The Middle East The world’s future logistics hub

The Middle East has acted as a refuelling point for air freight carriers and shipping lines moving between Europe and Asia for many years. It was therefore only a small step to create hub and spoke operations in this region in order to maximise capacity and improve operational efficiencies. Now just as important as its geographical location are a range of other advantages. These include:

• modern facilities

• relative lack of corruption

• free trade zones

• open sky policies

• easy customs procedures

The development of the now popular sea-to-air product (consignments which start off as sea freight are offloaded in the Middle East and then shipped by air to the final destination, mainly in Europe) also came about due to the Gulf countries’ advantage in transport and logistics assets. A lack of air cargo capacity out of India meant that shippers could more easily move goods by sea to a major port such as Dubai, and then air freight the goods to Europe. This worked due to the imbalance of air cargo flows into the Middle East which left air carriers looking for back loads to Europe. As a result transit time can be reduced by a week or more. As an illustration of the importance of the multi-modal approach, Dubai International has 56 truck docks for import, export and perishable cargo, with seven dedicated to sea-to-air traffic. Both Dubai’s airports are integrated with the main sea ports, Port Rashid or Jebel Ali, and movements of containers can take just six hours. The transfers can take place under bond.

An increasing number of manufacturers have decided to base their distribution facilities at hubs such as the Jebel Ali Free Zone in Dubai, from where they can more efficiently supply growing consumer markets across the region. For example, Japanese manufacturer Canon uses this location as its hub to supply 45 markets in the Africa and Middle East region. 95% of its product is transported to the hub by sea where value adding logistics services such as localisation and kitting can take place.

Chinese high tech manufacturer Huawei has also recently decided to use Dubai as its regional hub. Its location in the Jebel Ali Free Trade Zone will shorten delivery time by about 30 days for its sea freight shipments. The manufacturer’s logistics strategy for the region is typical. The hub will initially supply the Gulf countries and Pakistan but will then be expanded to serve Kenya, Tanzania and the rest of Africa.

One of the reasons why companies are increasingly basing their distribution operations in the Gulf is the business-friendly attitude which has been developed. This was borne out by the 2014 Agility Emerging Market Logistics Index. The Market Compatibility portion of the Index, which measures whether conditions are favourable for business and trade, was dominated by Gulf countries Qatar, UAE, Oman, Saudi Arabia and Kuwait, along with nearby Jordan.

‘Connectedness’ – that is, the quality of transport infrastructure and range of locations served by shipping lines – is also critical to the development of hubs and the region also performs impressively against these criteria. The UAE, Oman, Saudi Arabia, Bahrain and Qatar all appear in the top ten countries of the ranking.

Too much capacity?

However will the momentum that has been growing in the region be enough to support the huge capacity which is being created for sea and air freight?

At present the major sea freight hubs in the region have a capacity of around 40m TEU per year. However, if development plans are to be believed, this could rise in the next 10-15 years to closer to 100m TEU. Assuming that ports are at full capacity at the moment (which they are not) an annual increase of freight volumes of over 8% throughout this period would be required. Likewise the major airports in the region have a capacity of around 8m tonnes per year. This is set to rise to 14m tonnes by 2020 – an increase of three quarters, or a compound annual growth figure of close to 10%.

Some analysts believe that the region can only support two global hubs, although multiple sub-hubs could arise. If this is the case then the obvious candidates for global hub status are Dubai and Abu Dhabi. Jebel Ali Port is by far the largest in the region, almost three times the size of its nearest competitor, Jeddah. It is integrated with Dubai International Airport (DXB) and the smaller, more recent development, Dubai World Central Al Maktoum International. The latter has the stated aim of expanding to 12m tonnes of cargo capacity per year, although it is unclear when it would like to achieve this target by. At present its capacity is 600,000 tonnes.

Khalifa Port in Abu Dhabi is also under development, with the impressive target of 15m TEUs by 2030. It is part of a wider development – Khalifa Industrial Zone Abu Dhabi (KIZAD), which includes manufacturing and logistics facilities. The airport in Abu Dhabi, the home of Etihad, is also expanding, with plans to grow from 1m tonnes per year to 2.5m, and Dubai’s airports are also situated close by.

In terms of ambitions, the only other contender in this league is the port development on the Red Sea at the King Abdullah Economic City. The port has plans to expand to 20m TEUs per year by 2018. As well as planning on becoming a major future transhipment port, it is also developing port centric logistics capabilities. Toys’R’Us became one of the first companies to establish facilities on the site to distribute goods throughout Saudi Arabia. However the port is located 100km north of Jeddah airport, which will make integration for sea-air volumes more challenging.

Extending hub scope

Middle East hubs have been able to extend their scope far beyond their own region, filling a gap in the market created by Africa, Central Asia, India and Pakistan’s own lack of transport infrastructure and paucity of services. This means that as well as acting as a gateway for goods coming from Asia, Europe or North America, hubs can also be used for the distribution of goods on an intra-regional basis. Point-to-point transport is often made difficult by congestion, corruption and cost, issues which can be circumvented by using one of the more sophisticated Middle Eastern hubs. Middle Eastern carriers have benefited from this by capturing a significant share of the increase in the volumes out of these regions.

In addition to Africa, the Middle East has geographic proximity to a range of fast growing markets in the Commonwealth of Independent States (such as Kazakhstan, Turkmenistan and Uzbekistan) which have not yet developed their transport infrastructure. The alternative of using poor road and rail links through Western Europe adds considerable time and cost to the supply chain.

As manufacturers increasingly develop their distribution strategies to include secondary markets in the emerging regions, the Middle East will continue to enhance its position as a major and reliable transport hub.

This is the second in a series of three whitepapers published in advance of the upcoming Ti Emerging Market Logistics Conference in Dubai on June 4-5th.

For further information please contact Sarah Smith, Head of Marketing & Events, [email protected].