Logistics in the Middle East: A business at risk
Although times are again extremely volatile on the global economic front, we can state with confidence that Dubai has definitely left the recent crisis behind it. Today, we see many signs that business is back on track and this is visible in the level of goods moving through Dubai’s ports. Across many industries, we are again seeing record volumes flowing through the supply chain and finding their way from ships to warehouses, trucks, shop shelves and, finally, to customers’ homes.
From a logistics perspective, we should all be singing and dancing. But I am afraid that not enough lessons have been learned in the past few years. Although some logistics companies have managed to fundamentally rethink their operations, we still haven’t lost many of the old habits. We are all carrying on as before, very contentedly, since revenues and margins are again at very satisfactory levels. But I am afraid that the current business model is not sustainable and will, in the end, only commoditise the business as a whole.
In previous articles, I wrote about the fact that integration would be the next big thing for logistics in the Middle East. This would really take logistics in the Middle East to the ‘next level’. From a shipper’s perspective, it is today as good as impossible to find logistics integrators that can manage a whole supply chain on a Middle Eastern scale.
For many shippers, this is a serious issue as it forces them to keep alive entire supply chain divisions that handle all parts of their supply chain execution. Large internal teams need to knit and keep together a complex landscape of different logistics service providers for each aspect of their supply chain. So many different providers depending on the service, country and scale of business make it a massively complex task to manage properly. Operating such a regional supply chain in a consistent, reliable and cost-effective way is today surely not a task for the faint-hearted!
Although certain large players should be capable of handling this business as a whole, there is simply not enough of a competitive landscape of potential providers on a pan-regional level, integrating all aspects of logistics. This also partly explains the still very large margins that are being made by logistics service providers in the Middle East compared to other regions.
I see two solutions to this problem. One would be the formation of larger integrated regional logistics companies, growing out of the few strong local players that already have critical mass in their home countries. The other would be the arrival of more global players, seeking expansion of their business into the Middle East. From my perspective, I would strongly welcome more competition in the market from global new-arrivals in this market. It would force us to seriously consider mergers among ourselves and the formation of a stronger network of services.
In addition, more competition would bring an essential influx of new talent to the region, together with new ways of working and supporting methodologies. A larger and more competitive landscape of regional logistics service providers will definitely drive down market prices, with better services from the logistics service providers too. As a result of these lower prices, I would expect that shippers can then truly look at their supply chain from a regional perspective and this could definitely benefit Dubai as a regional logistics hub as well. Currently, supply chain costs are still too high as a percentage of cost of goods sold.
More competition in the market would drive margins lower, and would force the current providers to rethink their current business models and upscale and innovate.
The formation of larger regional logistics companies would carry many benefits in different ways. Recruiting and retaining talent would be much more interesting as logistics employees could seek future careers on a regional scale, with more opportunity for growth within a company. With the excellent Dubai-based graduate programs that exist, many nationals could be attracted to careers in the exciting world of logistics.
Larger companies can more easily invest in IT solutions and automation, since we today still depend too much on allegedly cheap labour, imported from abroad. Having a well structured process, automated through the proper technology, seriously reduces the risk of depending on people only.
Enhancing the talent pool can only be done when the underlying assets and services become larger. Larger fleets and bigger warehouses to manage will form a basis to pay more for those truly excellent and talented staff and managers.
Obviously, this stronger and more competitive logistics market will not suddenly establish itself. Many hurdles exist at different levels and I am sure that government bodies and industry associations here could play a meaningful role in supporting that vision. So, although wishing for more competition in the market may seem strange, I am convinced that it will benefit the entire industry as a whole and reinforce Dubai’s position as a preferred trading hub.
Tom Nauwelaerts is managing director of Al-Futtaim Logistics.