Air Cargo / Economic Development

Middle East Growing Despite Volatility

As both an end market and a trade hub, the Middle East continues to position for growth.

“Growth in the region has been remarkable for a while, it is not just recent,” says Ram Menen, divisional senior vice president of cargo for Emirates SkyCargo. It is a bit more insulated than other areas, he continues. “The way I look at it, the center of gravity has shifted a little bit.”

Oil prices are an issue for the region, and the oil-based economies are now diversifying, says Menen. Dubai diversified quite early, he points out. Dubai was not much more than a “trading post” but as a result of its diversification and economic growth, it has developed a strong consumer market.

Additional growth is the result of activity in Afghanistan and the Iraq rebuild, says Menen. The goods are all going to those regions as a result and, with the aftermath of the Arab Spring and the markets opening up, that fuels growth for the region.

Asked if some of the visible anti-American sentiment extends to U.S. products, Menen says, “These are very competitive markets. It’s more pricing that drives consumer sales.” In Asia, for instance, you find more Asian goods because it is cheaper and the price sensitivity is the same in the U.S., so Menen suggests there is no inherent bias against U.S. products in the region.

With the talk of moving more manufacturing back to the U.S., Menen comments, the finished goods would be more expensive. “Somewhere, there will be a balance and what I think is going to happen is the components are still going to come from those areas with final assembly occurring in the U.S.”

It will be interesting to sit back and see what happens, he continues. “During a [U.S. presidential] election year, you always get this uncertainty. It’s more psychological than anything else.”

Of course, he adds, the economic crisis in Europe over the euro is real. Unemployment there is a lot higher than it is in the U.S. “The social system is such that they have a bit of a cushion. But what we have seen at the moment is that consumers are not buying.” Wherever you look, economies are quick to blame the EU crisis, unemployment, etc. continues Menen.

“The root cause of the problem is the price of oil because oil is such a basic ingredient it cuts across all areas – the cost of transportation – domestic transportation – is getting higher so disposable income is getting lower. So, again, consumer items are affected. At the same time, you go to the supermarket to buy meat and the price of meat is going up because the cost of transportation is going up.” Menen’s conclusion is that the only way to see an improvement is if oil prices come down.

“What is a concern,” says Menen, “is that the oil price is no longer demand driven.” Speculative trading has created this issue, he points out. Supporting this, he notes that oil shipments are down 50 to 60 percent and a lot of tankers are empty. “That clearly shows that the demand for oil isn’t there. And yet, you see the oil tracking $110, $112, $116.”

“It’s a burden on commerce,” says Menen. “We’re not able to lighten that burden” or its effect on economies like Europe and the U.S.

On the subject of multishoring, Menen says, “All you have to do is look at Foxconn.” The Taiwan technology company, which counts components for Apple’s iPad and iPhone among its products, has reportedly signed a memorandum of understanding with the state government of Sao Paulo, Brazil to invest $500 million in new factories in the South American country. Itu, the area where Foxconn will reportedly build its factory, has already lured computer maker Lenovo to the region. Production at the Lenovo plant was expected to begin in November 2012.

“Globalization is here to stay,” says Menen, though he acknowledges trends towards insourcing and nearshoring.

The same is true for China, he notes. China has been investing heavily in research and development in technology. China itself has begun to outsource to places like Africa, Menen continues. “It’s a cycle you go through. All you have to do is look at the Pearl River Delta in China. That whole area and the region around Shanghai are becoming economically strong and, therefore, their costs have gone up. They are now migrating inland.”

For Emirates and the rest of the Middle East, Menen sees China remaining a strong market long-term. “For us, the Indian sub-continent – we’ve seen quite a bit of growth there. It might be slowing down lately, but that is more insulated. Both China and India have such huge domestic populations, the domestic markets themselves can be more insulated economically.”

He continues, “We have seen strength in Indonesia. Africa is another place that’s growing.” However, in some of these markets, including India, the lack of infrastructure is a problem in trying to reach those interior markets.

The rise of Dubai as a major hub is the result of the sheik of Dubai putting a lot of money into developing port infrastructure at the Jebel Ali port which, says Menen, is the world’s largest man-made port. To position the port where the sheik wanted it meant reclaiming land. At the time, many people questioned the decision, says Menen, because there was an efficient port nearby. “In 1985, everybody said, ‘This is going to be a white elephant’” recalls Menen. “And now, that port is so congested they’re expanding the port.”

“That’s vision,” Menen continues. Between 2004 and 2007, Dubai had 25 percent of the world’s construction cranes, he adds. “The infrastructure they created there was all towards catering to world trade. Dubai was a regional trading hub; it’s now become a world trading hub. That is the transition that has happened in the last 25 years.”

For Emirates, U.S. expansion has continued. In 2012, it brought on three new points in Dallas, Seattle and Washington, DC. That brings the total points served in the U.S. to seven, says Menen. This provides access to the airline’s cargo network and its partners. “It gives them access to a growing market,” he points out.

While those flights are a combination of passengers and cargo, Menen says Emirates SkyCargo does fly freighters into New York under a code share with TNT. The airline had operated freighters into Chicago until the market declined. Once the market picks up, they will resume those freighter operations, suggests Menen.

Longer term, Menen says he is an optimist, quipping, “What goes down must come up.” He follows with, “We are in it for the long term.” There are already some signs of things picking up, but there will be a bit more pain as the industry sheds some surplus capacity and older airplanes. The newer aircraft are more reliable and environmentally friendly, says Menen.

“When we started out this year, we were quite confident the last two quarters of this year would be good, but we haven’t seen any uptick at all. The last two quarters of this year are more likely to be slow.” Menen adds, “That could all change if oil prices come down that recovery could be faster.”

Long term, Menen sees air cargo turning up because product life cycles are getting shorter. Time to market becomes more critical. Menen sees more interaction among the different modes of transportation. “I’m a great believer that smart supply chain managers actually use transportation effectively,” says Menen, offering an example. As a product is introduced, you use air. The second batch goes sea-air, he suggests. And, the next batch goes by sea. “So you have the immediate stock that goes straight into the shop shelf. By the time that’s depleted, your sea-air has come through. And, by the time the sea-air inventory is depleted, the sea shipment has arrived.

“You immediately have a cost advantage in your first wave of production,” says Menen, referring to the three-phase distribution example. “These days, if you get a second wave of production, that’s a bonus.”

Adding the cost of capital to the scenario, Menen comments, this is where, in smarter supply chains, air freight adds value. “Your return on your investment is faster.” All of this, Menen concludes, is why he is not concerned about modal shift. And, he adds, the bounce when the markets strike bottom and start back up is always welcome.

While attending The International Air Cargo Association meeting in Atlanta, Menen and Emirates SkyCargo announced that since adding Dallas, Seattle and Washington, DC to its network this year, it had transported nearly 34,000 tonnes of cargo between the U.S. and points on its global network. Of that total, two-thirds were exports.

In his official statement accompanying that announcement, Menen said, “Our expanded services have not only boosted U.S. trade with the UAE, but also with its business partners throughout the Middle East, the Indian subcontinent, Africa, the Far East and Australasia.”

The newest addition to Emirates’ U.S. network is the daily non-stop flights from Washington Dulles airport. When Emirates made that announcement, Tim Clark, president of Emirates Airline, noted, “Estimates show that our U.S. flights produce several billion dollars of local benefits each year, helping to open new markets that the business community is reliant upon, as the globalization of commerce is dependent upon transportation for passengers and cargo.” wt

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