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UAE Logistics Unveiled: How is Government Shaping the Industry's Future?

August 24, 2023
logistic

In the dynamic realm of the UAE Logistics Industry, transformative trends are redefining its landscape. The surge in online shopping post-COVID-19 has propelled e-commerce logistics, yet challenges like traffic congestion, overreliance on road freight, and fuel price fluctuations loom large. Here, the government emerges as a catalyst for change. How exactly is the government taking the reins to surmount these hurdles and pave the way for sectoral prosperity? Delve into the next slides to uncover the strategic initiatives that hold the key.

1. Consumers shifting preference towards online shopping post-COVID-19 is leading to the growth of e-commerce logistics business in the UAE

Effects of COVID-19 on UAE Logistics Industry

  • The pandemic caused a dramatic shift in consumption patterns in the UAE and across the world, with demand for online retail spiking. The UAE is a regional center for e‑commerce, and the industry played a growing role in the economy and in meeting local and international logistics requirements.
  • Covid-19 pandemic interruptions on the nationwide distribution of goods and services in the UAE have been very minimal due to the government’s robust financial support to the logistics industry, and consequently the business resilience developed by the industry operators
  • The UAE Logistics industry is gradually recovering from the transport restrictions. Going forward, pharmaceutical logistics will play an important part in the distribution of the COVID-19 vaccine, and is hence, expected to lead vertical market growth in the future
  • The pandemic and accompanying restrictions accelerated the need for digitalizing processes in the logistics sector. The UAE is well placed regionally to adapt to and adopt technologies such as blockchain, internet of things (IoT), driverless vehicles, drones and artificial intelligence, which will help to reduce operational costs, enhance customer experience and facilitate faster deliveries. 
  • Free zones like DAFZA and JAFZA in UAE, introduced additional incentives to help logistics businesses such as the decision to waive fines and fees, delay rent payments, and facilitate the efficient movement of goods 
  • The pandemic impacted overall supply chain operations in the UAE, with road freight due to sealing of borders and air freight due to flight cancellation being the major sufferers.  International commercial passenger flights were suspended from March, 2020. As a result, low cost air freight providers had exited the market
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2. But, Traffic Congestion, Over Dependence on Road Freight, and Fluctuation in Fuel Prices among others are the major bottlenecks of the Logistics Market

Sustainable Logistics Practice
  • UAE has one of the largest carbon footprints in the world, and approximately 22% of UAE’s carbon footprint was contributed by transportation in 2022.
  • Freight forwarding transportation activity negatively impacts the environment due to their heavy reliance on petroleum products. With the expectations of rising cargo freight volume in coming years, the UAE’s carbon footprint could be dramatically increased.
Traffic Congestion
  • The UAE has the highest population growth rate in the Gulf region because of the continued influx of expatriates. Traffic congestion remains an issue with growing expatriate population, which accounted for ~90% of the overall population in 2022.
  • Traffic congestion affects logistics efficiency and direct operational costs. Furthermore, the opportunity cost of congestion-related delays along with excessive fuel consumption per kilometer travelled, and the underutilization of vehicles are major barriers caused due to traffic congestion.
Dependence on Road Freight
  • Cargo movement in and out of UAE is heavily dependent on road due to lack of extensive rail networks. Furthermore, location of cargo generating centers are extremely scattered with large scale industrial areas spread across GCC, thereby exacerbating the dependency on road.
  • In order to curb the excessive dependency on road freight, the government has planned to fully operate the Etihad Rail network by 2030 which is expected to carry around 50 million tons of freight per year.
Fluctuation in Fuel Prices
  • The fuel cost is the most significant expense for transportation. Despite being a major oil & gas exporter, the Emirates has also not been immune to fluctuations in fuel prices globally. The diesel price rose as high as USD 1.30 in July 2022, a 74% increase since January 2022.
  • Such sharp fluctuation in fuel prices also leads to fluctuations in the cost of the supply chain in the region, thus, hindering businesses from planning for long-term efficiency in the supply chain.
Source: Interviews conducted with Industry Experts, Industry Articles & Ken Research Analysis

3. Interestingly, the UAE government has set transport infrastructure investments that are focussed on the development of a rail network, expansion of airports & sea ports, & technologically advanced infrastructure

Some initiatives by the government of UAE for improving Logistics in the country

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    Abu Dhabi’s New Regulations for Freight Transport

  • All freight vehicles & operators in Abu Dhabi must be linked within the next six months to an electronic system & central database that aims to enhance traffic safety & regulate freight activities. This tracking software will help track freight vehicles, streamline operations, & monitor drivers’ compliance with traffic regulations.
  • Freight companies & operators will be prohibited from carrying out transport activities after the six-month grace period if they do not have an Integrated Transport Centre permit, as well as business licenses from Department of Economic Development.
chart1

    Initiation of Rail Network

  • UAE government is developing rail network of 1200 km to connect seaports, major transportation hubs, distribution centers, free zone areas, major warehousing areas and freight terminals.
  • Rail development to GCC countries is expected to accelerate the growth of logistics market of UAE due to its strategic geographical position and better connectivity.
chart1

    National Transport Master Plan (NTMP)

  • UAE Government initiatives such as Dubai IOT strategy, Dubai Block Chain strategy, Introduction of drones for last mile delivery, UAE National AI program, Smart Dubai 2021, Dubai 3D printing Strategy, Dubai Data Initiatives and National Innovation Strategy will revolutionize the logistics and warehousing market of UAE. 
  • Growth of the logistics market would rely on the adoption of technologically advanced mechanisms & trained professionals.
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5. However, the infrastructure from airports, seaports, and warehouses has not been standardized in Vietnam which inhibits the growth of the sector

Emergence of E-Commerce Sector

  • UAE is the e-commerce leader among Gulf Cooperation Council (GCC) states, where the market jumped by 53% in 2020 with a record of USD 3.9 Billion in e-commerce sales1 due to the digital boom post COVID-19.
  • It is estimated that the UAE e-commerce sector will generate USD 8 Billion2 in sales by 2025, attributed to the higher internet penetration rate of 100%.3
  • With the emergence of e-commerce sector, there exist a surging demand for last mile delivery services, contributing to the growth of UAE logistics market.

Expansion and Development of Sea Ports

  • In 2022, the government of UAE announced the expansion of Khalifa Port, a development project with an investment of USD 1.09 Billion to enhance logistical infrastructure for serving trading operations.
  • Port of Fujairah is planned to be integrated with Etihad Rail by 2023 to add significant volume of containers and bulk cargo to the port.
  • Further, the government of UAE has also initiated the process of developing a deep water bulk cargo terminal at Dibba Port, to envisage the utilization of mines and promote dry bulk exports from the region.

Integration of Advanced Technologies such as AI, Block-Chain and IoT among others

  • Technological advancements is rapidly leading to the automation of logistics industry in UAE.
  • Logistics service providers are equipping themselves with sophisticated technology such as AI, drones and block-chain to enhance their supply chain process.
  • In 2022, Al Futtaim announced the utilization of drones in their warehouses to provide accurate information on stock inventories and increase order fulfilment by 25-30%.
  • A major development in the industry will be the integration IoT to improve fleet management, and real time visibility.
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4.1 Rising maritime, air cargo & land transport sector serves as a major catalyst for the growth and development of the logistics industry in the UAE

Growing Pharmaceutical Industry

  • In order to achieve sustainable growth of the pharma industry, the UAE government proposed various strategies such as “Dubai Industrial Strategy 2030” to enhance the export potential and future growth.
  • Imports of pharma products to UAE was valued at USD 6.57 Billion while the exports of these products was valued at USD 2.3 Billion in 20211.
  • Import and export of pharma products to high-demand markets such as Africa, Europe and Asia complements the growth in logistics sector as it requires an optimal supply chain ecosystem with efficient warehousing capability.

Rising Maritime Sector

  • The Bunker Supply Index ranked UAE 3rd globally in transport services and 5th globally as a key competitive maritime hub.
  • As of 2022, there were more than 10 million cubic meters of crude and oil products storage capacity at Fujairah, making Fujairah the world’s No. 3 bunkering hub, which contributes in strengthening UAE’s position as a reliable supplier of crude oil,
  • The supply chain disruption due to COVID-19 had a low impact in UAE’s maritime sector, as the container port traffic reached 19.3 million TEUs in 2020, positively impacting the logistics industry in UAE.

Strengthening Air Cargo and Land Transport Sector

  • UAE’s air cargo volume showcased strong growth since 2017. However, in 2020 due to supply chain disruption, freight volumes was negatively impacted, quickly recovering in 2021.
  • Emirates Group freight yield per Freight Tonne Kilometer (FTKM) increased strongly by 88% in between 2020 and 2021.
  • The Dubai Flower Center is the first air freight terminal worldwide specializing in the transfer of cut flowers. The center handles close to 180,000 tons of freight per year.
  • Etihad Rail will be the country’s first national freight network, expected to serve 50 million tonnes of freight per year.
Source: Interviews conducted with Industry Experts, Industry Articles & Ken Research Analysis
1: United Nations Comtrade

5. UAE has ample opportunities to support the existing growth of logistics industry by leveraging on the positive outlook of the quick commerce industry in coming years

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Strengths

  • 9.98 million people in UAE were internet users in 2021, representing 99.01% of the overall population1.
  • High internet penetration rate in the emirate contributes to the growing demand of e-commerce products, thereby expanding the e-commerce logistics space.
  • Nearly a half of GCC countries cargo inbound flows are channeling through UAE as of 2022. Therefore, expansion of handling capacity of ports such as Khalifa Port, have been a major development in recent years.
  • Integration of IoT, AI, drones etc. have helped logistics player in UAE to enhance their business prospects.
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Weakness

  • Freight transport within UAE is road dominated, with little opportunity existing for rail transport.
  • However, the completion of Etihad Railway project in coming years is expected to reduce the dependency on road freight.
  • High costs related to warehouse establishment coupled with rising fuel cost in recent years have surged logistics cost across the emirate.
  • UAE’s logistics industry is extremely competitive and fragmented posing high risk of cannibalization of the exiting market instead of creating new volumes.
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Opportunities

  • Dubai and Abu Dhabi airports in recent years have been expanding their cargo handling capability.
  • Leveraging on this positive trend, most airports have an opportunity to expand their existing capacity and cargo handlers to increase their fleets.
  • Logistics player in the country can capitalize on the rapid growth of quick commerce and cater to consumers expectation of shorter delivery times by building an efficient network of warehousing & fulfillment centers.
  • Etihad rail which is expected to handle 50 million tons of freight per year upon complete construction, has the potential to offer lower supply chain costs for end users.
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