Allure of Middle East

The developing markets of China and India are increasingly gaining foreign investors, but Singapore companies hoping to ride on these markets’ boom need to rethink their expansion strategies by striving to seek entry into non-traditional markets where they can have an early mover advantage and face lesser competition. In recent years, attempts by various countries in Middle East to diversify their economies, and instead focus on education and training for its people so as to prevent over reliance on oil and gas, gives Singapore companies plentiful opportunities into the Arab region.

There exist good bilateral relationships between Middle East and Singapore, but it is only in recent years that trade between the two has surged. There was a year on year increment of 32 percent, in trade between both countries from year 2003 to 2004, and the region is now Singapore’s sixth largest trading partner. Both countries have traditionally been linked economically through petroleum related products, but as the region is going through rapid expansion plans to beef up on its infrastructures, many Singapore companies are now involved in areas of constructions and real estate.

Countries in Middle East have realized that strong infrastructures are fundamental to align themselves with other world markets, and Dubai of United Arab Emirates (UAE) is considered to be the most successful in spearheading the construction revolution. Well known for its ambitious world-class projects, Dubai is now seen as the model for success which other nations in the region are now emulating. Qatar, for example, has reportedly set aside US$100 billion to improve its infrastructure over the next decade, and plans to add 150 15-storey towers by 2007. With increasing competition around the region coupled with more foreign businesses expecting to seek entry, countries are also seeing the need to build more industrial parks, setting up of meetings, incentives, conventions and exhibitions (MICE) areas, improving road works and airports and strengthening of its financial markets to appeal to these investors.

Local firms should take advantage of the positive image generated by our business organizations in Middle East and seek entrance into areas which we have proven track records. We are recognized for being competent in sectors like transport, logistics and infrastructure building, and such strengths has enabled local firm DP Architects to nab the contract to design Dubai Mall, set to be the world’s largest mall. The success of Singapore as a well established brand name provides our businesses with added credibility should they decide to venture into the Arab region. Moreover, Singapore companies have another advantage over other western players as we are able to present the same level of expertise at lower rates.

Nonetheless, a construction boom in the various countries does not mean that local companies will face a smooth journey while conducting businesses in the region. There exist problems and various constraints when a country undergoes intensive real estate development. Though lucrative, such fast paces of developments will bring along with it a series of challenges and problems like raw materials allocation, labor shortages and difficulties in obtaining appropriate resources through the limited channels. The heavy commitment required for large scale projects also meant that local companies will require a pool of readily available expertise on location to provide knowledge and guidance. Hence, it is essential for companies to ensure there are staffs stationed on site to help make work well-organized, and whenever possible, businesses are advised to engage a local partner to share the work and risks involved. Most Arab countries are willing to co-operate with Singapore firms as they value the importance of knowledge transfer, as well as the job-creation prospects that such cross border ventures may bring along.

A report by International Data Corp (IDC) puts Middle East and North Africa as the third fastest-growing IT region in the world after China and India, and this signifies an enormous market in a region where other sectors such as e-government, logistics and financial services are also starting from scratch. Singapore’s robust IT infrastructure is well known in the Gulf Region and this is another reason why companies like System Access and Crimson Logic, which have set up operations in the Arab region, have managed to secure projects and deals with various parties, ranging from financial institutions to governments in countries like Saudi Arabia and Bahrain. By taking advantage of setting up operations in the region ahead of others, these companies have managed to exploit their early mover advantage to establish a presence, and help pave the way for other local companies.

The cosmopolitan culture in countries like UAE and Qatar will also enable smaller business without massive capital structures to carve a niche for their brands and products. Numerous smaller scaled companies involved in food and fashion can now use a city in the region as a base or launchpad to showcase their products to the world. Pastamania has eleven outlets in the region currently, and home grown shoe retailer, Charles and Keith, has also expanded their operations to Middle East, through a franchise agreement with a leading footwear player in the Gulf ,which sees them having up to 20 stores across various countries by end 2006. Nonetheless, as a growing amount of multi nationals are seeking development plans in the region, Singapore companies need to anticipate increasing competition in terms of prices as it will become inevitable. In addition, companies should not expect prompt results in business processes which they are accustomed to in Asia. This is because negotiation processes in Middle East are generally time consuming and will hence require patience. Therefore, it is vital to have the necessary contacts and social networks to help guide an operation along.

The array of business opportunities in Middle East is only starting to unravel and attract foreign investors in recent years, thus the region’s economies have much room for improvements. Hitches and drawbacks like the region’s backward financial systems, inappropriate exchange rate policies, and lagging political and institutional reforms will deter investors, and only with such systems aptly in place will these Arab economies be even more appealing.

In spite of everything, there are few countries that understand the dire consequences on its economy of such apprehensions and have since implemented political reforms and embarked on projects to strengthen their financial sectors. Foreign banks are now able and willing to establish a presence in the region to attract multi nationals, as well as to gain foothold in capturing a share of the lucrative Islamic banking segment. Bahrain is currently building the Bahrain Financial Harbour slated to be the financial center of the Gulf Cooperation States (GCC) which comprises of UAE, Saudi Arabia, Bahrain, Oman, Qatar and Kuwait. On the other hand, Dubai has its own financial exchange at the Dubai International Financial Centre where foreign banks like Deutsche Bank and National Bank of Kuwait have since established offices. With regards to trade, Saudi Arabia has inked two agreements and a memorandum of understating with Singapore to set up more conducive investment frameworks and to boost trade collaborations, while both Jordan and Qatar have free trade agreements with our government to encourage more cross border cooperation with enhanced trade status to Singapore exporters and service providers.

Singapore companies should strive to expand into the region, but they also need to realize that perseverance is essential to sustain their businesses. Firms should be realistic and not expect fast gains within a short period of time. Negotiations with Arab businesses are established on building strong personal relationships, but even though, issues pertaining and discussed while negotiating should be kept personal and not be revealed until the contract has been signed and finalized. The most crucial aspect in ensuring a footing in the region is the obligation to commit and have a local representative to oversee operations and be in tandem with the rapid development of these economies.

The Arab region is no doubt slowly progressing with varied growth rates and growth plans in different countries. As they liberalize and diversify, Singaporean companies will find it easier to gain entry, however, companies should seize an opportunity for early entrance where there are lesser competitors. Local companies should engage in our area of expertise and help mould a region still at its infancy stages. Nevertheless, we must first be able to understand the unique business culture of Middle East and recognize the importance of due diligence as different countries in the region calls for different strategies.


References:

Supplement 23, Feature on Middle East, The Business Times, 28 May 2005

Singapore, Saudi Arabia ink deals to boost ties, The Business Times, 11 April 2006

Opportunity knocks in the Gulf, The Business Times, 18 April 2006

Qatar beckons, The Business Times, 8 June 2006