Saudi Arabia - the land of logistics opportunity

An emerging logistics force stakes its claim for a place in the sun.
As one of the fastest growing markets in the region, more logistics companies are expected to invest in Saudi Arabia.
As one of the fastest growing markets in the region, more logistics companies are expected to invest in Saudi Arabia.

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Bordered by the countries of the UAE, Jordan, Iraq, Kuwait, Yemen, Oman, the Red Sea on one side and the Arabian Gulf on the other, the Kingdom of Saudi Arabia is an arid country, primarily covered by the timeless sands which has blown across its landscape for many a century.

Covering almost two million square kilometers, the kingdom is as dry as it is hot with the mercury climbing to 54 degrees in some areas during the summer months. And despite the odd oasis, the country remains parched for thirst − a sun-burnt environment.

How industry has been able to spring from such a dry environment is hard to imagine, but like the palm growing out of the oasis, industry has sprung forth from the desert, flourishing in the Kingdom of the sun. Up until the 1960s, Saudi Arabia’s growth remained modest. Despite the discovery of oil 30 years earlier, it really wasn’t until the 1960s that large scale oil production took off and Saudi Arabia began to experience rapid economic development.

Since then, the country has gone on to further diversify its economy with the petrochemical and energy sectors growing rapidly, spurred by international and domestic demand. Today, there are a host of massive infrastructure projects currently underway in the Kingdom with power stations, a high speed rail network and new airports under construction. The rapid development, which will accommodate forecasts of 3.6 per cent GDP growth between 2011 and 2020, and population growth which is expected to grow from 26 million to 31 million over the same period, means there are plenty of new opportunities for the logistics sector in the coming years.

It’s an exciting prospect which sees many local and international logistics firms eyeing expansion in the Kingdom. Global logistics firm Kuehne + Nagel is one such company that is actively pursuing expansion plans in Saudi Arabia.

“Pharmaceuticals are one of our key industries where we see a lot of growth potential, so we are working especially in Saudi Arabia on a couple of accounts,” says regional director, Werner Kleymann. “The company will look to expand its activities there beyond our three offices that we already have and also go into other areas,” he adds.

In terms of opportunities for logistics companies, Kleymann believes the growing burden on government is something the logistics sector can assist with. “The current government controlled business entities such as airlines, ports and healthcare, are markets that are evolving with large operating budgets,” says Kleymann. “This will benefit from third party intervention, including consolidation, supply chain solutions and outsourcing of specific elements including; warehousing, vendor management, shipping and transportation.”

Kleymann also points to the massive growth in the importation of international perishable products as another area logistics firms may seize upon. “Temperature controlled environments will be in high demand as growth in the perishables sector grows,” he says. “Medical and food stuffs will all require temperature controlled facilities, both in warehousing infrastructure and distribution to supermarkets,” he adds.

Srinath Manda, programme manager, transportation and logistics practice, South Asia, Middle East and North Africa, Frost and Sullivan believes the main opportunities for Logistics Service Providers (LSP) in Saudi Arabia exist in providing integrated supply chains, multimodal transport services and specialised warehousing services to fulfil the future needs of manufacturing industries in the country.

In addition, Manda comments that Saudi Arabia’s diversification industries will deliver new opportunities for the nation’s freight forwarders as the Kingdom diversifies into oil-based business. “Saudi Arabia’s active diversification into oil-based business is expected to cause a rapid surge in the country’s exports (approximately $271.58 million in 2010), which presents significant opportunities for the freight forwarding industry,” says Manda. “The impressive growth of domestic manufacturing bases for industries such as cement, chemicals, plastics, glass, steel and FCMG will provide growth opportunities for domestic logistics such as transportation and warehousing,” he adds.

Husam Al-Saleh, managing director of Saudi Arabian supply chain services firm Hala Group, agrees with Kleymann and Manda that warehousing is a potential growth sector. “The biggest opportunities in Saudi Arabia revolve around warehousing,” says Al-Saleh. “It is currently well below world standard − if we manage to upgrade this, we will upgrade the standard of living,” he comments.

Ranked in the top 10 emerging logistics markets for 2011 by Transport Intelligence, Saudi Arabia was the highest ranked Middle Eastern country and the highest climber in 2011, moving from 10th to 6th. According to Transport Intelligence, Saudi Arabia’s success at boosting its energy, industrial, real estate and financial sectors resulted in strong foreign direct investment (FDI) during the economic crisis.

At present, the Kingdom is developing six ‘economic cities’, the largest of which is King Abdullah Economic City, comprising of six key components – a seaport, an industrial zone, a central business district, a resort district, an educational zone and residential communities. Once completed the economic city will be a hub for at least 2700 manufacturing companies and the 13.8 square kilometre port is expected to emerge as one of the world’s top five largest industrial ports.

With massive investments in infrastructure such as this, the kingdom is being prepared for the growth of its logistics industry. But whilst the sun continues to nourish the growing Saudi Arabian economy there is a small dark cloud on the horizon − though the opportunities are many, there are still challenges which need to be overcome.

Almajdouie vice president logistics, Syed Mustafa notes labour issues as one of the key challenges for the Kingdom going forward. “If you employ local workers you face the difficult prospect of training them, which obviously takes time,” says Mustafa in relation to the labour market. “We have a situation here just in other countries in the world where there is not a readymade pool of skilled workers available,” he says.

“It’s a similar problem when employing foreign staff too. As current government policy supports the hiring of local staff, getting a visa for workers from abroad generally encounters difficulties − it’s an unfortunate situation which often leaves logistics companies in the middle,” he says. In addition to labour issues, Mustafa points to a lack of quality truck drivers as a further hindrance to logistics development.

“Despite the existence of many companies operating over 100 trucks, many of them are not professionally managed,” he comments. “There remains a lack of suitably experienced drivers who are capable of driving the trucks and in terms of maintenance − this is something which needs to be addressed for the benefit of the logistics sector,” he says. But trucking issues are not solely related to the drivers, the movement of freight trucks between the UAE and Saudi Arabia highlights another problem – that of confusing policy.

According to Mustafa, there have been instances where trucks have become stuck at the border and caused queues up to 30 kilometres long on the UAE side. This has resulted in a ban on oversized cargo crossing the border from the United Arab Emirates to Saudi Arabia, highlighting the difficult problems logistics firms encounter.

Whilst Mustafa believes the road infrastructure is good in Saudi Arabia, Frost and Sullivan’s Srinath Manda identifies that the nation’s transportation infrastructure is a challenge to logistics development. “Saudi Arabia’s infrastructure has not yet kept pace with the industrial development,” he says. “The existing infrastructure is still inadequate with very poor inland road, rail, and sea connectivity. This is resulting in increased transportation costs for the logistics industry.”

Though the UAE’s logistics sector has been in the public spotlight for a considerable period of time, bringing with it immeasurable benefits including university logistics programmes and streamlined government policies, Saudi Arabia’s logistics industry has not enjoyed the same publicity. For Hala’s Husam Al-Saleh, he recognises that there has been little profile given to the industry and the significant economic contribution it is making.

“There is a lack of focus on this industry in Saudi,” says Al-Saleh. “Especially from the media and education institutes,” he says. The problem this has seemingly created is a lack of talented logistics employees ready to step into the industry as Mustafa has previously pointed out. With unemployment hovering at approximately 10 per cent for the past year, a disconnect between logistics industry requirements and the Saudi Arabian workforce is apparent – jobs are available, as is a workforce, but it is the current availability of skilled workers that leaves the industry wanting.

For Kuehne + Nagel’s Werner Kleymann, one of the obstacles the logistics industry in Saudi Arabia faces is the prevalence of companies who sacrifice cost for quality. “Saudi Arabia has an abundance of new companies providing low cost services,” says Kleymann. “But this is usually at the expense of the service quality,” he adds.

Given the challenges facing the Saudi Arabian logistics sector, are there any solutions which will allow the sun to shine brightly? Both Mustafa and Al-Saleh agree that education is pivotal to driving the Kingdom’s logistics sector forward. “I think provision of training and education for Saudi’s in the logistics sector would help improve the talent pool for logistics firms to draw from,” comments Mustafa.

Emphatically, Al-Saleh comments that: “More education is needed – this is a core of Hala Supply Chain Services and we will always be committed to giving back to this great country.” Whilst education is no doubt critical to overcoming the challenges facing the Kingdom’s logistical hurdles, Manda looks to an improvement in infrastructure as a means of progressing the nation’s logistics industry. “Development of reliable surface transportation infrastructure such as rail mode and coastal waterways is needed to offset the challenges faced in domestic transportation,” he comments.

“The development of specialised warehousing zones and improved warehousing infrastructure across the country near major construction hubs would enable industries to realise safer and reliable storage practices over longer duration and fulfill consumer demands,” he adds.

So, given the prospects on offer in Saudi Arabia, will international logistics firms be closely eyeing opportunities with a view to establishment in the coming years? According to Kuehne + Nagel’s Werner Kleymann, the answer to this question is yes. “Saudi Arabia is one of the fastest growing markets in the region and as new economic cities are growing − more and more international logistics companies will enter into the market,” he says. “Major players are already established predominantly in the import/export and domestic transportation sectors,” he adds.

Manda agrees that the presence of multinational LSPs is increasing steadily in Saudi Arabia. “Multinational LSPs such as DHL, DB Schenker, and Agility have a very strong presence especially in the freight forwarding market segment,” he claims. “Other international LSPs who have a strong focus on oil and related industries are looking to expand their presence in the country, especially through the freight forwarding services,” he adds.

Whilst international logistics firms are excited by the prospects in Saudi Arabia, Manda believes that local and regional firms should not be overly concerned by competition from global players. “International LSPs still have a limited presence in domestic logistics activities and this segment will continue to be dominated by regional and domestic LSPs such as Aramex, Saudi Logistics and Wared Logistics,” he says.

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