Logistics a Mainstay Industry of UAE's Economy - An Overview


By

Lenin Karthikeyan
Senior Lecturer
Manipal University
Dubai
 


Logistics has became one of the vital activities for all companies where has been treated as strategic function to achieve competitive advantage over a companies' competitors.

Logistics has become widely recognized by the general public especially in this new millennium when companies expand their business in terms of range and volume of products. As market opens, global organizations look at the whole world as one potential market- sourcing, manufacturing, researching, raising capital and selling wherever the job can be done best (Gourdin 2001, p-14).

There has been increasing interest in Logistics in recent years, as it has helped to lower the operational costs, growing power of retailers, improved delivery performance and increased customer satisfaction levels, thereby making an organization more competitive in terms of cost, quality, delivery and flexibility. The value of logistics is also increasing due to the advancement in technology and globalization as more and more multi-national companies (MNC) are sourcing, manufacturing and distributing on a global scale, making their supply chains very complex to manage.

To look for the word "Logistics definition" Google search gives us approximately 61.300.000 results related to the term "Logistics". Around 20 definitions describes that logistics is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements including inbound, outbound, internal, and external movements, and return of materials for environmental purposes (Council of Logistics Management 1991).

Waters also describes logistics as 'the function responsible for the flow of materials from suppliers into an organisation, through operations within an organisation, and then out to customers' (2003, p-5).

The fact that logistics is explicitly recognized as a part of the supply chain process means that logistics can impact how well (or how poorly) an individual firm – and its associated supply chain(s) – can achieve goals and objectives. It is a process of the supply chain which adds the value of time and place utility. Nowadays, it is no longer an internal function within the organization. The environment which is related to logistics fields is realized to be much more immense than imagined. When the world-wide businesses expand, logistics expands its roots over the borders as well.

Logistics is defined as part of supply chain that plans, implements, controls the efficient and effective forward and reverse flow, storage of goods, services and related information between the points of origin and the point of consumption in order to meet customer's requirement (Vitasek, 2011).

Logistics is a functional system which is essential for enhancing efficiency, both in the flow of goods and information and to meet low-cost, fast, and reliable delivery objectives within a company and throughout a network of companies. Logistics plays a role for company's competitive advantage in both efficiency and effectiveness.

COMPONENTS OF LOGISTICS

Logistics services can be considered in terms of five major groups of activities: 

a) production processes (production flow management, inventory management,  packaging, order processing, demand forecasting);
b) materials and other inputs (procurement, materials management);
c) transport and storage;
d) product support (parts and services); and
e) reverse flows and disposal (product/equipment returns, recycling, waste).

The provision of these services is heavily dependent on reliable and timely information flows. The basic components of these flows, which facilitate the integration of related logistics activities, include:

* sales and delivery (e.g. sales information and forecasts, track and trace);
* inputs (e.g. materials, order placement); and
* export/import documentation (particularly customs and quarantine).

The development of e-commerce has significantly increased the capabilities and lowered the costs of information systems. Internet-based approaches are providing firms with new mechanisms to interact with customers and suppliers, and to re-engineer business processes.

The infrastructure and resources used to provide logistics services comprise:

(a) human resources (managerial and operational);
(b) financial resources;
(c) packaging materials;
(d) warehousing (land, buildings, plant and equipment);
(e) transport (e. g. pallets, containers, vehicles, terminals); and
(f) communications facilities, equipment and software.

The purpose of this article is to understand the current logistics scenario in UAE especially Dubai and to identify the existing challenges and threats facing companies and businesses. A discussion about the potential solutions to these challenges is also covered.

Residing as a Professor in UAE for a decade this topic is one of the great interests for the author. The information presented here may also be useful in the classroom. It will also help other people outside of UAE would truly understand the nature and potential of UAE Logistics.

Role of Logistics in UAE's Economy

As with any country in the world, logistics plays an active role to strengthen the nation's economy. The UAE sees continual economic expansion with a relatively strong position in the regional and global economy.
UAE's greatest  strength is its strategic location (as it is positioned at the cross roads of major shipping routes linking Far East and Europe and also serves as an interface between Eastern and Western worlds trade and commerce) UAE is regarded to be the gateway to the world's most progressive markets, including Africa, India, and China.

The country's geographical position and access to mainline infrastructure makes UAE as a leading sea-air multimodal transport hub in the world – an improved efficient and also a cost-effective mode of transport that generates desirable cost saving in transit time and freight cost, compared to pure sea freight or air freight mode. The need for these multi-modal hubs is driven by the need to optimize the cost efficiencies of sea freight with that of quicker but expensive air freight.

Indeed, UAE's position as an international logistics hub proved to be significant during the recession. It was one of the strengths that the government focused on in order to endure the effects of the crisis. While other economies were flagging, the country proved to be resilient as its merit as a logistics hub continued to attract investors from abroad.

In 2009, the UAE accounted for about 0.4 percent of the world's total foreign direct investment (FDI), 1.5 percent of that of developing countries, and over 10 percent of FDI into the Arab countries.  Exports, particularly non-oil, also remained robust. In 2009, the UAE's exports and re-exports increased despite the global financial crisis to reach $209.6 billion. Exports and re-exports of non-oil products also increased to $139.7 billion.

According to Frost & Sullivan study (2012) the UAE logistics marketplace is likely to witness steady growth this year with revenues reaching $7.5 billion. According to new research it is predicted that it shall witness consistent development of around 8-9 per cent every single year throughout the period 2010-2020 and reach revenues around $16 billion by 2020.

The recent research predicts that the UAE logistics market is anticipated to witness impressive growth in the next decade since it has a steady growth in the  global trade volumes, as well as a steadily-growing domestic market. The UAE logistics market recorded revenues around $7.03 billion in 2010, witnessing a rise of about 10.7 per cent within the previous year.

The UAE would increase its competitive advantage by becoming a world class logistics hub which will not only serve the region, but also the Indian sub-continent and provide a halfway stage for goods bound for Europe from China and East Asia. Dubai's main competitive advantage is the optimal combination of different transport modes (a port, an airport and roads to reach all GCC countries and all the way to Lebanon). In the near future it could be complemented by the GCC railroad network.

The entire logistics spend, or total logistics market size, in the United Arab Emirates represents around 2.5% of nation's total gross domestic product. However, it represents about 6.4 per cent from the services GDP. Being located close to the high growth economies of China and India the United Arab Emirates imports about 60% of their items from these nations, mainly transiting through Dubai's borders.

The Challenges

Majdalani et al (2007) believe that Dubai is best positioned to become a global multi modal hub as it has some of the key features required in a integrated hub, including:

* An economic environment that attracts foreign firms
* The availability of a large free zone built around a world class port and airport
* Track record of port and airport operator managing complex processes
* Highly competitive handling charges
* Provision of living standards to meet the demands of a large expatriate population

Based on the above discussion the key criteria identified for the setting up an integrated logistics hub are:

* Strategic location – along main shipping and air routes
* World class air and sea ports
* Efficient and adequate logistics infrastructure
* Ability to provide value added services at the hub
* Be a part of the business hub
* Cost effective multi-modal transfer of cargo
* Reasonable port, airport and handling charges
* Limited government intervention and bureaucracy

According to the recent study the estimated value of the UAE logistics market was determined using a combination of primary and secondary research, as well as data analysis, which found that the bulk of revenue was collected by the freight forwarding segment at around 63.1%, supported by heavy demand from customers in the oil and gas, engineering, and food and beverage sectors. Transportation was second highest contributor at 18.6%, with road transportation holding a dominant share in the segment. The final two contributors to logistics revenue are warehousing at 14.2% and value-added logistics services (VALS), such as packaging and labelling, at 4.1%.

Another factor that differentiates the UAE from several other logistics markets is the prominence of large domestic industry groups that have diverse business interests and operate their own logistics companies, such as the Al-Futtaim Group and Al Tayer Group. In addition, foreign LSPs require a local partner in order to effectively penetrate the domestic logistics market.

The growth of Dubai and the UAE as a logistics hub also poses challenges, foremost of which is the issue on the rate of inflation and cargo security. These are the pressing concern, especially as the country positions itself to be an international multi-modal logistics platform. Firstly a large part of the inflation in the UAE is a result of rising rents. Signs of rising property prices in Dubai feeding through to consumer inflation emerged at a faster pace. Especially higher rents and costs of operation including wages adversely affect Dubai's standing as a transport and logistics hub.

This has a double impact on the costs of operation for companies - higher rental costs and also a higher wage bill as companies need to compensate its workers in the form of increased accommodation allowances. To attract major companies to set up their operations in Dubai, inflation must be reigned in or the cost advantage of using Dubai as a hub may no longer exist.

Technology is only going to advance and hence Dubai has to provide cost efficiencies for companies to use Dubai as their base of operations. This should be viewed in the context of the increase in rents in Dubai. Furthermore, the rising rent leading to demand for higher wages compound the problem. In order to attract major logistics players to set up large operations in Dubai, the Free zone authorities should allot land at preferential rates to these companies and also provide accommodation for workers at cheaper than market rates.
The small size of the domestic market makes it critical for the hub to be utilised to serve international markets and therefore all the more important for cost efficiencies to exist for companies to use Dubai as their logistics hub.

An educated workforce is an asset for the logistics industry. In Dubai there is a shortage of professional logistics skills. This clearly indicates a gap between the requirements for an educated workforce in the industry and what is currently available.  Professional organizations in supply chain and logistics should set up their chapters in the region and aggressively pursue training and certification opportunities in Dubai.

E-Commerce has not yet taken off in the UAE mainly due to the lack of e-payments gateways. The banking system needs to set up gateways and standards for payments between the different companies.

As screening of cargo become more stringent, the challenge for officiating bodies in the country is to strike a balance between addressing the need for cargo security while permitting international trade and commerce to thrive. In addition the  customs authorities should extend the pre-clearance of cargo facility to logistics companies thus reduce lead times.

The development of free trade zones and industrial cities in neighbouring nations is expected to reduce the number of companies choosing the UAE (especially Dubai) as the hub of their operations. Regional logistics hubs, such as the ones in Saudi Arabia and Kuwait, pose a threat to JAFZA in the quest to be the premier logistics hub.

UAE should rapidly develop facilities and, if possible, additional logistics hubs that complement the existing infrastructure. Large-scale infrastructure projects including Dubai Logistics Corridor, Dubai Logistics City, enhancing of Jebel Ali Port and JAFZA, Dubai World Central, and the prestigious, ground-breaking Al Maktoum International Airport, among others, are expected to retain Dubai's (as well as the UAE's) position as the dominant logistics hub.

Logistics industry experts in the region observing the emergence of alternative logistics hubs in the GCC suggest the UAE should implement the following measures to retain cost efficiencies for companies operating from its territory, and thereby retain its leadership in the GCC: reduction of airport landing/parking charges in order to stay ahead; reduction of seaport dues, in order to remain competitive; remove land premium and quit rentals for companies leasing land in free trade zones; reduce land cost near sea and airport areas, and extend land tenure without additional premiums; introduce special incentives that allow trusted logistics companies to break-bulk (that is, deconsolidate both local and transhipment cargo) close to their own factory premises outside the free trade zone; allow pre-clearance of cargo: in some countries, this facility is allowed only to air express companies.

Conclusion

The good news is that massive infrastructural developments have been initiated to position Dubai as a world class logistics hub. Along with the physical infrastructural developments progress has been made in developing the financial markets, improving the corporate governance system and logistics related education and research will change the logistics landscape dramatically for the better.

Bibliography
Waters, D. (2003), Logistics: An Introduction to Supply Chain Management, Palgrave McMillan, New York.

Fernandes, C & Rodrigues, G.(2009), Dubai's Potential as an Integrated Logistics Hub, The Journal of Applied Business Research, Vol.25, No.3. Dubai.

Majdalani F., Koegler U. & Kuge S. (2007), Middle East Transport and Logistics at the Crossroads', Booz Allen Hamilton,  http://www.boozallen.com/media/file/ME_Transport_Logistics_Crossroads.pdf , retrieved on 3 September 2012.

Ashai Z., El Dahshan M., Kubba J., Talati H. & Youssefi P.(2007), 'The Transport and Logistics Cluster in the United Arab Emirates', Harvard Business School, http://www.isc.hbs.edu/pdf/Student_Projects/UAE_TransportLogisticsCluster_2007.pdf, retrieved on 21 September, 2013

Emerging threat to the UAE's logistics hubs (2012), http://www.arabiansupplychain.com/article-8152-emerging-threat-to-the-uaes-logistics-hubs, retrieved on 14 March, 2013

http://siteresources.worldbank.org/INTTRANSPORT/Resources/336291-1152714163458/2744896-115279562 4181/ibaluch-presentation.pdf
 


Lenin Karthikeyan
Senior Lecturer
Manipal University
Dubai
 

Source: E-mail December 31, 2013

          

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