While worldwide economic growth and trade activity has declined over the past year, some regions—including the Middle East and Africa—are faring better than others. According to the World Trade Organization, GDP growth in the Middle East and Africa in 2008 was 5.7 and 5.0 percent, respectively. While these growth rates are down from the previous year, they greatly outpace GDP growth in the United States (1.1 percent) and the European Union (1.0 percent).
While the petroleum sector represents a significant portion of MENA’s economic activity, the manufacturing and retail sectors are also on the rise. The Kingdom of Saudi Arabia (KSA), for example, is taking steps to grow its private sector, especially in power generation, telecommunications, and petrochemicals. Its $80 billion investment in the King Abdullah Economic City (KAEC) exemplifies this commitment. KAEC aims to become “the single greatest enabler of social and economical growth for the Kingdom of Saudi Arabia,” with planned infrastructure investments to promote the manufacturing sector, including plastics, computer-chip manufacturing, and sectors using raw materials such as steel, wood, and paper.
According to a report by CB Richard Ellis (“How Global Is The Business of Retail?,” 2009 Edition), “The emerging markets have been a major focus of new retail activity, the rankings of the most ‘international’ retail markets have changed from last year, with a number of markets making significant moves up the global hierarchy: notable amongst these were Saudi Arabia (from 31st to 15th) [and] Kuwait (from 30th to 19th).”
In addition, MENA countries are investing heavily to expand and improve their logistics infrastructure and capabilities. KAEC, for example, will include a deep-sea port with capacity for 10 million TEU containers per year. And another development project in Saudi Arabia, the Prince AbdulAziz Bin Mousaed Economic City, is set to become among the largest transportation and logistics hubs in the Middle East, with plans for a new international airport, a railway station, and dry ports and operation centers capable of handling over 1.5 million tons of cargo annually. Dubai’s Logistics City is another example of a large logistics-related investment in the region.
These trends in manufacturing, retail, and infrastructure investments have led to increased demand for logistics outsourcing services, from both multi-national companies and local firms. The majority of manufacturers and retailers in the region currently manage their warehousing and transportation operations in-house, unlike companies in North America and Western Europe that have been outsourcing their logistics operations for many years. But the pendulum is now shifting towards outsourcing in response to various factors, including:
- Increased competition and cost pressures are prompting companies to focus on their “core competencies,” which for most companies does not include logistics.
- Land is relatively scarce, expensive to develop, and subject to a complex web of zoning requirements. As a result, investing in a new manufacturing plant is often a wiser capital investment than building a new distribution center. Also, foreign companies are not allowed to own land or operate trucking companies in certain MENA countries, so they have to work with local partners.
- Labor markets, particularly for logistics jobs, are highly dependent on foreign workers. According to McKinsey, about 99 percent of the private sector labor force of the UAE is composed of foreign labor; foreign labor represents 52 percent of the private sector labor force in Oman, 54 percent in Saudi Arabia, 70 percent in Bahrain, and 97 percent in Qatar (“Getting Labor Policy to Work in the Gulf,” Gassan Al-Kibsi et al., McKinsey Quarterly, 2007). Obtaining visas for foreign workers, however, is a very difficult and politically-sensitive task, as is navigating the various quotas and laws state governments have implemented, such as Saudi Arabia’s “Saudization” plan, to promote the hiring of nationals across the private sector.
As in other emerging markets, the logistics service provider industry in the MENA region is highly fragmented, with many small players offering point solutions, such as freight forwarding, warehousing, and transportation services. Few providers have nationwide capabilities, and even fewer have the people, assets, and IT sophistication to serve clients across the entire region. Simply put, the 3PL market in MENA is still in the early development phase, and if it follows the same evolutionary curve as the markets in Europe and North America, a period of significant consolidation is on the horizon. This will give rise to integrated service providers with the scale and resources to offer end-to-end logistics services across the entire region.
As the 3PL market continues to evolve and mature, the key question for companies becomes: Which attributes are the most important when evaluating and selecting a logistics service provider in the MENA region? At a high level, the attributes a customer should look for in a 3PL partner are consistent regardless of geographic region. But there are several attributes that are particularly important when selecting a 3PL partner in the MENA region, including local expertise and relationships; access to labor; proximity to industrial zones and transportation hubs; sophisticated IT infrastructure; and trust and integrity.
(This posting is an excerpt from a more detailed Executive Brief–available here for download–that ARC wrote on behalf of Wared Logistics).
