SOHAR Port and freezone has named 2017 its Year of Logistics. In the first of  two part series, CEO Mark Geilenkirchen, shares insight from an exclusive report by MEED on the trends that will shape 2017

 

GCC governments have identified logistics as one of the key sectors to support their diversification strategy, with huge infrastructure spending laid out over the near future.

A focused approach towards the development of free-trade zones by the GCC nations has been a major contributor to the development of the logistics sector. Also, the promotional policies of free-trade zones have attracted multinational corporations to setup continent-level distribution centres for air and sea modes, thereby boosting the logistics services market.

Saudi Arabia
Saudi Arabia’s General Authority of Civil Aviation (GACA), with the support of other government agencies, is planning to set up free-trade zones at Jeddah and Riyadh airports as part of the long-term plan to diversify the Kingdom’s economy. The free-trade zones would be set up to attract foreign businesses through relaxed licencing, visa and taxation rules across industrial and services sectors.

UAE
Free-trade zones are an established phenomenon in the UAE. Jebel Ali, the UAE’s first free-trade zone, was setup in 1985, and has helped the country to significantly boost its industrial base and diversify its economy. Well over 20 free-trade zones now exist in the country, offering a range of benefits to businesses, such as 100% foreign ownership, import and export tax exemptions, repatriation of capital and profits, corporate tax exemptions up to 50 years, no personal income tax, and assistance with labour and support services. One of the latest free-trade zones is Umm Al-Quwain, set up primarily for SMEs and micro businesses; however, it is also attracting larger businesses.

Oman
To diversify its non-oil revenues, Oman began setting up free-trade zones in 2000. Oman currently has three functioning free-trade zones: at Salalah, Sohar and Al Mazunah. Salalah and Sohar are the larger and more important free-trade zones, and operate major projects. Oman is now building its fourth free-trade zone at the port city of Duqm, which when completed is planned to cover a mammoth 1,777 square kilometres, to serve the tailored needs of heavy manufacturing, tourism, logistics, food packaging, education and fishery industries.

Kuwait
Kuwait plans to build free-trade zones on five of its islands: Boubyan, Failaka, Warba, Miskan and Awha. The planned zones would serve as economic and cultural gateways between the northern Gulf region and Kuwait. These are slated to boost regional and international competitiveness. The proposal includes involving the private sector to finance, execute and operate the free-trade zones.
Governments across the GCC are leveraging existing and constructing new free-trade zones to offer a competitive edge to businesses and to help diversify their economies.

Qatar
Ras Bufontos free-trade zone spans 4.1 square kilometres of land close to the new Hamad International Airport and is specialised for companies operating in the technology, energy, construction, info-tech, and transportation sectors. Two other special economic zones include Um Alhoul and Al Karaana. Um Alhoul will be a 33.5 square kilometres light-manufacturing cluster adjoining the new port project, south of Al Wakrah, while the 38.4 square kilometre Al Karaana, located halfway between Doha and Abu Samra, targets businesses involved in building materials, machinery and fabrication, specialised spill-over industries, as well as safety, maintenance, and  specialised warehousing and logistics activities.

Bahrain
Bahrain boasts three main free-trade zones: Bahrain Logistics Zone, Bahrain International Investment Park, and Bahrain International Airport. These are suitable for foreign companies intending to use Bahrain as a regional manufacturing or distribution base. These free-trade zones enjoy a robust infrastructure and offer significant investment opportunities for logistical expansion, to help overcome existing trade bottlenecks.

POPULATION GROWTH
In 2015, the population of the GCC region was about 50 million, with expats making up more than 40% of the total.

The region’s growing population, compounded by a high proportion of expats along with a large working-age demographic, increases travel frequencies and makes further investment in transportation and logistic imperative.

The growing population also increases trade demand, stimulating all industries from retail to automotive, enhancing the attractiveness of the GCC region for investment across sectors, leading to the further expansion in logistics.
Between 2014 and 2019, the GCC’s population is expected to increase at an annual rate of 2.5%, much higher than the aggregate global population growth rate of 1.2%, further driving demand in the sector.

Growth in the retail sector and the expansion of logistics networks across the GCC region share a cause and effect relationship, as each has been driving the development of the other. There has been a boom in the construction of refrigerated warehousing facilities, especially in Dubai, Oman, Kuwait and Saudi Arabia, with significant levels of investment in cold chain logistics.

This has been due to the rapid growth in the FMGC retail markets, fresh foods market, and the growing preference for frozen and chilled foods. Due to the growing opportunities and promising prospects, private players are also investing in logistics. In late 2013, Spinneys, the Middle East supermarket chain, expressed its willingness to invest in constructing cold storage facilities worth $15 million in the logistics cluster of Khalifa Industrial Zone in Abu Dhabi, UAE.

The GCC retail market was valued at $221 billion in 2015, driven by steady economic growth; rising disposable incomes; a growing, young and affluent population; increasing penetration of international retail players; and mega events such as the 2022 FIFA World Cup, and Dubai Expo 2020.

MANUFACTURING SECTOR BOOM
The GCC manufacturing sector, expanding at a CAGR of 5.2%, is one of the primary factors driving the demand for logistics in the region. Factors driving manufacturing industry growth include low setup and running costs, duty-free access to manufactured goods in the GCC, the Greater Arab Free Trade Area (GAFTA), the US-GCC Framework Agreement for Trade, and favourable tax regimes.

In 2015, the GCC region had 16,842 manufacturing units, and the sector is projected to witness a CAGR of 4.8% from 2015 to 2020. Logistics, an integral part of the supply chain, is essential for the procurement, production, distribution and handling of raw materials and finished goods.

Moreover, the capital-intensive nature of GCC industry makes it imperative to have a robust logistics infrastructure. The growth in the manufacturing industry has been supporting strategic initiatives such as import substitution.

E-COMMERCE GROWTH
High Internet penetration and the changing buying habits of consumers in the GCC have been the main drivers of a five-fold jump in e-commerce demand, from $3.3 billion in 2010 to $15 billion by 2015. About 54% of the population in the GCC is young, below 25 years of age, and mostly tech-savvy, further driving online retail demand. Lured by growth volumes, private equity and venture capital firms are also investing in the GCC’s burgeoning e-commerce sector.

Swift logistics is indispensible in order to manage inventories, billing, packaging, shipping, cash on delivery, product return and exchange, tracking, and much more. But as an emerging economy, operational gaps on the GCC’s logistics front are posing significant bottlenecks to growth.

Nonetheless, e-commerce is still one of the top megatrends to boost business in the GCC and is therefore expected to climb 40% by 2020.

GCC TRADE
Trade with Asia and Europe is likely to remain the major driver of freight forwarding and transportation companies in the region. The booming GCC trade results in huge demand for port services. Between 2012 and 2014, the region’s total imports increased by 5.3%, while total exports decreased by 2.9%, mainly due to falling oil prices. The major trade partners of the GCC region include the twenty-eight countries of the European Union, China and India, which together account for nearly 40% of its total trade. As the GCC develops itself as an important global trade hub, demand in its logistics sector will rise strongly. Typically, the UAE and Qatar have been the most active trading nations in the GCC, while the much larger economy of Saudi Arabia has to-date been slightly inward facing. But that is changing now, with all the GCC nations becoming more focused on diversification and strengthening trade relations with other nations.

Trends in Logistics

Contract Logistics
The dominance of integrated service providers is a major trend in the GCC market, with the sector slated to expand by 33% in the MENA region by 2017. By outsourcing the logistics part of their operations to 3PL or 4PL providers, companies can focus on improving their core competencies while saving time and money. Moreover, increased competition has necessitated outsourcing to help companies maintain their position in the market. 4PL is the next step in the evolution of the logistics industry, as more customers require partners to share risks and gains.

IoT & Smart Logistics

The Internet of Things (IoT) is rapidly gaining ground in the logistics sector in the GCC, with companies implementing enhanced connectivity technologies to increase efficiency in port and road logistics. IoT offers traders a mobile, round-the-clock application platform that gives them real-time information from any geographical location. This in turn leads to better traffic management in and around port areas, and reduced waiting times at the docks. As an example of a successful IoT implementation in Dubai, part of a “Smart Port” initiative, active RFID (radio-frequency identification) tags have been issued to trucks transporting cargo to and from Jebel Ali terminal. The UAE and Qatar will also invest significantly in the development of IoT, with the GCC’s cloud market set to grow from $118.5 million in 2014, to $668.5 million by 2020.

Autonomous Vehicles

Autonomous vehicles are capable of sensing their environment on the basis of global positioning systems (GPS), radar, sensors and software, and navigate without human input. The technology of autonomous trucks holds great promise in the GCC as it can infuse a lot of efficiency in the road freight industry by reducing a large number of low-value expat jobs and creating high-value digital technology jobs for GCC nationals. Most of the freight in the GCC moves by truck, with more than one million trucks currently in operation, and this number has been growing at 5%–9% year-on-year since 2012. Experts believe that this trend would change the face of the GCC logistics industry, providing great cost savings and technological advantages to trucking companies in the region.

Development of Rail Network

The Gulf region’s railway landscape is set to transform due to the vast number of projects in planning and already underway. The need to balance out excessive dependence on roadways, save on fuel costs, and lower environmental impact has necessitated huge investment towards the development of railways in the GCC region. Over $200 billion have been earmarked for investment in constructing thousands of kilometres of new railway lines across the GCC. Saudi Arabian Railways is building a massive rail network of 5,000 kilometres to strengthen its existing road connectivity.
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Next month, Mark writes on the challenges ahead