Focus shifts beyond GCC for logistics firms

22 March 2011

Major logistics firms are looking to consolidate their businesses in the region and target new deals in Africa, the Indian subcontinent and the less developed countries of the Arab world


40: New third-party logistics companies that set up base in the UAE in 2008

$800m: Ceva Logistics’ expansion plan for the Middle East unveiled in September 2008

Source: MEED

The past decade brought break-neck logistics expansion to the Middle East. At the peak of the boom in 2003-08, logistics companies were scrambling for access to the market. Most new joint ventures and takeovers focused on the UAE, and particularly on companies with an established Dubai market base.

Industry sources estimate the UAE attracted more than 40 new third-party logistics companies in 2008 alone.

Among the newcomers that year were South African logistics firm Barloworld Logistics, which bought Dubai-based Swift Freight International in a $70m deal. In doing so, Barloworld gained access to a network that spanned the Middle East, southeast Asia, Africa and western Europe.

Another entrant was Netherlands-headquartered Ceva Logistics, formerly TNT Logistics, which in September 2008 unveiled an $800m expansion plan for the Middle East.

Trade slump in the Middle East

Recession came later to the Middle East than to more mature markets. But by 2009, regional growth had slowed. Global banks stopped lending and Dubai’s debt crisis brought a halt to the UAE construction boom. Regional trans-shipment volumes slumped amid a slowdown in global trade from October 2008.

The downturn halted the flurry of press releases from logistics companies trumpeting a new Middle East office or strategic partnership. Companies became extremely tight-lipped about their current and future plans.

“It’s not really possible to quantify the level of logistics business failures in this market,” says Keith Nuttall, commercial manager of Sharjah port management company Gulftainer. “But many of the smallest companies found, it very tough in 2009.

Many companies are taking time to reassess priorities. Conditions may well remain tough in many markets

Keith Nuttall, Gulftainer

“The market stabilised in 2010 and we hope to see it move forward this year. But it’s true that several businesses that were present in the UAE before are not here any more. Real estate was a major activity, and in 2009, logistics companies involved in construction, real estate and automotive had a particularly tough time.”

Barloworld Logistics regional managing director Frank Courtney says supply patterns shifted to moving less more often. “Very few Barloworld customers went out of business,” he says. “But what we did see in the downturn was that customers starting moving less more frequently, [so] we were required to do more shipments. However, our volumes decreased.”

Mergers and acquisitions also slowed, as companies turned their attention inwards. Cost-cutting and contraction replaced expansion and ventures in new markets. Major players including local port management company DP World, Dubai-headquartered GAC and Kuwait’s Agility announced redundancies, while others focused on cutting operating costs.

“Most players paused to take a deep breath,” Nuttall says. “And so mergers and acquisitions activity was non-existent in 2009. But there were signs it started to pick up again last year.” At the height of the boom, logistics companies were fighting for access to storage, transport and other infrastructure, creating a construction boom for warehousing and office space.

In the UAE, Jebel Ali Free Zone launched a new expansion south of its main site. Dubai also pressed ahead with a second airport geared towards sea and air trans-shipment at the purpose-built Dubai Logistics City. Manama announced the $280m Bahrain Logistics Zone to anchor cargo at the new Khalifa bin Salman port. Many logistics firms locked themselves into multi-million dollar deals to secure access to warehousing and storage.

Logistics oversupply looms

German logistics player Kuehne & Nagel was among the first to commit to Dubai Logistics City, signing a long-term lease to develop a 52,000 square metre site as its regional hub.

Ceva Logistics opened an 8,000 sq m warehouse and an 11,000 sq m warehouse at Jebel Ali in late 2008. This was followed by a 63,000 sq metre site at the free zone in 2009 and a deal to lease 10,000 sq m at Bahrain Logistics Zone. In March 2010, it opened a 122,127 sq m warehouse at Jebel Ali South Zone.

When the crash came, the market flipped from undersupply to oversupply. Several of the region’s smaller logistics zones responded to the change in the trading environment by slashing rents to try to boost demand.

“There were extreme shortages of capacity in 2008,” says Enver Moretti, chief executive and president Europe, Middle East and Asia region of Germany’s DHL Global Forwarding.

“Prices rose too quickly and no one forecast the coming economic crisis. Now, warehouse prices have fallen in some areas, but not at Jebel Ali, where space for expansion is limited. Jebel Ali has kept its rents high, because it has the best infrastructure and because it still has demand pressure on space.”

We plan to consolidate our presence across the entire Middle East region within the next two to three years

Enver Moretti, DHL Global Forwarding

As growth rates slowed, logistics companies found themselves with excess capacity to fill. Many have spent the past year trying to consolidate their existing interests. This too has put the brakes on new expansion. One of the few companies to defy the pessimism of 2009 was Saudi firm Wared Logistics, which launched early that year with start-up capital of $32m. A joint venture between Saudi firms Zahid Holdings and Construction Products Holding Company, Wared plans to create a network of modern distribution centres across the kingdom.

In a second deal targeting regional expansion, Hong Kong’s Toll Global Forwarding bought Dubai-based freight forwarder Logistics Distribution System, whose assets include a warehouse at Jebel Ali. In general, however, 2009 was a quiet year for mergers and acquisitions.

Emerging logistics markets

The market remained quiet until mid-2010, with little interest in expansion. As confidence slowly returns, early signs suggest that the focus is shifting beyond the GCC. A flurry of new deals is targeting Africa, the Indian sub-continent and the least developed corners of the Arab world.

At the end of 2010, regional giant Aramex announced a string of acquisitions in Asia. It took majority shares in Malaysian express courier company Avanti and in its Bangladesh subsidiary Expo Express Services. The Dubai-based firm also increased its shareholding in Aramex Turkey to 100 per cent.

In Vietnam, Aramex has formed a joint venture with Masan Services to set up a logistics operation. Aramex founder Fadi Ghandour hailed the deals as “a new phase of growth and expansion … the beginning of the firm’s investments in key emerging markets”.

Aramex finalised its acquisition of two Kenya express logistics companies in March 2011. Buying OneWorld Courier and In-Time Couriers positions Aramex for a new expansion in east Africa. It plans to open third-party logistics centres in Mombasa and Nairobi that will offer onward connections to Tanzania, Rwanda and Uganda.

Meanwhile, Kuwait’s Agility says it will use its base in the Middle East to drive a new expansion into Egypt and sub-Saharan Africa. Within the region, it believes Saudi Arabia, Abu Dhabi and Qatar offer the strongest mid-term prospects for growth.

Gulftainer’s third-party logistics arm Momentum Logistics is expanding into freight forwarding ventures in Turkey and Pakistan.

DHL Global Forwarding, which has just completed a five-year push into sub-Saharan Africa, sees the less developed markets of the Middle East as its next priority. “We plan to consolidate our presence across the entire Middle East region within the next two or three years,” says Moretti. “My priority now is to grow the business. I am focusing on emerging markets that include Qatar, Iraq, Syria, Libya and Algeria. In Syria, we have acquired our local partner, Nazha. We are looking to open our own offices in these countries. The time frame is imminent. I feel we are already late in targeting these markets. Had I invested in Iraq in 2004, I would now be a billionaire.”

Even though the past 18 months have been tough for GCC logistic firms, there have been some positive developments in the market. One is that the downturn has seen multinational customers move closer to regional markets. Several that previously operated out of distribution hubs in Europe are opening regional bases to cut their operating costs.

“New opportunities have come from growth in outsourcing and from multinationals moving closer to the market,” says Mohammed Esa, Agility’s regional vice-president for sales and marketing. “In the past, for example, the pharmaceutical industry served the Middle East from distribution centres in Europe.”

“These firms have started bringing their products closer to the market, setting up regional distribution hubs in places such as Jebel Ali Free Zone. Recession has also seen more outsourcing of logistics.”

“In markets such as the Middle East, it is critical to have reliable service providers who can navigate the market and cut through things like bureaucracy,” says Esa. “So there has been growth in outsourcing and we expect that trend to continue. Big multinationals don’t want to invest heavily in logistics now: they want to concentrate on sales and marketing.”

There are obstacles to regional growth, however. German logistics giant Schenker wants to accelerate its regional expansion, but says agency laws are thwarting its plans. “We are looking for long-term partnerships across our New Middle East region, particularly for joint ventures,” says Michael Barber, vice-president for sales and marketing.

“The territory spans Iran, Syria, Egypt and Tanzania … We are very focused on expansion, because we believe there are opportunities for growth here. That focus hasn’t slowed, but there are legal constraints to our growth. In most countries, it’s not possible for a foreign company to own more than 49 per cent.

“For us, that represents a constraint on future investment because Schenker, strategically, is not interested in anything except a majority stake.”

Market consolidation

It will take time before the region’s logistics community returns to double-digit annual growth. Players are taking a more measured approach to expansion.

“People are assessing what’s going on,” Nuttall says. “Yes, there has been a general shift towards more outsourcing, but Dubai is still fairly quiet.

“However, several markets – Abu Dhabi, Qatar, Iraq and Saudi Arabia – are buoyant. It’s hard to know whether many new big players will come in. Many companies are taking time to reassess their priorities. Conditions may well remain tough in many markets for some time to come.”

Barloworld’s Courtney says the logistics industry faces a new shake-up, with weaker operators particularly vulnerable to takeovers.

“The downturn has forced businesses to think over that big is not always the better and small is not always the best managed,” he says.

“The businesses that survived the downturn will now look to consolidate.”

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications