Transport and logistics key to GCC economic growth

dubai - The next phase of growth will be primarily driven by the region's effort in building modern warehouses and transportation infrastructure

The Mena region for long has remained a strategic hub for international trade and commerce between the East and West. The rising exports and imports have driven the supply chain and logistics market and the Middle East, led by the UAE, has become one of the most important hubs in the ensuing changing global trading lanes.

As the Mena countries pursue political transformation and economic diversification, transportation and logistics (T&L) investment are increasingly becoming the cornerstone to its future growth.

Leading local and global manufacturers have started setting up their regional headquarters and distribution facilities in Mena, enthralled by the improving transportation links and modern facilities. This, in turn, has also led to the set-up of companies specialising in logistics, transportation, freight handling, warehousing, packaging and supply chain management in the region to meet the growing demand.

Furthermore, in recent years, the industry has benefited from government initiatives, including setting up of freezones with in-built logistics infrastructure and providing incentives for using the air and seaports as stopovers for the transportation of goods globally. However, the logistics service provider industry in the region is highly fragmented, with many small players offering point solutions, such as freight forwarding, warehousing and transportation services.

Few providers have nationwide capabilities and even fewer have the people, assets and IT sophistication to serve clients across the entire region. Most notably, the 3PL market in Mena is still in the early development phase, thus witnessing significant consolidation. This is giving rise to integrated service providers with the scale and resources to offer end-to-end logistics services across the region.

Share of GDP
The Mena T&L industry generated $73 billion in 2015 (representing 3.4 per cent of the GDP), of which the GCC T&L industry accounted for $47 billion (representing 3.3 per cent of the GDP), which is very low when compared to other regions across the world. Nevertheless, T&L is emerging as one of the key drivers of economic activity in the region, especially in the GCC, whereby it now constitutes a major industry sector.

Among the GCC nations, Saudi Arabia's logistics market contributes the largest, accounting for nearly 40 per cent of the total market size in the region.

The business-friendly environment in the Mena region, especially the GCC, has also led to the increase in number of companies basing their distribution operations in the region. Most notably, e-commerce has witnessed rapid growth in the region and is emerging as a key growth driver for the logistics industry. With increased smartphone penetration, a young population, changing consumer behaviour and access to technology, the Mena e-commerce industry is entering a new era, where players have diversified their product portfolios, entered into new segments and a number of start-ups have emerged. Though the Internet penetration in Mena countries is variable, the volume and variety of online purchases continue to grow, with the number of online buyers increasing by nearly 14 per cent from 2014 to 2015.

E-commerce in the Mena region is expected to more than double from $95 billion in 2013 (two per cent of GDP) to $200 billion in 2020 (five per cent of GDP). B2C e-commerce is expected to represent 30 per cent of the total value, followed by government to business or customer at 25 per cent and B2B e-commerce at 20 per cent. Saudi Arabia, the UAE and Egypt are expected to be some of the fastest growing e-commerce markets globally in the next few years, with an expected 30 per cent top-line year-on-year growth across the Middle East.

However, several obstacles such as consumer trust, low awareness, shortcomings in payments, distribution and logistics infrastructure and obscure government policies are preventing the regional e-commerce market from reaching its full potential.

Payment infrastructure
Permissions for e-commerce gateways are still a grey area in the region and the levels of funding from regional banks is almost trivial, while local investors still seem sceptical to invest in e-commerce start-ups. Additionally, the region's payment infrastructure is still in a state of development, and it is estimated that COD (cash on delivery) makes up almost 60 per cent of online financial transactions.

In spite of improvements in the T&L industry, e-commerce vendors face several obstacles such as cross-border transportation, legal matters, payment and logistics concerns. Most retailers have inadequate warehouse coverage across the region for the much-in-demand same-day or less-than-24-hour delivery. Hence, within the GCC, several retailers such as Ikea, Souq.com, among others are investing in building their own distribution capabilities. On identifying the importance of last-mile fulfillment, investments made into their product delivery networks has led to many retailers seeking to slowly foray into international sales.

In conclusion, the growth of T&L and e-commerce industries in Mena is being driven by government initiatives toward economic diversification from energy-based industries to other commercial sectors such as technology, trade, export-import and tourism.

The writer is founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policies.