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Industrial Strategy
For Abu Dhabi Companies
in International Markets
February 2016
Issue 02-05012016

In association with

www.ihs.com

Sectoral Report
For Abu Dhabi Companies in International Markets

Dear reader
Multiple challenges confront Abu Dhabis industrial strategy.
Low oil prices and a strong dirham (as a result of the
strong US dollar) are eroding the economys competitive
edge. Meanwhile, the weakness of global growth and fiscal
austerity in adjacent countries soften the sales outlook for
Abu Dhabis nonoil industries. The Technical Committee of
the Department of Economic Development has proposed an
update to the industrial strategy of the country, synthesizing
selection criteria for sectors and sector clusters from the
Economic Vision 2030 and the current industrial strategy.
This report reflects on the criteria and the sectors put
forward for prioritization and compares the strategy update
with the Economic Vision 2030s industry goals; considers
the concepts of a sectors attractiveness and feasibility; and
assesses adjustments to the prioritization of the Vision 2030
goals. The report also presents and discusses the benefits
of clustering and geographical industry agglomeration.
Branching out to the new sectors, which requires largescale upfront investment, might be challenging given the
new global circumstances and competitive pressure. A
focus on existing and developed sectors and clusters to
reinforce the competitive edge might be advisable.

Contents
Manufacturing performanceTailwinds
and headwinds

Manufacturing sectors, subclusters,


and Vision 2030

Higher value-added activity

Economic diversification

Sustainable energy consumption

Skilled Emirati employment

Improved trade balance

Supply-chain linksBroadening the


sector focus

Subcluster performance and key challenges 7


Clustering and agglomeration

Market outlook, Vision 2030, and a new


industrial strategy

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Tel + 971 2 6214000
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E-mail: contact.us@adcci.gov.ae
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Printed in the United Arab Emirates

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February 2016

www.linkedin.com/company/abu-dhabi-chamber

Cover image: IHS

Executive summary

2%

The total manufacturing


grew on average

Exchange rate
headwinds
challenge local
producers

In the era of decarbonization and low oil


prices, diversification of the economy is
essential for an oil-dependent economy
like Abu Dhabi to sustain long-term growth
and success. This aim is clearly spelled
out in the Economic Vision 2030 for Abu
Dhabi and is further refined in its five-year
plans and industrial strategies. Currently,
an update of the industrial strategy is being
discussed, with the initiative spearheaded by
the Department of Economic Development.
Strong and sustained performance of the
industrial sectorbasically manufacturing
is critical. The Vision 2030 recognized
this need, with five of seven global focus
sectors belonging, for the most part,
to the manufacturing sector, including:
petrochemicals; metals; aviation, aerospace,
and defense; pharmaceuticals; and
healthcare equipment.

Manufacturing performance
Tailwinds and headwinds

The performance of Abu Dhabis


manufacturing sector has been solid during
the last 10 years, despite violent swings of
sector growth during and after the global
financial crisis of 2008/09. Average growth
of sectoral gross value added slightly
higher than 2% can be regarded as a
solid achievement if compared with major
industrialized countries (see Chart 1). Given
the challenges in the oil sector, though, that
rate is still too low to accomplish the overall
goal of diversification of the economy amid

a sustained increase of income. Abu Dhabis


manufacturing sector needs to shift into
higher gear (see chart 1).
International competitiveness is critical for
that. In the last half-decade, manufacturing
in Abu Dhabi benefited from the fixed rate
of the dirham to the US dollar because the
latter was relatively weak against other
major currencies. That tailwind changed
direction, though. The appreciation of the
US dollar against the euro, but also against
several emerging-market currencies,
since the second half of 2014 put Abu
Dhabis manufacturing sector at a cost
disadvantage, which is a serious challenge
if the dollars strength persists longer term
(see chart 2).
However, Abu Dhabis manufacturing
subsectors will be affected differently by such
challenges. Supply chains, local availability
of inputs, and proximity of downstream
markets matter as much as the ability of the
subsectors to adjust quickly to changing
circumstances. A more in-depth view on
manufacturing is warranted therefore.

Manufacturing sectors,
subclusters, and Vision 2030

Abu Dhabis Vision 2030 has prioritized


seven global focus sectors and a further
five sectors with the regional focus label.
Five sectors from the global focus group
are related to manufacturing, whereas five
sectors with regional focus are more related
to services. Altogether, these 12 sectors

Chart 1: Manufacturing sector growth


20%

Total growth 2006-14

19.20%

15%
10%
5%
0%
-5%
-10%

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: SCAD 2016 Abu Dhabi Chamber of Commerce & Industry

2016 Abu Dhabi Chamber of Commerce & Industry

Sectoral Report
For Abu Dhabi Companies in International Markets

Chart 2: Exchange rate index (foreign currency per 1 dirham, Jan. 2014=100)

Euro Yuan (China) Rupee (India) Yen (Japan)

130
125

Exchange Rate Index

120
115
110
105
100
95

2015M11

2015M10

2015M9

2015M8

2015M7

2015M6

2015M5

2015M4

2015M3

2015M2

2015M1

2014M12

2014M11

2014M10

2014M9

2014M8

2014M7

2014M6

2014M5

2014M4

2014M3

2014M2

2014M1

90

Source: IHS 2016 Abu Dhabi Chamber of Commerce & Industry

12

sectors form the core


industries for Abu Dhabis
Vision 2030

Attractiveness

February 2016

form the core industries that, according


to the Vision 2030, will drive Abu Dhabis
diversification and facilitate strong and
sustained growth (see chart 3).
A further breakdown of sectors is
needed, though, to make the vision
operational. A careful, methodological
selection process has therefore been
conducted within the Department of
Developments Technical Committee
for Abu Dhabis industrial strategy.
Subsectors have been identified based on
either attractiveness, in terms of growth
opportunities for the Abu Dhabi economy,
or feasibility, as regards downstream
markets, cluster synergies, capabilities,
and competitiveness.
Attractiveness of a subsector is defined
from five key criteria, which have been
synthesized from the five key goals of
the Abu Dhabi Economic Vision 2030
and the criteria upon which the previous
industrial strategy was based. The latter

Sector selection

Feasibility

criteria were public-sector cost, sustainable


growth, environment, skilled jobs and
Emiratization, and small and mediumsized enterprise (SME) and private-sector
development. Abu Dhabi still pursues the
goals of the Vision 2030 with the same
determination, and now we assess how the
emirate could reprioritize them relative to
each other (see chart 4).

Higher value-added activity

This goals priority ranking is considered


to be modestly lifted. Abu Dhabis high
living standards and increasing labor costs
warrant a strategy that caters to the needs
of industries that produce high added value
to sustain current living standards. More
recently, the appreciation of the US dollar
and, concurrently, the dirham has reinforced
this point.

Economic diversification

Diversifications priority, currently still


ranking highest, is proposed to be toned
down. Although the hydrocarbon sector still
accounts for nearly half of the economy,
the Abu Dhabi government can reasonably
claim that economic diversification has
made good progress in the last several
years. Moreover, the low oil price in itself
will force the share of oil in the economy
downboth through market forces as
oil production will be less attractive and
through GDP calculation itself, since a lower
price of oil shrinks the oil sectors nominal
weight in GDP.

Chart 3: Abu Dhabi Economic


Vision 2030
Global focus sectors
Energy oil & gas
Petrochemicals
Metals
Aviation, aerospace, & defense
Pharmaceuticals, biotechnology, life sciences
Tourism
Healthcare equipment & services
Regional focus sectors
Transportation, trade, & logistics
Education
Media
Financial services
Telecommunication services
Source: Abu Dhabi Economic Vision 2030
2016 Abu Dhabi Chamber of Commerce & Industry

Sustainable energy consumption

Having been low on the priority list, this


goals priority is proposed to be lifted right
up to the top of the ranking. Indeed, in the
era of decarbonization and global warming,
reducing energy intensity of businesses has
become ever more important.

Skilled Emirati employment

Supporting employment for skilled Emirati


nationals is proposed to remain high on
the priority list, with only a slight downward
adjustment. Clearly, high value-added
production and services need a highly
skilled labor force. Abu Dhabis high wage
level for nationals can only be preserved by
high value-added jobs.

Improved trade balance

Improvement of Abu Dhabis trade balance is


a goal that was relatively low-ranking already
in the previous strategy. It is proposed to
be toned down further, if only slightly. This
seems counterintuitive at first glance, given
that Abu Dhabis trade balance currently is

rapidly deteriorating under the impact of low


oil prices. However, a fast-growing market
with high living standards and strong net
investment inflows will almost inevitably have
a relatively weak trade balance as imports
for both investment and consumption will
outpace the export sector. The US economy
is a good example for that.
The synthesis of the five criteria of the
previous strategy and the five overall goals
of the Economic Vision 2030 are five new
industrial goals for Abu Dhabi, as proposed
by the Technical Committee. For each of
these five goals, several metrics have been
put on the table to measure progress toward
accomplishment (see table 5).
Diversification: Diversification of industry
base, export geographies, and firm type
Jobs: Create jobs for Emirati nationals
Economic growth: Growth driven by higher
productivity and exports
Sustainability: Resource usage of sectors
in question
Trade balance: How the sector influences
the trade balance

Exchange rate
headwinds
challenge local
producers

Feasibility of a subsector is defined along


four main criteria, all of which tie in with the
long-term viability of a companys or sectors
business operations. The two main criteria
from the previous industrial strategy, market
attractiveness and competitive advantages,
are enhanced and complemented by criteria
as derived from economist and researcher
Michael Porters standard diamond
framework to assess a firms business
strategy (see table 6).
Market attractiveness: Size, stability, and
growth outlook for a sector
Strength of cluster: Importance and local
abundance of clusters for the sector in
Abu Dhabi

Chart 4: Leading and supporting sectors from the


five-year plan 20142018
Strategic sectors Leading

Strategic sectors Supporting

Tourism

Power & utilities

Transport & logistics

Information & communications technologies

Manufacturing

Construction & real estate

Media

Education

Financial services & insurance

Healthcare

Source: Abu Dhabi Five Year-Plan 2014-2018 2016 Abu Dhabi Chamber of Commerce & Industry

2016 Abu Dhabi Chamber of Commerce & Industry

Sectoral Report
For Abu Dhabi Companies in International Markets

Table 5: Determinants for attractiveness of a subsector


Industrial goal

Metric to measure
accomplishment

Diversification

Jobs

Economic growth

Sustainability

Trade balance

Oil price correlation

Wages growth

Output per worker

Energy intensity

UAE imports share

SME share

Average wages

Exports

Environmental
sustainability

UAE exports share


rank

Export market
diversification

Emiratization
potential

Productivity growth

Import growth

Exports growth

Import intensity

Source: Department of Economic Development 2016 Abu Dhabi Chamber of Commerce & Industry

Table 6: Determinants for feasibility of a subsector


Industrial goal

Specific metric

Market attractiveness

Strength of cluster

Capabilities

Cost competitiveness

Global market size

Current sector strength

Revealed comparative
advantage (regional/
ranked)

Global export share

Stability

UAE export share of GCC

Downstream positioning

UAE export share rank

Growth

UAE export share

Product diversity

Labor cost

GCC competitiveness

Availability of inputs
Anchor alignment
Source: Department of Economic Development 2016 Abu Dhabi Chamber of Commerce & Industry

Capability: Determining comparative

advantages of Abu Dhabi as a production


location
Cost competitiveness: Comparison of all
key factor inputs for a sector between Abu
Dhabi and other locations

Widening the
focus on supply
chains and
clustering

Objectives from both a national


perspective for Abu Dhabi but also from the
viewpoint of individual companies have been
targeted with this approach. Subsectors
have been provisionally identified, which
carry either high/low attractiveness and
high/low feasibility (see chart 7).

Supply-chain linksBroadening
the sector focus

The deep dive into the industry structure of


an economy and the resulting narrow focus
on individual subsectors of manufacturing
tend to eclipse the network character of
a modern economy, though. Given the
existence of multiple supply-chain links
between sectors, and related possible
synergies that go beyond the geographical
clustering of companies within one and the
same subsector, the Technical Committee

February 2016

moved further to identify related benefits.


If sector A requires a similar set of skills, or
a similar set of inputs like sector B, it might
be worthwhile to develop both alongside
each other. The committee thus categorized
all subsectors in a bunch of sector clusters
(see chart 8).
Already, Abu Dhabi is producing goods
for most of these sector clusters. Several
different construction supplies like metal
windows, structural steel, fiberglass, and
even prefabricated buildings are produced
locally; the metals industry is churning out
steel rods, ferro-alloys, and roll forming
metal; aerospace manufacturers are
producing complex products like titanium
inboard wing spars; other examples pertain
to manufacturing firms in defense, ship
building, chemicals, plastics, and pharma,
among others.
The Technical Committee has identified
adjacent sectors and potential aspirational
products for these sector clusters. For
example, since polypropylene and
polyethylene are already produced locally,
facilitating local production of finished

Chart 7: Proposed sector selection for Abu Dhabi's industrial strategy update
HIGH feasibility / HIGH attractiveness
Structural metal products
Forging, pressing of metal, etc.
Aerospace and related machinery
Medical and dental instruments
Ships and floating structures
Military fighting vehicles

Measuring and testing equipment


Pumps and compressors, etc.
Paints, varnishes, and coatings
Cocoa, chocolate, and sugar
Weapons and ammunition
Soft drinks and bottled water

HIGH feasibility / LOW attractiveness


Refined petroleum products
Soap and detergents, etc.
Basic precious metals
Other chemical products
Basic chemicals
Plastics and synthetic rubber
Plastic products
Glass and glass products
Cement, lime, and plaster
Paints, varnishes, and coatings

Fertilizers and nitrogen comps.


Concrete and cement
Cutting and shaping of stone
Nonmetallic mineral products
Special-purpose machinery
Corrugated paper products
Processing and preserving of
fruits and vegetables
Other electric wires and cables
Other transport equipment

The challenge to spot


sectors which are both
high-growth and
sustainable

LOW feasibility / HIGH attractiveness


Structural metal products
Forging, pressing of metal, etc.
Aerospace and related machinery
Medical and dental instruments
Ships and floating structures
Military fighting vehicles

Measuring and testing equipment


Pumps and compressors, etc.
Paints, varnishes, and coatings
Cocoa, chocolate, and sugar
Weapons and ammunition
Soft drinks and bottled water

LOW feasibility / LOW attractiveness


Veneer sheet and wood panels
Builders' carpentry and joinery
Car and truck bodies
Rubber tires and tubes
Other electrical equipment
Watches and clocks
Other wood and cork products
Motor vehicle parts
Wearing apparel
Clay building materials
Refectory products
Motorcycles
Locomotives and rolling stock
Batteries and accumulators
Ovens and furnaces
Downstream aluminum extrusion
Bicycle and other carriages
Power-driven hand tools
Electromedical equipment
Metal forming machinery/tools
Treatment and coating of metals

Steam generators
Furniture
Pulp, paper, and paperboard
Optical/photographic equipment
Cutlery and hand tools
Meat processing/preserving
Computer/peripheral equipment
Magnetic and optical media
Nonferrous metals casting
Fabricated metal products
Fish processing/preserving
Grain mill products
Musical instruments
Domestic appliances
Printing
Sports goods
Man-made fibers
Dairy products
Games and toys
Textile articles
Food processing machinery

Source: Department of Economic Development 2016 Abu Dhabi Chamber of Commerce & Industry

plastic products could be a logical next step. Such


considerations give some indication of possible
synergies and economies of scale and scope, yet
to gauge the feasibility of a business strategy the
Porter framework is more appropriate.

Subcluster performance and key


challenges

Market performance has been solid during the last


five years for most of the subclusters considered,
although not overwhelming. Supercharged, highgrowth markets are hard to spot. A small number
of clusters, including food and beverages, medical
equipment, and ship building, have either a relatively
small global market or are dominated by local and
regional preferences, which makes it difficult to

realize economies of scale.


The only major subcluster that has had a truly
meager growth performance recently is defense,
where fiscal austerity has dampened state sector
spending and led to flat growth for the five-year
time frame between 2009 and 2014. Moreover,
with persistently low oil prices, more spending cuts
may be envisaged for the Middle Eastern region,
darkening the defense market outlook.
The size and performance of the overall
market matter, yet market share is what counts
for the individual firm. For the market share, cost
competitiveness and customer satisfaction are
essential.
On the one hand, a high-income country is
disadvantaged in this regard. That disadvantage is
2016 Abu Dhabi Chamber of Commerce & Industry

Sectoral Report
For Abu Dhabi Companies in International Markets

Chart 8: Potential subclusters


Basic metals

Plastics

Refined petroleum & chemicals

Medical equipment

Aerospace
Defense
Industrial equipment
Construction materials
Food & beverage
Ship building

Special-purpose machinery

16

Communication equipment
Advanced electronic systems & instruments
Electronic components

subclusters for Abu Dhabis


next industrial strategy

Pharmaceuticals
Other transport

Source: Department of Economic Development 2016 Abu Dhabi Chamber of Commerce & Industry

Labor costs are a


problem, but other
cost factors matter
as well

amplified by the recent appreciation of the


dollar and the dirham. However, as long
as other Gulf Cooperation Council (GCC)
member countries do not de-peg their
currencies from the dollar, the latter hardly
counts in Abu Dhabis neighborhood and for
the most important trading partners in terms
of nonoil exports. Yet competition from
elsewhere in the world counts.
Factors other than wages influence
costs, of course. For many industries, local
availability of supplies is critical. Many
high-tech hubs and industry agglomerations
dwell on the proximity of supplies. For
several subclusters local inputs are already
available in Abu Dhabi, which is the case
for basic metals, the petrochemical industry,
industry equipment (such as steel and
aluminum), special-purpose machinery,
and ship building. Other clusters, such as
plastics or pharma, suffer from high labor
costs in particular or some lack of locally
available supplies.
Cluster benefits stretch beyond nearby
availability of supplies, though. The
chemical and pharmaceutical sector
provides a good example of the impact of
clustering (also known as co-location) and
as a job machine for other sectors. Typically,
for an industrialized economy, for every 100
jobs in the chemical sector, 200 jobs in the
rest of the economy are created.

Clustering and agglomeration

The agglomeration of chemical companies


can spur cost savings and competitiveness
in other ways, too. In the case of Germany,
many leading regions for chemicals

February 2016

production are also hubs for plastics


manufacturing and for the oil and gas
industry.
The benefits of co-location occur for
a number of reasons. First, clustering
increases the productivity of firms.
Second, cluster participants and their
customers share knowledge that drives
innovation. Third, clustering encourages
entrepreneurism.
For the chemicals industry, the co-location
of firms is especially advantageous:
Materials integration in which by-products
from one process become the raw
materials for other processes, reducing
chemical waste and decreasing the
additional costs associated with externally
purchased raw materials; the case of the
chlorine supply chain exemplifies this
integration.
Shared infrastructure, which reduces
costs through economies of scale in waste
treatment, incineration, and the provision
of steam and other utilities.
Logistics integration, which reduces
costs, efforts, and risks in the transport,
handling, and storage of materials.
Greater expertise and more efficient
processes in areas such as R&D; process
engineering; logistics; and environmental,
health, and safety monitoring and
performance.
Development of the subclusters in the
Technical Committees focus has the
benefit of a strong alignment with sector
structures and clusters already existing in

Tourism

Transport & Logistics

Manufacturing

Media

Financial Services

Abu Dhabi and the United Arab Emirates. Refined


petrochemicals, metals, aerospace, defense, and
ship building are all cases in point.
Breeding new industries from scratch is probably
more challenging. Pharmaceuticals and industrial
equipment (unlike medical equipment, which
have adjacency to nearby subclusters) have only
low alignment with existing industry structures,
while electronic components and communication
equipment are moderately linked.
Close alignment with existing structures is
beneficial for both new ventures and established
business. In fact, the competitiveness of existing
structures will be reinforced, at least as long as the
new businesses are more complementary toward
existing firms rather than competitive.
Reinforcement of existing structures, though,
hardly leads to a more diversified economy.
Because of their alignment with existing structures,
most of the subclusters receive relatively low
marks on the diversification score. However, those
low marks may be discounted if diversification is
primarily understood as weaning the economy off its
dependence on hydrocarbons.

Market outlook, Vision 2030, and a new


industrial strategy

Putting the focus on reinforcing existing strengths


and structures might be a promising strategy against
the background of low oil, a strong dollar, and weak
emerging-market growth. However, branching
out to new sectors and subclusters or developing
business for which capacities currently barely exist
locally might be a serious challenge. Continued
focus on sectors like basic metals, petrochemicals,
aerospace, defense, and food and beverages might
therefore be advisable.
For some sectors, which are particularly exposed
to global competition and where local production
may easily be substituted by imports, some form
of temporary protective measures in the face of an
ever-stronger US dollar might also be considered.
The competitive edge of local production against
competitors from European or Asian markets may
otherwise erode too fast.

2016 Abu Dhabi Chamber of Commerce & Industry

Contacts
IHS Global GmbH,
Bleichstrasse 1, 60313 Frankfurt, Germany

Abu Dhabi Chamber of Commerce & Industry,


P.O. Box 662, Abu Dhabi, U.A.E.

Ralf Wiegert
Director Consulting IHS Economics & Country Risk
Ralf.Wiegert@ihs.com
+49 (0)69 20973 320
+49 (0)151 42628 143

Ohan S Balian, Ph.D.


Chief Economist Abu Dhabi Chamber of Commerce &
Industry
o.balian@adcci.gov.ae
www.abudhabichamber.ae
+971 2 617 7470

Matthias Herles
Director Consulting IHS Economics & Country Risk
Matthias.Herles@ihs.com
+49 (0)69 20973 218
+49 (0)174 1946560

About IHS:

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www.ihs.com:

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Address:Main Building of Abu Dhabi Chamber, Corniche Road, P.O.Box:662


Phone:00971-2-6214000, Email:contact.us@adcci.gov.ae

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contact.us@adcci.gov.ae :
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www.abudhabichamber.ae

2016

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