Logistics industry needs to think beyond the slowdown

The economic downturn has given the regional logistics industry time to pause and breathe. (EB FILE)

While slowdown in growth, decline in volume, and shrinking customer base dominated the issues surrounding the logistics industry in the year gone by, the UAE's logistics sector did reasonably well compared to the crisis the global logistics industry went through last year.

Industry players believe the new year is further seeing signs of renewed market stabilisation in the UAE. The icing on the cake is the recent World Bank report ranking the UAE at 24th place globally in terms of efficiency of customs clearance processes, quality of trade and transport-related infrastructure, ease of arranging competitively priced shipments, and competence and quality of logistics services.

However, even if the UAE's logistics and supply chain sector remained ahead of the curve despite the global slowdown, there are still issues that need to be addressed, believe industry players.

Emirates Business posed two questions before five major logistics firms of the region to delve more into the issue – what are the key challenges facing the logistics and supply chain sector in the UAE, and what are their expectations and resolutions for 2010. Everyone agreed: it's time to accept the market realities and move on.

The respondents were Gregory Olsen, Country CEO for Agility Dubai; Hussein Hachem, CEO-Gulf, Aramex; Shamsudeen Ahmed, Regional Director, Middle East, Ceva Logistics, Dubai; Tom Nauwelaerts, Head of Logistics, Al Futtaim Logistics, Dubai; and Brent Pearson, Managing Partner, Centre Point Logistics, Dubai.

Gregory Olsen

A big challenge to the industry in the UAE and the Gulf is the environment and infrastructure. The region suffers harsh temperatures and we are conscious of the effect our operations have on the environment, with the need to transport goods by truck over long distances, so we are constantly updating and refining our ways to combat this. With planned developments in the infrastructure of the region, we see the potential for growth rising.

For our industry, the economic downturn could be seen as a blessing in disguise, as it gave the regional logistics industry time to pause and breathe. Doubts about whether the sector could survive without the fast-paced growth it had experienced was unfounded. Rather than survive, the sector consolidated. The compelling fundamentals – Middle East and specifically the UAE due to its strategic location is the key meeting point, straddling major cross-roads of Asia, Europe, Asia and Africa, while offering excellent accessibility by air, land and sea – have remained and will not change.

Instead, projects such as Khalifa Port and Industrial Zone in Abu Dhabi was set in motion, with master plans for Area A agreed and dredging beginning; the Port of Djibouti had a $400 million (Dh1.4 billion) facelift and re-launched earlier this year; and we at Agility merged our Qatar operations with GWC, creating the largest and most integrated company in Doha.

Concerning 2010, we feel that regional investment in infrastructure projects such as ports and stadiums (Abu Dhabi); airports (Qatar) and construction (Dubai Metro) will fuel growth for the next few years. We are also seeing local governments liberalising regulations and diversifying themselves from oil and property, while some of the biggest regional private equity companies have stated they would like to buy logistics companies and tap into their future growth. This will eventually help position Dubai, primarily, and the region, as an international logistics hub.

Hussein Hachem

The challenging global environment has directly impacted the outlook for participants across the regional and international supply chain. Manufacturers, distributors and others in the sales sectors are looking for cost-effective ways to reach their end markets. This is significantly reshaping the global trade routes, including a greater role for logistics hubs such as Dubai.

At the same time, this means the industry needs to continuously focus on providing speed and reliability of service is maintained at all times to ensure a seamless flow of consignments across the supply chain.

The economic downturn led to an overall contraction in trade, affecting the movement of goods and services. Shipping volumes in general has been reduced across the board in the Mena region. At times like this, opportunities arise too. As a result of the overall slowdown in trade and consumer spending, there has been an inclination among clients to order lower volume of goods but with a higher frequency.

As a result, a lot of the volume earlier transported on ships is being diverted to air cargo. This is an interesting trend that we have seen evolve amid the global slowdown. The key question is how ready is the industry to adapt to such changes, which also represents opportunities, depending on how you view and address it.

Shamsudeen Ahmed

The global economic crisis has forced a lot of companies to look into their logistics spending in order to better redesign their logistics and supply chain requirements that meet their customers' expectations.

This has opened a lot of scope for outsourcing opportunities in the UAE and within the region. One of the most challenging issues last year was managing the volume decline due to less consumer spending that led to less shipment movement into the region. Further, the cargo capacity was taken out of the market, triggering rates to go up. However, we are seeing the situation is gradually and steadily settling down for the past few months, as volumes have started climbing up.

One of the most obvious opportunities for companies is to concentrate on their core competencies and outsource their logistics operations. This means the demand for third-party logistics or 3PL is going to pick up in the UAE as well as the rest of the region. Managing one's logistics operations constitutes a major chunk of a company's cost structure, which any company is keen to reduce right now, be it local or a multinational company.

The best thing to happen for the logistics sector in the region is to assess the ground realities, and match their business model with changed market conditions. Dubai continues to be a regional logistics hub, and I don't believe that position will change as none of the neighbouring countries has this massive scale of infrastructure in place as in Dubai.

Our resolution is to continue providing tailor-made services to our customers keeping our customers at the forefront of everything we do. Our unique value proposition, such as our operations excellence programme, smart solutions and sector expertise, gives us an added strength to understand our customers' requirements.

Tom Nauwelaerts

Because of the enormous growth, many companies have only been trying to cope with serving as much as possible their ever-expanding customer needs in the best possible way. This has put enormous pressure on limited resources such as existing infrastructure and people. Today, many companies are better aligned in terms of their internal capacity and market demand.

The general infrastructure in the GCC markets continues to be expanded and upgraded. The authorities have invested enormously in providing more and better infrastructure as well as improving and simplifying the accompanying business services.

I also believe that today there is a healthy balance of adequate logistics infrastructure and market demand in the 3PL arena. Many newly built warehouses have come online and there is a lot of new transport equipment available in the market.

A serious burden, however, remains and that is the overall level of technology being used. Many logistics companies rely mainly on blue-collar labour to get things done. However, I am convinced that labour costs will continue to rise, hence opening wide doors for more use of technology in the logistics field.

Also, the limited availability of technology partners in the region, especially in the area of supply chain software, limits companies to really leap forward here. In theory, this can easily be solved, but in reality, it is difficult to get access to readily available solutions that address the GCC specifics.

Today, many logistics companies are specialised in a few service areas only, from ocean or air forwarding to transportation and reverse logistics, and then mainly limited to their own home markets.

Potential exists for companies that provide end-to-end services on a GCC level. Currently, the offering in that market is limited and surely not price-competitive enough. New entrants will leverage the opportunity and upgrade the offering.

Without question, the global credit crunch has left its mark on the logistics industry worldwide, which is evident from the considerable decline in global trade volumes.

No doubt, the effect on the UAE logistics market has been felt. Without having detailed import and export volumes at hand, it remains obviously difficult to assess the exact impact during 2009.

The effect on the UAE logistics sector also varies quite a lot depending on which area, industry and logistic service we are talking about. As an example, we can see that the food retailing business has grown further strongly, while project cargo has probably slowed down since there are less new large construction projects being launched.

Throughout 2009, the logistics industry has had to digest big shifts in the logistics flows. As outbound volumes reduced because of slower market sales, this has led to a large buildup of stock in warehouses. Meanwhile, inbound flows kept going steady since much product was on unstoppable orders. As a measure, companies reduced their incoming product flows, in order to balance their stocked product again in line with the new market realities.

Today, the logistics sector is back into its normal rhythm without having to deal with this massive volatility of volumes. Overall, I believe the logistics industry has performed in 2009 at the levels we were enjoying in early 2008, and this trend seems to continue. The enormous growth increase of business volumes throughout 2008 has been erased.

Predicting the future of the logistics industry has never been more difficult than in these days, since the logistics industry is in fact very correlated with the state of the global economy. And, any predictions on that are extremely challenging to make.

It would probably be wise not to get too overexcited yet on a global upturn of the logistics business. There is still too much uncertainty around, with a lot of different opinions.

Although it is pretty clear that the markets have stabilised, so for the UAE logistics market, I would predict again overall market growth going forward.

Nevertheless, cautiousness and keeping as close as possible with your eyes on the ball are key words to me. The success of the UAE logistics has been mainly built on pure entrepreneurship and a relentless drive of the people to succeed, and that spirit hasn't gone away. In fact, from my personal view, we came out even stronger during the past year.

Many companies here have taken the opportunity to rethink their business models and evaluate all the options in their markets. Companies that are agile enough have developed new windows of opportunity and will be able to profit from the possibilities created.

Brent Pearson

I believe the key challenges for logistics and supply chain in the UAE will be the cost of doing business and maintaining its infrastructure advantage. The UAE and Dubai in particular is primarily a transshipment hub for the region and North Africa and Europe. To ensure the economics of this business remains intact, focus will be on becoming more efficient and reducing both unit costs.

The taxation regime is obviously beneficial, however it cannot stop there. The challenge remains with logistics companies, transport providers and free zone managers to ensure that the UAE is the place of choice to manage the transshipment business.

From a geographical perspective, there are arguably other cities in the region that could be better placed to provide a transshipment service. The reality is the infrastructure investment that has occurred in the UAE has made the country undoubtedly the primary transshipment hub in the region. The continuation of this investment, in addition to ensuring costs, is competitive.

On a regional level, I believe the land transport sector needs to improve – this is in no way being critical with the current providers. I believe the problem is more at a macro-level such as road infrastructure and cross-border issues. A GCC railway would go a long way to improving the current inefficiencies in this sector.

The past year was a challenging one for most sectors including logistics. There was considerable pressure on margins, excess capacity as far as warehousing and all forms of transport. Towards the end of 2009 this had improved and will continue to do so in 2010, although, I expect this improvement to be gradual not significant. Greater consolidation is required in the UAE as far as the number of logistics providers is concerned – this could be achieved through either merger or takeover or through the closure of those businesses that cannot adapt to the new playing field.

I think the next two years will see the entrance and expansion of some international logistics companies in the UAE via acquisitions. As far as resolutions are concerned, I always tell my team to stay close to our customers and understand what they really want and expect from us as their logistics supplier.

 

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