Dubai: Special Report - The Gulf's business destination

A diversified economy, combined with public and private finance, has created a city-state able to compete in global markets.

by Nigel Dudley
Last Updated: 23 Jul 2013

When Sheikh Mohammed bin Rashid Al Maktoum was the crown prince of Dubai, he would stun staff in government departments by appearing unannounced at 8am, an hour after they should have started work. Those not at their desks faced at best a reprimand and at worst the sack.

Now that he is ruler of Dubai, following the sudden death of his elder brother at the start of the year, Sheikh Mohammed will have fewer opportunities to use this strategy to keep state employees on their toes - or, indeed, for surprise visits to the offices of the senior expatriates running organisations such as Dubai's new international financial centre. But the fact that these trips - a rarity for a member of a Middle East royal family - took place at all reveals much about the philosophy that drives Dubai and will continue to do so.

For the emirate is not, as many visitors assume, driven just by the private sector. It is led by a ruling family whose senior members behave as if they were the board of a leading corporation, with Sheikh Mohammed playing the role of chief executive. His philosophy is that "the role of the government should be restricted to legislation and regulation, in addition to the continuous development of the infrastructure - thus making the private sector the engine of the development process".

But what has actually happened is that some of the most successful companies have been state-owned corporations, such as its award-winning airline Emirates or property developer Emaar, which was created by the government working with entrepreneurs in the private sector.

Some of its most professional executives, such as Sultan bin Suleyam, who is chairman of both ports operator DP World and major property developer Nakheel, and Mohammed Alabbar, who has headed the department of economic development and is chairman of Emaar, straddle both the public and private sectors.

The combination of a powerful, wealthy royal family and a close-knit group of technocrats able to control large budgets has made it possible to devise and keep to long-term plans to transform Dubai from a small trading station with a few low-rise buildings in the 1970s into a modern city with top-class facilities that will attract businesses and millions of visitors.

The decision to diversify the economy was made out of necessity, following the realisation that Dubai, one of the seven emirates that make up the Gulf state of the United Arab Emirates (UAE), would run out of oil in the first quarter of this century. Abu Dhabi, the wealthiest of the emirates, produces 2 million barrels of oil a day and has reserves of at least 100 billion barrels (more than 100 years' worth); Dubai produces only 240,000 barrels a day and has barely 20 years of reserves.

The aim has been to create the conditions - from homes to hotels, from roads to airports, from free trade zones to a global financial centre, and from a relaxed social culture to prestigious sporting events - that will persuade international corporations and organisations to use Dubai as their regional and, in some cases, global head offices, and to create a successful tourist destination.

This has been backed by a slick and aggressive marketing campaign that has made Dubai recognised across the globe and swept aside the competition from rivals in the region. Bahrain, for example, was once the business centre of the Gulf, but has now been overtaken by Dubai, and its position as the leading financial capital is now under threat from the Dubai International Financial Centre (DIFC). Formula One's choice of Bahrain for the Middle East's first motor racing grand prix was a rare setback for the Maktoums.

The stress has been put on the fact that Dubai is a modern city, from the skyscrapers to Internet City, designed specifically to attract the world's leading IT companies. And the image is reinforced by the enthusiasm for new technology - almost every official building has a sign with the website address above its main entrance. The presence of blue-chip companies, such as Microsoft, Nissan, Nokia and HSBC, is a testament to the success of this strategy. The free zones, from which it is possible to trade across the region and beyond, are also home to companies such as Black & Decker, Acer, Compaq, Daewoo, Nestle, DaimlerChrysler and Xerox. Dubai has been equally effective as a magnet for regional investment.

High oil prices have created a boom and the Gulf is awash with liquidity, much of which is finding its way into Dubai. Many of the hotels, resort developments and office complexes are owned by investors from Abu Dhabi and Saudi Arabia. The region's biggest project developers, such as Bahrain-based Gulf Finance House and private equity investor Arcapita, are now investing in Dubai, and Riyadh-based Tanmiyat has invested $2 billion in the Dubailand leisure and residential project.

There are, though, some who wonder privately whether the seemingly endless cycle of creating supply and generating demand - most recently seen in the latest private property boom, the mega shopping malls (one incorporating a ski slope) and luxury resorts - will prove to be several grand designs too far. Some expatriates in Dubai think it inevitable that the bubble will burst.

The strategy has also been controversial with neighbouring emirates. Some resent the liberal social attitudes on alcohol, women and nightclubs, while Abu Dhabi, wealthier and more powerful, has been unhappy at the way Dubai has forced through change - for example, unilaterally allowing foreign ownership of property, a decision that technically should have been taken at a federal level.

And the emirate's seemingly smooth path to international respectability received a sudden jolt this year when plans for DP World to buy P&O caused an unexpected political storm in the US. DP World had just won a tough takeover battle with the Singapore Ports Authority to buy UK shipping company and port operator P&O for $6.8 million when US Democratic politicians suddenly claimed that the deal, which included six ports in the US, jeopardised American security. The objectors, including New York Senator Hillary Clinton, appeared to be motivated more by a desire to embarrass President Bush than any real concern about security.

To the Dubai government, which privately was deeply angered, the protests made little sense. The Bush administration, hardly known for its softness on terror, had approved the deal; the American fleet has used Dubai's ports throughout the Iraq crisis without the slightest objection from US politicians; and one of the key elements of the deal was the commitment to introduce more efficient electronic security to the US ports. The deal was eventually saved when DP World agreed to sell on its interest in the six American ports in which P&O had had an involvement.

Although publicly embarrassing for Dubai, a state that has always seen itself as friendly to the West, the message from its government is that any difficulties were a price worth paying to do a deal that has pushed DP World right up the league table of international port operators. It was already seventh, with terminal contracts in countries including Germany, Australia, India, South Korea, China, Saudi Arabia and Venezuela.

"Now that we have P&O, we are one of the world's top three ports operators - and there is no doubt about the compelling strategic fit the companies have together," says bin Sulayem.

The success of the DP World is only one example of what has been the major corporate change in Dubai in the last decade - the ability of the government to establish from virtually nothing, in many cases with private sector support, companies that can compete in global markets. The most high-profile of these has been Emaar, which, in eight years, has grown into one of the fastest growing property developers in the world. In the first quarter of this year alone, the company made profits of $430 million, a 14% increase on the same period last year.

As well as playing a major role, with other private and state-driven developers, in building housing complexes, Emaar is now rapidly building an international operation, which has seen it launch projects in Turkey, Morocco, India and, most significantly, Saudi Arabia. There it is the master developer for the $35 billion King Abdullah Economic City, which is being built from nothing on the west coast. The final result will be a maritime metropolis, including industrial, business, financial and residential centres.

Equally important to Dubai has been the success of its airline Emirates, which in only 20 years has become established as one of the world's leading airlines. Its competitors complain that it has gained an unfair advantage from massive government subsidies - an allegation that the airline's managers robustly reject.

What is incontrovertible, however, is that Dubai's open skies policy has created a competitive environment in which Emirates has been able to expand rapidly to the extent that it now flies to 80 countries, and has a reputation for reliability and high-quality service.

What links DP World, Emaar and Emirates is not just that they are now international companies, able to compete in global markets, but that they have also played a vital role in creating the local infrastructure that is one of Dubai's strongest selling points. The greatest strength is that Dubai's royal family has had the resources to develop long-term plans. For example, billions of dollars have been invested in the international airport, which now takes more than 13.5 million passengers a year and has the capacity to take 20 million.

The government is now looking to build a new airport near Jebel Ali port, which will cater for cargo and possibly charter flights.

Dubai's ports are also impressive: Port Rashid is able to take cruise liners and Jebel Ali, which is one of the most efficient in the region, has a dry dock that is large enough to take American battleships.

The success of the air and sea links set the foundations that attracted international companies to Dubai's free zones - in 1985 the Jebel Ali Free Zone had only 19 companies; today, there are more than 5,000. The strategy has been clearly targeted: larger companies use Jebel Ali, though it has failed to attract the heavy industries that were in the original plan; lighter industries use the airport free zone; IT companies are directed to Internet City and newspapers and broadcasters use Media City.

Good air communications have also been vital in the development of a tourism centre that offers an extraordinary mix of sun, desert, water sports and culture. Sporting events have helped fill the hotels, as well as marketing the emirate - leading golf, horse racing, tennis and cricket tournaments take place in some of the best facilities anywhere in the world.

Perhaps the one failure is the inability to control the traffic in Dubai, where it is de rigueur for anyone of even modest wealth to have a car.

However fast the roads are built, however many bridges and tunnels are built to provide a link across the creek that divides the city, the traffic still grinds to a halt. There are now plans for a metro, but few believe that it will help reduce journey times.

Part of the reason for this is that Dubai has now embarked on the next stage of its expansion. The stress is on the supply of property, with the construction of mega-resorts and residential complexes - up to one in four of the new properties coming on the market is bought by Europeans.

"The real estate sector in Dubai is poised for continued expansion during 2005-09. We anticipate it will deliver around $20 billion in residential and estate projects by the end of 2008," says Mohammad Kamal, property analyst at Dubai-based investment bank Shuaa Capital.

Equally important will be the DIFC, which, after a slow start, is beginning to attract international banks, such as Deutsche Bank, and has ambitions to become a centre for regional banking and finance. Characteristically, Dubai, which has hired Euronext as its partner in the regional stock exchange that is part of the DIFC, has now started to buy shares in the Brussels-based market operator.

- Dubai's Port Rashid is able to take cruise liners and Jebel Ali has a dry dock large enough to take US battleships

DUBAI FACTS

- Shoppers in Dubai spend on average 30 times more on gold than the rest of the world

- In March 2006, sales at Dubai's duty-free outlets rose by 18% to a record $25 million. A new daily record of $1.2 million was also achieved in January

- Dubai hosts the World Cup, the richest horserace in the world - but there is no on-course gambling

- Visitors from 33 countries can obtain a visa on arrival in Dubai

- The Burj Al Arab hotel soars to a height of 321 metres - all its rooms are suites over two floors

- Dubai is located midway between the Far East and Europe, is served by 100 airlines connecting it to 140 global locations, and, when Africa is included, has a catchment area of 1.5 billion people within 120 minutes by air

- Business activity is carried out in English

- Dubai currently has over 30% of the world's cranes at work at any one time

- Weekends are Thursday and Friday for workers in government offices, and Friday and Saturday for private companies. Businesses that stay open seven days a week, such as supermarkets, close on Friday afternoons for afternoon prayers

- In winter, camel races are held at the Dubai Camel Racecourse on Thursdays and Fridays

- For the past eight years, Dubai GDP has grown an average of 8.5% a year. The population has grown by 8% in four years and is expected to reach 2 million by 2010. Over the same period, hotel occupancy rates have risen from 70% to 87%

- Dubai levies no major VAT, property tax, wealth tax, inheritance tax, corporation tax or income tax

INTERNATIONAL CRICKET COUNCIL

International cricket had been run from Lords Cricket Ground since 1909, so traditionalists were stunned at the decision by the International Cricket Council (ICC) to move its headquarters to Dubai, a country that little more than a decade ago did not have much grass, let alone a cricket pitch. In part, this was a decision driven by geographical location: Dubai is a much shorter journey for administrators from Australia, New Zealand and the Indian sub-continent, which is the financial powerhouse of modern international cricket.

The ICC says it would have liked to stay in London, but the British government did not offer a package that matched Dubai's bid, which was also more attractive than those presented by the other bidders, Singapore and Dublin.

"The package on offer to relocate the ICC to Dubai was very attractive," says Ehsan Mani, the ICC's president.

The precise terms remain shrouded in secrecy, but some estimates suggest that the ICC will save enough in taxes alone to enable it to repay each of the 10 test-playing countries $1.4 million a year. That does not even take into account the package offered for offices and accommodation. Add in other factors, such as the sponsorship of umpires by Emirates, and the temptation to move was irresistible.

VIRGIN ATLANTIC

In April Virgin Atlantic, Britain's second largest airline, opened flights between London and Dubai - the operator's first service to the Middle East. Having started with four flights a week, the number has now increased to five, reflecting the considerable demand for travel between London and Dubai.

Richard Branson says the launch of his airline's service will "bring more visitors to explore the Arabian hospitality and experience all that has made Dubai a sought-after year-round destination. The growth potential is immense." The UK is the largest source of visitors to Dubai. Last year, the number of people staying in Dubai hotels was more than 680,000, and the numbers are expected to increase as more Britons buy property or holiday there.

"Dubai is a key business and leisure destination for Virgin Atlantic, as it is the second biggest long-haul route out of London, while London is the most popular long-haul route out of the UAE. We are confident we can make big inroads into this market, targeting a 10% market share in our first year of operation," says Branson.

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