Middle East Logistics: Looking Beyond Dubai

While Dubai draws much of the focus for companies looking for a point of entry into the Middle East-North Africa market, better options may be available to access the region's fastest-growing consumer markets

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Global enterprises looking to import goods into the Middle East-North Africa (MENA) region have become accustomed to thinking of Dubai as their primary point of entry into the market. With well-established, modern port facilities, attractive free trade zones, and a locally headquartered marine terminal operation, DP World, that is one of the largest in the world, Dubai has much to offer for companies targeting the growing region.

But if you are considering extending your supply chain into the Middle East to tap into the region's rapidly growing consumer markets, Brian McHale would like to expand your horizons beyond Dubai.

McHale is the longtime American logistics industry veteran at the helm of Wared Logistics, a Jeddah, Saudi Arabia-based provider of importation, transportation, distribution and logistics management solutions and services in the MENA region. Formed last year as a joint venture of Saudi-owned Zahid Group Holding and Construction Products Holding Company (CPC), both of which have more than 30-plus years in the logistics industry in Middle East, Wared operates transportation hubs, warehouses, and distribution centers across the region, in Saudi Arabia, Egypt, Syria, Lebanon and the United Arab Emirates.

Wared offers services in Dubai and its fellow emirate, Abu Dhabi, but McHale points out that the bulk of consumers — and the bulk of future consumer spending — is outside the UAE. "We have the ability to import product with our physical locations in Dubai and Abu Dhabi, but it's really a question of math," McHale says. "There are only 1.5 million people in Dubai, and with the financial crisis there, the consumer market has been drying up faster than a damp towel in the Saudi sun. You're going to want to distribute your product to the consumer base, and that consumer base is in Saudi Arabia and Egypt and, to some extent, Lebanon."

In fact, a recent report from ARC Advisory Group notes that while the UAE will continue to enjoy much higher per capita income levels than countries like Saudi Arabia and Egypt, those latter two countries will together account for more than $200 billion in retail sales by 2013, according to estimates by Business Monitor International. Many retailers already are making plans to get into the market to take advantage of that increased spending. The ARC report, "Beyond Dubai: Taking a Holistic Perspective of Trade and Logistics in the MENA Region," written by ARC analyst Adrian Gonzalez on behalf of Wared, points to a 2009 survey of retailers by CB Richard Ellis suggesting that more than one-quarter of the 220 retailers questioned were "actively looking" to open at least one store in the MENA region.

Expanding Logistics Market

The ongoing and impending expansion in the region also is driving growth in the logistics industry within the region. In a report issued last year, consulting firm Booz & Company estimates the Middle East transportation and logistics market will increase from approximately $18 billion in total value in 2008 to $27 billion by 2012. "Transportation (ground transport, air and sea freight) will likely grow at approximately a 7 percent [compound annual growth rate (CAGR)], only slightly surpassing overall GDP growth. But logistics services, that is, warehousing, contract logistics, and freight forwarding, are expected to show substantially higher annual growth rates of 10 percent or more," the consultancy writes in the report, "Not Too Late: Finding Opportunity in Middle East Logistics."

Logistics service providers have a significant incentive for moving into the region, as profit margins for operations in the MENA region are likely to be higher than in more established areas of the globe. "Those profit margins can increase in tandem with the complexity and level of sophistication of the logistics service. But even basic road transport services yield operating margins of approximately 6 to 10 percent — significantly higher than in mature markets such as the European Union, where margins are typically about 2 to 4 percent," Booz reports. That trend is likely to continue in spite of the global recession, the consultancy adds.

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To date, however, the logistics and transportation market has largely been fragmented among a myriad of smaller players siloed in one segment of the supply chain or another, and in one country or another within the region. "Some of these players operate quite profitable businesses within their local, modal, or customer relation-based niche," the Booz & Company report notes. "But most lack a clear strategic perspective and still perform as traditional operators with limited skills, capabilities and positional assets." The report adds: "There is still a great scarcity of sophisticated supply chain solutions and IT capabilities in the region. Reliable, high-quality, network-based services are also hard to find in the market."

Changing the Dynamic

Wared's founders created the company in part to change that dynamic. The business model for the company provided for uniting two established surface transportation companies, together with an established, London-based international freight forwarder and customs clearance organization, and then concurrently organically growing a full-service, asset-based distribution network with warehouses in key locations throughout the region, adding a planned 2 million-plus square feet of warehousing this year alone, according to McHale. In addition, the company is building the technology infrastructure necessary to give multinationals the kind of detailed visibility into their inventory in motion through Wared's network that they have come to expect in their 21st century supply chains.

That ability to provide a "glass pipeline" will likely be a necessary condition for any logistics service provider looking to operate MENA supply chains for sophisticated Western enterprises. However, McHale believes that Wared's local ownership gives the company a strategic competitive advantage in a region where domestic partners are a requirement, not an option, to own major assets in a country like Saudi Arabia. "There really isn't a Western model being created in the Middle East, primarily because the major players can't get into the region without a 50 percent local partner, and that really guts their model. Wared doesn't have that constraint," he says.

Local expertise also will be an important differentiator for logistics service providers operating in the MENA region. The ARC report, for example, notes: "Simply put, for multinational companies like Caterpillar and Volvo, a logistics service provider like Wared enables them to effectively navigate the legal, cultural and logistics complexities inherent in the region to exploit the vast business opportunities that exist there."

Changing Perceptions

For his part, McHale says that he is not surprised that the prevailing perception is that Dubai is the go-to gateway into the MENA region. "They've done a wonderful job of marketing themselves," he notes. He views part of his job — and part of Wared's mission — as helping Western firms understand the opportunities available for enterprises that can bring product directly into major markets like Egypt and Saudi Arabia.

McHale himself says that many of his own perceptions of the region and the MENA logistics market have changed since he came on as CEO at Wared after the company's creation last year. "I've spent pretty much my whole career in the Western Hemisphere conducting third-party logistics for companies like Ryder, Menlo and NFI," he says, "And even though I did have pretty extensive international experience with Menlo and Ryder, I still had a one-dimensional view of what third-party logistics was."

For one thing, McHale thought he would be at a disadvantage moving into his position because he doesn't speak Arabic. But that has proved not to be a handicap because essentially everyone in the Middle East from the manager level on up is fluent in English. "You have a multilingual management pool throughout the MENA region," he says. He also was surprised to learn that the blue-collar workforce in the Kingdom of Saudi Arabia is almost entirely expatriate, even despite government's more recent efforts at "Saudiazation" — the drive to employ more Saudi citizens throughout the economy in positions currently held by expatriates.

Asked about his personal experience living and working in the region, McHale offers: "What I've learned is that regardless of culture, human nature is pretty much the same, and businesses — regardless of how they're legally formed or fiduciarily financed — are made up of people, and those people's interest all center primarily around looking after their families and themselves."

Reflecting for a moment, McHale concludes, "It's been incredibly intriguing, it's been exciting, and it's been frustrating, but it's also been renewing." ¦