Middle East: Hope or Hype?

If you deal in transport equipment, motorised or not, you can’t ignore the Middle East as a potential target market. But how about the image of widespread violence, rampant corruption and outright war that mainstream media continue to paint?

According to Australian expert Cynthia Dearin, who served as the first female CEO of the Australia Arab Chamber of Commerce and Industry and is now helming a boutique consultancy in Sydney, the first impression – despite being unnerving – can often be false. “A continent away, the media shows Iraq and Syria burning to the ground at the hands of ISIS, Hamas and Israel firing rockets at each other and the price of oil fluctuating wildly,” she says. “To the uninformed, the idea that business people should start trading with the Middle East seems like madness. But it’s not.”

While most of the media coverage on the Middle East is pretty bleak, Dearin says it’s also very one-sided. “The truth is that not all Middle Eastern countries are the same and while things may be going badly in some parts of the region, in others they are going very well.”

According to Dearin, the United Arab Emirates (UAE), which has turned into a regional economic powerhouse over the last decade, is a case in point. Despite a volatile oil market, the small, oil-rich federation’s economy grew between four and five per cent in 2014. And its economic capital, Dubai, became one of the top five fastest growing cities in the world, according to a survey of 300 cities by the Brookings Institute and JP Morgan Chase, released in January 2015. “Add to that the fact that just over a year ago, Dubai won the right to host the 2020 World Expo and you have a pretty potent combination for economic expansion and international business opportunities,” she says. “Dubai is expected to host more than 25 million visitors during the Expo alone and is racing to build state-of-the-art facilities to accommodate them all.”

With the 2022 World Cup in Qatar also on the horizon, the local construction industry is bound to expand multifold, which will in turn boost demand for transport services and equipment. One company that has already found a way to capitalise on the imminent boom is Swedish OEM Volvo, which registered a solid 24 per cent jump in deliveries across the 13 regional markets it serviced in 2014.

While the brand’s success is in part driven by a comprehensive product upgrade, Lars-Erik Forsbergh, President of Volvo Trucks for the Middle East, says that providing a complete, mature transport solution is equally important to be taken seriously in modern-day MENA (Middle East and North Africa).

“We’ve optimised our transport solutions around the new models to provide our regional customers with the best the market has to offer in terms of care packages that help increase productivity and truck efficiency,” he says – indicating that the market is rapidly maturing and demanding the same level of attention as mainland Europe or the US. And it’s not just OEMs like Volvo or rival MAN (35 per cent sales hike) that are likely to benefit from the region’s construction boom. According to Frost & Sullivan research, the influx of new and used commercial vehicles also means demand for spare parts is bound to go up. In Saudi Arabia alone, it is currently valued at US$2.05 billion and estimated to reach $3.65 billion by 2020.

But there’s even more to the MENA region than an ambitious construction market. If you believe expert consultant Dearin, who is fluent in Arabic and has worked as a diplomat in the region before, there’s also no getting away from the fact that the MENA region – located on the crossroads between Asia, Europe and Africa – is home to 60 per cent of the world’s energy resources in the form of oil and gas, making for additional opportunities to sell equipment down the line.

“The region contains six of the top 15 oil-producing countries, and three of the top ten gas-producing countries. So, despite the current volatility in the oil and gas markets, the MENA is likely to remain a source of long-term financial security and purchasing power,” she says. “The GCC countries, which produce most of the oil are expected to grow above four per cent in 2015, leading economic growth in the region on the back of robust non-hydrocarbon activities and large budget surpluses. These countries also benefit from solid financial fundamentals such as huge assets in their sovereign wealth funds and external surplusses. There is no shortage of capital for expenditure.”

Statistical data proves that the region is extremely resilient too, says Dearin. “Between 2003 and 2013, regional annual economic growth averaged between five and six per cent, whereas the US economy achieved average annual growth of 1.7 per cent and the economy of the United Kingdom averaged just 1.3 per cent annual growth,” she explains. “By contrast, a number of MENA countries performed extremely well between 2003 and 2013, led by Qatar, which was the world leader in economic growth for the decade, achieving a whopping 13.4 per cent.”

As a direct result, the MENA region’s middle class is burgeoning both economically and culturally, driven by increasingly high levels of education in most countries across the region. Already, more than half of the region’s population is less than 25 years old, making it one of the most youthful markets in the world. Dearin says only India comes close, with 48 per cent of the population under 25 years old, “but only 34 per cent of both the Chinese and United States populations are under age 25.”

According to Dearin, the take-away here is the MENA is a rapidly growing consumer market and despite the stereotypes that paint the region in a negative light, its youthful, rapidly expanding and increasingly affluent population is as hungry for sophistication and the same kind of quality products as consumers anywhere else. The result is a growing need for sophisticated supply chain solutions and reliable transport equipment – albeit with a certain delay due to long vehicle life cycles and a historic preference for proven second-hand equipment.

In the interim, many experts anticipate the market to remain segregated between ‘value’ and high-end equipment. “In the wake of the Financial Crisis, local contractors have adopted an altogether more cautious approach to equipment acquisition. In turn, the sectors of plant, machinery and commercial vehicles have become segmented along the lines of ‘premium’ and ‘value’ manufacturers,” says James Morgan of Construction Week Online.

While Morgan admits that when extrapolated to a broader context, that development is probably not new – the battle between the high-end segment and the no-frills competition is a well-worn industry trope – the example of the MENA’s equipment sector is still a particularly interesting case, as the market polarisation is mainly driven by dealers and distributors who directly interact with the local clientele.

“Broadly speaking, there are two schools of thought on the subject,” Morgan explains. “On the one hand, there are the dealers that have opted to stick with premium manufacturers, extolling the long-term benefits that stem from Total Cost of Ownership (TCO). On the other, there are the suppliers that have embraced the value segment, choosing to spend their time strengthening brand confidence and talking about initial outlay.”

According to Morgan, the question is not so much which school will win, but whether or not the OEM in question is able to provide dealers and distributors with a suitable sales strategy for each philosophy – at least until the market has embraced the value-added concept and is ready to make a purchase decision based on TCO instead of list price.

So, does it make sense to jump on the investment bandwagon? Yes, says Cynthia Dearin, who is also teaching at Melbourne’s La Trobe University. “To the uninitiated, the MENA region may seem like a closed and inhospitable society. But as those who have spent time in the region will tell you, the reality is very different. The MENA region is globally interconnected and open to companies and visitors from around the world.”

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