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back to index backEUROtalk April,  2007


Middle East transport and logistics at crossroads

Today, the Middle East region is in the middle of exciting global, regional, and local developments in terms of transport and logistics.  With the explosive growth of global and regional trade, and especially the trade between Europe and Asia and within the broader region, the Middle East faces unprecedented opportunities to capitalize on the unique strength of its favorable geographic location.

The Middle East region’s excellent geographic location and very good accessibility by air, land, and sea have brought it to the top of the agenda for global logistics as the strong growth of global trade requires efficient transport and logistics structures,” said Fadi Majdalani of Booz Allen Hamilton.   Hence, from a global perspective, the region has a set of three unique opportunities.”

First, the region can benefit from the strong volume growth on the trade lane between Europe and Asia.

Second and more important, the Middle East will benefit from the volume growth on the Europe -- Asia trade lane as shippers use larger vessels and apply more advanced logistics concepts. The hub-and-spoke approach, an alternative method to transport, becomes more favorable as volumes and vessel sizes increase. In this layout, the volume from one origination point is loaded onto a vessel irrespective of its destination and then transported to a central node—i.e., the hub.”  If volumes and vessel sizes achieve a certain threshold size, a hub-and-spoke approach is the ideal logistics concept to achieve cost-effective transportation.

Finally, there is a third driver of the Middle East as a growth area for global logistics along the Europe Asia trade lane: the need for multimodal hubs.

For most goods, a complete airfreight transport is still much too expensive to be viable. Hence, a new transportation concept that we call acceleration in motion,” offering a conversion from sea transport to air transport, becomes more important. Such a service offering allows the shipper to start with cost-effective sea freight transport; if need arises, due to better sales or unexpected additional demand, while the goods are already in motion, the shipper can manage almost in real time how fast additional supplies will be brought to market. In sum, this allows the shipper to achieve better trade-offs on speed to market, stock availability, and transportation cost.

The Middle East is a natural location to do the sea to air transport conversion, for three reasons:

1. The Middle East is already the natural hub for refueling stopovers for the air freight industry;
2. The region is easily accessible by sea and is increasingly becoming a hub for the sea freight industry; and
3. Acceleration in motion”, if done in the Middle East, achieves attractive reductions in transportation time—approximately five to seven days—while still conserving the cost-effective sea transport rates for half of the total transport.

In fact, Dubai has already made significant infrastructure investments in the integration of its airport and sea port in Dubai. With an annual volume of more than 100,000 tons of freight converted from sea to air freight, this operation proves the viability of the concept.

The Europe¬ Asia trade lane is not the only opportunity for the Middle East to capitalize on global trade. Its favorable geographic location provides the Middle East with a strong opportunity to establish the leading transport and logistics hubs for the broader region serving Northern and Middle Africa in the south-west; Pakistan in the east; and the Caucasian CIS states, such as Kazakhstan, Turkmenistan, and Uzbekistan, in the north. Three key factors act in the region’s favor for such a positioning.

First, the Middle East has the advantage of a geographic location with equal proximity to all these markets and very good connectivity by road and short sea transportation.

Second, the trend for regionalization of logistics and distribution structures drives the allocation of regional headquarters and distribution centers in the Middle East.

The third factor supporting the allocation of regional logistics and distribution centers for the broader region is the positive economic outlook for consumption and increasing production in the Middle East.  Excellent global accessibility based on an extensive logistics infrastructure of ports, airports, and road networks will be crucial for the establishment of such regional centers. This already qualifies the global hub locations, such as Dubai, to play a significant role in regional distribution.

There are four macroeconomic elements making a strong and efficient transport and logistics sector a strategic must:

1. Enhancing economic activity. Strong and efficient transport and logistics service offerings are essential to provide efficient access to markets for domestic trade and manufacturing and enhance economic activity. At the same time, the availability of efficient transport and logistics services is increasingly a key decision criteria for foreign direct investment, in addition to competitive factor costs and availability of skilled resources.

2. Enhancing industry competitiveness.  Opening markets and abolishing import custom duties increasingly expose domestic industries to global competition.  For the Middle East, these realities have ramifications on two levels: first, the effective removal of import barriers, as promoted by the World Trade Organization, exposes local and domestic markets to global competition; thus, Middle Eastern manufacturers face increasing competition in their home markets. Second, Middle Eastern manufactures face stronger competition in their international export markets as global logistics and supply chain services become more sophisticated on a global scale.

3. Growth of the industry sector.  The transport and logistics sector itself provides an attractive opportunity to enhance economic activity.  The Middle East’s opportunities globally and in its own broader geographic region, described earlier, make a strong transport and logistics sector crucial for the Middle East in particular.

4. Generation of sustainable job opportunities.  Finally, besides providing a key building block for growing economic activity in manufacturing and other sectors and hence providing a basis for increasing employment levels, the growing transport and logistics itself will provide the substantial potential for employment growth that Middle East countries are eagerly looking for.  As in other emerging markets, an additional supporting factor of the industry’s employment potential is the Middle East’s competitive labor cost, which reduces pressure for automation and workforce efficiency.

Each of these four macroeconomic elements provides rationale enough on its own for the Middle East to position the development of the transport and logistics sector very high on the government agenda; they are even more compelling in combination.

Governments should consider and decide on a set of five building blocks for their transport and logistics sector strategy:

1. Choose a strategic play for the sector on a global level.  Fundamentally, there are three different strategic plays that governments can pursue for the transport and logistics sector:

A.  Global multimodal transport and logistics hub.  The global multimodal transport and logistics hub strategic play is the most demanding strategy for sector development.  It requires a multitude of factors that have to be coordinated and strategically aligned. In terms of the airport and port infrastructure, a multimodal hub requires both operations playing capacity -and utilization-wise within the top league of the respective segments to provide capacity and attractiveness for several dozens of the global and regional transport carriers and logistics service providers.
B.  Regional logistics and distribution hub.  The regional logistics and distribution hub strategic play requires the same critical success factors as a global multimodal hub, as key tenants will also be global and larger regional industry and logistics service players.  As hubs pursue specialization strategies, such as specific industry focus or focus on a sub-region, the consolidation of the regional logistics and distribution centers into one single location is not as much an imperative. Hence it seems that a few traditional gateways to the broader region, such as the Nile delta, the Red Sea areas, the Kuwait area, and the northern shores of the Gulf, qualify for such a positioning.
C.  Domestic focused transport and logistics services.  If a country does not have the qualifying factors to meet the criteria of a global or regional hub play, the government should focus its sector strategy on the development of its domestic transport and logistics services.  Countries with tight budget constraints that do not match the qualifying factors for the global or broader regional play should focus on a broad set of local developments, providing excellent connections to the global and regional hubs and nurturing the domestic development of the sector.

2. Focus infrastructure investments to fit the chosen sector play.  The investment plan and execution of the investment need to consequently be followed through and subjected to regular reviews.  The infrastructure potential needs to simultaneously allow for very good connections to global hubs and exporting countries, as well as excellent connections to the neighboring regional markets. This requires the establishment of an appropriate road and short sea infrastructure on a regional level.  Finally, a domestic-focused transport and logistics services play requires the most humble infrastructure development plan.  Besides the basic road, port, and airport infrastructure development, free zones in the inner country, close to the relevant consumption and production markets, are of significant importance.

3. Adjust policies and regulations to promote sector development.  Policies and regulations should promote foreign direct investment, provide a liberal economic environment, and allow for full foreign ownership of the respective entities, as competition for tenants happens on a global level and hence needs to adhere to these standards.  The more mature markets in North America and Europe can provide model cases of a clear liberalization strategy with thorough and consistent regulatory oversight. In these markets, liberalization and the removal of market entry barriers have resulted in substantial productivity gains, service level improvements, and volume growth.  Finally, to ensure a level playing field for all industry participants, the government should establish thorough economic regulatory oversight, independent of strategy setting and policy definition.

4. Optimize government services to meet the demand of the logistics sector.   Optimization of government services in the areas of business and equipment licensing, regulatory oversight and competitive regulation, and customs services should be part of a broader economic development program that promotes and fosters entrepreneurial activity.

5. Promote the development of national transport and logistics champions.  The development of high-quality, efficient transport and logistics processes and structures is substantially hampered as small enterprises do not own the means to establish sophisticated logistics processes and service offerings, whereas industry players focus predominately on their core business, often neglecting the optimization and sophistication potential of the logistics processes.

Hence, the development of the transport and logistics sector also requires an industry structure in which medium to large logistics service providers play a more prominent role. Even with a liberal market approach, governments can actively promote and influence the development of the industry toward such a target structure using three focused measures.

Governments can carve out, consolidate and subsequently privatize the logistics functions of large state-owned industry enterprises. In most Middle Eastern countries, a quite substantial industry base is government-owned, such as national oil and basic industry companies in the GCC countries or enterprises in the steel, mining, cotton textile, and retailing industry in Egypt.

The government could pursue a comprehensive carve-out strategy integrating the transport and logistics operations into dedicated entities of substantial size.  Governments can expand state-owned transport players, such as post offices, railways, and port/airport operators, into the logistics business.  However, almost all of these expansion strategies have been the growth part of a fundamental restructuring program. Because they had previously been performing poorly and sustaining losses as government-owned authorities, a fundamental restructuring of the core business was necessary before they earned the right to grow.”

6. Finally, governments should also pursue a soft strategy” to promote outsourced logistics and logistics service providers.

The Middle East region has a favorable geographic location along the substantially growing Europe Asia trade lane and in the middle of a broader region spanning from Northern Africa to the southern borders of Russia and to Pakistan. This provides a broad variety of opportunities for the Middle East to gain a fair share of the global and broader regional transport and logistics business.

Governments of Middle Eastern countries should embark on a well-defined development strategy for the sector,” concludes Urich Koegler of Booz Allen Hamilton. The strategy should comprise of the best choice of a long-term strategic play, the appropriate focusing of infrastructure investments, the adjustment of policies and regulations, and the optimization of government services to support the chosen strategic play.”

The interplay of a clear and well-thought strategy with excellent execution will finally achieve the desired results and economic benefits for everyone involved.

Source: Mena ReportGAI


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