Saudi Arabia's economic boom has become a magnet for global logistics, accelerating demand for supply chain management services.
Most of the big names in global logistics have long had a presence in Saudi Arabia. These include DHL Exel, part of the Deutsche Post Group, FedEx, UPS, Danzas, Kuehne & Nagel, Schenker, Aramex, Agility and Panalpina. Thousands of other local firms offer trucking or warehousing, but rarely end-to-end services.
If global logistics is fragmented, this is even more true in Saudi Arabia. Calculating the size of the industry - in terms of volume or value - is nearly impossible. While the multinationals compete on spread of network and value-added services, thousands of smaller local players compete on price.
Traditionally, the biggest local companies handled logistics in-house. But now there is growing demand for third-party logistics contracts, specialist firms taking over all transport, warehousing and supply-chain management needs.
“Saudi Arabia's logistics market is changing,” says Nabil Khojah, Saudi Arabia country manager for DHL Exel Supply Chain. “The concept of supply chain management is becoming more recognised...a lot of Saudi businesses have started to invest in it.”
“There are so many projects in the pipeline, and so many already being built,” says Hussein Hachem, chief executive officer of Aramex in the GCC. “The increase in oil prices has helped to accelerate private sector growth in Saudi Arabia since 2002. Aramex is having to upgrade its Saudi infrastructure to keep up with demand.”
Growth in outsourcing is being driven by the need to cut overall costs, by companies refocusing on core activities and by demand for tailored, one-stop-shop solutions from manufacturing base to point of sale. Demand is growing around Riyadh in particular, where 350 new businesses were awarded operating licences in 2007.
“We are seeing much more trading in the centre of Saudi Arabia,” says Khojah. “Because Riyadh is central, it makes sense to use it as a hub for the kingdom's scattered cities. And growth is not yet being driven by the raft of new megaprojects - a level of economic change that is yet to come.”
Saudi Arabia's economic growth is boosting demand for logistics, and large and small firms are responding. Norwegian-owned shipping agent Barwil has two Saudi bases: one in Jeddah, the other in Dammam. It plans to set up its own specialist logistics companies on both coasts.
In the past, international logistics companies directed their Saudi operations from distribution hubs and management offices in Bahrain or regional trans-shipment giant Dubai. But the Saudi Arabia General Investment Authority (Sagia) created in 2000 under the Foreign Investment Law, hopes to change that.
“We are developing six economic cities across Saudi Arabia, and developing the ports and logistics base to support them is very important,” says Abdulaziz al-Babutain, director general for transportation at Sagia. “Between 20 per cent and 25 per cent of world sea trade passes through the Suez Canal. We want to leverage a greater share of that for Saudi Arabia.”
Al-Babutain sees opportunities in the planned Saudi Landbridge rail project, carrying freight between the kingdom's Red Sea and Gulf coasts, and in downstream industries. Both will boost prospects for logistics, he says, while the planned Millennium megaport at King Abdullah Economic City will become a competitive hub for regional trans-shipment, serving the African and Middle East markets.
“Transport is Sagia's core business,” says Al-Babutain. “We aim to create a proactive environment for investment, with the emphasis on energy and transport. We see great opportunities for investment in these two sectors. Saudi Arabia is planning to invest SR7-8bn [$1.9-2.2bn] in 2007 on expanding roads.
“Logistics and supply chain management is critical to our future plans. We are overhauling the regulations to enhance movements of imports and exports, and have set up a new committee under Sagia to facilitate trade and transport. It will review the processes and increase efficiency of movements of cargo by air, sea and land.”
Sagia plans to create integrated logistics hubs in Saudi Arabia's key cities, new and old, with bonded areas and expanded Electronic Data Interchange coverage to all industrial sites and entry points, ending the delays and red tape that slow down Saudi cargo shipments. There are also plans for a logistics city at the border city of Hail.
“We want to act as enablers for industry as Saudi companies increase their market share in downstream products,” says Al-Babutain. “It is critical to get these products onto the shelves of the retailers on time and for a competitive price. To do that, we need the biggest global logistics providers to come into Saudi Arabia.”
There are signs that new initiatives are beginning to produce results. Aramex is planning to expand its operations in Jeddah, Riyadh and Dammam. Historically, there have been strict height restrictions on warehouses in Saudi Arabia.
These are being reviewed, and a private US-owned investor is negotiating to build dedicated logistics parks in the three major Saudi cities, says Hachem.
In the past, foreign logistics companies needed a local partner to operate inside Saudi Arabia. Now, according to Sagia, only land transport companies require a local partner, and even here the largest firms - whose portfolios include air, sea and land transport - are being granted unconditional licences.
“Usually, the logistics companies go where their clients send them” says Al-Babutain. “Saudi Arabia is looking at this the other way around. Our manufacturers need logistics supply companies to come into the market. We have already signed a memorandum of understanding with Schenker, and are talking to all the biggest global logistics players.”
“Sagia has signed a memorandum of understanding with our parent company, Deutsche Bahn (DB), to identify and detail projects related to logistics and transportation in the kingdom,” says Christian Tengs, a spokesman for Schenker. “The first common project is the logistics hub at King Abdullah Economic City. If DB becomes an active player on the Saudi Arabian market, in its core markets such as railway operations or terminal operations, Schenker will be able to offer the full range of transport and logistics services [as it does] in Germany and other European states.
“Schenker in Saudi Arabia plans to expand from its bases in Riyadh, Jeddah and Dammam to the industrial cities in Jubail and Yanbu. The announced development of economic cities all over the kingdom - King Abdullah Economic City in Rabigh [and others] in Tabuk, Jizan and Hail - will require Schenker to expand further to get closer to its customer base.”
The main constraint on Saudi logistics growth remains the shortage of labour. Firms need to increase their Saudi-born workforce by 5 per cent a year. DHL Exel has launched the Careers Not Jobs campaign, offering staff long-term training, and incentives such as language classes for families.
Meanwhile, Sagia is excited about the prospects for railfreight. There is currently only a limited railfreight network in Saudi Arabai, mostly serving the mineral-rich north.
However, Sagia is in discussions with a European operator of railfreight between Germany and Turkey about rail services to and from Europe. Adding a 150-kilometre rail track through Jordan would create direct rail links between Saudi Arabia and northern Europe, says Al-Babutain.
Tengs says that although the prospects are positive, the government needs to take action to help the logistics market achieve its full potential. “The regional impact will be determined by factors beyond pricing,” he says. “It will depend on factors including the compatibility of rail networks in neighbouring countries, the quality of intermodal terminals, especially for cross-border traffic, the flexibility of the customs authorities and the strategy of shipping lines, which favour UAE ports over Saudi ports.
“Ocean container pricing from northwest Europe is higher to Jeddah than to Jebel Ali, in spite of a considerably longer voyage. The same is true for air cargo, with airfreight rates from Europe to Dubai approximately 65-75 per cent lower than rates to Saudi Arabian airports.”
“The question for importers, air carriers, ocean carriers, freight forwarders and integrators outside Saudi Arabia is: Why should I pay more for using Saudi as a hub if I can have the direct service much cheaper?”
Transport projects worth SR50bn are currently planned or under way in the kingdom.
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