 2014, to announce the launch of flights to Bahrain beginning in the first quarter of 2015. More recently, Cathay Pacific has announced an increase in the number of its flights between Bahrain and Hong Kong. The addition in March of three more flights per week creates a daily connection between the two financial centres. Turkish budget carrier Pegasus announced in 2014 it would begin seasonal flights to Istanbul’s Sabiha Gokcen Airport. In conjunction with the airport expansion, Bahrain’s Cabinet also mulled a host of incentives to encourage more airlines to add Bahrain as a destination.

Asian Markets The expansions will allow the airport to better reach markets in Asia, an important part of the airport’s growth strategy.“We are currently in the final stages of

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deciding our route strategy,”Mohamed Yousif Al Binfalah, CEO of Bahrain Airport Company, told OBG.“What is now very clear is that Asia is where we can attract new airlines and increase our connections to underserved destinations.” Gulf Air, The Gulf sits at a Bahrain’s strategic location for international air traffic, national airline, relatively equidistant is currently from the booming business centres of East undergoing Asia and the financial a number of and political centres structural of Western Europe. and strategic However, BIA is also a key airport for shortchanges to haul flights. Riyadh and increase its Dubai can be accessed within a 45-minute competitiveness plane ride while Doha and to take is only 20 minutes by advantage of air. Furthermore, BIA’s catchment area includes the airport the Eastern Province of renovation Saudi Arabia, according to Bahrain Airport Company. As such the firm puts the total population of the airport’s catchment area at 3.2m people. 16 GSC YEARBOOK 2016

Upgrades should also allow Bahrain to better position itself as a hub for Saudi air travellers as well. In 2013 some 54m air passengers moved through Saudi Arabia’s 27 airports. In 2010, Skytrax Global Airport Awards ranked BIA as the number one airport in the region, ahead of both Dubai and Abu Dhabi. BIA is expected to sit comfortably with similar expansion projects in the region, such as the new Doha airport, which opened in April 2014.

Racing Ahead Sporting events are helping to drive passenger traffic. Bahrain’s annual Formula 1 racing event sees the total number of travellers to the kingdom swell, and BIA opens special border

control lanes to cater to race visitors. Looking ahead, Qatar is set to host the 2022 FIFA World Cup, which may have knock-on effects for demand at BIA. If the 2022 World Cup in Qatar receives a similar number of visitors to Brazil’s 2014 World Cup, access to a second airport will be important. Indeed, Qatar’s World Cup bid recognised the need for a 40-km causeway linking the two states to facilitate such added capacity. Under the terms of the bid, 40% of the causeway is to be finished by 2018. When it is completed, Bahrain will be able to act as an alternative entry point to both Saudi Arabia and Qatar. -www.oxfordbusinessgroup.com


ADVERTORIAL

World leader in Bulk Logistics top open the Bahrain Logistics Zone

B

ahrain xx February 2016: Schmidt Middle East logistics SPC, a wholly owned company by Schmidt Heilbronn, a world leader in dry bulk logistics and a global specialist for dry bulk polymer logistics, announced today that the company will start its operations out of its multi-user base in Bahrain soon and it is to hub out its logistics operations in the Gulf region, and is expected to start its operations by middle of 2016. Schmidt Middle East Logistics SPC has leased about 40,000 square meters of prime

KSA, being a short drive away. Ultimately, this will lead to an increase in the number of companies with specialised expertise and operational skills, especially in the bulk market, setting up shop in Bahrain, which will help support Bahrain’s economy in the future,”said Dr. Wolfgang Hoppmann, CEO, Schmidt Middle East Logistics. Speaking on the importance of the newly developed hub, Dr. Hoppmann said:“Our hub in Bahrain represents a key part of our expansion plans in the GCC to better serve our customers. We have also started the development of our facility in KIZAD, in the UAE, in addition to serving our existing customers for their onsite projects in Kuwait, Saudi, Qatar, and Oman.” “We continue to develop our infrastructure and facilities in the region as part of our commitment to our customers, and in order to facilitate the growth and efficiency of their operations in the region. We are confident of the future growth of this sector in the region, and we will continue to offer world-class services we are known for,”he added.

land at the Bahrain Logistics Zone (BLZ) in order to setup an economical and efficient solution to store, handle and distribute different bulk materials like polyethylene, polypropylene, catalysts and additives for the chemical and petrochemical industry. “This strategic decision to set up a multiuser hub in Bahrain allows Schmidt to open the gates for highly specialized logistics in this region, with Bahrain playing an important role as a distribution hub for the GCC, with the biggest market in the region,

Silo storage

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431 m3 each silo

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pallets, big bags, octabins

see silo storage

Material handling

pallets, big bags, octabins

from silo to bulk truck and bulk container

Tilting operation

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from container or silo-truck to silo storage

Ensilage operation

from 25kg bag, octabins or big bag to silo truck or container

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Bagging operation

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GSC YEARBOOK 2016 17


KUWAIT

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KUWAIT

Infrastructure

investments The Kuwaiti government has energised the national economy by outlining major investments across strategic sectors under the Kuwait Development Plan (KDP), which runs from 2015 to 2020

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everaging the country’s strategic location at the head of the Gulf, the plan will direct major investments into transport and logistics infrastructure and services with the goal of establishing Kuwait as a commercial hub for the northern Gulf. Enhancing sea and air links to improve connectivity with the region and beyond is a major priority for the state, with several significant projects planned to develop seaports, airports, and road and rail networks.

Background While most countries in the GCC have similar plans to use transport and trade to drive economic growth, Kuwait has great advantages given its proximity to markets in the largest and most populous countries in the Middle East. Iraq, Iran and Saudi Arabia alone have a combined population of 140m 22 GSC YEARBOOK 2016

people and an economic output of more than $1.3trn in 2013, according to the World Bank’s World Development Indicators. Kuwait’s transport and logistics sector could play a critical role in serving these markets. In addition to public investments in transport and logistics infrastructure, private firms are playing a growing role in many segments, ranging from airlines and bus services to commercial logistics. Several local firms are also expanding their footprint by investing abroad, particularly in niche markets outside of the GCC region. Despite the positive outlook, Kuwait’s transport and logistics industry faces some challenges going forward. The biggest of these come from regional competition as governments in neighbouring

In addition to public investments in transport and logistics infrastructure, private firms are playing a growing role in many segments, ranging from airlines and bus services to commercial logistics


                     

    

                                                                             


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GCC countries fast-track investments in the transport and logistics sector. In contrast, Kuwait has faced major delays in implementing previous national development and investment plans, which could hamper growth as the country loses ground to competition in the longer term. Nonetheless, recent indicators suggest that the government is actively tackling these issues, with a number of projects approved and contracted in the first half of 2015.

Spending

A significant milestone The EU-US was reached in 2014, with projects worth an estimated Open Skies $38bn awarded over the year, Agreement, according to business media unveiled in outlet Trade Arabia. The 2005, has scale of activity has made Kuwait’s project market one been a major of the fastest growing in the catalyst for region, and this momentum growth and has been important for the country as it seeks to competition. implement much-needed While rapid transport and logistics projects in 2015 and beyond. expansion has Going forward, the been positive government has outlined an for the local $80bn budget for 2015, of which an estimated $8.2bn aviation has been allocated for major market, construction and transport Kuwait’s projects, according to data published by Construction infrastructure Week. The budget covers has also the 2015/16 financial year running from April 2015 to limited the March 2016 and is based overall rate of on an estimated oil price of expansion around $45 per barrel, with revenues projected to reach some KD19bn ($65.46bn), according to the Ministry of Finance. Lower oil prices would adversely affect these revenues, but the government has indicated that the deficit would not curtail investment over the short term. The annual budget is in line with the KDP, which was approved by the parliament in January 2015. The national strategy seeks to implement a number 24 GSC YEARBOOK 2016

of reforms to spur development and revive major projects sidelined over the last several years. The government has announced plans to spend approximately $116bn on projects over the next five years. The spending will cover more than 523 projects across the country, according to press statements by the parliament’s financial and economic affairs committee secretary, and will include KD2.3bn ($7.92bn) for the development of Mubarak Al Kabeer (MAK) Port, KD1.7bn ($5.86bn) for the international airport expansion project and KD5.6bn ($19.29bn) for the metro project.

Air Links While originally a regional leader, Kuwait’s aviation sector is still in early stages of development compared with emerging regional and global hubs

in the Middle East. Investment to expand passenger and cargo capacity at the country’s main airport have been gradual; however, the approval of a mega-project to upgrade the airport in 2014 should support the future growth of the sector. Kuwait International Airport (KIA), which also serves as a military facility, was built in 1927 as a refuelling stop for British aircraft. The discovery of oil led to decades of growth and expansion for the airport, although infrastructure damage related to the Gulf War in 1990-91, estimated to be in the range of $330m, affected development. A major $60m deal in 1999 led to the expansion of passenger facilities with the construction of a 32,000-sq-metre terminal building. A new terminal


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featuring 64 check-in desks and modern baggage-handling systems was built in 2008 under a second phase of development. The facilities, designed to deal with approximately 7m passengers annually, quickly exceeded capacity, however. According to data from“Annual Statistics Bulletin of Transport 2013” put out by the Kuwait Central Statistics Bureau (KCSB), the latest available figures at the time of writing, more than 9.38m passengers travelled through the airport in 2013, up from 4.76m just 10 years earlier in 2004. The airport also handled 75,820 flights in 2013. The EU-US Open Skies Agreement, unveiled in 2005, has been a major catalyst for growth and competition. While rapid expansion has been positive for

the local aviation market, Kuwait’s infrastructure has also limited the overall rate of expansion. The tendering process in 2014 to upgrade the airport was expected to help reduce pressure in the future. However, while the Central Tenders Committee announced the winning consortium of local construction firm Kharafi National and Limak Holding from Turkey in November 2014, this bid was cancelled in early 2015. The Kuwaiti government is now working to determine the best way to move forward, and is considering expanding the airport through a build-own-transfer scheme under the new public-private partnership law, introduced in 2014.

Carriers There are currently two main players in the local aviation market. Kuwait Airways, the national carrier, was

founded in 1954 as Kuwait National Airways Company, with a 25% government stake. It was renamed Kuwait Airways Corporation when the government doubled its holding in the company the following year. Kuwait Airways has invested heavily in redeveloping its operations since 1990, as a number of its aircraft and other assets were destroyed during the Gulf War of 1990-91. Ticket sales and revenues have grown rapidly in recent years. According to data from the airline, direct ticket sales excluding online sales grew from 2.79m in 2013 to more than 3m in 2014. Concurrently, revenues grew by 12% from KD366m ($1.26bn) in 2013 to over KD410m ($1.41bn) in 2014. Despite the uptick in overall revenues, Kuwait Airways’ market share has fallen from 50% in 2005 to 23% in 2015, GSC YEARBOOK 2016 25


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reflecting changes brought about by the open skies deal. However, the airline has ambitious plans to expand and upgrade its fleet and expects to add 22 aircraft by 2017. Contracts with Airbus and Boeing will include the purchase of 15 Airbus A320s and the lease of 20 Airbus A350-900s to cater primarily to its core regional markets, and a further 10 Boeing 777ERs for its long-haul routes to New York and Los Angeles. The government is supporting the airline through public Kuwait Airways sector investments, soft loans and guarantees for its has invested fleet additions. In addition, heavily in the airline benefits from redeveloping having highly coveted its operations airport slots in some of its biggest markets, including since 1990, as London Heathrow, due a number of to its long-standing its aircraft and operations in the region.

Privatisation

other assets were destroyed during the Gulf War of 199091. Ticket sales and revenues have grown rapidly in recent years

In parallel with efforts to develop its main operations, Kuwait Airways is also working with the government to privatise its ownership. The process was started in 2008 and has progressed slowly. Most recently, in May 2015, the CEO of Kuwait Airways, Rasha Al Roumi, met with the country’s Emir, Sheikh Sabah Al Ahmed Al Jaber Al Sabah, to present the airline’s new development plan. Kuwait Airways is one of the first major state-owned entities to be privatised in the country. One critical issue still being discussed is staffing. Existing laws require specific protections for national staff, which complicates the shift to private ownership. However, the government has recently put in place a number of reforms to help ease the process, including allowing transfers into other government agencies. Under the proposed privatisation plan, the state would retain a 20% stake in the company, while 35% of the shares would be sold to private sector investors, 40% to 26 GSC YEARBOOK 2016

citizens of Kuwait and the remaining 5% retained for staff of the airline. In May 2015 the low-cost carrier Jazeera Airways submitted a letter of intent to acquire the full 35% stake in Kuwait Airways, though as yet no valuation of the shares has been released. This stake represents the maximum amount allowed by a private investor under Kuwait’s privatisation law.

Making the Cut Kuwait has also seen the rise of a major private operator following the liberalisation of the airline industry in 2003. Jazeera Airways, launched in 2004, became one of the first fully privatised airlines to operate in the Middle East and is proving to be a major competitor in the local


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market. The airline was launched via an initial public offering (IPO) in June 2004, raising more than $34m. The firm subsequently bought its first Airbus A320 and inaugurated operations with a maiden flight to Dubai in 2005. Key to its success, the airline was one of the first in the Middle East

to embrace a new business model that did not rely entirely on ticket agents. Developing a strong call centre and online presence, it has been able to direct more than 42% of its ticket sales away from the more expensive agent channel. The airline also focuses almost exclusively on destinations that are within two hours of Kuwait City,

enabling it to maximise aircraft utilisation and to reduce turnaround times. Jazeera Airways reports that the company has maintained profitability for 17 quarters in a row. According to its financial reports, revenues grew more than 15% year-on-year between the third quarter of 2013 and the third quarter of 2014, from KD20m ($68.9m) GSC YEARBOOK 2016 27


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to more than KD23m ($79.24m). Operating profit over the same period grew even faster, from KD8.7m ($29.97m) to over KD10.3m ($35.49m). Jazeera Airways currently operates seven Airbus A320 aircraft. The company has rapidly grown to capture more than 10% of the passenger traffic in Kuwait, transporting 1.1m-plus passengers in 2014 alone. According to financial services group Alpen Capital, the The government airline has carried more has ambitious than 28m passengers since it first launched plans to expand operations. It is now the this capacity second-biggest carrier in Kuwait, ahead of regional by developing competitors such as the new MAK Emirates, Qatar Airways port facility on and flydubai. Boubyan Island, At the same time, another airline launched located just off in Kuwait has fared less the coast from well. Wataniya Airways – which was the second Kuwait City. airline to receive a While the port licence after deregulation has faced a in 2003 – started off strongly in 2009, carrying series of delays, more than 250,000 it now looks passengers during its to be on track first year of operations, according to Arabian under the KDP Business. Wataniya marketed itself as a premium airline offering only business and premium economy seats. Although its successful IPO and growth over the first year boded well for the company, high costs and increasing competition globally prompted it to halt operations in March 2011. There are, however, indications that the company will resume operations in 2015 following a major fund raising initiative in 2014. According to Swiss airline intelligence provider ch-aviation, Wataniya is currently in the process of raising KD24m ($82.7m), with plans to lease two aircraft in 2015. The total number of airlines operating in Kuwait has fluctuated in recent years, from 74 in 2011 to 89 28 GSC YEARBOOK 2016

in 2012 before falling to 67 in 2013, according to the KCSB.

Cargo Air freight movements in Kuwait have followed a similar trend to passenger traffic. According to the KCSB, freight shipments at KIA have grown by 22% over the last decade, from under 150m tonnes to more than 175m tonnes between 2003 and 2013. Kuwait Airways controls a large portion of this business, making up 72.5m tonnes of the total market. Jazeera Cargo is a far smaller player, accounting for just 2.5m tonnes of freight in 2014, according to data from Kuwait Airways.

Ocean Bound The country’s ports and other sea transport infrastructure are another critical component of the government’s investment strategy under the KDP. Kuwait currently operates two dry cargo ports in Shuwaikh and Shuaiba, and three oil terminals at Mina Al Ahmadi, Mina Al Shuaiba and Mina Al Abdullah. Shuaiba and Shuwaikh serve as the main commercial ports for Kuwait, handling an estimated 98% of exports in 2012, according to the KCSB. Shuwaikh is the main commercial port supplying the country. It houses 21 deepwater berths in a 1.2m-sqmetre water basin and has a 4.3-km channel that enables ships to enter the harbour safely. The facilities can handle merchant ships, fishing trawlers and passenger vessels. Shuaiba Port, which primarily serves Shuaiba Industrial Area, handles imports of raw materials, equipment and machinery as well as exports from the petrochemicals and oil refining, gas liquefaction, cement and fish processing industries. The port is home to 20 commercial and container berths.

Port Expansion The government has ambitious plans to expand this capacity by developing the new MAK port facility on Boubyan Island, located just off the coast from Kuwait City. While the

port has faced a series of delays, it now looks to be on track under the KDP. The $1.2bn facility is still in the early stages of design and implementation, but is expected to serve as the major sea link into Kuwait. The port is to operate with an initial annual capacity of 1.8m containers managed through 24 berths. Land reclamation has begun for the project, though the initial target date of 2016 is likely to change as infrastructure plans are implemented. The new port will significantly boost the country’s port capacity as well as position Kuwait as a major gateway for trade into Iraq, Iran and northern areas of Saudi Arabia. However, there are a number of other regional developments also vying for trade through these channels. MAK Port’s initial development plans, for example, have already been scaled down due to concerns voiced by Baghdad because the new facility will share access routes to Iraq’s own port facilities. Even so, it is likely that the port will become a strong competitor on regional trade routes when it is completed.

Road While port and airport upgrades will enhance Kuwait’s transport links with regional and international trade partners, the government is also investing in local projects to improve connectivity across the country. The Jahra Road Development Project is one of the most visible of these initiatives. The project, estimated at KD264m ($909.53m), is one of Kuwait’s biggest infrastructure projects currently under development. The Ministry of Public Works sought a joint venture between Louis Berger and Pan Arab Consulting Engineers to serve as the project designers, while the Arab Contractors Company is the main contractor developing the infrastructure. The project was started in 2010 and is slated for completion by September 2015.


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(KPTC), owned by the Kuwait Investment Authority, is the main player. KPTC was established in 1962 with 25 routes across the city. The firm’s passenger volumes have fallen from a peak of 121m in 1989 to 50m passengers across 40 routes in 2014. This represents roughly 50% of the total bus market in Kuwait. CityBus and KGL are the other two players, with the former controlling 40% of the market and the latter 10%, according to KPTC. The firm is set to expand its fleet of 300 buses, with plans to purchase 550 new buses over the next two years. In a bid to expand the public transport network, the KDP also aims to develop the country’s rail and metro network. The metro project is expected to cost $20bn and will be constructed on a build-operate-transfer basis. Phase I of the project is anticipated to be complete by 2017, though delays in launching the project, initially planned for 2013, may extend this timeframe. The final project phase will add more than 160 km of metro rail, with a total of 69 stations across Kuwait City. In parallel, the government is pushing ahead with plans to develop a national railway, which is expected to eventually link up with the larger GCC rail network. Construction Weekly reports that the government is aiming to lay more than 500 km of track by 2018.

Outlook

In parallel, the government is also developing the Sheikh Jaber Causeway, which is reported to be on track for completion in 2018. The causeway involves developing a 37.5km sea-bridge between Shuwaikh and Subiyah, and a shorter 16-km sea-bridge between Shuwaikh and Doha. The $2.6bn project commenced in 2012. According to Construction Weekly, construction of the bridge

is currently being handled by Abdullah Al Hamad Al Sagar and Brothers Company and Hyundai Engineering and Construction Company. The causeway is designed to eventually link the proposed $94bn Silk City project with Kuwait City.

Public Transport The public transport network consists mainly of an integrated bus network. Kuwait Public Transport Company

The local transport sector provides ample opportunities for the country to diversify its economy. While current infrastructure capacity may restrict growth, Kuwait has several large-scale transport infrastructure projects in the pipeline to address this. Implementation is likely to be a challenge given the raft of projects across the GCC region, although the government’s five-year development plan outlines a strategy to meet its goals. When complete, these projects will enhance the country’s trade links and help establish Kuwait as an important regional centre for commerce. -www.oxfordbusinessgroup.com GSC YEARBOOK 2016 29


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Boosting industrial productivity

In common with many of its regional peers, Oman’s current economic strategy is focused on achieving high-value-added growth, characterised by capital-intensive production methods, advanced technology, and scientific research and development. Yet rather than increasing capital intensity, recent IMF statistics appear to show that the economies of the GCC are becoming less, not more, productive. Can government policy help Oman’s industry check this trend, and recover its lost productivity?

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Bonuses & Penalties According to IMF estimates, over the past decade the contribution of total factor productivity (TFP) – a measure of how efficiently capital and labour inputs are used in the production process – to economic growth has slumped across the GCC. Oman has proven no exception. Compared with the preceding decade (1990-99), the average contribution to non-oil growth of TFP in Oman fell from 1.8 points to -2.3 points in the period 2000-12. In effect, this means that during the 1990s productivity gains ensured that Omani investments in capital and labour (at 2.5 and 1.6 GDP percentage points, respectively) produced an added “bonus” of 1.7 points of GDP growth, making a total of 5.8% average annual GDP growth for the period. In the 2000s, however, that bonus turned into a penalty: investment in capital and labour of an estimated 4.8 points each should have led to average annual GDP growth of at least 9.6%; instead, the attained rate was only 7.3%. The gap – 2.3 points – is in effect negative TFP: an inefficiency in the allocation of labour and/or capital which prevented the full gains of investment from being realised. There are a number of possible explanations for this decline in productivity. For instance, economists have hypothesised that different developing economies may have varying“absorptive capacities” for technology transfer. At the point at which investment in additional labour or capital formation exceeds this absorptive capacity of an economy, such investment would not produce additional growth. The resulting“gap” would, by definition, represent a decline in TFP. With their substantial foreign currency earnings from oil and gas over the past decade, the economies of the GCC may simply have had 34 GSC YEARBOOK 2016

too much cash for their non-oil industries to efficiently absorb.

Labour Productivity The IMF, while acknowledging constraints on the absorption capacity of GCC states, nonetheless identifies the particular growth model pursued by those economies over the past decade as a probable explanation for falling productivity. In the IMF’s view,“Strong growth has There are been underpinned by the a number availability of relatively low-cost foreign labour.” of possible Indeed, in the 15 years explanations between 1999 and 2014 for this decline the private sector added more than 1m new jobs in productivity. for expatriate workers, For instance, with the figures rising economists from just under 475,000 in 1999 to 1.57m in 2014. have The total number of hypothesised Omanis working in the private sector, by contrast, that different stands at just under developing 200,000. economies may The IMF’s own calculations for labour have varying productivity over the “absorptive period 2000-13 place capacities” Oman in a relatively positive light in for technology comparison with other transfer GCC economies. By contrast to the UAE, where labour productivity has fallen by more than 4% year-on-year during that period, the decline in Oman has been only fractionally negative: an average fall of perhaps 0.1% per year, which is a positive sign for the sultanate. However, not only does this figure compare poorly with nonGCC oil economies (which have seen rises in labour productivity over the same period), it also suggests that almost all the decline in productivity in Oman has come from the inefficient allocation of capital. Rather than becoming more


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capital-intensive, the Omani economy has instead become less capitalintensive, which ultimately relates back to the issue of management skills.

An Issue Of Management In a recent study on productivity within Oman’s manufacturing sector,“poor management practices”were identified as the chief obstacle to productivity gains. The paper, jointly produced by academics at the University of Sharjah in the UAE and Sultan Qaboos University in Muscat, surveyed operations managers at 51 manufacturing enterprises in Oman, and asked them to rate the importance Omanisation has of 15 different obstacles been combined to productivity growth. since 2013 with When the researchers analysed the results, they an increased discovered that the most minimum wage common obstacles all for nationals of related to management failings. OR325 ($841). Moreover, the other Together, the two failings identified by the study were also two policies are related to poor personnel disincentivising management:“employee cheap expatriate job dissatisfaction” and “poor human resource labour and management practices.” encouraging Although these were less prominent than the businesses management failings, to invest in they nonetheless automation and consistently cropped up improved skills in industry responses. A similar recent study conducted in the construction sector involving a sample size of 138 resulted in similar conclusions:“lack of professionalism”and “incompetent supervisors”were ranked first and third, respectively, as factors holding back productivity – both higher than factors relating to capital, such as“shortage of materials” (fourth) and“contractor’s financial difficulties” (10th). When more detailed analysis was applied to the data, the researchers reached the same conclusions as the report on manufacturing: poor management was 36 GSC YEARBOOK 2016

the chief factor in common among the main obstacles.

Policy Response The question, then, is what can be done to reverse the process? In common with most GCC countries, the private sector wage differential in Oman between nationals and expatriates has become substantial, leading to segmentation in the labour market. This segmentation is not just between the private and public sectors, but also within the private sector, as Omani nationals must compete with expatriates who will in most cases take a lower salary. At the very bottom of the market this effectively excludes Omanis from a number of jobs, while an abundance of cheap labour may also result in the creation of fewer wellpaying jobs in the middle, as employers

have less incentive to automate and invest in skilled labour. Any effective response must therefore address not only the wage differential, but also the productivity-sapping effects of cheap labour, and the transitional impact of weaning industry off it. Three government policies in Oman are intended to help industry move in that direction. First, the sultanate’s Omanisation policy (which has been in place in some form since the 1980s) has been amended in recent years to encourage higher-value recruitment in middle management positions. Manufacturing industries are currently expected to reach a target of 35% Omanisation in their workforce, but a restructuring of the influential sectoral committees in 2010 (which introduced private


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sector involvement in the process) has allowed for greater flexibility in the implementation of the policy. Second, Omanisation has been combined since 2013 with an increased minimum wage for nationals of OR325 ($841). Together, the two policies are disincentivising cheap expatriate labour and encouraging businesses to invest in automation and improved skills. Finally, to offset any temporary loss of competitiveness while companies absorb these changes, the government has a number of policies in place which allow for a price preference of up to 10% for local content in tendering. “Having only expatriate labour is not a sustainable model; this is why industry must work closely with government to implement programs

which enable the sector in the short term and train Omanis for the long run,”Bjorn Skjelby, general manager of Jotun Paints, told OBG. The combination of these three policies is already helping both to improve productivity as well as integrate Omanis in the workforce. For example, Muscat Steel, which began operations in 2009, is currently close to the 35% target and employs locals extensively in midand high-level roles.

Need For Innovation Ultimately, however, there is a limit to what government policy alone can achieve. According to Gert Hoefman, CEO of Oman Cables Industry, there is also a need for Omani industry to innovate and take an active approach towards product diversification.“There is no choice for Omani companies but

to innovate to stay competitive in the future, especially outside of Oman,” he told OBG. According to Hoefman, Omani companies can distinguish themselves from the competition by investing in quality and diversifying their product portfolio. There are signs that manufacturing is on the right track. Labour market segmentation, for instance, is slowly beginning to decline, and there are calls to extend the minimum wage to expatriate workers – a move which would help further encourage management to improve the quality of manpower and invest in automation. Ultimately, however, it may be the declining oil price which proves the biggest spur to productivity: with less money to go around, industry will have to learn to make their cash go further. -www.oxfordbusinessgroup.com GSC YEARBOOK 2016 37


RHS Logistics- Everything Logistics

RHS Logistics, the 3pl division of the Rais Hassan Saadi Group was launched in 1998 and has cemented its status as an innovative market leader, with leading edge facilities in Dubai South, Jebel Ali Free Zone, Dubai Airport free Zone housing presently 106,000 pallet locations spanning in 162,000 sq:m plot size. Dubai South, a regional multi modal logistics platform, is the new and latest development of the UAE’s Logistics infrastructure, which houses the Al Maktoum International Airport, the Expo2020 site & the upcoming Dubai wholesale City. It is strategically located adjacent to the seaport and the free zone of Jebel Ali. These centers of excellence will enable customers to operate through all modes of transport, including sea, air and rail, linking with Dubai International Airport, Jebel Ali Port and Al Maktoum International Airport to the developing infrastructure of the nation’s capital Abu Dhabi. Richard Bell is the Managing Director of RHS Logistics and has been responsible for the development of the company since inception, Bell Comments.“For me there is no doubt that Dubai is the most dynamic location in the world right now to be a Logistics service provider.” RHS will continue to develop infrastructure that complements the evolving nature of the Logistics offering in Dubai. We would not be able to do this without the commitment of the officials in Dubai Free Zone Authorities, they are proving that private and public development can work hand in hand to achieve the vision of a world class logistics platform supported by sophisticated logistics infrastructure.” Facilities • TAPA-A certified , 5* (by Dubai Multi Commodity Centre, Dubai Government),

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software functional testing on products, kitting, bill of material based activities, barcode printing, RFID tag printing and RFID data identification. RHS Logistics holds the client in high regard and will always seek to understand current and future customer’s needs, requirements & will strive to exceed expectations. Services • Global Supply Chain Partnerships • Origin to Destination Consignment Management • Modern Inventory Management • First Class Warehousing Environment • State of the Art Warehouse Management Systems • Experienced, Well trained personnel Richard Bell, Managing Director of RHS Logistics

State of the art temperature controlled Warehouse in Jebel Ali Free Zone Capacity is 50,000 pallets on 50,000 sq. m plot. • State of the art temperature controlled Warehouse in Dubai Airport Free Zone Capacity is 7,000 pallets on 6,000 sq. m plot. • Dubai South Facility will have Capacity of 120,000 pallets on 106,000 sq. m plot. (phase 1- 32,000 pallet positions, Phase 2 - Bespoke built 17,000 pallet locations is presently operational) Industry Experience RHS Logistics business experience extends to various industry segments such as Electronics, Telecommunications products, Computing Products, Garments, Ambient Food, Packaging Materials, Pharmaceuticals and many more. Value Added Services that enhance the customer experience in RHS Logistics include

Information Systems Focus The logistics DC infrastructure is supported by sophisticated Information Systems. The systems are continually upgraded with the latest developments relative to the Logistics industry. RHS Logistics use Exceed 4000 from INFOR as the main WMS which is complemented by In-house developed reports and tools that enable efficient business data handling. Exceed 4000 is a highly regarded, world class system and when integrated with Radio Frequency (RF) terminals and Barcode technology provides a seamless and transparent information capture enabling the customer to have a live and accessible picture of their inventory.. RHS Logistics platform is a ‘Supply Chain Systems Integrator’. The platform integrates with complementary host systems to provide a comprehensive, secure, accurate Origin to Destination supply chain solution. This is achieved by Global standards of Electronic


ADVERTORIAL UNWIND

Vision:

‘To be the preferred third party distributor in the Gulf by offering reliable management control of the supply chain and by exceeding customer service requirements through value added services, full product care,accurate inventory control, timely delivery and the provision of comprehensive management information.’

Data Interchange ( EDI’s) between the systems. The EDI increases speed and efficiency of the transfer of business data between the systems. Having accurate data enables efficient Supply chain decisions as there is less reworking of transactions within the systems. Other system features are Single Platform Concept, B2B,B2C, Online Access 24x7,Customized website hosting for customers. Supplier Responsibility, Quality, Safety & Security RHS Logistics believes in responsible practices to safeguard the right and ethical working conditions of the staff, environment and expects all our suppliers to have highest commitment to our business code of conduct. Being an ISO 9001:2008 certified company RHS Logistics’ Quality policy ensures continual improvement on the processes with regular process audit and corrective actions. The upgrade towards ISO 9001:2015 is underway with more emphasise on Risk Assessment and Audits. RHS Logistics follows a strict QHSE(Quality Health Safety Environment) controlled and monitored by Internal policies and procedures and adhering to the Dubai Government Authorities. Being a BRC (British Retail Consortium) certified company, RHS Logistics is certified for ‘Storage of ambient food, packaging materials and consumer products’. The BRC Standards guarantee the standardisation of quality, safety and operational criteria and ensure that RHS Logistics provide protection for the customer products. RHS Logistics is TAPA-A certified and follows stringent security policy to ensure the best safeguard of the assets. The security infrastructure is well supported by CCTV cameras, with 24x7

surveillance by security agencies patrolling within the premises of the warehouse. Volumes RHS Logistics holds around 80,000 CBM of customer inventory that values to 200 million USD. The facilities handle around 50,000 CBM of inbound and outbound inventory transactions through the warehouse every month. There is movement in excess of 300,000 individual products through these warehouses from various industry segments. Additionally there is currently co-packing in excess of 2 million units per month and localisation of 500,000 units per month. Unique Selling Point RHS Logistics only focus on the provision of warehousing services, whilst ensuring that their resources, infrastructure and systems are best in class. RHS Logistics aim to provide the widest and highest quality range of valueadded services, in order to facilitate the clients’ ability to focus on their core business activities. Value Added Services RHS Logistics offers a full range of logistics and supply chain solutions that ensure highest level of customer satisfaction • Flexible and Customized solutions adapting unique customer requirements. • Coordination : Tracking , Monitoring , Scheduling ,MIS • Best of breed WMS : Flexible module blocks that can be customised as per need, flexible reporting • Storage and Handling : secure storage , product care, Inventory management • Configuration and Assembly : Product Technical specification changes, Market

specific localization ,Software upgrade • Kitting and Packing: In line Packaging , Co Packing , Labelling , InkJet printing • Order fulfilment: Receive & Process orders B2B , B2C , Pick Pieces • Returns Management: Reverse inventory flow , warranty management, perform product triage • Personalised Service. Dedicated Account Manager. • KPIs : Record and monitor time-based activities for Service and performance improvements Challenges When asked what his biggest challenge is, Richard Bell states. “Our biggest challenge not just as RHS Logistics but as industry practitioners is to change the way the purchasing of Logistics Services is predominantly made in the Middle East. The long term financial benefit an origin-to-destination service such as that we provide, supported by value-added services and comprehensive management information support is often not considered in the final analysis. Typically the decision is often based on tariff cost alone and there is not enough weight given to the value a“real”Logistics provider can give to the end user. There are quality Logistics providers out there, with real investment in technology and many have far more capabilities than their clients ask of them.” “We want to get the message out to potential purchasers of Logistics services that they can gain significant competitive advantage to their business operations by asking their Logistics service providers to “think out of the box”and go beyond the typical storage and retrieval activity.”

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OMAN

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OMAN

Stability attracts

investment and growth A ccording to preliminary Despite having figures produced by the different consumer Central Bank of Oman patterns and a less (CBO), the wholesale and developed domestic retail segments of the services sector contributed OR2.1bn ($5.4bn) to retail market than the Omani economy in 2014, equivalent to some of its GCC 6.6% of total GDP. This figure represented neighbours, the growth of 2% on 2013 figures, down from Omani retail sector the previous year’s 4%. The growth figure nonetheless continues is also less than half that for the economy as a whole, at 4.6%, or indeed the average to experience stable across the services sector of 13.1%. growth, attracting Regulation investment from Part of the explanation for the slowdown in local and regional retail growth may have to do with changes developers, as well as to the regulatory environment. Since 2011 interest from leading Oman’s retail sector has been subject to strict price controls, enforced by the Public global brands

Authority for Consumer Protection (PACP). The controls were motivated by a rapid increase in prices occasioned by the boom in commodity markets following the global downturn. As an oil exporter that imports many of its consumer goods, Oman is heavily exposed to such cycles, and the controls have had the positive effect for consumers of suppressing consumer price inflation (CPI) in recent years. Having peaked at around 4.5% in 2011, CPI has since fallen to 1.1% in 2013 and 1% in 2014. In recent years the government has attempted to overhaul the price control system established in 2011, and the situation currently remains in flux. A Cabinet decision in March 2014 attempted to limit the PACP’s responsibility to controlling the price for 23 essential products, including rice, flour, meat, fish and other staples. The price of


OMAN

other commodities not included in the list would thus be set by market forces. However, a royal decree issued shortly after stated that the implementation of the Cabinet decision would be delayed until a new Consumer Protection Law had been issued. In fact, three laws regulating the sector were passed later that year: a new Commercial Agencies Law, which came into effect in July 2014, significantly liberalised the Omani market, enabling foreign Indeed, Ghubrah principals to now act looks set to through multiple agents become the retail in Oman, or even sell directly to consumers. hub of Muscat, This was followed later with Muscat in the year by a new Grand Mall, a Consumer Protection Law, and Oman’s first 65,000-sq-metre Competition and Antidevelopment by Monopoly Law.

Consumer Growth

Tilal Development Company which opened its doors in 2012, also in the neighbourhood, and set to add an extra 100 retail units in a new expansion

A.T. Kearney, a management consultancy firm, estimates total retail sales in the sultanate currently stand at $11.9bn per year, with a compound annual growth rate of 7.6% since 2010. Recent growth in consumer spending has been boosted not only by price controls – which have arguably kept retail prices below the prevailing rate of inflation – but also wage increases. In July 2013 the government raised the minimum private sector wage for Omanis by 60% to OR325 ($841) per month, while CBO figures show that government spending on wages, salaries and allowances grew by 35.3% in 2014 to reach OR3.3bn ($8.5bn). The combination of the two factors has resulted in an increase in purchasing power for Omanis, which is in turn translating into rising consumer spending, though it is likely to also be squeezing retailers’ margins. 42 GSC YEARBOOK 2016

Companies are looking to increase productivity through new technologies. “There is also room for more e-commerce. Growth here is slow, but it is clear that mobility will be key when it takes off,”Satish Moorjani, CEO of Mustafa Sultan Group told OBG. Not all regulatory reforms have favoured an increase in consumption, however. Recent changes to bank regulations have lowered the ceiling on personal loans from a maximum of 40% of total bank credit to 35%. Partially as a result, car sales have fallen by an estimated 25-30% over the past 12 months, while consumer confidence also declined by 10 points in the final quarter of 2014 (the last period for which figures are available). Despite the fall, the absolute value of the index remained high, with two-thirds of the sultanate’s citizens believing their financial conditions will improve in 2015 and the future in general. Underlying these recent figures is more than a decade of strong growth in consumer purchasing power. According to figures released by the National Centre for Statistics and Information (NCSI) in early 2014, average household income had risen by 83.9% over an 11-year period, reaching an average of OR1172 ($3034) per month, and as high as OR1459 ($3777) in Muscat. The same figures show that average household spending hit OR930 ($2408) a month, with around 30% of spending going on food. According to Sridhar Moosapeta, CEO of the consumer products group at Khimji Ramdas, one of Oman’s oldest companies, local consumer habits remain quite different to those in neighbouring GCC countries, and particularly the UAE.“People in Oman are still somewhat diffident about indulging in malls,”he told OBG.“They are reluctant consumers, although habits are definitely changing. We’re finding though that malls are tending to become weekend destinations, while there isn’t much organic growth in the new hyper- and supermarkets. They seem to be cannibalising each other’s

market share.”As such, he sees more potential in what he describes as the“friendly neighbourhood store”segment, with Khimji Ramdas planning to launch nine such stores in partnership with Spar International by 2016.

Real Estate Muscat has seen rapid growth in capacity in recent years, although it remains a small market in comparison with the neighbouring UAE. A.T. Kearney’s annual Global Retail Development Index, which ranks the top 30 emerging markets for retail investment, placed Oman in 26th position in 2015. While concluding that the outlook for Oman remains“fairly positive”, the company nonetheless highlighted the comparatively slower pace of retail development as the reason for the fall. OBG estimates current gross leasable area (GLA) in airconditioned malls to stand at approximately 353,000 sq metres as of end-2015, with two new developments entering the market during the year. The Avenues Mall, a 105,000-sq-metre (80,000 sq metres of GLA) Lulu Group development located in the Ghubrah district, opened its doors to the public in May 2015, while Panorama Mall, a 21,000-sq-metre development by Allied Business Corporation, opened in late 2015 just a stone’s throw away. Indeed, Ghubrah looks set to become the retail hub of Muscat, with Muscat Grand Mall, a 65,000-sq-metre development by Tilal Development Company which opened its doors in 2012, also located in the neighbourhood, and set to add an extra 100 retail units in a new expansion. While experiencing less rapid growth than the neighbouring UAE and Qatar, Oman’s retail sector is attracting significant investment from both domestic and foreign investors. -www.oxfordbusinessgroup.com


QATAR

QAFCO adapts to a changing market

Located at the heart of a region that has seen double-digit growth in fertiliser production capacity in recent years, Qatar is now one of the international leaders in exports of these products, which remain vital to global food security.

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ccording to the figures from the Gulf Petrochemicals and Chemicals Association (GPCA), the GCC accounted for approximately onequarter of global urea trade by volume in 2013 and 12% of global ammonia trade, with 90% of the region’s output exported. Qatar accounts for a considerable slice of this industry. Its leading fertiliser manufacturer, Qatar Fertiliser Company (QAFCO), is“now the largest exporter of urea in the world, with a 15% share of total supply”, QAFCO’s chairman, Abdulaziz bin Ahmed Al Malki, told OBG. The long-term future is likely to see demand for QAFCO’s products continue to rise. International Fertiliser Association figures suggest a global population of 9.3bn by 2050, requiring a 60% increase in food production.

History QAFCO was founded in 1969 as a joint venture between the government and private shareholders, such as Norway’s Hydro, which had a 25% stake. The rationale was to develop a downstream industry for the local


QATAR

oil and gas sector – a sector that has grown considerably in size and range since. QAFCO is now 75% owned by Industries Qatar and 25% by Yara International, Hydro’s demerged fertiliser business and the world’s top producer of ammonia, nitrates and NPK (a blend of nitrogen, phosphorus and potassium). QAFCO’s first facility, QAFCO 1, began production in 1973, with five more trains being added in subsequent years. QAFCO 2 came on-line in 1979, followed by QAFCO 3 in 1997, QAFCO 4 in 2004, QAFCO 5 in 2011 and QAFCO 6 in 2012. Each train has two production units, one for ammonia and the other for urea, and all six have the capability built in to switch production from one product to the other, based on prevailing market conditions. According to company figures, total production capacity is 10,241 tonnes per day (tpd) of ammonia and 14,531 tpd of urea. Figures quoted by Reuters in October 2014 put total annual output at 5.6m tonnes of urea and 3.7m tonnes of ammonia, with the firm recording a

profit of around $1bn in 2013, despite volatility in international fertiliser prices. Its main export markets are South-east Asia, North America, Australasia and Southern Africa.

Suppliers QAFCO also has interests in a number of suppliers, including a stake in Gulf Formaldehyde Company (GFC), a joint venture with United Development Company, Qatar Industrial Manufacturing Company and asset management firm Amwal. GFC supplies urea formaldehyde, a vital ingredient in the production of urea. QAFCO sells via the combined Qatari petrochemicals, chemicals and fertilisers marketing company, Muntajat, to over 45 countries. Pricing remains an issue. Ammonia and urea headed in different directions in 2014, with urea prices falling and ammonia prices rising. The strong dollar – in which fertilisers are priced – may also impact global demand in 2015, along with generally lower agricultural prices and weakening growth.

Capacity to change There is also a surge in supply of ammonia and urea as new capacity comes online, with 30 ammonia projects and 25 urea projects moving forward in North America alone, according to agriculture industry publication Capital Press, leveraging on shale oil and gas. According to the GPCA, the GCC’s fertiliser capacity will pass the 66mtonnesper-annum mark by 2018, thanks to a number of large-scale projects in the pipeline. Given the circumstances, a rethink is under way. In October 2014 QAFCO announced that it would be switching more of its production to niche, environmentally friendly products, with the EU and other Western markets in mind. These would likely command lower volume but higher prices, offsetting some of the potential downside in mainstream sales. -www.oxfordbusinessgroup.com


QATAR

W

ith innovation and proposed projects extending all the way to the expansive Qatar Rail Development Programme (QDRP), a multibilliondollar effort comprising construction of a light rail transit (LRT) system in Lusail City, the Doha Metro, and a long-distance passenger and freight railway network, connected to the wider GCC railway via Saudi Arabia and Bahrain. In 2014 the government moved ahead with establishing a unique solar energy programme, to be integrated into the QRDP, with the potential to generate enough renewable energy to fuel a small power plant.

Qatar Solar Tchnologies

Railways running on

solar

Under the aegis of Qatar National Vision 2030 (QNV 2030), the government has pledged to generate 2% of energy needs via renewable sources by 2020

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Qatar Solar Technologies (QST ec), a joint venture between Qatar Solar, a subsidiary of Qatar Foundation for Education, Science and Community Development’s solar investment company, SolarWorld AG, and the Qatar Development Bank, was established to manufacture materials needed for a viable solar energy programme. The company has also worked with Qatar Electricity and Water Company to build an 8000-tonne-per-annum (tpa) polysilicon plant in Ras Laffan Industrial City, under a $1.1bn deal announced in May 2012. The facility is the state’s first solargrade polysilicon facility. According to reports from the company, its first silicon products, produced by the factory’s two polysilicon trains, were


QATAR

made available in December 2014. Polysilicon is a critical ingredient in photovoltaic (PV) panels, which convert sunlight directly into electricity, and a readily available domestic supply bodes well for Qatar’s future renewable energy plans. The facility is the With a total area of state’s first solar1.2m sq metres at its Ras Laffan site, enabling grade polysilicon long-term production facility. According to expand to 45,000 tpa, the company reports its to reports from the factory will eventually company, its first be able to integrate silicon products, downstream facilities produced by into its production line, manufacturing solar the factory’s ingots, wafers, cells and modules, and producing two polysilicon 6.5 GW of solar modules, trains, were or enough solar energy made available in to power a large city. December 2014 QST ec is now building a 150-MW solar module facility and 1.4-MW solar farm at its Ras Laffan site, with both due to start operations in 2015. One of the first projects slated to benefit from new supply of its solar technology will be the multibilliondollar QRDP.

Solar Railways In July 2014 QST ec signed a memorandum of understanding (MoU) with the Qatar Railways Company (Qatar Rail), to explore installing solar panels on the state’s rail network. Up to 80 MW of power could be generated if fully implemented, according to QST ec authorities, with the first stage of the agreement expected to study the feasibility of installing ground and roof-mounted PV panels on the proposed 3m-sq-metre rail depot facility, to be constructed near the new airport. “This is a long-term agreement that demonstrates the very essence of QNV 2030, and we look forward to working closely with Qatar Rail to develop sustainable solar energy solutions,” Khalid Al Hajri, chairman and CEO of QST ec, told local press. The MoU came after a lengthy feasibility study, with development of a solar project a key part of Qatar’s efforts to build one of the most energy-efficient

railways. The ultimate goal is a four-star rating on the Global Sustainability Assessment System (GSAS.) GSAS consists of six certification levels to measure a project’s environmental impact, lifespan and sustainability (see Construction chapter). A railway that obtains a cumulative final score below zero does not meet the baseline, and will be denied certification. Certification is achieved when the final score is greater than or equal to zero, with GSAS rail projects receiving a rating of between one and six stars. Criteria include wastewater load, energy delivery performance, water consumption, materials, support of the national economy and solid waste management. No timeline has been specified for the solar rail project, and officials did not say whether a working system would be installed prior to Lusail LRT’s launch in 2018, or the Doha Metro’s soft launch in 2019. -www.oxfordbusinessgroup.com


ADVERTORIAL

Almajdouie Logistics supports Yanbu 3 Desalination Project In mid 2014, Almajdouie Logistics transported an Evaporator weighing 5,736.8 tonNEs (gross weight during transportation), and believed to be the World’s heaviest, at the Yanbu 3 Desalination Project, Kingdom of Saudi Arabia.

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total of six Evaporators will be transported by Almajdouie Logistics; four Evaporators will be fabricated in Vietnam and shipped to the site jetty at Yanbu, where they will be rolled off the vessel and transported to the foundation by use of Self Propelled

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Modular Transporters (SPMT’s). A further two will be fabricated in modules locally by Bilfal Heavy Industries, and transported to site for assembly. On the vessel arrival Almajdouie Logistics were ready at the Yanbu site jetty with their transportation team,

along with 200 axle lines of SPMT’s and 6 Powerpacks, to execute the roll-off operation and to install the giant evaporator, with Dimensions (L x W x H) 137.9 m x 32.1 m x 11.4 m, to its final location at the SWCC site. After the berthing, custom clearance


and removal of seafastening procedures, a steel plate bridge was placed between the vessel and the jetty to facilitate the rollon of the SPMT’s, which were already fitted with temporary intermediate steel supports. After the jack-up of the Evaporator using the SPMT’s integral hydraulic system, the roll-off procedure over the steel plate bridge began in conjunction with the vessel ballasting to maintain the level of the barge to the jetty, with constant close coordination between the vessel and transport operations teams. Proper planning and safety are very important in such projects, with method statements, transportation drawings, stability calculations and coordination meetings beginning from several months before the actual operations began. The transportation route had been designed and prepared for loads of 10 tons per square meter up to the foundation, and once the Evaporator load was transferred onto the foundation, using the SPMT integral hydraulic system, another successful superheavy Evaporator transportation was completed, the latest of 30 Evaporators weighing more than 2,000 tons transported by Almajdouie Logistics in the last few years. Doosan Heavy Industries & Construction is to build the Yanbu Phase 3 Seawater Desalination Plant under a contract worth US$ 1 billion from the Saline Water Conversion Corporation of Saudi Arabia. The Yanbu 3 multistage flash (MSF) plant will be built 350 km north of Jeddah to supply fresh water to the industrial city of Yanbu and the nearby Medina region. The plant will deliver 550,000 m³/d of water, sufficient to meet daily requirements of 1.8 million people. GSC YEARBOOK 2016 49


KSA’s focus on non-oil growth The non-oil private sector is forecast to grow at more than 5% in 2015 and is expected to lead to economic expansion in three directions: vertically in industries drawing on the Kingdom’s hydrocarbons endowment; horizontally in industries that do not rely on oil; and spatially into areas of the country that have grown more slowly than the larger cities

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KINGDOM OF SAUDI ARABIA

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he opening of the $20bn Sadara petrochemicals plant in 2015 is the most prominent example of vertical expansion, along with major growth in refinery capacity in the Kingdom. The ongoing demand for health care and consumer products from a population set to pass 30m is partially responsible for driving horizontal potential. Spatial growth is being directed by the ongoing development of up to six economic cities, as well as industrial developments like the Waad Al Shammal mining complex.

Saudi Arabia’s 10th Development Plan, for the period 2015-19, emphasises the need to diversify the country’s economy and reduce its reliance on oil, which accounts for 90% of fiscal revenues and 80% of export revenues, and also highlights the need to provide livelihoods for future generations. Industrial enterprises that can add value to the Saudi economy in this way will find businesses in the Kingdom keen to engage in joint ventures, and will also be able to tap government funds and land to facilitate project development. The Saudi Arabian Company for Industrial Investment

was formed in 2014 with SR2bn ($533m) in capital and will invest SR7.5bn ($2bn) in the next five years in a programme targeting conversion industries that rely on non-oil manufactured products, including petrochemicals, plastics, fertilisers and steel. The company is a joint venture between Saudi Aramco, Saudi Basic Industries Corporation (SABIC) and the Public Investment Fund.

Growth Indicators The latest figures from the Central Department of Statistics and Information (CDSI) show growth of


KINGDOM OF SAUDI ARABIA

key industrial non-oil sectors, both year-on-year and in terms of overall contribution to GDP. Manufacturing other than oil refining grew from SR201.6bn ($53.7bn) in 2012 to SR215.9bn ($57.5bn) in 2013 at current prices, an increase of 7%. According It said it to preliminary data, this expected rose by an additional 8.7% to SR235.34bn ($62.72bn) non-oil in 2014. The mining and manufacturing quarrying sector, other than growth to slow oil, grew from SR9.4bn ($2.5bn) in 2012 to SR9.9bn in 2015 due to ($2.6bn) in 2013, an weaker global increase of 5.9%, and by a demand for further 6.2% to SR10.54bn petrochemicals ($2.81bn) in 2014, as per preliminary figures. The combined GDP contribution of mining and non-oil manufacturing rose from 7.6% in 2012 to 8.2% in 2013 and 8.7% in 2014. Khaled Juffali, chairman and 52 GSC YEARBOOK 2016

CEO of Khaled Juffali Company, told OBG,“The export market has a bright future in the Kingdom, especially in the manufacturing industry for products like automotive spare parts. Nonetheless, manufacturer’s priority is not exports as the local demand is relatively strong enough.” Jadwa Investment reports that overall non-oil private sector growth was 7% in 2013, and in January 2015 it predicted growth of 5.7% for 2014 and 5.3% for 2015. It said it expected nonoil manufacturing growth to slow in 2015 due to weaker global demand for petrochemicals. These predictions were borne out by CDSI figures comparing exports in January 2014 and January 2015. Exports of plastics fell 16.6% and exports of chemical industry products were down 12.6%, according to CDSI data. The balance of trade figures show that in 2013 the ratio of non-oil exports to imports was 23.6%.

Looking at Figures A discussion paper published by the IMF in March 2015 titled “Saudi Arabia: Tackling Emerging Economic Challenges to Sustain Growth” showed that 95% of all exports from Saudi Arabia were commodities for intermediate consumption, with only 4% of all exports being products for final consumption. Although exports of petrochemicals and refined petroleum products are still defined as commodities for immediate consumption, the expansion of these sectors signals Saudi Arabia’s determination to extract more value from its hydrocarbons. Jadwa estimates that Saudi Aramco’s two joint venture refineries – Yanbu Aramco Sinopec Refining (better known as YASREF) at Yanbu industrial city, and Saudi Aramco Total Refining and Petrochemical Company (better


KINGDOM OF SAUDI ARABIA

known as SATORP) in Jubail industrial city – will create 10% growth in the refinery sector, while the Sadara petrochemicals complex will have the capacity to produce 3m tonnes of products per year. Adel Al Ghassab, president of Zamil ChemPlast Holding Company, told OBG,“We are currently only converting 15-20% of the plastics resin produced in Saudi Arabia. Boosting this number would have a significant economic impact and create many new job opportunities.” Developing export potential will be key to growth across the industrial sector, as new sectors gain ground.“The most important sectors now are pharma or anything related to health, building materials and also food,”Abdulrahman Al Zamil, chairman of Riyadh Chamber of Commerce and Industry, told OBG. “However, if you build something

here you had better be prepared to export 20-30% of your products.” Saudi Arabia’s location and its reputation for stability are expected to support these efforts, according to Abdulhakim Al Mahdi, general manager of Arabian Medical Products Manufacturing Company (ENAYAH), which exports 40% of its products to Iraq and North Africa.“The strategic position of Saudi Arabia in the heart of the Middle East and in close proximity to Europe, Africa and Asia makes it a potential export hub for manufactured goods,”said Al Mahdi. Saudi products are also in demand throughout the region. Abdulghani Al Hammouri, CEO of Saudi Pipes System Company, told OBG,“When it comes to manufacturing and quality products, Saudi brands are very strong around the region. For instance, in Jordanian supermarkets, about 70% of products are from Saudi Arabia. The

Kingdom manufactures according to international standards.”

Labour Market Since 2011 the Ministry of Labour has introduced measures designed to tackle unemployment among Saudis and to increase the number of citizens working in the private sector. The most prominent of these schemes is the Nitaqat Saudiisation programme, which divides employers into different bands based on the proportion of Saudis on their payroll. Nitaqat uses financial incentives to encourage the employment of Saudis and financial penalties for businesses that fail to comply with their quotas. A Jadwa Investment analysis of Ministry of Labour figures comparing 2012 and 2013 showed the manufacturing sector’s Saudiisation rate increased from 13% to 19.3%. The number of Saudis employed in GSC YEARBOOK 2016 53


the construction sector grew by 34%, while non-Saudis rose by 14%. This was despite a high wage differential between expatriates and Saudi workers. In response to concerns raised by the Council of Saudi Chambers, the Ministry of Labour postposed the start of the third phase of the Nitaqat programme, which had been due to go into effect in April 2015. Had it been enacted, large business groups would have seen the Saudiisation rate raised from 29% to 66%. No date has yet been announced for its introduction. Muhammad Abu Samak, general manager of Arabian Tile, told OBG, “The biggest impact of the labour law changes have been on the profit margins of small and medium-sized businesses, which limits their ability to Saudi compete with regional and Arabia’s 10th international companies of Development the same industry.” Plan, for the Business leaders in Saudi Arabia back the period 2015aims of the labour reform 19, emphasises programmes, but have the need to had mixed experiences in terms of the impact of the diversify the reforms.“There is plenty country’s of money to develop a proper industrial sector economy that supports economic and reduce diversification,” Ibrahim Al Daghrir, general manager its reliance of Al Wafrah for Industry on oil, which and Development, a accounts for manufacturing, sales and 90% of fiscal distribution company for food products, told OBG. revenues and “However, the availability 80% of export of affordable, quality revenues manpower is a challenge given all the labour reforms.” For Selim Chidiac, CEO of jewellery manufacturer L’Azurde, recruitment, training and retention of young Saudis should be seen as an investment rather than a cost. He said L’Azurde employed 130 women in its factory.“Companies need to recognise the writing on the wall and embrace Saudiisation instead 54 GSC YEARBOOK 2016

of complaining and trying to fight it,” Chidiac told OBG. According to Al Zamil, joint ventures with international companies often have a good record of retaining the Saudi staff they hire.“Foreign joint ventures are the best employers because they understand that you can take a young educated man, give him insurance, other benefits and a secure job, and he will work well for you and stay with you,” he told OBG.

Minimum Wages In November 2014 the Saudi Gazette cited government sources in an article claiming a new private sector minimum wage would be introduced for Saudis and for expatriate workers after the third phase of Nitaqat was implemented. The report said the minimum wage for Saudis in the private sector would be SR5300 ($1412) a month, while the minimum wage for expatriate labour would be SR2500 ($666). Based on a four-week month and a 40-hour working week, the hourly minimum wage for Saudis in the private sector would be SR33.13 ($8.80) and the rate for expats would be SR15.6 ($4.20). At the time of press it is unclear how the postponement of the Nitaqat’s third phase will affect salary levels. From the perspective of the Saudi government, the introduction of a minimum wage in the private sector will send a strong message to young Saudis, who have traditionally preferred the better pay and conditions enjoyed by public sector workers. In 2013 the IMF reported the government had introduced a minimum wage for the public sector in 2011 of SR3000 ($799) and at the same time had introduced Hafiz stipend payments for jobseekers of SR2000 ($533) a month for a maximum period of a year. However, these reforms are only the beginning and the system will require tweaks in the near future. Aiman Al Masri, CEO of Middle East Specialised Cables Company, said,“Employees have benefitted from labour changes

through higher salaries and increased training programmes. However, the industry is facing a greater level of employee turnover and supplementary operating costs.”

Industrial Development As part of the government’s 10th Development Plan for 201519 there are ongoing efforts to diversify the economy spatially by building industrial developments around the country. By 2020 four new economic cities are due to be completed, with anticipated populations of 40,000, 80,000, 200,000 and 250,000 at Rabigh, Hail, Medina and Jazan, respectively. In addition, expansion is also taking place at Jubail on the east coast and Yanbu on the west coast. The Royal Commission of Jubail and Yanbu is responsible for administering the development of these two cities and is also developing a new industrial settlement at Ras Al Khair in the Eastern Province and a new mining-focused development at Waad Al Shammal near Turaif in the north of the country. These new developments offer opportunities in a variety of sectors. For example, the economic city at Jazan could include agribusiness and light industry. Mohammed Al Manea, CEO at the Jazan Development Company, told OBG,“Jazan offers excellent opportunities for agribusiness given its good climate and fertile soil. This can be complemented with light industry allowing companies to grow and package food products in the same area.” Attracting foreign players to the sector will be critical for growth. “The Kingdom needs to attract global corporates to help build the manufacturing sector. The vital catalyst will be to introduce the right subsidies in key industries to accomplish this,”Jameel Al Molhem, managing director of the Shaker Group, told OBG. Mohammed Alnamlah, the


KINGDOM OF SAUDI ARABIA

metallic minerals”has created the most factory units, reaching a total of 1304, according to SIDF figures. This sector has also received the second-highest level of SIDF funding over the 40-year period, with SR89bn ($23.7bn), or 10% of the total. It has also created the second-highest number of jobs, with 156,214 workers taken on during that time.“Funding is readily available for local industrial companies,”Alnamlah told OBG.“SIDF loans are fairly easy to get, and once you have been approved by the SIDF then getting a commercial loan from a bank is simple.”

New Opportunities

managing director of Amnest Group, a holding company primarily focused on the manufacture of building materials, believes the opportunities for foreign investment in Saudi Arabia are improving. “Overall, there are good regulations in place to support foreign companies looking to establish operations in the Kingdom,” Alnamlah told OBG.“However, obtaining visas, especially for females, remains an issue that needs to be addressed.”

Stimulating Growth Another key mechanism offering stimulus to investment in the Kingdom is the Saudi Industrial Development Fund (SIDF). The fund offers long-term, low-interest

loans to industrial projects, covering 50% of costs across the Kingdom and up to 75% in less developed regions. Since SIDF began issuing loans to Saudi businesses in 1974, the number of industrial units has increased from the initial 198 to 6471 in 2013. Capital invested by SIDF has risen from nearly SR12bn ($3.2bn) in 1974 to more than SR883bn ($235.3bn) in 2013, while the number of employees working for those enterprises has grown from 34,000 in 1974 to 843,000 in 2013. The sector that received the most financing from the fund between 1974 and 2013 was the chemicals industry with SR427bn ($113.8bn), representing 48% of the total. Food and beverage manufacturing has created the most jobs over that time, with 159,107, while the sector defined as“other non-

Ibrahim Behairi, CEO of Al Watania for Industries, a holding company with interests in the manufacture of construction materials, containers, foodstuffs and packaging, believes the investment climate is ideal for international companies looking for joint ventures.“International companies are looking to co-pack with local companies, which offers good opportunities for internationals to enter the market and local companies to gain more business,”Behairi told OBG. Majid Al Otaibi, the CEO of Takwa, a company with interests in spare parts, automotive and industrial equipment and industrial recycling, also believes that joint ventures can offer a chance for success through symbiosis.“There are significant opportunities for foreign companies to come to the Kingdom and partner with local companies,”said Al Otaibi.“International companies have the money and can help regulate the market by bringing in best practice procedures, while Saudi partners can provide local knowledge of the market.” When it comes to pursuing opportunities for horizontal diversification of the Saudi economy, away from industries fed by oil or natural gas, Al Otaibi believes lateral thinking about the nation’s other natural assets could provide some opportunities.“Saudi Arabia needs to focus its diversification efforts on areas where it has the greatest GSC YEARBOOK 2016 55


KINGDOM OF SAUDI ARABIA

advantages,”he told OBG.“For example, as there is a huge amount of sand in the Kingdom, we should dominate the world glass industry.”

Petrochemicals However, as SIDF investment figures for the last 40 years demonstrate, the abundance of hydrocarbons in the Kingdom has led to a proliferation of downstream petrochemicals businesses, the clearest example of what the 10th Development Plan refers to as“vertical diversification”. The natural gas that is allocated to producers at a subsidised price of SR2.81 ($0.75) per million British thermal units, the lowest price anywhere in the world, has been a significant part The latest of Saudi Arabia’s value proposition for foreign figures from investors. However, the the Central petrochemicals companies are not the only businesses Department of attracted by discount Statistics and feedstock, and as demand Information has grown pressure has (CDSI) show increased on national oil company Saudi Aramco’s growth of key supply. Businesses rely industrial nonon allocations of gas made by the Ministry of oil sectors, Petroleum and Mineral both year-onResources. According to year and in the Oil and Gas Journal, Saudi Arabia had a gas terms of overall processing capacity of contribution 11.8bn standard cu feet per day (scfd) in January 2014. to GDP Saudi Aramco’s Wasit gas processing plant, scheduled to be fully operational by mid-2015, will offer additional capacity of 2bn scfd. SABIC describes itself as the world’s second-largest diversified chemicals company and the biggest nonoil company in the Middle East. In 2013 the company employed 40,000 people worldwide and had global sales of SR189bn ($50.4bn). Saudi Aramco is also a significant producer of petrochemicals, and in 2015 its $20bn Sadara complex in Jubail Industrial City 56 GSC YEARBOOK 2016

II, a joint venture with Dow Chemicals, came on stream (see analysis). In March 2015 Saudi Aramco also announced it had secured financing to expand its Petro Rabigh facility, a joint venture with Sumitomo of Japan.

Plastics Petrochemicals production also presents opportunities for integration with valueadded segments.“The petrochemicals industry should be grown vertically through developments such as downstream industrial parks, so that rather than exporting commodities you can turn them into higher value-added finished products,”Ziad Al Labban, CEO of Sadara Chemical Company, told OBG.“This creates more value and, even more importantly, more jobs for our young population.” Plastics producer Rowad National Plastics Company makes polycarbonate, acrylic and several other types of sheets and geomembrane liners for the construction and media sectors. They also produce battery cases for the automotive industry and BOPP film for the packaging industry. One-quarter of the company’s sales are exports, with key markets including Italy, Greece, France, Poland, North Africa, Pakistan, India and Australia. In addition, it has ambitions to supply North and South America from a new SR800m ($213.2m) facility in Hail, set to start production in late 2015. “Downstream petrochemicals, especially plastics, is a very competitive sector due to the highly developed local industry,”Ossamah Elshebany, the company’s general manager, told OBG.“Plastics companies do not enjoy the same sort of low feedstock costs that upstream petrochemicals manufacturers do. However, they are still located close to petrochemicals production facilities, allowing for greater access and cheaper transport costs, which enables the industry to be slightly competitive internationally. However, there are significant challenges in the sector, with producers facing high prices and a

shortage of materials, largely due to petrochemicals companies selling overseas rather than the local market. Downstream producers have faced an environment where many firms must contend with a general lack of investment. As a result, businesses have banded together to press the government to enact legislation requiring petrochemical producers to sell more of their output locally. One businessman who has been central to these efforts is Ali Hassan Al Jameel, industrial sector CEO of Al Rajhi Holding. He said,“By requiring petrochemical companies to sell more of their products locally by imposing an export tax if they export more than 70% of their product, it will boost availability of materials and create competition, which will bring prices down to a point that will attract increased investment in downstream production. This will help to create more job opportunities and further diversify the economy.”

Automobiles Meanwhile, the auto sector has provided a new avenue for opportunities in the sector. Local producers may choose to concentrate their operations in southern regions such as Jazan, as facilities located there will be able to take advantage of a large Yemeni workforce and lower logistics costs – as well as having the additional benefit of providing stability to the border regions. With an initial focus on assembly, the industry may also look to securing government contracts and exporting to high growth areas in Africa, given its proximity to nearby markets. Local firm Takwa has been around for over 50 years in the manufacturing and industry sectors, with a focus on the production of auto and industrial parts and equipment, and is looking to rebuild and refurbish some of its factories,


KINGDOM OF SAUDI ARABIA

in line with wider trends. As Saudi industrialists begin to explore their options in the auto industry, foreign companies will likely find significant opportunities for partnerships with local firms that are looking to expand, while also helping to introduce best practices. METALS: Saudi Arabia’s steel production rose by 15% from 2013 to 2014, the second-highest increase in percentage terms in the world. Production was up from 5.5m tonnes to 6.3m tonnes, according to the World Steel Association, making the Kingdom the world’s 25th-largest steel producer. Monthly steel production for December 2014 showed Saudi Arabia produced 547,000 tonnes, up 7% from the same month in 2013, when it produced 509,000 tonnes. Steel production in the Middle East rose by 7.7% from 26.5m tonnes to 28.5m tonnes. Mahdi bin Nasser Al Qahtani, CEO of Al Rajhi Steel, told OBG,“The demand in steel is well-ensured by the ongoing mega projects, even though the industry is facing issues from imported materials.” SABIC is the biggest steel producer in the country, through its subsidiary Hadeed Saudi Iron and Steel Company. In 2013 it produced 5.9m tonnes globally, a rise of 5%. The company said in its 2013 annual report that it was investing $4.3bn in new manufacturing facilities in Saudi Arabia and that it was carrying out a feasibility study on iron ore reserves in Mauritania, which could give it access to 500m tonnes of iron ore. SABIC products include wire rod coils, steel billets, galvanised products and steel slabs. In April 2014 local press reported SABIC hoped to increase its global production to 10m tonnes by 2025 at new plants at Rabigh and Jubail. Steel consumption is largely fuelled by the construction sector, and Saudi steel business executives see growing demand driven by

construction projects large and small. “The current shortage of housing will be a big source of future revenue as the government and private developers look to fill this gap,”Hussain Al Nafisi, CEO of Absal Steel, told OBG. “Significant amounts of local steel will be consumed in these efforts. Over the next five to10 years we anticipate a boom, with lots of projects set to come on-line and additional expenditure on infrastructure upgrades expected.” However, in the short term Al Nafisi was concerned by the impact of cheap steel imports from China. With declining steel prices squeezing margins and putting pressure on smaller steel producers, there is some expectation that the government should provide more support for Saudi Arabia’s local manufacturers, such location and as new regulations for its reputation export of reinforced steel for stability and cement. Sharjeel Azhar, CEO of are expected Al Ittefaq Steel, told OBG, to support “Even though the steel industry is driven by mega these efforts, projects and infrastructure according to construction in the Abdulhakim Al Kingdom, we are still facing unfair competition, Mahdi, general volatile prices and manager oversupply.”Majed Al of Arabian Dawas, the acting CEO of Jubail Energy Services Medical Company, expressed Products similar sentiments. He Manufacturing told OBG,“Foreign competition is hurting the Company local industry, as many are coming in and selling (ENAYAH) below cost. The GCC needs to take collective action against this to protect local companies.”

Building Materials An example of new government rules supporting Saudi businesses can be seen in another area of the building supply industry.“The Ministry of Water and Electricity announced that all new houses will be required to have

thermal insulation. We are hoping that they will consider red bricks as a substitute to thermal insulation, as this would be a serious boon for local brick manufacturers given the amount of housing that will be built in the coming years,”Behairi told OBG, adding that the Kingdom’s brick companies were producing 2400 tonnes per day. Others agree. Khalid A Al Amoudi, CEO of Saudi Red Bricks, told OBG, “In the near future, we expect growth in the demand for insulated bricks within the construction market. Not only is this new product cost-effective during the construction phase, but it will also reduce the cost of electricity consumption as a result of improved insulation.”According to MEED, the value of projects either planned or under way rose by 13.7% in 2014 to reach $1bn. Jadwa Investment reports that new letters of credit for imports of building materials stood at $5.9bn for the year by November 2014. The cement sector is also poised to benefit from future home building schemes. According to the US Geological Survey, Saudi Arabia’s cement production growth was higher than anywhere else in the world, with output increasing by 10.5% from 57m tonnes in 2013 to 63m tonnes in 2014. This made Saudi Arabia the eighthlargest producer of cement in the world, overtaking the output in Japan and Turkey in 12 months. The 14 cement companies listed on the Saudi Stock Exchange saw sales grow by 3.8% in 2014 to reach SR13.5bn ($3.6bn), according to local media reports in March 2015. The National Committee for Cement Companies (NCCC) said demand for cement was expected to grow by 4% in 2015 to reach 59.5m tonnes. In the meantime, producers have built up a surplus.“Saudi cement is the only industry that keeps stocking, whereas in other countries companies will cut production,”Ali Al Qahtani, the managing director of Cement Services Industries, told OBG.“Companies keep producing because they want to be prepared for the inevitable construction GSC YEARBOOK 2016 57


KINGDOM OF SAUDI ARABIA

cycle upswing. The cement industry enjoys the privilege of low energy cost that has helped the industry to keep investing in high capital expansions to avoid an acute shortage of cement.” Access to foreign markets would also support suppliers, and the NCCC called for the lifting of a ban on cement exports.

Logistics A significant proportion of the infrastructure work taking place in the Kingdom in the next few years will revolve around improving transport links and building ports, roads, rail links and metro services. The GCC railway system is due to be complete in five years and will allow freight to travel In November across Saudi Arabia, with goods coming from the 2014 the Saudi West arriving at Saudi Gazette cited Arabia’s Red Sea ports, while container ships from government China and East Asia will sources in be able to dock in Oman an article to avoid using the Straits claiming a new of Hormuz. Work on the network is under way and private sector although the 2018 deadline minimum is not expected to be reached, some sections will wage would be up and running. be introduced The rail shipments are for Saudis and expected to take 13-14 hours from coast to coast for expatriate on the new network.“The workers after ships will save 10 days of sailing at a cost of $70,000- the third phase 80,000 a day, but while of Nitaqat was the expense is important, implemented so is the speed,”Al Zamil told OBG.“For this reason, logistics is an important area for the Saudi economy. We are starting to see global companies coming and investing in that sector in a big way.”This infrastructure focus will also benefit a varied range of manufacturers. Dionysius Metzemaekers, CEO of Saudi Cable Company, told OBG,“The demand for both high and extra-highvoltage cables is driven by all mega58 GSC YEARBOOK 2016

infrastructure projects in the Kingdom; a good example is the Makkah rail project. Indeed, as far as extra-highvoltage cables are concerned, I see this as an irreversible trend.”

Pharmaceuticals Saudi Arabia’s health care market was worth $24.7bn, according to World Health Organisation figures in 2011, and in 2014 Alpen Capital forecast a compound annual growth rate of 11.4% from 2014 to 2018, with a projected market value of $31.5bn by 2018. Serving this growing market is an expanding pharmaceuticals industry. According to CDSI data, there were 34 factories with a combined output of SR3.2bn ($852.8m) worth of pharmaceuticals in the Kingdom in 2013, with 9099 employees. SIDF data shows that 32 projects have received funding totalling SR2.96bn ($788.8m) since the fund was established. For example, Saudi Chemical Company’s sister firm, Aja Pharma, built a SR230m ($61.3m) factory in Hail. “Saudi Arabia has the potential to become a pharmaceuticals manufacturing hub in the near future,” Mohammad Al Badr, Saudi Chemical Company’s general manager, told OBG.“The industry won’t only supply the Kingdom, but will also sell products to the regional and even international markets.” International investors are keen to capitalise on these opportunities. After South Korea’s president, Park Geunhye, visited Saudi Arabia in February 2015, Korean media reported that three representatives of pharmaceuticals businesses there had been part of the delegation and were keen to invest in the Kingdom with the intention of building production facilities as a base to export to the Middle East. In November 2014 Saudi media reported that Indian businessman B.R. Shetty was planning to invest SR1bn ($266.5m) in a health care centre and Neo Pharma pharmaceuticals factory in Jazan. The report said the SIDF would provide 75% of the funding in soft loans to be paid back over 20 years.

Medical device and equipment manufacturers are also seeing growth in the national market and further afield. Abdulhakim Al Madhi, general manager of ENAYAH, said the Kingdom had earned a reputation for high-quality goods.“With hospitals shifting from reusable to disposable items, we are seeing significant growth in demand for locally produced consumables,” said Al Madhi.“Surrounding Arab countries see products made in Saudi Arabia as high-quality, desirable goods.”

Testing Times However, just as Saudi companies are looking outward to support growth, international players coming into the market are creating competition. According to Metab Al Saif, CEO of Motabaqah, a company that operates 15 testing laboratories, in the Kingdom, one of the biggest challenges it faces are that firms abroad are able to import goods with foreign Kitemark assurances. Compounding the issue of foreign competition in the segment, the Saudi Standards, Metrology and Quality Organisation both regulates the sector and also runs its own testing laboratories.“While the government is supporting the sector by licensing and allowing many private labs to operate in the field, further support is expected in the accreditation process and competition caused by having certain government bodies in the field,”Al Saif told OBG.“These government entities are expected to potentially adopt international standards recognised by international governing bodies such as [International Laboratory Accreditation Cooperation] ILAC. As such, the private sector is expecting the government to act as a regulator only, allowing the private sector to increase their capacity without competing with the government testing labs.”


KINGDOM OF SAUDI ARABIA

Light Industry The growth of Saudi Arabia’s population has enabled a range of lighter industries to cater to consumers’ needs. CDSI data for 2013 shows that the textiles and apparel industries employ about 15,000 and 13,000 people, respectively. The textiles industry is worth SR5.9bn ($1.6bn), while SR1bn ($266.5m) of apparel was produced in the Kingdom. Saudis are also producing goods for their homes, with SR14.7bn ($3.9bn) worth of electrical equipment manufactured by 34,500 workers in over 200 factories, and SR2.9bn ($772.9m) worth of computers and optical equipment produced by over 8000 workers in around 50 workshops. As more homes are built, there is also a growing demand for furnishings and interior

design; the furniture market was worth SR3.4bn ($906.1m) in 2013 and employed more than 25,000 staff in more than 300 factories. Abu Samak told OBG,“The demand is massive here so sales are not an issue. The real challenge is being able to keep up with consumption.” Two of the biggest light industrial sectors supply the country with food and drink. The food industry was worth SR46.5bn ($12.4bn), while beverages accounted for SR27bn ($7.2bn). The food industry employed 118,000 people in almost 700 factories, while 42,000 people worked in the drinks industry in 188 production plants. One of the most high-profile new entrants to the food sector was the confectionary firm Mars, which opened a new plant in Emaar, the Economic City at Rabigh, in December 2014.

Outlook The proliferation of industries serving Saudi Arabia’s 30m consumers shows it is a significant market, but the big hitters in the economy are still the heavy industries fuelled by hydrocarbons and their byproducts. The drop in oil prices may have reduced the advantage producers in the country have over foreign competitors, but those using natural gas are still paying a lower cost than those elsewhere. The determination to see more of the population working in the private sector, and the subsequent introduction of Nitaqat quotas and penalties, present short-term challenges for investors planning labour-intensive enterprises, but weigh up well when balanced against the advantages of cheap operating costs and a foothold in a stable and prosperous economy and regional hub. -www.oxfordbusinessgroup.com GSC YEARBOOK 2016 59


Advantage F&B

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UAE

The fast-moving consumer goods (FMCG) subsector has come in for special focus in recent times, with Dubai seeking to reduce its bills for imported food and beverages (F&B), while also growing its own business and employment opportunities – and by doing so, also tackling growing concerns about food security


UAE

Y

et expanding this local industry is a challenging task. Dubai is home to a wide variety of nationalities and F&B tastes, with much of these satisfied by imported items – a recent report into the F&B sector by Dubai Small and Medium-sized Enterprises (Dubai SME) suggested food sold in local outlets consisted of 75-80% imported, consumer-ready products. Major multinational companies (MNCs) have established large facilities in the free zones, mainly for export and re-export, Major but also to supply local multinational needs, often squeezing companies out local producers. At the same time, the (MNCs) have emirate lacks the kinds of established economies of scale and climate that would make large facilities a foray into mainstream in the free agriculture viable. zones, mainly Competition from nearby or neighbouring low-cost for export and processed food producers, re-export such as India and Saudi Arabia, also makes gaining a foothold in the mass F&B market in the emirate highly challenging.

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Benefits Yet Dubai does have a number of major advantages to leverage in growing its F&B sector. The emirate’s logistics and transport infrastructure is one of these, as it enables F&B firms in the emirate to turn around products rapidly and ship them quickly, with a global as well as local network already in place. This transportation infrastructure is also closely linked to the industrial zones, which are able to offer manufacturers a range of incentives and benefits. At the same time, Dubai also benefits from the Greater Arab Free Trade Area agreement, which provides Customs-free exports to 18 Arab countries – many of which, in the Gulf in particular, are also highly dependent on imports for processed FMCGs. “FMCGs in Dubai benefit from the fact that many of the UAE’s largest export markets have trade agreements, which helps keep transportation costs below 5% of the total cost of production,” Sudhir Chavan, managing director of London Dairy, in Dubai, told OBG.

Product Differentiation One way local firms can potentially secure a place is via the production of more high-value, niche products. The

local market is a sophisticated one, with F&B lines such as organic, health food and fortified food becoming increasingly popular. In addition, another area of increasing popularity is shariacompliant halal foods. In Dubai Industrial City (DIC), a 6m-sq-foot halal cluster was launched in 2014, hoping to capitalise on what the Dubai Chamber says was a $1.1trn industry, worldwide, in 2013. The Dubai Chamber’s expectation was for a 6.9% compound annual growth rate (CAGR) for the sector in the lead-up to a $1.6trn total by 2018. The chamber also reported that the UAE halal market alone was worth some $20bn in 2012, with packaged food likely to be worth Dh14.08bn ($3.8bn) by 2018. DIC has recently become one of the most active locations for F&B, too, while the traditional base has been at Al Quoz. JAFZA was also an early location, with the emirate’s F&B sector first beginning there with Mehran’s Pure Foods plant, back in the 1980s. By 2013, however, some 20 companies, covering over 3.5m sq feet of land were located at DIC in its F&B cluster, according to local press reports. This number was increased in early 2015, when boutique Lebanese chocolatier Patchi announced plans to build a 10, 000-kg-per-daycapacity factory there, highlighting an expanding niche area – Euromonitor International figures suggest the UAE’s confectionary market will expand from $289.6m in 2014 to $319.2m in 2015 – while also underscoring a shift to higher valueadded products. Indeed, with most of the MNC confectionary manufacturers in Dubai catering to the mass market, the growing number of niche-based concepts are developing a clear competitive advantage. Such outfits’ higher-value, niche products may therefore be the way ahead for the F&B segment – leaving the MNCs to cater to the emirate’s lower-value FMCG mass market. -www.oxfordbusinessgroup.com


Benefits galore at

industrial zones

Z

onesCorp has four industrial zones currently under operation, with three more in the pipeline. Its industrial zones are estimated to account for close to 50% of Abu Dhabi’s manufacturing GDP.

Strategy These zones, located south of Musaffah, on the mainland near Abu Dhabi Island, and in Al Ain, offer a range of advantages to the investor. The focus is on providing installed infrastructure and a streamlined investment process, cutting down the number of separate licensing processes from different government bodies, allowing ground to be broken and production to commence more quickly. While there are financial incentives, the government is keen to enhance other competitive advantages and ensure that the zones become centres of industries that have a strategic fit with Abu Dhabi’s long-term development goals and provide knock-on effects for the broader economy. ZonesCorp is aiming to follow models of best practice and avoid the“stopstart”development that has characterised some free zones

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Some of the emirate’s most attractive opportunities for industrial investment exist in the industrial zones established by the Higher Corporation for Specialised Economic Zones (known as ZonesCorp)

elsewhere in the region. While the zones are attracting international investors, ZonesCorp also aims to help support the development of small and medium-sized enterprises (SMEs). Through the cluster model, the organisation intends to encourage SMEs to set up downstream facilities, suppliers and service businesses around large manufacturers. This drive is garnering increasing support from financial institutions.

Competitive Advantages The zones have installed infrastructure, a cluster-based zoning system allowing industry integration and promoting synergies and economies of scale, as well as full government backing. Products manufactured in the zones can be exported free of Customs duties to the five other GCC states and members of the Greater Arab Free Trade Agreement, which includes countries in the Levant and North Africa. Machinery and raw materials can be imported free of duty, and capital and profit can be freely repatriated. Tax exemptions are also available. On the labour supply side, vocational training centres provide skilled workers and large residential cities offer employee accommodation. Employment procedures are streamlined via foreign labour services.

Success Stories The first zone, Industrial City of Abu Dhabi (ICAD) I, covers an area of 14 sq km. On top of infrastructure and utilities investments totalling Dh1.2bn ($326.6m), it has attracted industrial investment of Dh6bn ($1.6bn). Industries which ZonesCorp has focused on

attracting to ICAD I include textiles, food processing, engineering, chemicals, plastics, construction materials and high-tech businesses. The adjacent ICAD II has installed infrastructure worth Dh450m ($122.5m) in contracts over an area of 11 sq km. It focuses on sectors including chemicals, plastics, construction materials, and oil and gas services. The 12-sq-km ICAD III is under development through a publicprivate partnership, and the zone will focus on chemical compounds, construction materials and engineering industries. According to ZonesCorp, the industrial zone already seeing strong demand from local and international investors. The 10-sq-km Al Ain Industrial City, divided into zones I and II, is located 20 km west of the centre of Al Ain City. After infrastructure investments worth Dh125m ($34m), the zones have attracted investment volumes of Dh1.4bn ($381.1m) across their 300 industrial plots. Sectors of focus include light manufacturing and maintenance businesses, agricultural and food processing (as befits an agricultural area), chemicals and plastics, and technology. ICAD IV will occupy an area of 24 sq km, and will be dedicated to technology, light industry and logistics, as it lies both on the main motorway from Al Mafraq to Tarif, and the proposed freight railway connecting to the Etihad Railway, while ICAD V, on an 11-sq-km plot, will be dedicated to the automotive sector. -www.oxfordbusinessgroup.com


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MANAGEMENT

Automotive - inventory

It’s time for a new view on lean inventory, one that is sustainable and healthy – not size zero, but rather size “right”

L

ean has put inventories on extreme diets. While many supply chains have benefited from reduced flab, in others lean has gone too far. Like supermodels pursuing a false ideal of perfection, some companies have sought the unrealistic: minimal or even zero inventory. The concept of lean inventory took off in the automotive industry, where stable manufacturing capacity facilitates the use of techniques such as just-in-time from the inbound supply chain to the assembly

line. And what’s not to like about lean? After all, inventory is one of the seven sources of waste, and, as everyone knows, waste is bad. Right? But tell that to the car manufacturer that had to charter private jets to get material on time from one of its tier one suppliers. Further, from an endto-end perspective, automotive supply chains are often far from lean with large stocks of finished cars as a result of the disconnect between production volumes and consumer purchases. Or consider the high-tech sector. One company’s contract manufacturer had stretched its

make-to-order supply chain so taut that a disruption anywhere led to supply issues, and any planning error had a direct impact on customer service. This was driven by the philosophy that inventory should be reduced to zero. These all-too-common cases confirm our belief that inventory is not waste per se. Rather, excess inventory is waste. The question, then, is how much inventory is the right inventory?

Rightsized Inventory Accepting the idea of rightsized inventory rather than zero


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inventory changes the whole perspective: it is just as bad to be understocked as overstocked. And finding the right inventory level is a matter of balancing the trade-offs between planning accuracy, supply resilience, and the customer offer (see figure).

Planning accuracy The one sure thing about sales forecasts is that they will be wrong. So unless your customers are willing to wait longer than your total supply lead time, you will need buffer stock somewhere. This can be an issue for manufacturing resource planning systems, which because of their focus on the plan are notoriously inflexible – and particularly bad at accommodating make-to-order products. Higherperforming companies acknowledge that sales forecasts are at best a guide and therefore hold stock at strategic locations to absorb fluctuations in demand. 68 GSC YEARBOOK 2016

The key lesson is: use techniques such as postponement to aggregate demand and minimize volatility from poor planning accuracy.

Supply resilience Today’s long, complex supply chains are more vulnerable to disruption than in the past. The ability to withstand not just day-to-day fluctuations but even a prolonged breakdown is essential to business continuity. The United Kingdom narrowly averted a dramatic situation in late March 2013 when a key natural gas supply link from Belgium shut down unexpectedly, just when Britain’s gas stocks reached end-of-season lows and temperatures plummeted. Fortunately, Qatari tankers could be chartered at the last minute to resolve the problem. Achieving supply resilience can be more difficult than it seems. In 2011, a pharmaceutical company had selected needle suppliers across the

globe to minimize supply risks. What it didn’t realize, however, was that most of them bought their steel from plants in Japan, where a magnitude 9.0 earthquake and tsunami had knocked out suppliers’ electricity. The key lessons are: mitigate known risks where possible, and minimize the impacts through appropriate buffer inventory.

Customer offer The third dimension in the trade-off to rightsized inventory is the customer offer. Some customers, depending on their needs and the nature of the product, will be willing to accept longer lead times, while others will not. For example, car buyers who want a particular configuration may be prepared to wait for a model to be customized, but customers who are in a hurry will want to buy from dealer stocks and are probably willing to compromise on the specifications.


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means spare parts inventories must be located near the point of use. Conversely, parts to service less vital equipment can be stored remotely or even made to order. The key lesson is: use segmentation to avoid Accepting the under- or over-servicing idea of rightsized customers.

Assessing the Trade-Offs

Or consider service parts. When critical equipment fails, repairs must be made within hours, which

Few companies have resolved the trade-offs around planning accuracy, supply resiliency, and the customer offer. Even fewer have addressed the risks to supply chains from unexpected spikes in supply and demand. Determining the appropriate stock levels requires several moves: Minimize reliance on plans. The best companies configure their supply chains with buffers in inventory or capacity – or often both – to handle the inevitable deviations from forecasts.

F I G U RE Finding the right stock levels requires trade-offs

Source: A.T. Kearney analysis

inventory rather than zero inventory changes the whole perspective: it is just as bad to be understocked as overstocked. And finding the right inventory level is a matter of balancing the trade-offs

Look end to end. Supply chains have to be resilient enough to meet customer needs and handle unexpected demand. This is more about configuring the supply chain to be able to respond appropriately than it is about building resilience into each link in the chain. Although some industries such as retail need finished goods, in others inventory can be stored further back in the supply chain. Differentiate the offer. Most businesses supply a range of products to an array of heterogeneous customers. A one-size-fits-all offer over-services some products and customers and under-services others. By moving to a differentiated offer where, for example, standard products are supplied immediately from finished goods but special variants are supplied on longer lead times, a company can have both lower stock levels and more satisfied customers. Measure both overstocks and understocks. Instead of measuring overall stock turns, inventory dashboards should measure the stock balance: items understocked, items overstocked, and items in target range. The target ratios are not easy to define, but once they’ve been set, they can dramatically improve supply chain management. Pursuing rightsized inventory – neither too much nor too little – provides a new perspective on supply chains. Companies that adopt this approach find that their stocks are optimally balanced and their performance is transformed. Keeping track of the vital signs and avoiding extreme inventory diets is a must. There is a lesson to be learned from the size zero problem in fashion. Take steps to avoid size zero inventories before they lead to undernourished supply chains. -Wayne Brown, Principal and Lee Feander, Consultant at AT Kearney GSC YEARBOOK 2016 69


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Salaries outlook

2016

What can you expect this year? Will you get a pay raise, will you not? GSC Yearbook speaks to experts about the outlook for employment in the coming year

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ompanies and personnel were quite unprepared for the monumental slide in oil prices. Certain countries are suffering more than others, with geopolitics coming into play, and certain parts of the industry are making mass redundancies, which was predominately the service sector and drilling, projects are put on hold or cancelled, and the uncertainty of the Iranian impact on the regional and global markets is adding to the uncertainty.“So with all that

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going on caution was the back story to the salary survey,” says Gary Ward, Operations Director – Hays Oil & Gas – EMEA. “As with previous years, a lot of information We expect came back on the new openings benefits package that’s becoming more and more to arise less important to employees, frequently and and we’ve seen a year face a large on year increase in the number of employees amount of receiving benefits as part competition of an overall package,” from candidates he continues, adding, “Employers were again who will be cautious, but fairly keen to fill optimistic about head count away from drilling these positions. and oilfield service companies, with 31 per cent expecting a decrease and 32 per cent remaining

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static, the rest were looking at increases but less than previous years.” Employees were also cautious about sustained employment, and employees in the GCC were on average more optimistic than the rest of the world, it was found.“Personally, I feel the Oil and Gas industry will fare ok. It will obviously be leaner, which isn’t such a bad thing, and a lot of lessons are being learnt the hard way due to the downturn. But the GCC countries should come out of this stronger,”he states. In terms of future roles, it is difficult to predict which will come out on top. At the moment, in the GCC, disciplines focused on construction and or expansion of Refineries and Petro Chemical facilities are doing well. The future is almost impossible to predict though.“One knock-on effect of the global redundancies, which the industry agrees on, is that with the

thousands made redundant, we could face severe skill shortages in the coming years across wide parts of the industry,”he warns. James Newman, Senior Recruitment Consultant – Hays, talks about the situation in the facilities management industry.“Recruitment in the FM industry is challenging. The qualified and suitably experienced candidates are few and far between, and we have noticed that demand for project specific candidates is often high. Generally speaking, large service providers will have several interview stages before sending an offer to a candidate.” The first stage will include an HR/Recruitment screening, this is followed by an interview with the direct line manager, and the process usually closes with a client interview.“We have found that


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FM service providers often choose to invest in recruiting candidates with proven experience rather than spend on the training of less experienced candidates. This is particularly relevant in the current market, as we have seen that employees are unlikely to stay at the same company for longer than two or three years,”he adds. Due to global warming and pressures from government entities for buildings to become more ‘energy efficient’, there is expected to be an increase in demand for LEED qualified facilities managers in the coming years. These people are able to reduce the usage/ wastage of gas, water and electricity in the most cost-efficient ways. Coming to the logistics industry, Scott Wilson, Associate Business Manager – Hays, has this to say:

“We have seen the job market within the Logistics Industry to be relatively buoyant versus other industries in the GCC. We would not be surprised to see a fall within some areas of project logistics, given the turndown in the oil industry. However, the Middle East remains a key distribution hub connecting the east with the west. Our recent salary survey has found that 69 per cent of candidates (registered within Logistics / Supply Chain specialism) in the market are optimistic about opportunities inside and outside their current company heading into 2016.” The job market is expected to be more active at a junior to middle management level, particularly within the sales side. This is as a result of organisations continuing to search for new avenues to drive revenue growth, be that dealing with new industries/accounts or developing new trade lanes.

Hiring activity of senior management is likely to be more subdued than those more junior/ middle management positions mentioned above.“We expect new openings to arise less frequently and face a large amount of competition from candidates who will be keen to fill these positions. Finally, we believe that employers will focus on candidates with local/regional experience, which will potentially limit opportunities for those outside of the region. Furthermore, with the general market in an unsettled place, it is likely that when employers do recruit they will be looking for potential employees to tick 10/10 boxes. Job seekers should not be surprised if the process take slightly longer with more steps than they have been used to,” he concludes.

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ompanies in various sectors throughout Europe are investing heavily to digitalize their business models in general and their supply chain management (SCM) in particular. Take major logistics service providers such as DHL, which has announced that it will rely increasingly on big data to minimize risk, while trials it has conducted with employees using data glasses for picking processes have increased productivity by 25 percent. Logistics provider DB Schenker is investing in a digital mobility lab, and airlines with a strong cargo business, such as Lufthansa and Emirates, are expanding their paperless e-freight offering, which includes data cleaning for customers. Ocean carriers and forwarders, such as Kuehne + Nagel, use INTTRA’s ocean freight platform for e-payments, and global retailers Amazon and Alibaba have invested in robotics for goods handling, drones for deliveries, and new apps for optimizing own asset-light delivery services in cities. What can be observed with logistics service providers and retailers is also notable in manufacturing companies as they digitalize their SCM. Automaker BMW is working on achieving a fully digitalized factory and on a more dynamic, data analytics-driven supply-chain segmentation for inbound parts. Referring to the 15th International Trade Fair for Logistics, Mobility, IT and Supply Chain Management in Munich that ended in May 2015, head organizer Stefan Rummel told industry journal DVZ: “Where logistics people meet, they almost always talk about digitalization.”

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Digital Supply Chains Supply chain managers expect major improvements to result from high digital investments. Dr. Sven Rutkowsky, Principal; Ingo Petersen, Consultant and Felix Klötzke provide deeper insights

This seventh edition of A.T. Kearney’s European Excellence in Supply Chain Management study also focuses on digitalization. Conducted jointly with the Kühne Institute for Logistics Management at the German business school WHU–Otto Beisheim School of Management, it delves into the ways that digitalization in all of its formats impacts SCM, based on feedback from 60 industrial and commercial companies throughout Europe (see sidebar: About the Study). This report summarizes our findings and explores in detail what SCM digitalization means for business, how it affects investment in IT and analytics, and the areas where it will have the greatest benefit.


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Digital Technology Enablers and Their Business Implications Digital trends in SCM affect the overall business model From sensors and cloud services to nanotech and big data, a number of technologies drive digital trends. How fast these technologies advance in performance and cost will determine how quickly they bring about change in SCM. In figure 1 we identify and describe six big technology enablers that are digitalizing SCM. A.T. Kearney has observed a number of general digital business trends not only with direct effects on SCM, but also with much larger implications for manufacturing and retailing companies’ overall business models (see figure 2). Obviously, each industry and company will face different opportunities and challenges, even going so far as to completely question the current business model or product configuration. SCM will be central to wider digital transformation Supply chain managers who want to lead the transformation of their SCM into the digitalized age not only will identify the opportunities and challenges facing their own function, but will also consider the digital transformation of the entire company, its products and services, and the way suppliers, customers, and other market partners interact with their company. How SCM can contribute to the digitalization of the business model is as important as defining the digital transformation agenda of SCM itself (see figure 3). In terms of the key dimensions for digital supply chain management, we differentiate between digital planning, digital supply, digital manufacturing, and digital logistics. While this study largely focuses on

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F IG U R E 1

Digital enablers and select implications for supply chain management

Note: GPS is global positioning system‚ GSM is global system for mobile communications‚ SCM is supply chain management‚ UI is user interface‚ and CKD is completely knocked down. Source: A.T. Kearney analysis

digital logistics, all aspects of digital supply chains are taken into account. Key levers for digital SCM listed in figure 4 have been tested empirically as part of our study to establish what supply chain managers will focus on and what investments they will make in the next three years. The SCM function is not digitalizing in a vacuum. While some elements of digitalizing the SCM function are exclusively within the purview of the SCM departments, such as replacing paper freight documents with digital ones, the overall digital transformation of the business model can be thought of as a second dimension of digital outside of its control (see figure 5). SCM decision makers who clearly understand the dynamics in this dimension as well will be better able to address the challenges posed

in each dimension. The extent to which the SCM must transform itself will also depend on whether the company has entered the market with a digital business model from the beginning as a digital native, or has adopted it later on as a digital migrant.

Digital to Drive Heavy Investment in IT Integration and Big Data Over the Next Three Years IT systems integration remains the hottest topic – internally and externally European supply chain managers tell us that the key digitalization topic for their companies is SCM IT integration. This is where they anticipate the greatest impacts and


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F IG U R E 2

Select digital business trends and supply chain management implications

Note: SC is supply chain‚ and SCM is supply chain management. Source: A.T. Kearney analysis

where planned investments are highest. More than 80 percent of respondents expect the integration of IT systems and data within their group to offer significant, high, or very high potential for improvements to their SCM, and 77 percent anticipate the same from IT networking with partnering suppliers and customers in the

supply chain. A core finding of the study is not just that businesses expect IT integration internally and externally to deliver strong benefits in the next three years, but also that 70 percent of respondents intend to make considerable investments in internal IT integration (42 percent relevant investments and 28 percent

high investments) and 53 percent in external IT integration with supply chain partners (see figure 6). For many companies, IT integration remains a Herculean task. They still have large numbers of stovepipe solutions that do not interface or share data seamlessly with other systems. Arriving at and maintaining globally standardized supplier, material, and product data remains an equally big challenge. When a supply chain spans multiple countries and partners, new challenges arise whenever acquisitions are made or partners change. Jan Keller, group vice president for supply chain at ABB, states:“As a rule, our internal IT systems are managed locally. The objective has to be a unified product base that’s identical in every country.” In addition, some businesses remain cautious about IT integration with suppliers and customers. The potential benefits of streamlining their IT may be clear, but a number of respondents state that they lack a sufficiently trustful relationship with SCM partners to engage in more intensive data sharing. Alexander Moldenhauer, chief supply chain officer at Avanco GmbH, explains: “Many of our raw material suppliers have started downstream activities and turn into competitors, so sharing data calls for a special degree of trust.” Moving forward, the larger companies intend to invest more heavily in IT integration along the supply chain than the smaller companies. This is hardly surprising, given that they are in a better position to set standards within their supply chain and thus extend IT integration outside their own organization. Expected benefits are first and foremost substantially lower inventory levels and more flexible delivery times and batch sizes.

GSC YEARBOOK 2016 77


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F IG U R E 3 Demand forecasting and planning is focus for IT investments Digital trends are affecting all supply chain IT systems. This not only refers to general needs, such as seamless integration and interfacing within and across companies, but also includes real-time synchronization of data, global standardization of implemented work flows, and rising demands on cyber security. These trends challenge the core of supply chain IT system functionalities and features, requiring them to evolve to best support areas such as integrated, automated data gathering, tactical planning, procurement, and execution (see figure 7). Fifty-seven percent of surveyed supply chain managers plan to invest significantly in demand forecasting over the next three years (see figure 8). This is some 20 points higher than for other IT systems in SCM. For example, Fortaco, a Finnish production engineering company, has integrated a forecasting system into its enterprise resource planning (ERP) system which, Fortaco CEO Lars Hellberg explains, covers downstream customers and suppliers. Not all supply chain partners are tied into the system yet, but the company is one of just a few to have deployed a fully integrated solution of this kind. Under Nico Weidel, the management team member responsible for supply chain management at CHRIST, the company has developed its own forecasting system and integrated it into its existing ERP system.

Digital supply chain framework

Source: A.T. Kearney analysis

F IG U R E 4

Areas digitalization and supply chain management levers and challenges

Advanced big-data data analytics will be a hot topic in SCM Seventy-two percent of the surveyed companies say that big data is capable of delivering strong improvement effects in SCM over the next three years, as we saw earlier in figure 6. Companies making more than 80 Note: SCM is supply chain management‚ and GSM is global system for mobile communicatins. Source: A.T. Kearney analysis 78 GSC YEARBOOK 2016


Warehouse Management Software Efficiency. Transparency. Reliability.

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percent of their products to stock see significantly greater effects (20 percentage points) than companies making more than 80 percent of their products to order, underlining the high importance of big-data analytics for make-to-stock businesses. According to Manuel Galitschke, director of process management and operations at Cadenzza, one thing is clear:“There’s no shortage of data.” What he considers crucial is“picking out the important data, analyzing it, and incorporating it into the ongoing business.”And Franz-Peter Kayser, head of transport and replenishment at German retailer Tchibo, confirms: “The data is already there. It just needs to be utilized and evaluated appropriately.”For him, the principal goal with big data is to achieve the required transparency to expose process disruptions and enable changes to be implemented quickly. What supply chain managers expect more than anything through big-data analytics is substantial reductions in outbound inventory: Fifty-two percent of respondents see clear or even very clear effects here, versus 40 percent for inbound inventory. Forty-five percent expect improvements in optimization of batch sizes, and 43 percent expect to reduce SCM risk (see figure 9). However, several of the supply chain managers expect big data to also give rise to major challenges such as the need for culture change (as a consequence of putting faith in data without necessarily striving to understand causalities) and the creation of capabilities to network and evaluate the data effectively.

F IG U R E 5

Interdependence between digitalization of business model and supply chain management

Source: A.T. Kearney analysis

F IG U R E 6

Digital levers worth investing in for the supply chain

E-platforms, smart tagging, and 3D printing: Few companies confirm high SCM optimization potential during the next three years Just 40 percent of the surveyed companies currently use transport Note: SC is supply chain‚ SCM is supply chain management‚ and GSM is global system for mobile communicatins. Source: European A.T. Kearney/WHU Logistics Study 2015

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F IG U R E 7

Implications of digitalization on supply chain IT systems

Note: RFID is radiofrequency identification‚ and TMS is transport management system. Source: A.T. Kearney analysis

F IG U R E 8

Investment in IT systems

Source: European A.T. Kearney/WHU Logistics Study 2015

management systems and software to optimize their transport networks and routing. The picture is similar with respect to using software for electronic management of freight documents. In transport sourcing and routing, as well as in optimization of mode selection, considerable differences are evident between very large enterprises (such as those with revenues of more than €10 billion) and others. Among the former, the share of those expecting advantages from big data is almost twice as high. Only a third of respondents see potential to deliver significant efficiency gains in the three years ahead by attaching GSM or radio transmitters to products, packaging, or containers to improve tracking. Insufficient IT integration with other partners in the supply chain, directly or over a shared platform, and the lack of a clear business case for the investment are explanations. Torben Weilmünster, director of supply chain management for the pharmaceuticals and consumer division at Merz, acknowledges the advantages of radio-based tracking but adds:“Radio/ GSM tagging isn’t business-critical. The technology can’t generate higher sales as such. The ability to locate goods precisely at any given time does not yet offer anyone within the supply chain a sufficiently valuable information advantage to warrant the higher expense.” Although supply chain managers do not expect e-platforms to drive a marked shift in the purchase of logistics services toward direct carrier selection and transactions in the next few years (only 10 percent of respondents support this notion), 45 percent see e-platforms as becoming of high significance in the optimization of their supply chains.

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Only a small group of respondents expect to see appreciable improvements result from automation technology, in particular through greater use of robots or self-driving vehicles. Just 15 percent of supply chain managers expect 3D printing to deliver significant improvements in the near term, whereas more than half of respondents do not expect it to have any impact at all in the next three years. One of the respondents adds that 3D printing has not reached a level where it can replace traditional production techniques and lead to a whole new production setup, as the range of printable raw material is still quite limited. Considering all of these focus areas for digitally driven change and investments, what benefits do supply chain managers expect from digitalization?

F IG U R E 9

Expected effects of investing in big-data analytics in supply chain management

Note: SCM is supply chain management. Source: European A.T. Kearney/WHU Logistics Study 2015

F IG U R E 1 0

Impacts of digitalization on supply chain management

Digital Benefits: Strong Effects for Inventory Levels, Delivery Times, and SCM Flexibility Focused on cutting inventories and delivery times Forty-three percent of the companies expect digitalization to clearly lead to more just-in-time procurement and lower inbound inventories (see figure 10). Dr. Stefan Nöken, an executive board member at toolmaker Hilti, explains:“A fully integrated system provides visibility of inventory levels throughout the entire value chain and thus helps us to reduce inventory levels substantially.” SCM followers (the companies that self-report their supply chain performance as below average) see greater benefits of digitalization than SCM leaders (companies rating their supply chain performance as above average or clearly above average) in every dimension. The difference between perceptions is particularly large with regard to the potential effects of

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Note: JIT is just in time‚ and LTL is less than truckload. Source: European A.T. Kearney/WHU Logistics Study 2015

digitalization on inventory reduction (62 percent of followers versus 35 percent of leaders). Almost one-third of participating companies expect digitalization to lead to more decentralized warehousing in order to shorten delivery times. While around 40 percent of SCM leaders expect to see this effect, less than a quarter

of SCM followers do. Assessments differ widely between companies that generate more than 80 percent of revenue through direct sales to end customers and those that market most of their products through resellers: while in the former group only a few companies (18


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F IG U R E 1 1

Positive impacts of supply chain digitalization

Note: SCM is supply chain management. Source: European A.T. Kearney/WHU Logistics Study 2015

F IG U R E 1 2

Impacts of digitalization on employment in supply chain management

Note: SCM is supply chain management. Source: European A.T. Kearney/WHU Logistics Study 2015

percent) expect more decentralized warehousing, a majority (56 percent) of the latter group hold that expectation. Torben Weilmünster at Merz sees a trend toward inventory

centralization at his company: “Decentralized inventories are costly and, in Europe at least, not absolutely necessary. Here, we can get goods

to customers within 48 hours, no matter where they are.” More than a quarter of respondents expect to see a reduction in the number of stages in the selling chain through to the end customer. Interestingly, companies that generate 80 percent or more of their revenues through indirect sales channels are not more inclined than other companies to use digitalization to circumvent intermediate stages in the selling chain. Better SCM decisions, less risk, greater flexibility The study assigns the expected benefits for companies into the categories of“improving customer value”(which can translate into higher sales volume, higher prices, or higher customer bonding), “improving supply chain agility and reducing supply chain risk,”and “reducing supply chain costs.” Overall, supply chain managers see greater transparency and, thus, better SCM decisions as being the foremost benefit that the digital levers can deliver, and 65 percent of SCM leaders expect to see a clear or very strong benefit in terms of SCM flexibility from digitalization in the next three years (see figure 11). This comes as no surprise to one experienced supply chain manager in the mechanical engineering sector who took part in the survey:“The more transparent a supply chain, the greater the number of options that can be explored in the decision-making process. Today, few companies actually have the transparency to see how much vendors charge on various routes. I think there are sizable savings to be found here.” While 61 percent of companies that market their goods primarily through intermediaries see

GSC YEARBOOK 2016 83


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digitalization offering a clear benefit in terms of an increase in product and service quality, the same is only true of a third of companies that generate more than 80 percent of their revenues through selling directly to end customers. SCM departments expected to shrink as a result of digitalization While only one participating supply chain manager expects a revenue decline for his company when comparing 2017 with 2013, 23 percent expect overall SCM costs to go down during this period. And although one-third of participants expect their company’s revenues to grow by 10 to 25 percent during this period, less than half see an increase in SCM costs in the same range. Forty-three percent of supply chain managers polled expect digitalization to lead to a reduction in SCM headcount in the next three years (see figure 12). By contrast, only 15 percent expect the headcount to increase. The larger the company, the higher the expectation that staff will be cut: close to three-quarters of the companies with annual revenues of more than €1 billion anticipate making workforce reductions because of digital trends. Employees working in transport and logistics administration functions will be affected the most. In this segment, 47 percent of the companies expect cuts. The situation is similar in the customs and shipping processing functions. In contrast, strategic and tactical supply chain planning is becoming more important: it is the only area in which many companies are planning to increase headcount. As one respondent explains,“Many of the processes directly involved in SCM can be automated and greatly simplified. Parallel to this, strategic

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SCM activities will gain greater importance and play a key role in creating a competitive advantage.” No Revolution, but High Expectations for Continued Digital Supply Chain Evolution The study clearly shows that evolutionary changes will take place in select areas. Supply chain managers expect big benefits from continued digitalization in their supply chains. Namely, they expect greater transparency and flexibility, plus a reduction in inventories and delivery times, particularly through better integrated IT systems within

their own company, along their entire supply chain, and through bigdata analytics, which has climbed very high on the ranks of importance for supply chain managers. However, it seems no revolution is in sight for the digitalization of supply chains. Supply chain managers do not plan on transacting directly with carriers rather than using freight forwarders, and there are no major moves either to eliminate stages in the selling chain to the end customer or to significantly change batch sizes at each processing stage. Over the next three years, neither the self-declared SCM leaders nor the

SCM followers are planning to make significant changes to the number of logistics partners they work with. Three-dimensional printing, a potentially disruptive technology that could change supply chains entirely by printing parts at the point of need, is expected to only play a minor role until 2017. The pace for digitalization may increase significantly as crossindustry initiatives aim to better connect supply chains among companies to achieve next-level cost and delivery speed optimization. Linking customer data, sales forecasts, historic differences between plans and reality, and forward-looking SCM data can create much-improved supply chain planning. On the other hand, linking the transport and logistics procurement systems enabled for collaborative optimization with operational systems will be one of the tasks that go largely unsolved. Linking virtual production simulation to SCM simulation is another item that goes unchecked on many action lists. The degree of transformation for supply chains will depend on the industry sector and company, but we expect it to create significant productivity benefits overall, both within the next three years and beyond. We strongly believe that companies may achieve exponential gains by acting on some of the supply chain digital levers not presently judged as creating revolutionary change over the next three years. In manufacturing, many companies that make smart investments in disruptive supply chain configurations will be able to create a competitive advantage for the entire business model; 3D printing will be one of them. For the short term, laying the IT and data groundwork, this study shows, is the highest priority. -AT Kearney


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ADVERTORIAL

Spokesperson: Mr. Raman Kumar, Managing Director, Al-Futtaim Logistics

How has 2015 been for Al-Futtaim Logistics? The year 2015 has been a record year for Al-Futtaim Logistics. Our overall volume increased in comparison to last year. We expanded our client base in fashion and extended services to food and performance footwear sectors. As a result of operational excellence, the customer lead time has also been further improved and today, it is one of the best in the industry. This year has also seen the entry of AlFuttaim Logistics into new markets. The company ventured into green logistics, by using trucks with very low CO2 emissions in 2015. This year Al-Futtaim Logistics won a host of accolades, including the ‘Overall Compliance and Business Support” award by Dubai Trade and the” Supply Chain of the year 2015” award at the SCATA which is considered an industry benchmark. What were the key milestones during 2015? Al-Futtaim Logistics ventured into E-Commerce as well as Value Added delivery and assembly services by partnering

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with retailers who require deliveries to businesses and consumers. The company also started providing logistics solutions such as international trade documentation assistance, customs clearance, storage, value added activities, and distribution to the customers in the retail food segment. The supply chain model offered by Al-Futtaim Logistics enables both the principal and its franchiser to enter Middle East & Africa market faster added with cost effective solutions. In 2015, Al-Futtaim Logistics introduced a new concept in its delivery fleet by creating double container road trains which aim to reduce the firm’s carbon

footprint, while optimizing productivity and truck utilization. What changes or developments have you seen taking place in the logistics industry this year? Logistics companies are racing to innovate through technology to offer competitive customer delivery lead time. This involves the implementation of highly efficient technology that can automate the end to end operational processes starting from unloading to replenishment, minimizing the double handling of stock movements. This industry is more conscious about Corporate Social Responsibility. Today,


it is essential to incorporate eco-friendly methods to help in the reduction of CO2 emissions to the atmosphere. What Kind of impact do you foresee the oil price having on logistics in the region throughout 2016? As a result of the reduction in the price of oil globally, customers will expect a revision in the logistics cost, but in reality fuel is one of the contributors to logistics costs. Customers will most likely re-think their operating model. At Al-Futtaim Logistics, we enable this decision by providing customers multiple service options. We work with our customers closely based on market situation. What are you going to be focusing on in driving your business next year? We are looking to grow the business both vertically and horizontally. Next year will see our company venturing into chemical logistics.

In the Fashion Logistics sector, we aim to attract high and low end categories of fashion apparel as we are currently dealing with the mid-range fashion. With regards to footwear category, we handle performance footwear and we want to expand the offering to casual and official footwear. In the retail food logistics segment, we will focus on expanding the cold storage facilities for up to -30 degree C during 2016 and beyond. Is there anything else you would like to add? Al-Futtaim Logistics has come a long

way from servicing Al-Futtaim brands to extending its offerings to many clients outside Al-Futtaim. Our mission is to be the partner of choice, developing intelligent Supply Chain solutions and delivering the highest level of Service, Quality and Efficiency. We are very proud to be servicing more clients in the fashion, food, footwear, industrial, chemical, engineering, hi-tech, humanitarian and PMV sectors. We are providing logistics and supply chain solutions for new businesses who want to enter the UAE and Middle East & Africa markets by offering them fully integrated logistics solutions.

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Digital Lean:

The Next Stage

Traditional lean needs a turboboost from digital to manage rising complexity and increasingly linked value chains. COOs should start investing now in the people, tools, and capabilities that digital lean requires

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Digital Lean: Lean with a Digital Boost The operations panorama is changing like never before. Shorter product cycles, extreme market volatility, and shrinking margins are chronically straining supply chains and continually transforming distribution models. Manufacturing setups, in particular, have become more complex than many imagined possible. In the past, lean and Six Sigma techniques allowed manufacturers in nearly all industries to reduce waste and variability in their production processes and dramatically improve product quality and yield. In lean’s heyday, which

started with the pioneering work done at Toyota, its most skilled practitioners often achieved productivity increases of 10 to 15 points. Today, however, gains of just 2 or 3 percentage points are considered a major achievement.

Has lean run out of steam? Not yet. Lean is still the most powerful toolbox to optimize the shop floor. But traditional lean’s focus on shop-floor execution is too narrow for today’s complex, linked value chains and adaptable manufacturing environments.


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Over the past five years, digital production lines (with real-time information and optimization possibilities) and digital analytics have given rise to digital lean and, in so doing, opened up whole new areas of opportunity (see figure 1). Traditional lean, a continuous process improvement methodology driven by customer demand, centers on rooting out production inefficiencies, achieving error-proof processes, and engaging the entire production staff. Typical lean tools are single-minute exchange of die, value stream mapping, Five S, Kanban, Kaizen, and root cause analysis. Digital lean, in contrast, focuses on optimizing the entire manufacturing setup, for example, by changing work flows and by questioning process steps and their sequences. Some of the questions that digital lean answers include: How can material flows be optimized across every step of the value chain? What additional savings can be generated by making changes in the value chain – for example, by consolidating or separating certain steps? How can manufacturing systems be made more robust? Where do the highest failure rates occur? How can potential dependencies between failures be addressed? Digital lean – as the next stop on the journey toward the digital operations frontier (see sidebar: The Digital Operations Frontier) – lets companies repurpose old-fashioned hand tools into modern power tools to exhaustively test hypotheses, simulate scenarios, and calculate detailed costs without the risks of pilot tests or actual implementation. It does so by combining the analytical power and breadth of traditional lean with three new

F IG U R E 1

Digital lean boosts the power of traditional lean

Source: A.T. Kearney analysis

digital tools: 360º site simulation, holistic modeling, and advanced analytics (see figure 2).

360º site simulation Simulation tools conceptually digitize manufacturing and production processes, which can then be tinkered with in a digital“playground”to seek better-suited alternative setups. Simulation tools let companies test the robustness of potential solutions no matter how complex the systems. More specifically, they help identify flaws, calculate asset and resource capacities, optimize stock points, reduce throughput times, and balance production line utilization. The learnings and observations obtained in these risk-free digital simulations can then be incorporated into real-life production process flows. Typical 360º site simulation tools include workflow and shop-floor simulation, value chain process simulation, agent-based simulation, Monte Carlo simulation, and production plan simulation. Such tools

are often applied when designing a new production site or optimizing an existing one – for example, to model workflows, minimize handling times, avoid bottlenecks, and maximize asset utilization.

Holistic modeling Similarly to 360º site simulation, holistic modeling tools allow operations managers to observe and better understand process flows and to test production hypotheses. These tools work by applying iteration-based algorithms to solve highly complex problems and arrive at solid results. One way they do this is by dynamically modeling interdependencies and variances, measuring specific performance indicators at process interfaces to determine the most efficient overall design. Real-time modeling, process parameter modeling, value modeling, optimization solving, and financial modeling are among the most commonly used holistic modeling tools. Companies often employ these tools

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to define multi-echelon batch sizes, develop complex production plans, optimize the workflow among mixed product equipment, improve shopfloor flows, and increase overall equipment effectiveness.

F IG U R E 2

Digital lean radar

Advanced analytics Production line execution systems, sensors, and machine logs provide companies in many industries with reams of data on their manufacturing processes. Smart sensors (to detect, for example, vibrations, heat, and humidity) with wireless transmission functionality – often referred to as the Internet of Things – have already fallen in price to a few dollars apiece and will drop to just cents by the next decade. Not only are smart sensors inexpensive, but they are also simple to install across entire production lines, making it easy to track deviations and predict behaviors. And with data storage cheaper than ever, mass data can be warehoused in the cloud with no need to invest in fixed assets. Likewise, the computational power to run smart factories has increased exponentially and is available via web, allowing companies to perform complex analyses on demand. Yet most factories today are still far from being smart, as they use less than 5 percent of data to improve production. In most cases, data is simply dumped after each batch – or production lines aren’t even hooked up to manufacturing execution systems. Sophisticated statistical analyses and tools such as predictive analysis, big data and machine learning, data mining, data intelligence, and neural networks are starting to change how companies think about data by providing a better understanding of complex manufacturing processes and subsequent ways to improve them – for example, by identifying dependencies and detecting issues before they materialize. Moreover,

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Note: SMED is single-minute exchange of die Source: A.T. Kearney analysis

by taking a deep dive into historical data, operations managers can spot patterns and relationships among discrete process steps and inputs, and then optimize those with the greatest effect on yield. Leading firms have started to connect all their lines and systems, and they are massively storing all their data in the cloud for analysis. An entire industry for service-based data analysis is emerging, making the analytical work an affordable effort for operational excellence departments.

Rich Data, Rich Rewards The financial impact and return on investment of digital lean can be substantial:

Additional revenue. Digital lean reduces the challenges of manufacturing new products (for example, through additive manufacturing), mass-customizing existing ones, or increasing product quality. As a result, companies can open up new revenue streams or raise price points, without incurring the typically high costs of complexity. Lower cost of goods sold. Smart automation and smart robots make production less labor-intensive and drive down personnel costs. Companies applying the tools of digital lean also achieve higher yields that allow them to lower raw material consumption. Finally,


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F IG U R E 3

Digital lean requires capabilities to better connect manufacturing with business requirements

between production and quality control requirements on the one hand and lean material flows on the other. Thanks to digital lean, the company was able to double the project’s net present value, reduce the capital budget by 20 percent, and lower conversion costs by one-quarter.

Start Investing Now

Source: A.T. Kearney analysis

optimized batch sizes and better synchronized processes lead to higher asset utilization, while better control of production assets and quality result in fewer quality losses and write-offs. Reduced working capital. Thanks to improved coordination and flows within (and among) production steps, as well as the benefits of scenario-based forecasting and integrated operations planning, lean digital practitioners are able to lower their safety and cycle stocks to bring down the need to hold inventory. Lower capital expenditures. The superior overall equipment effectiveness enabled by digital lean more than offsets the required investments in new

controls, sensors, and analysis technology. The case of a large medical device manufacturer illustrates what we’re talking about. The company was planning a major new production site in Asia that would be much more efficient than those in its existing network. In designing the new plant, the company combined classic lean with digital simulation, holistic modeling, and advanced analytics to create a“virtual plant.”Using solver-based models, the planning team defined production parameters, determined the equipment and facilities needed to optimize capital expenditure and timing, and established the proper trade-offs

Digital lean offers much promise to manufacturers that are struggling to wring the last drops of efficiency out of an already trim yet highly interconnected production value chain. But the benefits digital lean promises will not come for free (see figure 3). Operations teams already have the tools of the trade for conventional shop-floor optimization: process knowledge, manufacturing knowledge, and mastery of traditional lean tools. To reap the digital lean bonus, COOs will need to invest decisively in capabilities in critical new areas: Business knowledge, hiring digital natives for their operational excellence areas with sufficient expertise to powerfully model financial, material, and information flows Digital tools, acquiring not just the tools themselves but also the talent needed to use them and effectively interpret (and apply) their output Data security, adopting and implementing solid cyber defense strategies to shield the business from major competitive and operational risks Digital lean is the next stop on the journey toward the digital operations frontier. The time to start investing is now. -Oliver Scheel, Partner; Sean T. Monahan, Partner; Oliver Eitelwein, Principal; Marco Koelbli, Consultant. AT Kearney

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M Overcoming supplier

“No other supplier can provide you the service that we do.” “Next year’s workload is 50 percent of our minimum sustaining rate and without more workload we will have to exit the business.” “Because you’re not ordering enough, costs are going to more than double next year.”

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ost defense acquisition and supply-chain professionals hear some version of these statements on a weekly, if not daily, basis. As overseas contingency operations wind down and sequestration becomes a yearly challenge, developing strategies to assist these suppliers is becoming ever more difficult for the acquisition community – especially the program manager. But in a time of constrained resources, which capabilities are truly important or critical and at risk? To each supplier, the answer and the remedy are immediately clear and justifiably self-serving – more work for their unique capabilities. Department of Defense (DoD) acquisition and sustainment executives increasingly find that, without a proactive industrial base mitigation strategy, their limited resources are quickly directed to the loudest voice, not the greatest risk. The traditional approach to mitigating critical industrial-base risks is to fund additional workload for the supplier. What is left unsaid is that the incremental workload normally fails to address the underlying cause and delays a right-sizing that is both necessary and unavoidable. Not only does it fail to address the root cause, it also compounds the problem by increasing inventory beyond sustainable levels which then prolongs the expected dip in demand and increases inventory obsolescence costs. Most acquisition

executives are rightly concerned that such an approach is at best a poor use of taxpayer dollars, and, at worst, fails to address the truly critical risks within the industrial base.

Assessing Risk From DoD’s Viewpoint A new approach is needed for maintaining a sustainable defense industrial base. Too often, the acquisition community, prime contractors and legislative entities assess risk from the supplier’s point of view – thus, scarce financial resources are normally committed to mitigating a firm’s unique risk.. An effective strategy that maintains the industrial base must proactively answer four fundamental questions: What capabilities are at risk? What capacity, if any, of that capability is required to meet DoD’s future needs? Who is ultimately responsible for mitigating that risk? What is the most cost-efficient way to mitigate that risk? Each of these questions requires the evaluation of risk primarily from the buyer’s (i.e. , the DoD’s) point of view, not that of the respective supplier. While challenges at individual suppliers may require risk-mitigation efforts led by the DoD program managers when the capability is sufficiently unique or critical, more often than not an individual supplier’s capability is


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replicated elsewhere in the industrial base. Rather than address these unique risks, DoD should use its limited financial and personnel resources to deal with the truly systemic risks with wide-ranging impacts to core or critical capabilities. These business choices may result in an individual firm exiting the defense sector or even going bankrupt. However, the loss of one supplier usually does not constitute systemic risk for the broader defense industrial base. In fact, after a multiyear surge of demand due to overseas contingency operations, opportunistic suppliers are expected to exit the industrial base as demand returns to historical norms. The traditional approach to buyer (DoD) interactions with the supply base focuses on buyer power versus supplier power that can seem, and often is, adversarial. In comparison, many corporations have adopted the best practice of assessing risk alongside suppliers for mutual benefit.

Two DoD program executive offices employed this approach through onsite facility assessments of more than 100 suppliers within their respective industrial bases. These assessments clearly identified the essential factors and scoring criteria that enable acquisition and sustainment executives to identify which suppliers possess truly critical capabilities and determine which of those are at greatest risk due to a number of factors.

Identifying Critical Capabilities

The traditional approach to mitigating critical industrial-base risks is to fund additional workload for the supplier. What is left unsaid is that the incremental workload normally fails to address the underlying cause and delays a right-sizing that is both necessary and unavoidable

Assessing supply-base capability is a daunting task for DoD acquisition and sustainment executives. In order to identify critical capabilities and risks to those capabilities within the supply base, a collaborative supply-base landscape assessment leverages data on each supplier’s capability, capacity and cost. The goal of the assessment is to determine how unique the supplier is in the broader market, how important the supplier is to DoD, and how difficult it is to move or integrate the capabilities into a new supplier. To accomplish this, the landscape uses 10 dimensions

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of capability, capacity and cost to assess each supplier. Each of the dimensions measures discrete elements and, taken together, provide an accurate picture of the supplier’s criticality. For example, the capability assessment focuses on four main elements: market availability, intellectual property, interconnectivity, and importance. These dimensions measure the relative importance of the buyer to the supplier (supplier point of view) and contrast that with the importance of the supplier to the buyer (buyer point of view). All four elements of capability influence the buyer’s point of view, but only one impacts the supplier’s point of view.

Pinpointing the Risks Once the evaluation of a supply base is completed, defense buyers not only can create a comprehensive picture of capabilities but also can determine where resources should be dedicated to mitigate the risk of losing those capabilities. The supply-base landscape ultimately is used to evaluate two key characteristics: a supplier’s elasticity and the buyer’s mobility. Supplier elasticity measures the impact to a supplier’s cost structure from varying demand profiles while maintaining overall lead time and product quality requirements. Mobility considers the relative ease of moving manufacturing capability from one supplier to another while considering the importance of the capability, how many programs are affected, and the ability to overcome any intellectual property-related obstacles. Taken together, these two viewpoints result in the Supply Base Landscape and identify which suppliers and capabilities are critical and/or represent a systematic risk to the buyer. The supply-base landscape identifies a simple yet often

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overlooked attribute of any supply base – the strong correlation between product cost elasticity and mobility. Suppliers with unique capabilities that lower the assessor’s mobility generally have lower elasticity – i.e., their cost structure and associated pricing respond substantially to changes in demand. The more specialized and highly engineered the product, the likelier it is that the supplier’s business is both inflexible to cost and driven by only a few core buyers. With this mutual dependence in mind, suppliers with relationships that are the most closely correlated with the assessor’s needs should

fall within a narrow corridor in the supplier risk landscape. This corridor is called the Complexity of Operations Relational Expectancy (COREdor). Suppliers that fall within the COREdor are performing as expected given their relative elasticity and mobility. Suppliers that fall beneath the COREdor are more elastic than expectations, given the relative mobility from the buyer’s point of view. These suppliers often embody the best practices that should be extended to the rest of the supply base: Suppliers that fall below the COREdor generally employed


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indicate. Generally, suppliers are lagging due to business decisions that drive unsustainable cost structures. The assessment found that the risk was most often the result of: Aggressive capital investment to meet short-term demand Failure to adjust facility sizes and cost structure to expected demand And an undiversified business model By increasing the proportion of fixed cost to overall cost, these suppliers left themselves poorly positioned to handle the inevitable variability in demand. Even with these challenges, some suppliers with commercially attractive capabilities have not sought new sources of revenue However, beyond the DoD.

Addressing the Risks

one or more of the best practices: They are able to leverage a commercial business with strong synergies to their military business. They deliver products or services with a high level of commonality with other DoD programs. Or they outsource work and minimize capital expenditures when adding capacity to meet temporary surges in production demand. Conversely, suppliers above the COREdor are more inelastic than the mobility measurement would

the loss of one supplier usually does not constitute systemic risk for the broader defense industrial base

Once critical manufacturing capabilities are identified and critical risks assessed, targeted risk mitigation actions should be taken to address those capabilities in jeopardy. Previous experiences with supplybase assessments reveal that roughly half of riskmitigating activities depend on supplier-led changes rather programoffice-initiated actions. Furthermore, only 45 percent of risk mitigating activities require investment from the program. In fact, the majority of mitigation activities can and should be managed directly by the supplier and require little attention from the program manager beyond periodic status updates.

Conclusion The future of the DoD industrial base is at a critical juncture. These suppliers have been instrumental

in delivering and maintaining required warfighting equipment. With a top-line budget that over time either is flat or declining in real terms, the DoD’s main weapon for meeting fiscal requirements will remain painful cuts to its Other Procurement and Research Development Test and Evaluation accounts. Failure to reverse this trend will jeopardize the ability to sustain an industrial base that leads the world and that can modernize future forces. Looking to the future and an expected environment of reduced budgets and aging facilities, the DoD must make some hard choices, much as the private sector has done in past downturns. Only by carefully assessing the critical aspects of capability, capacity and cost can a meaningful analysis be done to develop a robust supply chain strategy to sustain and modernize the industrial base so that it can satisfy future warfighter requirements. -The authors can be contacted through Konajilo.Barrasso@ atkearney.com. Jeff Sorenson is a partner, Kevin Krot a principal, and Jason Krajcovic and Andrew Webb are managers at the global management consultancy A.T. Kearney in Arlington, Virginia.

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Changing the landscape Dr John Gattorna, Executive Chairman of a Sydney-based specialist advisory business, Gattorna Alignment Pty Ltd, talks to GSC Yearbook about the future of technology and supply chain management

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W

e have come a long way since 1965, when attempts were first made to make supply chains a management discipline. Things have moved from a narrow operational view of a company’s operations, to a truly end-to-end view, from customer to supplier, and back again. And, in the last few years, we are starting to talk about ‘networks’ at both end rather than linear chains. “In order to be on top of the game, you have to start by segmenting

your customers. But not any old segmentation.You need to use behavioural segmentation techniques, which highlight the different groups of customers out there who want to buy your product or service, in different ways. Once you have mapped the marketplace, everything follows, using this as the point of reference,”advises Dr John Gattorna, Executive Chairman of a Sydneybased specialist advisory business, Gattorna Alignment Pty Ltd. Coming to the current scenario, falling oil prices may not be good


for the suppliers, but it is good for users, be they consumers or companies such as those in the transportation business, like airlines, 3PLs, etc, as they will be able to make money under these new conditions.“Unexpected, disruptive events will surely happen, either man-made or through natural causes. For this reason, you need to reserve capacity to allow you to respond in such times,”he says.

This can be done in two ways: 1. Build capacity in your own system through additional inventory, machine and storage capacity - the only problem with this is that it is costly. 2. Build alliances with selected suppliers to help you with short-term capacity needs as required. Globalisation has generally reduced production points and supplier points, but with this apparent efficiency comes

longer lead-times and less agility. Which is not good if you are serving fast changing domestic markets. “Sustainability in supply chains simply means eradicating over and under-servicing. Apply ‘alignment’ principles by understanding your customers much better, and starting by segmenting your customer base into the four or five major groupings of buyer behaviour. Once this is achieved,

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sustainability will follow more easily as you give customers just what they want and are prepared to pay for, no more or no less,” he states. Talking about inventory, the company’s entire network of facilities have to be re-appraised, and re-configured for the new, more demanding customer, including those who buy online.“Taking cost out of the logistics component of the business is important, and this starts with rationalising facilities. Next, you must look at

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the inventory profile in each facility for the purpose of serving the local catchment of customers, some of which will be online customers,” shrugs Gattorna. In order to develop a successful supply chain model, Gattorna advises to first start with a new concept, or ‘theory of the Firm’, TOP-DOWN, rather than simply try to keep improving operations, BOTTOM-UP.“There is a finite limit to the latter approach. 3PLs and corporates have to recognise what

they are dealing with here, ie, that logistics networks, and their wider supply chain networks of which they are part, taken in aggregate, are in effect the essence of business itself, not some appendage or neutral facilitator,”he explains. Start with a deep understanding of customers, segment along buying behaviour lines, and let this inform as you reverse engineer back inside the Firm - for example, processes, organisation design, technology, etc. “What is currently missing is such a


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scheme, and it is exactly that I have been working on for the last 25 years. I call my model, dynamic alignment. Several global FMCG, EHT, and industrial companies are applying this model with significant operational and financial success,”he smiles. Complexity is the big enemy of our time, and the paradox is that the conventional wisdom being applied in many companies is making things worse. Blind application of ‘common processes’, ERP systems, lean principles, Six

Sigma, market research surveys (especially NPS),etc, just makes things worse, because they are largely guesswork.“The only way to systematically reduce complexity is to start from the outside, reinterpret the market, use common metrics, understand exactly where the mis-alignments are, and focus on these as a matter of priority,” he adds. Once we get away from a ‘onesize-fits-all’ mindset, and embrace a multiple supply chain mindset,

it becomes very clear exactly where and how to implement ‘sustainability’ initiatives, for example, where relationships are important to customers, sustainable operations are required, and customers are prepared to pay any premiums necessary. In straight ‘transactional’ operations, where customers are looking for lowest cost every time, sustainability is a little trickier.“And in supply chains where there is a sudden un-plannable interruption, we

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Dr John Gattorna

Dr John Gattorna has spent a lifetime working in and around enterprise supply chains, in many different capacities – line executive, researcher, consultant/adviser, teacher, mentor and author. He is passionate about the subject – some might say obsessive. In the late 1980s, he became disenchanted with the lack of conceptual depth in the ‘logistics’ field. So he started to search for a new model/framework that would better inform the design and operation of enterprise supply chains, seeking to satisfy customers and consumers, at the appropriate cost-to-serve. And he found it in dynamic alignment. For the last two decades, Gattorna John has been working with major blue chip corporations around the world to take his new model from the conceptual stage to a finer level of granularity - companies such as Dell; Unilever; Teys Australia; and Schneider Electric. The unique quality about Gattorna’s perspective is that he presents a multidisciplinary whole-of-business approach to the design and management of enterprise supply chains, and this requires an eclectic mindset. He has written several books along the way as his thinking has evolved, but his three most recent titles have been seminal: Living Supply Chains (FT Prentice Hall, Harlow, 2006); Dynamic Supply Chain Alignment, Gower Publishing, Farnham, 2009); and Dynamic Supply Chains (FT Prentice Hall, Harlow, 2010). His hope is that his work and writings will inspire others who follow in his footsteps. Gattorna is Executive Chairman of a Sydneybased specialist advisory business, Gattorna Alignment Pty Ltd, and he collaborates with a large community of supply chain enthusiasts, worldwide. He is now one of the most respected supply chain ‘thought leaders’ in the world.

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are looking for a fast recovery, so sustainability is not necessarily on top of the mind, like in an earthquake or tsunami,”he says. Arguing about the efficiency of 3PL over 4PL, Gattorna believes it all depends on scale, and how far you can drive unit costs down the ‘Experience Curve’.“3PLs can aggregate volume to a certain extent, and this is reflected in their rate structure. But shippers don’t always get much of a share of these economies for the business they tip into the pool. The idea of a 4PL is to aggregate the volume from the combined business of three or four partners equity partners, build a ‘Control Tower’, and then closely manage selected 3PLS, benefiting from the economies of scale while using the 3PLs’ assets to do all the hard work,”he explains. But the theory seldom becomes a reality, mostly because of the design of the 4PLs. For example, if you design a 4PL and tie all parties together in a contractual (rather than consortium) sense, what you have in effect is a ‘super’ 3PL. And the scenario that ensues is just more of the same.“We have seen examples of this in the UAE Oil & Gas industry. Companies have not been prepared to ‘fully innovate’, and yet, that is exactly what the UAE needs to do to close perceived gaps in performance, and go to the next level on the performance curve,”he adds. Academia has an important contribution to make when designing effective supply chain operations, but teachers must foster research among students and keep up-to-date syllabi.“Even then, their disadvantage is that teachers seldom have access to real world cases. I think consultants have a better chance to observe what is going on at first hand, and to translate the lessons learned into new and advanced practices. The emphasis by such companies as Accenture on supply chain ‘thought

leadership’ is typical; of what I mean- they have the resources, but academics rarely do,”muses Gattorna. “All my learnings over the last 25 years have come from using companies as my laboratory, observing empirical behaviour, looking for patterns, and then forming theories in reverse, from ‘practice to theory’. My book, Dynamic Supply Chains [FT Prentice Hall, Harlow, 2010] is a good example of this process, and my next book in 2015 will take this process to a new level,”he adds. Gattorna predicts that BRIC countries will be at the centre of future developments in the supply chain, but on different time-lines. Brazil is struggling right now; similarly Russia; India is very slow to get decisions, but it’s IT has progressed well ahead of its physical infrastructure. China is the opposite to India. South East Asia is very promising because countries like Singapore, Indonesia, Malaysia, and Thailand are much more used to embracing innovation and the change it brings. And of course


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they are powered by growth and progressive governments, and will do well despite local political issues. “In order for countries to develop rapidly in the future, they have to embrace a ‘supply chain mindset’, which means understanding that supply chains run through enterprises and the economy like the central nervous system in the human

body. Everything is connected, so we are really talking about embracing the idea of networks of supply chains, and beyond that, networks of networks. A great example of this type of foresight is the 2013 agreement between Emirates and Qantas. Each now has the ability to tap into each other’s network, for mutual benefit. Learning to

work this way with competitors, when it is necessary, is a sign of the future things to come, despite the efforts of competition authorities in various countries. The world will become borderless, supply chains in networks will dominate, and we are seeing the birth of a new republic; ‘the Independent Republic of the Supply Chain,”he concludes.

Dynamic Supply Chains: How to design, build and manage people-centric value networks Hard copy published May 15, 2015 This book is the culmination of my 40-year [1975-2015] journey of discovery through the maze of logistics and supply chain networks that pervade our lives, day-to-day. Without them we could not survive. But then again, a lot has changed in the last four decades, and supply chain networks today are very different to those of yesteryear,

and operate under much more pressure to perform. The defining difference is the much higher degree of volatility in the current operating environment, and this very factor demands that new solutions be found to satisfy customers in ever-more cost-effective ways; continuous innovation is

mandatory under these conditions. When I started my journey in 1975, the prevailing philosophy in what then was known as ‘distribution management’, focused primarily on finished goods distribution; and it was centred on the belief that ‘one size fits all’. The idea

was to seek the best configuration of resources in the business to satisfy all customers, equally. There was no distinction made between customers in the marketplace: no segmentation took place as all were assumed to require the same service level. This made life relatively easy for those working on the supply-side, but uncomfortable for their customers, who at that time had little leverage to change the situation.

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RAIL

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A connected

GCC and more

Faris Al Mazrouie, CEO, Etihad Rail, gives a few insights on the progress of the rail project in the country and region

What more needs to be done to improve the inter-connectivity of key infrastructure so that the industrial sector is able to benefit? FARIS AL MAZROUEI: Close collaboration among infrastructure operators is a key factor in ensuring successful inter-connectivity. We work closely with our future customers and partners to ensure that the UAE’s national rail network is properly integrated with regional ports, industrial zones and other transport infrastructure such as the wider GCC rail network, Dubai Metro and the planned Abu Dhabi tram and metro networks. With regards to the GCC railway in particular, a coordinated effort from all six states is required to 106 GSC YEARBOOK 2016

ensure the necessary harmonisation of technical standards and that the railways will serve their customers’ needs. This collaboration will play a major role in facilitating full technical and operational interoperability and streamlined institutional arrangements – such as Customs processes – to ensure efficient regional rail services. For Etihad Rail, having proper interconnectivity also means we can link to other major transport and infrastructure hubs, benefitting our customers who are looking for a one-stop shop solution. In the UAE, Etihad Rail will connect industrial areas across the emirates and link these to the wider region, boosting trade and creating new business opportunities.


RAIL

Industrial Area in Dubai – will play an essential role in the overall connectivity of the railway with key centres of economic importance to the UAE and the region, enabling a stronger and more efficient supply chain. To deliver this integration, we are continuing to form important partnerships with logistics infrastructure providers across the emirates.

How can dedicated rail logistics parks in close proximity to air and seaports improve the UAE’s integrated trade infrastructure network? AL MAZROUEI: The availability of mode choice in a hub is critical in global supply chains because different modes of transport give you different speeds of delivery, reliability and costs. In today’s global economy, supply chains must be able to adapt to ensure companies are competitive. Tight integration of modes ensures that these companies have the adaptability and flexibility in their

supply chains to meet the needs of their customers and to deliver their products at the lowest possible cost. Close integration between rail and logistics infrastructure providers – at airports and seaports alike – is a strategic element in the development of the UAE’s infrastructure network and of our trading economy as a whole. Having proper connectivity will allow us to offer logistics companies an enhanced transportation system combining sea, road, air and rail. Etihad Rail’s connection to logistics infrastructure hubs – such as Khalifa Industrial Zone Abu Dhabi and Jebel Ali

What opportunities will be made available for investors as stages two and three of the project are rolled out? In what ways will local small and medium-sized enterprises (SMEs) benefit? AL MAZROUEI: A number of regional SMEs have been subcontracted on construction and supply projects and have been instrumental in the timely and efficient delivery of stage one. Going forward, both stage two and stage three will open up similar opportunities. We also need to consider the bigger picture and the key role that Etihad Rail has in the continued development of regional businesses – SMEs and larger corporations alike. The UAE rail network will provide a boost to existing commerce by cutting delivery times and making the transportation of goods more efficient. It will connect remote areas, creating new trade hubs throughout the country and expanding logistics capabilities. It is a well-known fact that logistics represents a significant cost for any business so by making this process more efficient and cost-effective, Etihad Rail will contribute to the economic prosperity of SMEs across the region. Many services will also be required to support the operation of the railway and we expect local businesses to be able to take advantage of these opportunities. -www.oxfordbusinessgroup.com

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Port report

Cliff Brand, General Manager, RAK Ports Group shares his insights into the progress of the emirate’s ports and what the future brings

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Can RAK’s port activities be further diversified from the current concentrations? CLIFF BRAND: The scope for diversifying RAK’s port activities varies from port to port. In the case of Saqr Port, there are limited options for diversification, if any at all. The port and RAK quarries rely on one another, and demand for quarried products will be high for the foreseeable future. As such, Saqr Port will remain a major bulk port for as long as there is quarried product to export and import. RAK Maritime City is a landlord/ tenant port and diversification opportunities are limited there, as are options at Al Jeer Port, which

concentrates on leisure, small vessel cargo and livestock. In the cases of Ras Al Khaimah Port and Al Jazeera Port, diversification is possible and there are many options available, particularly within the cruise and leisure industries. What effect will Etihad Rail have on commercial activities at RAK Ports, and how is the ports strategy developing to accommodate this? BRAND: Etihad Rail will benefit all players in RAK and will provide an additional transport option, as far as RAK Ports is concerned. Current planning on port strategy


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How significantly does the maritime economy drive growth in the emirate? Do you see room for maritime sub-sectors to emerge? BRAND: The maritime economy plays a part in the growth of RAK, and an increase in construction activity in the Middle East and the Far East has resulted in increased demand for aggregate and other products, which leads to greater demand for bulk shipping and other shipping services. Generally, it is the commodity and service sectors that drive the maritime economy, as can be seen from the effects declining oil prices are currently having on that segment of the maritime industry. Conversely, greater demand for bulk products and other services has a positive effect on RAK’s economy. In relation to the emergence of maritime sub-sectors, again this is dependant on the success of the economy in RAK. If the demand for commodity and service products grows, this will inevitably result in the emergence of maritime sub-sectors.

takes into account the impact that the new rail freight link will have and also looks to the infrastructure requirements that will inevitably result once it is completed. However, it is too early to start developing strategies in this regard. How will rail expansion alter the dynamics of RAK’s logistics segment? Will aggregate shipping continue to depend on trucking? BRAND: The rail expansion will have an impact on the entire logistics

industry in RAK, creating a more streamlined and efficient transport system that will generally benefit industry. The majority of aggregate for both import and export from and to RAK currently travels by road. When the rail link arrives, it is inevitable that a percentage of the aggregate will be shifted to the rail segment, provided rail transport is cost competitive. However, some 20% of the emirate’s product is exported to other countries and will remain unaffected by the connection to the rail freight network

How concerned are you that there will be a significant decline in maritime activity after Dubai Expo 2020 and FIFA World Cup in 2022 in Doha? BRAND: Both of these events are expected to have some effect on the throughput of Saqr Port in particular; however, RAK quarries are fulfilling foreign demand for their products and this will more than cover the gap resulting from any decrease in demand from Dubai and Doha. As such, the port is expected to remain a major bulk port in the MENA region beyond the dates and events in question. -www.oxfordbusinessgroup.com

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production of automated manual transmissions for trucks, Mercedes PowerShift features sophisticated control technology for gear changing, as well as a range of new functions for improved vehicle handling and enhanced driving comfort. Thanks to its rugged gearbox technology and superior shift strategy, the risk of gearshift errors is eliminated, which reduces wear, improves driving performance and increases safety.

How to benefit from Mercedes PowerShift? Mercedes PowerShift not only optimises the profitability of the fleet owners business in terms of reduced fuel consumption, reliability and lower TCO, but also reduces the strain on the driver. The precise selection of gears and shorter shift times as well as the transmission of higher torques and outputs deliver superior performance, safety and ease of operation. Key benefits for fleet owners and fleet managers: • • • • • •

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To control even the harshest conditions: the Rocking free mode. Rocking free mode assists the driver if a vehicle gets stuck in a recess on a soft surface. Activated at the touch of a button, it can be utilized for all pullingaway gears (forward and reverse) up to a speed of 5 km/h. Pressing the accelerator pedal simultaneously engages the clutch. Quickly releasing the accelerator disengages the clutch – causing the vehicle to roll back and forth, creating a rocking motion, which helps the vehicle getting free.

Providing full engine performance: the Kick-down function. Mercedes PowerShift moreover offers a kick-down function which is activated when the accelerator pedal is fully pressed, delivering a burst of power and torque. This provides a valuable margin of extra performance, versatility and safety, especially in situations such as overtaking or joining fast-flowing traffic.

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Power at the push of a button: the Power mode. The Power mode enables the driver to call upon enhanced power over a short period. This increases the vehicle’s agility and allows the driver to mobilize power reserves in specific situations, e.g. on uphill stretches, when joining motorway traffic or when overtaking. Power mode is deactivated automatically after ten minutes and the system returns from a power-focused to a consumption-optimized driving style.

For comfortable backwards driving: the Rapid reverse program. Mercedes PowerShift features four reverse gears, making reversing easier than ever before. Two of the four reverse gears offer a rapid transmission ratio at higher speeds. This is highly beneficial for extended distances in reverse or long access lanes without turning opportunity.

Enhanced ride comfort and safety: the Cruise control function. Thanks to an extended tolerance range, the drive and braking cruisecontrol systems deliver improved ride comfort and optimum exploitation of the EcoRoll mode. As the usual speed tolerance for the cruise control is fixed at 4 km/h, with Mercedes PowerShift it can be set to anywhere between 2 and 15 km/h. This enables the driver to get the most out of the vehicle momentum, lowers fuel consumption and raises the average speed.

Greater ease of handling with the Direct shift function. Another convenient feature of Mercedes PowerShift is the ability to switch directly from first gear into reverse. Engaging neutral in the process is no longer necessary. Direct shift between 1 and R assists the driver when maneuvering, enabling him to move the vehicle forward and backward faster and more conveniently. This saves time and hassles, easing the driver’s workload.

To watch the Mercedes PowerShift movie showcasing all modes or to download the brochure, visit: Trucks.MercedesBenzME.com “The efficiency of the Actros in fuel consumption helps us control costs. Especially in Actros that pull close to 70 tons over a route that has multiple roundabouts where stopping and starting is common place.”

“Mercedes PowerShift convinced me because we calculated lower fuel consumption and less wear and tear. When operating, especially in excavations, it helps the take-off of the heavy loaded vehicles.”

Mr. Rohit George, Executive Director Golden Global Logistics Fleet of 30 trucks, Oman

Mr. Meysam Kasiry, Executive Director Shaheen Al Dhahbi Transport L.L.C. Fleet of 35 trucks, UAE

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Linking up the various

networks A

t the forefront of these In addition to the improved connections construction of new will be planned interfaces transport infrastructure between the new in Abu Dhabi, linkages national rail network, Etihad Rail, and other forms of between different transport, including shipping and air forms of freight and cargo. Other connections, such as links passenger transport between the road network and the sea, as well as between various forms are set to deepen substantially in coming of urban passenger transport, are also being strengthened. years, boosting the efficiency of local and A New Dimension regional supply chains Improving multimodal connections is a priority for the authorities in Abu Dhabi. The emirate’s Multimodal Freight Master Plan, issued in January 2014, includes multimodal policy as one of its nine main themes and calls for“efficient physical interchanges between modes of transport”to be prioritised by, for example, ensuring “effective land transport access to major transport terminals”.

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A major development that will significantly expand and deepen such multimodal connections in the emirate is the forthcoming launch of a national railway network, Etihad Rail. The company behind the project estimates it will boost the UAE’s GDP by up to Dh3.5bn ($953m) a year by 2030. The first stage of the system, which has been completed and is set to enter into service soon (see overview), will link up with maritime transport; its main purpose is to transport granulated sulphur to the Port of Ruwais for export. However, it is the second stage, which will see the network connected to Musaffah Port and

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Khalifa Port, as well as to Jebel Ali Port in neighbouring Dubai, and will also link up with the wider GCC rail network project, that will do the most to deepen the emirate’s network of multimodal interfaces. Within Abu Dhabi, the connection between the network and the emirate’s largest port, Khalifa Port, will be particularly important – especially given that the Multimodal Freight Master Plan seeks to maximise the use of rail and sea freight transport, due to their lesser impact on the environment. In February 2014 Etihad Rail signed a memorandum of understanding with Abu Dhabi Ports regarding construction of an integrated bulk and container

rail terminal at Khalifa Port; the terminal will also provide access to the Khalifa Industrial Zone Abu Dhabi. Seamless integration between road, rail and maritime transport at the site will be critical to the growth of non-oil exports and the diversification of the economy more generally given government targets for Khalifa Port and its adjacent industrial zone to generate 15% of non-oil GDP when all phases are complete. Etihad Rail will also be integrated with air transport in the emirate; in April 2014 the firm said it was in talks with Abu Dhabi Airports about the construction of a rail logistics park at Abu Dhabi International


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Airport. This news comes as Abu Dhabi Airports and Etihad Airways seek to expand cargo capacity at the airport; Abu Dhabi Airports told OBG that it was in discussions with Etihad Airways over where to locate a new air freight facility and that 12 new dedicated aprons for cargo aircraft will enter into operations in late 2015 or early 2016. Such additional infrastructure will accommodate rapidly rising air cargo traffic; the volume of freight transported through Abu Dhabi International Airport in 2013 stood at 706,456 tonnes (373,097 tonnes of

inbound freight and 333,359 tonnes of outbound freight), up 24.4% from 567,964 tonnes the previous year, according to figures from Statistics Centre - Abu Dhabi. Asia was the largest source of incoming air cargo, with 170,280 tonnes, up from 162,763 tonnes in 2012, while Europe was the most important outbound destination, with 121,997 tonnes, up from 94,481 tonnes in 2012.

Port Connections Connections between Khalifa Port and the UAE road network

are also being upgraded. A new 62-km road between Abu Dhabi and Dubai, which will pass by the port and thereby improve road connections to the two cities and beyond, is being built parallel to the existing main road to reduce rising congestion. The road will have four lanes in each direction, with an option to expand this to six lanes, and will be able to accommodate 7000 vehicles an hour. A contract for the project was signed in December 2013, with the construction expected to take 30 months to complete.

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The interface between road and sea at Khalifa Port is already highly efficient. Abu Dhabi Ports reports that truck turnaround times at the port’s container terminal takes 12 minutes on average, the shortest time at any container port in the region and representing a reduction of 70% since the opening of the port. Steps taken by the port authorities to bring waiting times Etihad Rail down have included will also be training drivers to use the terminal’s semiintegrated with automated systems air transport and implementing an information technology in the emirate; system that allows in April 2014 drivers to choose a the firm said time window of their it was in talks preference to load and discharge containers, with Abu Dhabi among other things, according to Abu Dhabi Airports about the construction Ports. Ship-to-ship of a rail connections are also set logistics park to intensify at Khalifa Port in coming years, at Abu Dhabi with trans-shipment International operations forecast to increase from 5% of port Airport activity in 2013 to around 20% by 2016. Khalifa Port is called upon by 20 major global shipping lines that have a direct connection to more than 52 international ports around the world.

Regional Constraints Such improved connections will help to support the growth of the freight transport and logistics industry not only in Abu Dhabi, but also in the UAE and wider GCC, given that a large proportion of logistics traffic in the Gulf passes through the emirate. There are, however, some regulatory constraints that are limiting the growth of intermodal freight linkages

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and logistics in the region, and these are expected to somewhat reduce the links’ impact for logistics service providers. “There are restrictions on consolidated shipments, express and e-commerce, via land within the GCC,”Yasser Zahreddine, senior station manager at the Abu Dhabi branch of logistics firm Aramex, told OBG.“Currently, you cannot move a consolidated shipment across a land border within the GCC to then be broken up and distributed to different customers within the second country,”

he said, explaining that inter-GCC consolidated shipments could only take place by air, which adds to costs. “An open-border policy and unified Customs law, with proper implementation would represent a major boost for the local logistics industry,”Zahreddine told OBG. However, he added that security concerns on the part of some regional states mean that this is unlikely to occur in the near future.


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Passenger Hubs A number of projects to improve access to more passenger-oriented forms of transport are also in the pipeline. Discussions regarding integrating the emirate’s planned metro and light rail system with Etihad Rail’s passenger services are taking place, though dates are not in place yet for the launch of either

network.“We will need to integrate heavy rail with the metro and light rail networks in order to attract the maximum number of passengers,”said John Thomas, regulatory affairs advisor at Etihad Rail, adding that he expected that an integrated ticketing system allowing passengers to buy one ticket for use on

both the metro and the railway system would be put in place. Such plans will extend beyond transfers between different forms of rail transport.“There will eventually be several main transit hubs in Abu Dhabi City that will integrate all forms of transport – trains, the metro, cars, buses, walking, cycling and even water taxis in some instances,”said Falah Al Ahbabi, director general of the Abu Dhabi Urban Planning Council (UPC). The emirate’s Surface Transport Master Plan also seeks to ensure“hassle-free” transfers from cars to public transport through the creation of infrastructure such as park-and-ride hubs. Road infrastructure is also being upgraded to deal with growing air passenger traffic. In April 2014 the emirate’s Department of Transport (DoT) announced plans for Dh638m ($173.6m) of construction work to improve access to Abu Dhabi International Airport in time for the opening of the new Midfield Terminal Building, which will eventually triple passenger capacity at the airport, in 2017. The authorities also intend to extend the metro and light rail network to the airport, which will involve the construction of an express metro service between the central business district of Abu Dhabi City and the airport. Abu Dhabi Ports has also started construction on its new permanent cruise terminal. The cruise segment has been rapidly growing in recent years and efforts are being made by the port’s management and the government to help develop it to tap into tourist interest. The new cruise terminal will be well suited to cater to this new demand. Abu Dhabi has been included as a stopover within regional trips, for activities ranging from cultural excursions to major events, and 189,000 passengers visited in 2013/14. -www.oxfordbusinessgroup.com

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Ras Al Khaimah better connected Geographical location, welldeveloped infrastructure and free trade within the GCC are among the top logistical advantages offered to businesses locating in Ras Al Khaimah. The emirate benefits from the high standard of road networks in the broader UAE and from close proximity to some of the world’s busiest airports and ports, but it also has its own distinct strengths and value propositions

National Plan In its UAE Vision 2021 national development plan, the country has given itself less than a decade to create transport infrastructure that will rank as the best in the world by some measures and in the top 10 by others. It is already making great strides towards these national performance indicators for the categories of both sustainable environment and infrastructure, according to international comparisons published by the World Bank and the World Economic Forum (WEF). Results from WEF’s“Global Competitiveness Report 2014-15” rank the quality of the UAE’s airport infrastructure as the second highest in the world, behind Singapore but ahead of Hong Kong and the Netherlands. The UAE was ranked third by this measure in the 2013/14 report and is aiming for first place by 2021. The quality of its port infrastructure is ranked third, behind the Netherlands and Singapore, also an improvement

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of one place on the previous report – and here again the UAE is aiming to become number one by 2021. In terms of overall transport infrastructure, the UAE is ranked third, behind only Switzerland and Hong Kong, which is a rise of two places on the previous report and just two places short of its firstplace target. The country is already ranked first in the world in the WEF report In its UAE for the quality of its road Vision 2021 infrastructure, ahead of Portugal, Austria and France. national However, it still has some development way to go to reach its target plan, the of being in the top 10 of country has the World Bank’s logistics performance index, which given itself less measures competence in countries’ Customs processes, than a decade to create timeliness and tracking of goods: the UAE currently transport ranks 27th.

GCC Mega-Projects

infrastructure that will rank as the best in the world by some measures and in the top 10 by others

RAK is also set to benefit from a clutch of transport mega-projects that are due for completion by 2020 across GCC countries. A variety of new roads and railways currently under construction or in the pipeline will offer faster journey times throughout the region, connecting to two new Arabian Seaports in RAK’s neighbour Oman that offer enhanced access to markets in East Africa and the Indian subcontinent. Almost $200bn will be invested in the GCC railway project alone, with the first cargo trains scheduled to reach RAK by 2018 as part of the Etihad Rail project, according to MEED, a business weekly that covers the MENA region. In the UAE alone, some $3.4bn worth of transport infrastructure projects were signed in 2013, MEED calculated.

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RAK Investment RAK is not merely relying on the expansionary policies of the federal government, however, nor on the megaprojects being undertaken by its neighbours: it is also making improvements to its own roads, seaports and airports to enhance the speed, efficiency and safety of its transport networks and facilities. While it may not be attempting to match the spending levels of Dubai or Abu Dhabi, it is able to benefit from its proximity to the big cities without suffering from the problems of congestion – both on the roads and in the air – that the larger centres face. When travel is measured in journey time rather than kilometres, the people and businesses in RAK, as well as visitors to the emirate, enjoy easier access to parts of Dubai, including its main international airport, than those who live in some parts of the city itself. From a UAE-wide perspective, RAK also serves as a gateway to Oman’s northern Musandam Governorate. And, to the extent that trade sanctions are eventually lifted on Iran – negotiations for which took place in early 2015, with a framework agreement reached in April and a formal deal concluded in July – more opportunities should open up for businesses based in RAK. According to the World Bank, Iran’s population of 80.8m is second only to Egypt in the region. The IMF estimates that Iran’s GDP is $393.5bn at 2015 current prices, larger than the UAE’s $363.7bn. RAK is served by transport networks on land, at sea and in the air, which complement elements of the national infrastructure and which must also been seen in a broader regional context.

Seaports There are five ports in the emirate, each with a clearly defined role or niche. Branded as RAK Ports, all are

managed by the Saqr Port Authority. Saqr Port was the UAE’s first major port and is now the largest port for bulk dry commodities in the Middle East and North Africa, according to the emirate’s Investment and Development Office. RAK Maritime City (RAKMC), created by emiri decree in 2009 and opened in May 2011, has been designated a special investment zone for companies needing direct access to the sea, providing private jetties, common user berths, 5 km of quay wall and plots of 20,000-1m sq metres for lease. This allows them to make products near their own wharf and ship directly, without the added cost of transporting them to a separate port. RAK Khor Port, which is the marine base for several offshore oil and gas operators and provides layby facilities for barge and workboat operators, has a passenger cruise terminal and also provides cargohandling services, warehousing and marine maintenance. Al Jeer Port, opened in 2009, handles livestock and general cargo, as well as caters to leisure craft. Last, Al Jazeera Port provides 12 dry docks, with repair and lifting facilities covering an area of 50,000 sq metres. It can handle vessels up to 55 metres in length and 18 metres wide.

Special Investment Zone RAKMC has been built over 8m sq metres and offers free zone terms to a variety of commercial, industrial, trading and manufacturing companies wishing to take advantage of the emirate’s proximity to markets in the Gulf and further afield. Air Liquide Middle East Manufacturing, for example, produces air separation units at a 33,000-sq-metre plant on its waterfront site of 181,000 sq metres. Operating since 2014, the plant has a private jetty 452 metres long that allows direct loading onto heavy lift vessels for shipment to Middle East


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customers. Similarly, Eversendai Offshore, which fabricates steel, is using its 180,000-sq-metre plot and 505-metre private jetty to enter the market for jack-up rigs for the Middle East oil and gas industry. Archirodon, a multinational with extensive maritime construction contracts in the Gulf, has its regional base on a RAKMC plot of 152,000 sq metres with a 666-metre jetty. In April 2015 Panol Industries, a subsidiary of India’s Panama Petrochem, opened a plant that makes rubber processing oil after 18 months of construction. Other companies with private waterfront operations in RAKMC include Boskalis Westminster, a global dredging firm, and two onshore and offshore construction companies, Van Oord and BAM International.

Al Jazeera Port Focused on dry-docking and ship repair for small and medium-sized vessels, Al Jazeera Port covers a range of marine services, with a 50,000-sq-metre dry dock area and 12 dry berths. Global Shipyard, headquartered in India and a subsidiary of Mumbai’s Prince Marine Transportation Services, began building ships at a new base in Al Jazeera Port in 2015 (it also has a base in Singapore). The company’s first project at this new facility, a 48-metre, multi-purpose supply vessel, has been launched and was nearing completion for delivery as of mid-2015. Another order for a second vessel is awaiting confirmation. Global Shipyard has signed a 10-year lease on a dry berth at the port, and has requested additional space for planned expansions. Al Jazeera Port is also playing a key role in various marine

construction projects. For up to two years from January 2015, Hyundai Engineering and Construction, which was awarded the $1.89bn contract to build a series of manmade islands off the coast of Abu Dhabi, will store and sort sections of concrete quay walls at Al Jazeera Port. These sections will then be shipped to Satah Al Razboot Island Number Four. The concrete units are being manufactured at RAK Precast at their Al Hamra facility and then transported to the port by road prior to shipment.

Commodity Cargo Saqr Port is the emirate’s main conduit for raw materials and bulk cargo, catering to a range of goods including aggregate, limestone, bauxite, clinker, coal, calcium carbonate, gypsum, iron ore, red shale, laterite, silica sand, animal feedstuffs and soda ash. Because it handles the rock, aggregate and cement produced by RAK’s heavy industries and quarries – many of which serve the region’s construction industry – the volume of cargo it handles can fluctuate with the level of construction work taking place in GCC countries and beyond. However, the regular shipment of limestone to the Indian iron and steel industry has given the port significant additional volumes. Saqr Seaport Authority volume throughput figures show the port handled about 49.6m tonnes of cargo in 2014, an increase of nearly 100% on the 25.9m tonnes handled in 2010. Of this total, 44.1m tonnes were for export. During 2014, the port handled 1626 vessels loading or discharging bulk cargo, using 10 berths: seven port authority berths, another berth with a rail-mounted

ship loader that is operated solely for RAK Rock and Stevin Rock vessels, and two common-user berths at RAKMC.

Broader Picture Although RAK’s five ports on the Gulf have distinctive offerings that are particularly useful for certain industries, the emirate’s road network gives access to other opportunities at The quality all points of the compass. of its port Many companies use Jebel infrastructure Ali, to the south in Dubai, is ranked third, the ninth-largest container port in the world. Expansions behind the taking place at Jebel Ali Port, Netherlands which is operated by DP and Singapore, World, mean it will have a capacity of 19m twenty-foot also an equivalent units (TEUs) by improvement the second half of 2015. of one place on The port is located 122 km from businesses in the RAK the previous Industrial Authority area, with an estimated journey time report – and one hour and 20 minutes, here again the of though the route can become UAE is aiming busy during peak traffic hours. to become Significant developments number one have also been taking place by 2021 in ports operated by RAK’s eastern neighbour, Oman. Khasab Port, in that country’s northern Musandam Governorate, is on the Straits of Hormuz and just 90 minutes’ sailing time from the ports of Iran. It is already being used by cruise ships, and there are plans to develop it as a commercial port. In 2014 the Omani government signed a memorandum of understanding (MoU) with Iran’s Kaveh Port and Marine Services to develop facilities at Khasab. The significance for the emirate is

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that the only road serving the port starts at the RAK-Oman border crossing. The journey time from the emirate’s industrial zone to Khasab is one hour and 40 minutes, and companies in RAK City are able to reach the Omani port in just over an hour. Those wishing to trade with Iran, should sanctions be lifted, could opt to use the emirate’s ports as well. Bandar Lengeh port in Iran is less than 100 nautical miles from RAK Port, half a day’s sail for a vessel travelling at 10 knots. Businesses in RAK would also have an advantage if shipping through the Straits of Hormuz is ever compromised, thereby disrupting Jebel Ali or RAK’s ports, because Oman is also investing in its ports on the Arabian Sea and on infrastructure to link these with the Arabian interior. The port of Sohar, which is the result of a $15bn investment, is just 186 km from the emirate’s industrial area and can be reached in two hours and 20 minutes. For businesses in RAK’s southern Al Ghail Industrial special investment zone, the journey time is just over an hour. Sohar is closer to RAK than it is to either Jebel Ali or Abu Dhabi. Goods from the UAE can be exported from Sohar to East Africa, Europe or the Indian subcontinent without having to pass through the choke-point of the Straits of Hormuz. Oman International Container Terminal, which is within the port of Sohar, has a capacity of 1.5m TEUs, with current expansion plans set to raise this to 2.5m by 2018.

Road Networks RAK is served by three multi-lane federal highways, two of which run southwards to Sharjah, Dubai and Abu Dhabi. The E11 Al Etihad Road hugs the coastline and takes traffic through Umm Al Quwain, Ajman and Sharjah on the way to Dubai.

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The E311 road, known as the Emirates Road until it was renamed the Sheikh Mohammed Bin Zayed Road in 2013, is a 140-km arterial route linking Abu Dhabi to Dubai and RAK. The 73-km section running through Dubai was expanded to six lanes in 2006 and is capable of handling 12,000 vehicles an hour. From RAK, the E311 is the preferred route for traffic heading to Dubai, Jebel Ali or Abu Dhabi. Traffic joining the road in RAK can bypass Sharjah, Ajman and Umm Al Quwain and so potentially reach the centre of Dubai more quickly than vehicles making the journey from those

emirates. For traffic heading more directly to Abu Dhabi, the E611, or Emirates Road, runs south-west and links up with that emirate without passing through Dubai. The third federal highway is the E18, which takes traffic from the centre of RAK City, out past RAK International Airport, on towards Al Ghail Industrial Park and thence towards the emirate of Fujairah, Dibba in Oman, Al Manama in Ajman, or further south to Sohar in Oman. For traffic heading north to Oman’s Musandam Governorate, there is a multi-lane highway to Sham, just


BY AIR

has a compelling proposition, and we are seeing reverse migration, with people from Dubai or Sharjah moving to RAK because it has a lovely feel to it,”Timothy Lefebvre, president of Mabani Steel, told OBG.“This is the closest I have ever RAK is also set lived to work, and if I to benefit from a want to go to Dubai it is only an hour away.”

clutch of transport mega-projects that are due for completion by 2020 across GCC countries. A variety of new roads and railways currently under construction or in the pipeline will offer faster journey times throughout the region

short of the border check-point, and from there a single-lane road runs through Oman to Khasab, at the far tip of the Musandam Peninsula.

Commuter Times The ease of access afforded by the Sheikh Mohammed Bin Zayed Road, combined with the difference in housing costs between Dubai and RAK, creates a strong value proposition for commuters. It is

possible, for example, to drive from Al Hamra to Dubai International Airport in less than an hour. Moreover, in that same part of Dubai, free park-and-ride schemes for metro users mean commuters are able to take the green line from Etisalat, which has 3000 parking spaces, or the red line from Rashidiya, which has 2714.“RAK

Road Users

Ministry of Interior figures show that 23,667 driver’s licences were issued or renewed in RAK in 2013, of which 21,282 were for cars, 821 for trucks, 634 for motorcycles and 554 for buses or mini-buses. A wellregulated and metered taxi service operates in RAK, licensed by the emirate’s transport authority, and provides services between the different emirates. Some hotels offer shuttle services from the airport. The Al Hamra bus route runs from the south of the emirate to Sham in the north. In 2009, the Indian company Ashok Leyland began operations at a factory in RAK that builds thousands of buses and mini-buses a year. The company supplies vehicles that can be used to transport workers or schoolchildren in the UAE and other GCC countries.“In 2014 we built 2750 buses, and by the end of 2015 we will have taken capacity up to 4500,” K M Mandanna, Ashok Leyland’s head of international assembly

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operations, told OBG.“A lot of the demand is coming from the growth in the construction sector.”

Rail Project The 1200-km Etihad Rail project is being built across the UAE in three stages and will eventually transport both freight and passengers, providing rail links to the proposed GCC network. The first phase, which runs between Habshan and Ruwais, has already been completed and the second will connect the line to Mussafah, Khalifa Port and Jebel Ali, as well as reach the borders of Oman and Saudi Arabia. The connection to RAK is part of phase three and is due for completion by 2018. The British

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engineering firm Atkins won the Preliminary Engineering contract and its initial blueprint for phase three shows the line turning north at Al Ghail junction, with branch lines for a Stevin Rock Terminal and a Ghail Bulk terminal between that junction and RAK station to the north. At RAK station the railway forks, with one line heading north towards Saqr Port and the other turning towards the coast and passing through an Al Hamra Transfer Station and Depot before terminating at Al Hamra Bulk

Container Terminal. According to Etihad Rail, a number of businesses in RAK have already signed MoUs with the company. In June 2014 it reported Tarmac Middle East had signed an

agreement to serve its Al Futtaim Tarmac Quarry Product Company at Shawkah. Meanwhile, Al Jaber Group has signed an MoU to transport aggregates from its facility at Shawkah to UAE ports and eventually across the GCC network. In all, Etihad Rail reports that some 54 companies across the UAE have signed MoUs to use the rail network as of mid-2015.

Air Services RAK’s proximity to Dubai International Airport offers significant advantages to the emirate’s tourism and real estate industry. Its beaches and villas are within an hour of what is the world’s busiest airport by international passenger traffic, according to Airports Council


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RAK is served by transport networks on land, at sea and in the air, which complement elements of the national infrastructure and which must also been seen in a broader regional context International. Dubai International is also one of three UAE air hubs – the other two being Abu Dhabi International and Dubai’s Al Maktoum International – that are expanding to cater to a third of a billion passengers a year between them within a decade. RAK’s own international airport is used by budget airline Air Arabia and a number of charter carriers, but in a significant move, in May 2015 Qatar Airways announced it would begin running direct flights to RAK starting in February 2016, which could pave the way for other international airlines to do so as well. The challenge for

RAK International Airport is to find ways to complement the multibilliondollar investments being made in Abu Dhabi and Dubai by developing facilities that serve RAK’s businesses. “I think the UAE should be thinking about how to capitalise at UAE scale in aviation, rather than just focusing on individual emirates,”the airport’s CEO, Mohammed Qazi, told OBG. “The land area is very small, and as a consequence the airspace above is very small too, but you have the northern part of the country here in RAK where there is quieter airspace you can utilise.”

Outlook The transport infrastructure that serves RAK has already helped the emirate to grow and has improved its value proposition for businesses, tourists and residents. The arrival of the railway in 2018 may not instantly boost the fortunes of the UAE’s most northerly emirate, but it will add a multi-modal element to its transport infrastructure that will help ensure that RAK is able to tap into the opportunities afforded by a GCC region that is increasingly interconnected. -www.oxfordbusinessgroup.com

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PORT REPORT - DP WORLD ADVERTORIAL

Future strategy DP World announces intention to back potential infrastructure development in India

H

aving an invested capital of USD 1.2 billion (AED 4.4 billion), DP World is now seeking opportunities in India worth over a billion US dollars (AED 3.67 billion) over the next few years. It is currently the only foreign operator with six port concessions in the country, with approximately 30 per cent market share. The announcement was made during a visit to New Delhi and Mumbai by His Highness Sheikh Mohammed Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces of the UAE, and His Excellency Sultan Ahmed Bin Sulayem, Group Chairman and CEO, DP World. This visit follows a twoday official trip by Indian Prime Minister Narendra Modi to the UAE last August.

The DP World investments could cover: Expansion in brownfield container terminals Long term greenfield container concessions Inland Container Depots (ICDs) Expansion of existing inter-modal rail services for rolling stock H H Sheikh Mohammad Bin Zayed Al Nahyan, said,“The UAE and India enjoy historic bilateral relations, and these potential

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investments reinforce our confidence in the long term growth of the Indian economy, and our desire to actively contribute to the economic development of this friendly nation. DP World has established a leading position in the Indian market, and is a pioneer in the development of container terminals. It has the biggest portfolio along the Indian coast, and is looking to enhance its presence there, transferring the UAE’s experience of infrastructure development in line with our plans to enhance the strategic relations between our countries and to take them to a higher level.” In Mumbai, H H Sheikh Mohammad Bin Zayed Al Nahyan and H E Bin Sulayem also inaugurated the new 330-metre berth at Nhava Sheva (India) Gateway Terminal (NSIGT), at India’s premier gateway port, Jawaharlal Nehru Port (JNPT). Said H E Bin Sulayem,“We are reinforcing our commitment to enabling India’s growth and economic development through our operations in the country, where we have invested over USD one billion (AED 3.67 billion) in the past, supporting over 30 per cent of India’s container trade. Being one of the strongest emerging economies in the world, India offers immense potential for growth in the maritime

sector. With Nhava Sheva (India) Gateway Terminal, DP World will contribute even more to India’s growth offering our customers the ability to grow and expand their business.” Dubai’s non-oil foreign trade with India has seen a striking 144 per cent growth from 2004 to 2014. By the end of 2014, trade between the two countries amounted to AED 109.34 billion, compared to AED 44.87 billion in 2004. India was Dubai’s second largest trading partner in 2015, with bilateral trade of AED 73.86 billion during the first nine months of 2015 – comprising imports of AED 41.73 billion; exports of AED 14.54 billion and reexports of AED 17.59 billion. In terms of its own growth, DP World Limited handled 61.7 million TEU (twentyfoot equivalent units) across its global portfolio of container terminals during 2015, with gross container volumes growing by three per cent on reported basis, and 2.4 per cent on a like-for-like basis. Growth in 2015 was largely driven by their European and UAE terminals. The portfolio benefited from the ramp-up in London Gateway and the UAE handled a record 15.6 million TEU’s, representing like-for-like growth of 2.3 per cent for the year. Utilisation at Jebel Ali remains high at


PORT REPORT - DP WORLD

approximately 90 per cent, despite the softer volumes in Q42015. Market conditions in the second half of 2015 were challenging, with like-for-like gross throughput growth flat year-on-year in Q4 2015. At a consolidated level, their terminals handled 29.1 million TEU during 2015, a 2.7 per cent improvement on a reported basis. Consolidated like-for-like volumes grew by 1.7 per cent for the year.

H E Bin Sulayem commented,“The second half of 2015 was difficult for global trade operators, as various economic headwinds, including currency weakness and lower commodity prices adversely impacted trade growth. Against this challenging backdrop, all our three regions continued to deliver full year volume growth on a like-for-like basis which demonstrates the strength of our portfolio. Despite the uncertain

near-term macro environment, and given the high utilisation at our portfolio, we remain confident about the medium to long-term outlook of our industry, and continue to invest to meet the future capacity requirements of our customers. As we look ahead into 2016, we look forward to the new capacity at Rotterdam (Netherlands), Mumbai (India), Prince Rupert (Canada) and Yarimca (Turkey) to deliver a full year contribution to our throughput.” DP World expects to open their third berth at London Gateway (UK) in mid2016, adding 600k TEU of new capacity. The additional two million TEU at terminal three (T3) Jebel Ali (UAE) will now be operational in the second half of 2016. “DP World has once again delivered ahead of market throughput growth in 2015, and given this resilient performance, we remain confident of meeting full year market expectations. While trading conditions in 2016 are expected to remain challenging, we believe a portfolio focused towards faster growing markets and origin and destination cargo, coupled with the addition of new capacity can continue to outperform the market,”he added.

www.dpworld.ae

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BY LAND

Enhancing connectivity As it moves forward on major transportation and infrastructure projects mandated by Qatar National Vision 2030, the state is seeking to boost domestic and regional connectivity, enhance links to major residential and transport hubs within Qatar, and boost the flow of goods and services to the wider GCC

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hile road upgrades represent the most important facet through which to boost intra-regional trade, cross-border flows will receive their most substantial support via the state’s planned long-distance freight and passenger railway, with both witnessing steady progress in 2014. The state is well positioned globally, located at the crossroads of Asian, European and African trade routes. However, Qatar’s sole land link to the rest of the GCC passes through Saudi Arabia via Salwa Road, which has been notoriously congested, with queues at the border extending up to 18 km at times in 2012. Although Ashghal’s (the Public Works Authority) phased Salwa Road upgrade project opened to traffic in late 2013, significantly reducing bottlenecks, congestion remains an issue, both at the border crossing and within Doha. According to a September 2014 report published by the Institute of Chartered Accountants in England and Wales, increasing intra-regional trade volumes is central to Qatar’s

diversification objectives. In its“GCC Economic Insight”report from thirdquarter 2014, the institute noted that the state’s plans to connect its Lusail Light Rail Transit (LRT) and the Doha Metro systems to the GCCwide railway network will have a transformative effect on its transport and logistics sector.

Paving the way The Salwa Road upgrade involved a QR1.7bn ($466m) investment to upgrade and expand the existing Qatar-Saudi highway. A 6.9-km stretch from the Industrial Exchange to the Al Asiri interchange opened in May 2012, while the Salwa highway itself was expanded to four lanes on each side, stretching all the way to the Abu Samra border crossing, and representing the second phase of the project. The Salwa project is one part of Ashghal’s multibillion-dollar Expressway Programme, which comprises over 30 projects divided into 46 contracts. There are currently 19 expressway projects under construction, while the remaining projects are still in design or will soon enter the procurement phase.

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East to West The QR3.9bn ($1.07bn) East-West Corridor will create strategic links with southern Doha, connecting the state’s new orbital highway and truck road with the recently opened Hamad International Airport (HIA). Expected to include both walkways and bicycle lanes, the project also comprises several signal-controlled intersections, with planned interchanges providing new access to key residential areas and roads including Al Although road Matar Street, Najma projects will ease Street Extension, Barwa Access Road current capacity and the new Al Wakrah constraints Bypass. According to local media reports in and enhance 2014, the project will connectivity also accommodate between Doha’s construction of ports, airports interfaces with the Doha Metro, allowing and border, the for a future longstate’s planned distance rail corridor. long-distance A QR2.23bn ($611m) contract freight and for construction passenger of the project’s eastern corridor was railway awarded to China represents a Harbour Engineering significant future Company in June 2013, while Joannou driver of regional and Paraskevaides trade and travel (J&P), a Cyprusbased company, won a QR1.67bn ($458m) contract for construction of the western corridor in the same month. Ground broke in April 2014, with work expected to finish during the second quarter of 2017.

Lusail Expressway The Lusail Expressway, meanwhile, will provide a vital connection to Lusail City, a growing development that could house as many as 450,000 residents on completion. The project will feature upgrades to the existing

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Al Istiqlal Road from the south Al Wahda arch roundabout to the North Channel Crossing. A 5.3-km, fourlane highway will feature additional lanes for interchange movement, with a total of three interchanges planned to create connections with the Pearl, Katara and Lusail City. Furthermore, the expressway will connect to Lusail’s planned LRT system, in addition to the Doha Metro’s Red Line. The project, worth some QR3.5bn ($959m), is expected to open by 2017, with works contracted to Hyundai Engineering and Construction. As of February 2014 the project was nearly 30% complete, according to statements made by Ashghal.

Orbital highway Perhaps the most significant of Qatar’s current highway projects is the roughly 190-km new orbital highway and truck route, which will create an expressway with separate, dedicated truck lanes to Doha’s western areas, linking the new Hamad Port and Mesaieed Industrial City (MIC) with Al Khor in the north, and creating a vital road link to domestic transport hubs and industrial areas. Offering enhanced connectivity for Dukhan, MIC and Ras Laffan Industrial City, the project aims to create a north-south corridor diverted from Doha proper, reducing traffic and congestion within the city, while at the same time facilitating the smooth flow of goods and passengers. Project works include 22 gradeseparated interchanges, with roads designed to manage up to 1500 heavy good vehicles per hour in each direction, catering to general traffic volumes of 8000 vehicles an hour in both directions. The project’s dedicated truck lanes make it unique in the state, and are expected to significantly improve road safety by removing slower trucks from fast-travelling vehicles. As it will enhance connectivity to stadia in Al Rayyan, Al Khor, Lusail and Al Wakrah, the project is also a vital component of Qatar’s preparation for the 2022 FIFA World Cup.

A host of awards for the project, divided into four contracts, were granted in 2014. Contract One, a 45-km dual carriageway, will connect Al Wakrah to Mesaieed Highway, and the new Hamad Port to the East-West Corridor in the north, the Al Wakrah Bypass in the east, and the orbital highway in the west. In January 2014 a joint venture between J&P Overseas and J&P Avax was awarded a QR3.26bn ($894m) contract for the work. The QR4.2bn ($1.15bn) Contract Two, a 48-km dual carriageway connecting four separate expressway projects, including contracts three and four of the orbital project, Dukhan highway, the North Road, and the North Road relief projects, was awarded in March 2014 to a joint venture between Qatari Diar Vinci Company and Bin Omran Trading & Contracting. Ashghal awarded Contract Three, worth QR6.1bn ($1.67bn),


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in March 2014 to a joint venture between Habtoor Leighton Group and Al Jaber Engineering, which will lead construction of a 55-km new dual carriageway, including five grade-separated interchanges. The contract will cover works in the west and south of Doha, providing connections between Contracts One and Two, as well as the East-West Corridor project. Contract Four, entailing construction of a new 42-km dual carriageway, will cover works at the west and north of Doha, providing a connection between Contract Two, the Dukhan Highway, North Road and the Al Khor bypass. In May 2014 South Korea’s Daewoo Engineering and Construction announced it had won the $910m contract, with work expected to be completed in the second quarter of 2017.

Rail Although road projects will ease current capacity constraints and enhance connectivity between Doha’s ports, airports and border, the state’s planned long-distance freight and passenger railway represents a significant future driver of regional trade and travel. The Qatar Rail Development Programme includes the establishment of a long-distance network connecting major population centres and industries in Qatar, and forming part of the planned 2200-km GCC railway network, set to all six GCC members within the next decade. Qatar’s long-distance rail network, which will be developed in phases, is expected to span 510 km. Phase One, set to wrap up in 2018, involves

construction of a 133-km line from the Saudi border to Mesaieed and the new Hamad Port, as well as to an inland station, Doha West International, which will connect to the Doha Metro. Passenger trains will travel at 200 km per hour (km/h), while freight trains will travel at 120 km/h. The second phase, to be completed in 2021, involves construction of a 171-km line between Doha West International, HIA and Bahrain. The line is planned to be incorporated into a causeway linking Qatar to Bahrain, under discussion since 2001 and approved in 2005. The causeway has since faced delays, including design changes to incorporate the railway, and is now stalled. The high-speed passenger service is designed to travel at speeds of 250 km/h. Phase Three, expected to conclude in 2027, will involve construction of an 80-km line dualising the existing Doha West International and Bahrain lines, as well as new links to Al Khor and Ras Laffan, travelling at comparable speeds to Phase One. The fourth phase, which will finish in 2030, will span 128 km and connect the Qatari peninsula, from Doha West International to Dukhan. Progress on the network has been steady thus far. In February 2014 a joint venture between Parsons and Systra was awarded a design consultancy services contract for the network, and Qatar Rail launched the prequalification process for the civil works tender in February 2015. The tendering process is expected to run through mid-2015, with the contract set to be awarded sometime in mid2016. A separate tendering process will select a railway systems supplier, which will effectively act as a subcontractor to the civil works manager. -www.oxfordbusinessgroup.com

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Oil Supply and the End of Iran’s Sanctions

Lifting Iran’s international sanctions will add yet another supply source to a market where prices are already depressed. What could it mean for the global oil market? What could it mean for IOCs and NOCs operating in the Middle East?

Iran’s Oil Industry Potential The year 1976 marked a high point for the Iranian oil industry. Domestic oil production consistently exceeded 6 million barrels per day, and in November of that year it reached an unprecedented 6.68 million barrels per day; only Saudi Arabia, the Soviet Union, and the United States were bigger producers at the time. Events then sadly took their course, and in the past 35 years Iran’s total oil output never reached two-thirds of its mid-’70s peak (although gas has

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largely made up for the shortfall), despite the country’s oil reserves growing by nearly 70 percent in the past 15 years, which is a much faster pace than those of its neighbors over the same period(see figure 1).Yet the experience of the 1970s still stands as a powerful reminder of what Iran’s petroleum industry might be capable of should the sanctions be lifted. The United States, European Union, and United Nations’ trade sanctions imposed on the country since 2011 caused a significant decrease in Iran’s oil production. The sanctions did not completely


OIL AND GAS

close the world’s markets to Iranian hydrocarbon, as some major consuming countries such as India and China continued to buy Iranian crude. Nevertheless, their impact has been substantial: in particular, severe constraints on technology imports resulted in major deterioration of upstream facilities. In addition, the EU extension of the ban on tankers’insurance imposed a major limitation on Iran’s export capacity (as more than 90 percent of the global tanker fleet’s insurance is governed by European law). The net result was significant loss of oil production primarily due to unplanned shutdowns, with a total loss of 18 to 20 percent of potential output since the sanctions were instituted in 2011 (see figure 2).

Perspectives for 2016 As a potential deal to end these sanctions appeared closer, it was no surprise when global oil markets took a bearish turn, with oil prices dropping by 25 percent between June and August 2015. At the same time, NYMEX futures still pointed toward a mild price recovery, and several international agencies predicted in their July and August 2015 forecasts that prices would stabilize again around $45-$65 per barrel, similar to the price range seen between January and July 2015 (see figure 3). Where the oil market goes from here will depend to a large extent on how much (and how rapidly) crude supply is expected to increase once the sanctions are lifted. There are two major opinion groups regarding this potential increase. On one side, the IEA estimates that Iran currently has a sustainable spare oil production capacity of around 800,000 barrels per day, second only to Saudi Arabia’s (see figure 4).

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F IG U R E 1

On the other side, the EIA estimates – assuming sanctions end in early 2016 – an annual average increase in Iranian crude oil production of 300,000 barrels per day from 2015 to 2016, with most of the increase coming in the second half of the year. The main reason for such disparate estimates is that the latter gives more weight to the impact several years of sanctions have had on the deterioration of Iran’s upstream infrastructure, which might now need some time to ramp up. After all, since mid-2012 Iran has consistently lost between 600,000 and 800,000 barrels per day of crude oil production due to unplanned shutdowns. How relevant are these production estimates in today’s global oil market? A production increase of 800,000 barrels per day represents circa 1 percent of today’s total global oil supply, which may suffice to drive dramatic price changes in a tight market, but not necessarily in an oversupplied one. More specifically, in the medium to long run, oil prices tend to alignto marginal upstream costs (that is, the cost of extracting the last barrel of oil to fulfill demand). A prolonged low oil price stifles investment in developing higher cost fields; eventually wells shut down and supply shrinks. If prices stray above marginal upstream costs, new investments bring in additional, more expensive oil sources. In this context, relative to the oil price shift in 2014, the market today has a less-sensitive cost curve (as the most expensive developments are already profitable). Therefore, a small additional source of lower-cost supply will have much less impact on price than in the tight market mid-2014. As a result, our oil market model suggests that should Iran be in the position to ramp up its crude oil production by an extra 800,000

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Iran’s historical oil production and reserves growth

Source: BP Statistical Review of World Energy 2015; A.T. Kearney analysis

F IG U R E 2

Iranian oil production and unplanned shutdowns since January 2011

‘ Reflects the production shutdown in the Neutral Zone between Kuwait and Saudi Arabia‚ which is split 50-50. Sources: EIA Short-Term Energy Outlook (July 2015)‚ EIA International Energy Statistics; A.T. Kearney analysis

barrels per day in 2016, Brent crude prices in 2016 will most likely continue to be in the $45-$65 per barrel range, which is consistent with the price band already observed throughout 2015 (see figure 5).

Looking Three to Five Years Ahead In the longer run, however, the impact of Iran’s comeback could be more substantial. The past few years

have witnessed a wave of new reserve findings in Iran, which is significantly above the Middle East average. The country has not been in a position to fully exploit these reserves due to limited access to external upstream technology and expertise. As a result, not only is Iran’s crude oil production tracking behind its historical record, but its proven reserves level is the


OIL AND GAS

F IG U R E 3

Actual and forecasted global oil prices

Sources: EIA Short-Term Energy Outlook‚ International Monetary Fund (IMF)‚ NYMEX Futures as of the end of July 2015; A.T. Kearney analysis

F IG U R E 4

Production vs. sustainable capacity by country

‘Defined by the IEA as a capacity level that can be reached within 90 days and sustained for an extended period. Sources: International Energy Agency (IEA) Oil market report (July 2015); A.T. Kearney analysis

highest in its history. At the same time, current production levels are nowhere near where they need to be to cover government expenditures (see figure 6). This, combined with the fact that Iran (unlike Kuwait, Saudi Arabia, and the UAE) does nothave

a well-stocked investment fund to make up for fiscal shortfalls, means that Iran faces a fiscal deficit whose most obvious solution, should the sanctions be lifted, is to increase oil (and gas) exports—which, in turn, will

depend on Iran’s ability to put forth the required technologies and expertise. Iran’s regulatory framework also poses a significant challenge to foreign companies wishing to invest money and know-how in Iran’s energy sector. Iran’s constitution prohibits either foreign or private ownership of natural resources, and production sharing agreements (PSAs) are also forbidden under the law. IOCs and other foreign investors are only allowed to participate in Iranian E&P activities through buyback contracts. Buyback contracts are, in effect, equivalent to service contracts, allowing external investors to explore and develop hydrocarbon fields under the condition that, once production starts, operator ship reverts to the National Iranian Oil Company (NIOC) or one of its subsidiaries, which can buy back the rights for a predetermined price. In 2014, the Iranian Ministry of Oil announced plans to implement so-called Integrated Petroleum Contracts (IPCs), which operate like joint ventures or PSAs with a potential duration of up to 20 to 25 years (twice as long as the extension allowed for buyback contracts).6 Should this new type of contract be allowed under Iranian law, Iran’s appeal as an upstream investment target (to IOCs and other international players) will rise significantly and lead to faster development of its hydrocarbon reserves. Our estimates suggest that new investments can increase Iran’s upstream production capacity by circa 6 percent year-on-year average for the next five years (which is consistent with the growth rate

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F IG U R E 5

observed in Iraq for the past few years), compared to the estimated 1.4 percent growth in the Middle East’s crude production as a whole. In this scenario, and assuming demand predictions remain the same, oil prices could move within the $60-$80 per barrel range by 2020,whereas in the absence of these developments the price band might be 10 to 15 percent higher,all things being equal. In this price range, investments in higher-cost reservoirs such as shale oil, tar sands, or offshore fields are unlikely to return to pre2014 levels. Although production should continue as long as lifting costs remain low enough to justify operations, the rapid decline of such reservoirs will reduce their relevance (shale wells in particular usually produce 80 percent or more of their output in the first three to five years). Under these conditions, incremental production in Iran will hit U.S. shale production hard, with less impact on offshore fields in the Americas, Asia, Africa, and Russia’s Far East, and an accelerated decline of the North Sea fields, with this production replaced by increases in Iran and potentially other countries such as Iraq and Libya. Figure 7 compares this scenario to a base case scenario in which Iran’s sanctions are not lifted.

Time to Reassess The end of sanctions against Iran will trigger the need for IOCs and NOCs in the region toreassess their strategic plans and take into account the challenges and opportunities thisscenario presents: 1. Foreign Investment in Iran. The end of the sanctions will open up a wide range of potential investment opportunities for IOCs and other foreign investors, particularly if the Iranian government approves the new IPC contracts. After years of limited

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Upstream marginal cost Curve (global)

Sources: A.T. Kearney analysis

F IG U R E 6

Iranian oil reserves and fiscal breakeven compared with other Gulf countries

Sources: EIA International Energy Statistics‚ IMF‚ Citi Research; A.T. Kearney analysis

access to external technology and expertise, the Iranian upstream industry will need a lot of outside help, and the state of the Iranian government’s finances suggests it will be in their interest to pull out all the stops to get this help fast. Furthermore, while upstream is likely to be the area with the most peremptory needs, a similar situation can be envisioned for midstream (pipelines to export growing gas production),chemicals (gas-based petrochemical cracking to produce olefins for export), and downstream(in a desire to upgrade refining that may have deteriorated

during the sanctions period).To this last point, Iran used to be a major gasoline importer before the sanctions, so now a case could be made for expanding refining capacity in order to meet this demand locally, particularly as the low exchange rate of the riyal could justify import substitution. 1. Middle East NOCs. Iran’s production ramp up, added to Iraq’s already growing output and a foreseeable increase in Libya once the political situation stabilizes, is likely to reinforce and prolong today’s cheap oil scenario.


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F IG U R E 7

Iran’s sanctions end: scenario projection for year 2020

Sources: A.T. Kearney analysis

There are a number of strategies that GCC NOCs can follow to mitigate the impact: 1. Upstream. Leverage opportunities to reduce costs and improve efficiency, particularly related to OFS, EPC, and other external costs. When oil is cheap and global E&P investment in high-cost reservoirs slows down, OFS and EPC providers experience overcapacity and therefore become a lot more open to renegotiating their rates downward. Also, as key commodities such as iron ore are now quoted at historically low prices, substantial cost reduction opportunities can be found through materials management. For Middle East NOCs whose reserves are still cheap enough to justify continued investment, focusing on supply chain operations improvements presents a real opportunity to reduce costs substantially without impacting real investment. 2. Chemicals. Cheap oil also means cheap naphtha. In fact, as gas feed stock is typically sourced more locally than naphtha, naphtha prices tend to correlate to crude

oil prices. This means that in a depressed oil market, naphtha prices drop faster than those of local gas contracts. At the same time, if Iran enters the market with additional gas crackers (which are relatively easy to put on stream) to leverage its already large and growing gas production, it will put additional price pressure on the combination of products these crackers generate. Indeed, given that the country has no LNG export facilities (and could take years to complete one), opportunities to monetize its surplus gas production are reduced to either building new pipelines (such as the one that today links the country to Turkey, Armenia, and Azerbaijan) or cracking its gas into olefins. Iran is already aggressively betting on this latter option (while also planning additional gas pipelines) to meet the feed stock requirements of the new petrochemical plants on the Western side of thecountry. For example, construction of a 1,500 km West Ethylene Pipeline is now in its final stages. This, combined with Iranian plants’ low operating expenses, is

likely to position Iran as the lowestcost producer of light olefins.7 Yet this also means that the combined price of a naphtha cracker’s product slate will now further widen its premium respective to gas crackers. Iran’s reentry in the market will therefore require a second look at the comparative profitability of a naphtha-based versus gas-based petrochemical portfolio, while gasproducing countries in the Gulf may find changes in the comparative profit ability of exporting gas as LNG versus transformed into olefins. 3. Downstream. Just as cheap naphtha is good for naphtha crackers, cheap crude oil is good for refiners. This may not lead to many incremental investment opportunities in the Gulf, as several massive capacity-enhancement projects are already under way (without considering additional downstream expansion that could take place in Iran). Nevertheless, as financially strapped IOCs and independents in other parts of the world seek to raise cash by divesting their refining assets, Middle East NOCs can potentially swoop in to capture attractive M&A opportunities.

Back to the Future Sanctions relief for Iran, and the resulting increase in hydrocarbon supply, reinforces the conclusion that we are – as in the 1980s – at the beginning of a potentially long stretch of cheap oil years. The years ahead pose both challenges and opportunities – the future belongs to those who incorporate these changing dynamics quickly and effectively into their strategies. -Richard Forrest, Partner; Sean Wheeler, Partner; Eduard Gracia, Principal and José Antonio Alberich, Partner. AT Kearney

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y d a e r l i a R

the , is Rail hance n a m en or, O gies to t c e r i, Di t strate m t n a Al H vernme gh rail n a o m ou lrah about g ivity thr u d ct Ab dent nne fi o n c o c ’s ntry cou

138 GSC YEARBOOK 2016


BY LAND

What challenges is the Oman Rail Project facing from the current low oil prices? ABDULRAHMAN AL HATMI: The low oil price environment is an extremely challenging one but we see the upside of it. It provides us with new opportunities and ensures that we do not become complacent and continue to rely solely on oil money to fuel economic growth. The current situation forces us to think differently and instils a sense of urgency in all other sectors to step up their performance. There are the negative impacts of course, mainly the capacity and cost of funding, but this is a short -term issue, and longterm decisions are not made based on short-term challenges.

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BY LAND

We are being creative when it comes to funding the rail network. First, we have segmented our operations and built new models around the funding needs of the different business streams involved. We are in good shape because there are a multitude of investment opportunities associated with the project. Passenger terminals and operational maintenance, for example, are seen as very lucrative for investors. We have seen very good responses and are working to build on these potential partnerships. There is room to raise competitiveness standards which, once in place, will encourage plenty of international players. How is Oman Rail working to best align itself with the goals of the logistics strategy and maximise added value to the sultanate? HATMI: The rail project is the cornerstone of the logistics strategy and integrates the many pieces that must combine to make logistics a future economic driver. We think of ourselves as the backbone of the sector. Either directly or indirectly, the railway project will have a huge impact on the economy. We aim to increase capacity, reduce costs, improve efficiency and, ultimately, create economic freight corridors. First, we are focusing on market segmentation, which will ensure appropriate revenue streams and allow Oman to fully utilise its assets in the most efficient way. Second, we are focusing on competitiveness. To be successful globally, you must be competitive. Not only do we have tough competition regionally; we also have the large ports and extensive networks to compete with in the Indian Ocean. There is a market of over 2bn people in the Middle East and the Asian subcontinent, which we need to compete heavily for.

140 GSC YEARBOOK 2016

We have very good ports here, but ports that focus on trans-shipment add little value to the economy. To be competitive, we need to anchor businesses around the ports, free zones and industrial areas. This is what creates real economic growth. We are working directly with the ports, and our first priority is to connect all three of them. This alone will require 1500 km of track, but it will enable us to connect the whole country and reach optimum returns for all the entities involved and consequently support the economy. Connecting only one part of the network does not give us the maximum benefit that we will get from connecting all three ports. How will knowledge transfer and capacity building be facilitated during the project? HATMI: We have started building

capacity in-house by making sure the brightest young Omanis are in on the ground floor of the project, and by ensuring that the development pathway is clear to everybody. It is important to realise that we are building a whole new sector, and we must encourage everyone to follow suit. Training, then, is a substantial part of both the sector and the project, similar to the way Omani skills have been developed in the energy sector. Our In-Country Value programme is an aggressive one, and is focused around three central objectives: offering opportunities to existing businesses; upskilling existing businesses and raising their capacities; and creating new industries, skills and technologies jointly with Omani small and medium-sized enterprises. -www.oxfordbusinessgroup.com


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