Saudi Arabias logistics market is showing robust growth and strong performance according to the analysts. But with the World Bank placing it behind the UAE, Qatar and China in the Logistics Performance Index 2016, could the Kingdoms ambitions to become an industry leader, be in jeopardy?
In the face of ongoing economic woes in the oil industry, Saudi Arabias logistics industry has demonstrated robust performance over the course of 2016, paving the way for a number of new players from across the industry to invest in the country.
Over the last few weeks alone a number of reports have drawn hugely favourable conclusions. Research consultancy Solidiance predicts the Kingdoms logistics industry is set to further, and rapidly, build on the $1bn growth witnessed 2013 2014, with the creation of more trade zones expected also.
In a report by Container Management magazine, King Abdullah Port was named the fastest growing port in the world, topping a list of 120 ports globally. The only fully private sector owned and operated port in the country, its management expects to finalise the first phase of bulk cargo terminals with a capacity of 3 million tons, in addition to the RORO terminals with a capacity of 300,000 CEU, by the beginning of 2017.
With Saudi Arabia responsible for 40% of the $47bn GCC logistics industry, such findings stand to verify the country is on track to reach its 2030 goals, as outlined in the Saudi Vision 2030. It is under this vision the country has outlined its ambition to raise its ranking in the World Banks Logistics Performance Index from 49 to 25, however in the 2016 list the country was placed at 52, behind the UAE (13), Qatar (30) and China (27). The criteria for the ranking accounts for customer processes, infrastructure, international shipments, competence, tracking and tracing, and timeliness. Saudi Arabia averages 3.16 while the UAE takes a score of 3.94.
When compared to the top performer, Germany, Saudi Arabia is consistently a full point behind on all six key indicators. When the results are viewed on an overall average from 2007 to 2016, very little progress is visible YoY.
The country recognises there are gains to be made to the regulatory environment and that support is required for the further development of e-commerce capabilities.
There will be a specific focus on the SME sector and the development of multi-modal hubs in Yanbu and Jubail Industrial Cities. The steps will also be necessary to meet National Transformation Plan targets which predict the countrys dependence on imports is set to increase, placing greater demand on logistics providers.
In real terms and in the face of the LPI results firms are still flocking to invest. Among them DHL, which will soon become the first international express provider to offer a direct network flight service into Jeddahs King Abdul Aziz Airport. Part of an ongoing expansion drive, which will include the development of the firms biggest ground and air operations facility in Jeddah, it will enable DHL to introduce additional network flights into the city as demand increases.
Faysal El Hajjami, country manager, DHL Express Saudi Arabia, was quoted in a release as saying: This is a real statement about DHLs commitment to our operations and our customers in the Kingdom as we open the doors to our third and largest air and ground operations facility. DHL is continuing to set new standards for the logistics industry across the Kingdom and we will continue to work closely with our key partners and customs officials ensuring that our customers in the Kingdom of Saudi Arabia receive the highest levels of service.
Investment potential
While the 2016 LPI ranking may fall short of expectations, Saudi Arabia does score highly on the lists of others, including Agility, which placed the country second in its 2015 Emerging Markets Logistics Index.
Pipped to first place by China, it marked the fifth consecutive year of improved results under Agilitys scoring framework, which specifically highlights strategic economic planning, combined with growing domestic demand and the high market potential with few barriers to market entry.
In addition, investments in multi-modal land transport continue with the Saudi Arabia General Investment Authority (SAGIA) having earmarked a hefty $28bn for ports and sea transport, and around $23bn for aviation.
The government has made a strong commitment to developing infrastructure, specifically sea ports, which is a highly competitive business regionally. Handing approximate 20% of the regions port capacity, this is set to increase along the Red Sea coast specifically. A rail network of 9,900km is set to be operational by 2040 and investment in roads is ongoing, adding to the existing 97,000km network.
According to data from the organisers of Transtec, in addition to the ongoing expansion of King Khalid International Airport in Riyadh and King Abdulaziz International Airport in Jeddah, the King Fahd International Airport (KFIA) in Dammam is now developing its Cargo Village Project to reduce timings for customs clearances by 50%.
Features of the village include: a second Cargo Terminal of 20,000 sqm; a non-dedicated new outbound terminal of 10,000 sqm to handle exports; a semi-automated processing facility; and a bonded freezone.
Knock on demand
The demand for logistics facilities specifically warehouses is growing. Before 2030, the Saudi government wishes to expand the industrial sectors contribution to the economy to 20% by 2020, up from the current 10% level. In a report, Colliers International believes this will provide considerable boom to the logistics and warehousing sectors.
Imad Damrah, Saudi Arabia MD for Colliers International, notes: Import and export activities have been a major occupier of warehouse space to store and distribute products such as FMCG good, household items, equipment and machinery.
Highlighting another factor driving the growth of the warehouse market, he adds: The number of manufacturing operating factories has been growing rapidly at circa 6% over the last 10 years, which in turn has increased the need of storage and warehousing space for finished goods and products.
In Jeddah, the construction, retail, and automotive sectors will continue to account for the majority of demand for warehouse space and manufacturing land. Elsewhere, Riyadh has witnessed unprecedented private development of industrial cities, and in Makkah where 20% of the countrys total factories are located, manufacturing output sustains demand. Nationwide, driving the demand for warehouses in addition to transportation solutions will be the strong retail sector and high disposable income among large swathes of the population, notably Gen Y and Gen Z.
Its far from a one-size-fits-all approach, placing onus to the warehouse technicians and designers to create bespoke facilities. As the report notes: Districts concentrated on the southern outskirts of the city primarily feature large and mid-sized warehouses used by prominent commerce and trading companies as their central storage units. Conversely, industrial districts situated within close vicinity to population and work centres generally feature small warehouses catering mainly to demand generated by distributors, retailers, and workshop owners.
The heightened business activity is also driving demand for commercial vehicles, which is expected to sit at a growth rate of around 9% to 2021, according to the Saudi Arabia Commercial Vehicles Market Forecast and Opportunities, 2021 report.
Drawing in the crowds
In addition to DHLs expansion plans for the Kingdom, 3M has located its largest manufacturing facility in the MENA region in Dammam. Announced a little under a year ago, initially to cover the needs of the Saudi local market, the 3M manufacturing facility will be developed to become a regional source of supply for other countries in the Middle East, Europe and Africa.
Saleh Al-Rasheed, director general of the Saudi Industrial Property Authority says: When we look at the development of the industrial sector in Saudi Arabia today, it is easy to observe that the industrial cities have been successful in attracting major global industrial players.
We believe that having the first 3M manufacturing facility in the MENA region in Dammam Third Industrial City will have great positive impacts on the industrial sectors constant growth and prosperity.
Industry exhibitions and conferences have also followed on this well-worn path to the kingdom.
Messe Frankfurt, organisers of Materials Handling Middle East, will hold the inaugural Materials Handling Saudi Arabia show this month, with Transtec returning the following month.
It is exactly this buy in from the private sector that Saudi Arabia is looking to strengthen, in light of the continued struggle of the oil price and the need to diversify and modernise in order to compete with its neighbouring nations more than ever before. In this bolstering of the private sector, projects such as King Abdulah Port will no doubt become best practice case studies.
As the first fully privately owned, developed and operated commercial port in Saudi Arabia, it is strategically located on the Red Sea coast on one of the worlds busiest maritime shipping lanes and with direct access to extensive transportation networks and urban centres. Once fully built, King Abdullah Port will be able to handle 20 million containers (TEU), 1.5 million vehicles (CEU) and 15 million tons of clean bulk cargo every year.
Once operating at target capacity, and with the co-located Industrial Valley fully operational and developed, the adjacent King Abdullah Economic City is expected to rival Jeddah as a prominent logistics base drawing demand for a transhipment, export and re-export business as well as large-scale warehouse and logistics projects.
Last year, a statement from Saudi Arabias General Authority for Civil Aviation outlines plans to privatise 27 airport across the Kingdom, starting with Riyadhs King Khaled International airport (KKIA). However the private sector is now bound by strict nationalisation criteria, which is to see four million private sector jobs given to Saudi nationals by 2030. This will drastically change the employment landscape if one considers that currently 70% of Saudis of working age are employed in the public sector.
Adding to the concern this causes, research published earlier this year by Riyadhs King Saud University found that 80% of Saudis polled in the capital said they would rather wait for a government job than work in the private sector.
In an editorial published in June, The Wall Street Journal cited it as one of the Kingdoms greatest challenges.
Workforce reforms will no doubt be supported by the privatisation of select government backed companies with plans to increase the percentage level of private sector contribution in the rail sector from 5 to 50%, and in the ports sector from 30 to 70%. But without continued buy in from the private sector, Saudi Arabias visions for 2020 and 2030 will fall short.
It is these key ease of business criteria that will define the coming decade the ability to not only easily finance the facilities required to meet growth targets, but also train in the skillsets necessary to staff them.
Saudi Arabia must weather the post-oil world by creating enough confidence in a sector it has prevented from flourishing before, in order to remain competitive and in order to achieve ambitions that have been set out in the most public way.
Whether the World Bank wishes to recognise the strides made in these plans to date remains unseen. For all its economic progress Saudi Arabia remains a challenging country to do business both in and with, considering its political approach to many sensitive issues. While this could continue to haunt progress over the short to mid-term, it is unlikely to stop the Kingdom in its tracks. The momentum built to date and the presence of more and more private companies, who are investing heavily to ensure they have a ringside seat at transformation of this super-economy, will be vital to the countrys future.