ExportWise - Summer 2008 - A Capital Oasis
By Dennis and Sandi Jones
Of the six countries that make up the Gulf Cooperation Council (GCC), the Kingdom of Saudi Arabia usually draws the most attention because of its oil wealth and the size of its economy. Canadian companies have been active in the Kingdom for many years, but for a growing number of Canada’s exporters, the other GCC members – Qatar, Oman, Bahrain, Kuwait and United Arab Emirates (UAE) – are now attracting at least as much interest.
Since 2001, trade between Canada and the GCC has grown by 140 per cent; more than 1,500 Canadian companies are now doing business in the GCC, and their numbers are growing at 10 per cent per year.
Several factors account for this rapid expansion. A combination of oil wealth and sensible planning have transformed the GCC’s six states into a large and affluent market that has limited restrictions on foreign ownership and welcomes overseas trade and investment.
Increases in the price of oil have left the GCC awash in capital, which has caused a spectacular boom all across the regional economy. Huge investments are being made in infrastructure, petrochemicals, oil and gas, healthcare and education.
The big boom
The regional boom presents many opportunities for Canadian exporters. “The GCC is essentially one market because of the economic integration of its member countries,” says Klaus Buttner, EDC’s Regional Vice-President for Africa, Europe and the Middle East. “This makes it one of the most important emerging destinations for Canadian companies, right after Mexico and China, and ahead of Brazil or Russia.”
This growth is behind EDC’s recent decision to establish a permanent representation in the region, in the person of Jean-François Croft, the new EDC Chief Representative for the GCC & Yemen. Based in the UAE emirate of Abu Dhabi, Croft has been directly responsible for this market portfolio since 2005.
“Canadian business in the GCC has been growing steadily year over year, and more and more companies have been asking for direct EDC support in the market,” Croft observes. “So it was natural for us to set up a permanent presence here, especially since 90 per cent of our customers in the GCC are small and medium-sized Canadian businesses.”
Canadian firms have been involved for years in the GCC’s oil, gas and heavy construction industries, but our exporters are now moving steadily into many other sectors.
Most of our exports now go to the UAE, especially to the two emirates of Dubai and Abu Dhabi, with the Saudi Arabian market a close runner-up. Dubai should be of special interest to Canadian businesses since much of what it imports is promptly re-exported; it’s thus a gateway through which a company can reach into South Asia and other parts of the Arab world. Many Canadian companies, in fact, may find it easier to access those markets though Dubai than try to enter them directly.
Developing diversity
What does the GCC offer small or mid-sized Canadian businesses with international ambitions? A great deal, says David Hutton, Co-Director of the Canada-Arab Business Council, who has seen many such companies succeed in the region.
“More than 100 firms are registered in Dubai’s duty-free ports,” he notes, “and at least a dozen Canadian franchises have set up operations here. These range from Fruits & Passion’s body care products, to Second Cup’s coffee, to Fidel’s high-end clothing. We’re active in the health sector as well, selling a large range of medical services and products. InterHealth Canada, for example, which specializes in the development and management of healthcare facilities, is currently involved in major projects in Dubai and Kuwait.”
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Canada, EDC and the GCC |
There’s also room in the GCC for Canadian telecommunications companies. Emerging GCC telecom corporations, such as the UAE’s Etisalat, are expanding across the Arab world and moving into Africa and other developing markets. Local demand for components, systems, software and design is being driven by that growth, with Nortel and many smaller Canadian companies already involved.
Agri-food companies in particular should take a close look at this market, according to James G. Hannah, Senior International Markets Officer at Agriculture and Agri-Food Canada (AAFC). “We’ve had AAFC specialists in the region since about 1994,” says Hannah. “Since then, Canada’s annual agricultural exports into the UAE have grown from around $8 million to a high of $267 million in 2007. Most of our business is with Dubai because it’s a re-export centre; one of our buyers there purchases canola seed, then processes it into biodiesel for Germany and animal feed for Asia.”
Bulk commodities such as canola aren’t the GCC’s only taste of Canada. Canadian ice cream moves briskly in the consumer market, to the tune of $10 million every year. McCain’s, Cavendish and Maple Leaf Foods all sell their frozen potatoes into the GCC, where they’re turned into french fries. Specialty foods such as honey, maple syrup, frozen desserts, and hotel- and restaurant-ready foods are other possibilities. Beef and chicken are popular when turned into convenience foods, since the region is, as Hannah puts it, “fast food heaven – everybody eats out all the time, and they have takeout places everywhere.”
Heavy lifting
Canada’s major activities in the GCC have traditionally been in the oil and gas sector and the heavy construction industry. There are more than 30 Canadian construction companies operating out of local offices in Dubai alone, and Dubai and Abu Dhabi together are home to 75 Canadian firms in the oil and gas sector. Companies such as SNC-Lavalin have been involved in the region for years, providing engineering and other services for major projects including an aluminum smelter in Qatar.
These industries tend to be dominated by large corporations, but the regional boom has opened up numerous subsectors for small and mid-sized companies. Green building technologies that can be incorporated into major construction projects are especially sought after, since all new buildings in the UAE must now be constructed to the highest global standards for environmental responsibility.
Masdar Initiative
In an even larger vision, Abu Dhabi’s Masdar Initiative is intended to create a zero-carbon-emissions city from the foundations up. With a price tag of USD 25 billion, this will present a wealth of prospects for Canadian companies with advanced environmental expertise.
Located near Abu Dhabi International Airport, Masdar City will be the world’s first zero-carbon, zero-waste, car-free city.
The city is part of the Masdar Initiative, Abu Dhabi’s multi-faceted investment in the exploration, development and commercialization of future energy sources and clean technology solutions. The six square-kilometre city, growing eventually to 1,500 businesses and 50,000 residents, will be home to international business and top minds in the field of sustainable and alternative energy. Masdar City is slated to be fully functioning by 2015.
Rotoflex International
The GCC needs many kinds of equipment to support its rapidly diversifying economy, and Canada’s Rotoflex International shows how a mid-sized company can step neatly into the light machinery sector.
Based in Mississauga and in business for more than 35 years, Rotoflex manufactures precision tools and machinery for the label industry.
“Starting from Canada,” says Rotoflex Vice-President Val Rimas, “we expanded to the United States, Germany, France and South Africa. Then, in the early 1990s, we participated in a government mission to the Mideast that included stops in Dubai and Saudi Arabia. That gave us an opportunity to learn firsthand about the market and its needs.”
The company eventually picked Dubai as the best place to establish its GCC presence. “The deciding factors,” says Rimas, “were the strength of Rotoflex in Europe, plus the strong connection between companies in Dubai and the European companies with whom we were already doing business. We got some great references from our European customers, which gave us the credibility we needed to do business in Dubai.”
For Rotoflex, Dubai is an international hub, facilitating trade with the Middle East and eastern Africa. Its repackaging and distribution systems are extremely modern, and Rotoflex products are in continuous demand as a result. If there’s a challenge to operating in the GCC, says Rimas, it’s the distance between the company’s Dubai offices and the main manufacturing facility in Mississauga; to deal with this, Rotoflex relies on its German office for support in the region.
Rotoflex also relies on EDC when the company has financial needs. “We enjoy a very good relationship with EDC,” says Rimas, “and they’ve always been very helpful to us. We use several of their products, including accounts receivable insurance, contract frustration insurance and bonding.”
Crystal Fountains
Mid-sized Canadian companies can do well in the GCC’s construction services sector, as the experience of Crystal Fountains amply demonstrates. In operation since 1967, the Toronto company is one of the world’s leading designers and manufacturers of spectacular water features, and has customers in more than 30 different countries. Its GCC market includes the Gulf coastline from Kuwait to the UAE, and the firm is now making gains in Saudi Arabia as well. Among its current projects are retail and hotel developments in Abu Dhabi, Qatar and Kuwait, and the multiple water features that surround the world’s tallest building, the Burj Dubai.
“Crystal Fountains has been operating in Europe, Southeast Asia and the GCC for quite a while,” says Paul L’Heureux, the company’s president. “The North American construction recession of the early 1990s made us realize that we needed to find new markets overseas, and we’ve been very successful in doing that. We think that the example of what Dubai has accomplished, plus the increasing amounts of capital available from the region’s oil revenues, will sustain the GCC’s construction sector for the next 10 years.”
Crystal Fountains currently uses EDC’s accounts receivable insurance to underwrite its credit. In addition, says Chris Despond, EDC account manager, “Crystal Fountains and EDC are exploring other ways to work together, so the company can continue to expand its business in the GCC and the Middle East. EDC’s Export Guarantee Program, for example, could provide the requisite backing if Crystal Fountains needed additional work-in-progress financing from its bank. We could also furnish political risk insurance, or bonding and guarantee instruments if those were required.”
Sophistication and stability
Although generally categorized as an emerging market, the GCC is a very sophisticated and well-established one.
Still, like any booming market, it presents its own set of problems.
“There’s a capacity crunch in both labour and materials,” says Croft. “This is inflating the costs of products such as reinforcing steel, so your bids have to allow for increasing prices. Another problem is the mobilization of personnel; if you become involved in one of the GCC’s high-growth sectors, you have to plan very carefully to make sure you’ll have the workers you need.”
| There are more than 30 Canadian construction companies operating out of local offices in Dubai alone, and Dubai and Abu Dhabi together are home to 75 Canadian firms in the oil and gas sector. |
Political risk is a minor concern, according to Croft. While the region is close to pockets of political instability, the GCC countries are generally well managed and very secure.
On the financial side, you should always operate on letters of credit when dealing with a new company; later, when you get to know the client, you can provide more flexible payment terms.
Logistics are excellent, since the GCC’s port and transportation systems are highly efficient. But you can’t just send your products to your end users; in almost all cases you must ship to a company that is at least 51 per cent owned by a local national.
“That means you’ll be working with representatives and distributors,” says AAFC’s Hannah, “so you’ll need to find someone who knows the region and how the business culture works. But always do your due diligence when selecting a partner, and always have a lawyer check your contracts.”
And when choosing a local representative, adds Paul L’Heureux, be wary of anyone who asks you to enter into an exclusive agreement. If you’re tempted to do so, obtain legal advice first, since it can be very expensive to free yourself from such a commitment once it’s in effect.
Companies with long experience in the GCC will tell you that negotiating strategies can be very different from those used in North America, and negotiations often proceed so slowly that you may have to restrain your impatience.
“You’ll need several years of senior-level contacts to establish and develop the relationships necessary for doing business here,” advises Hutton. “That can include inviting your opposite numbers to Canada. We tend to underestimate the value of bringing potential buyers and partners here so they can visit our plants and facilities, and even enjoy a Canadian vacation.”
And while it’s important to be aware of cultural sensitivities, it’s not vital to understand every subtlety. Many of the local people you’ll encounter will have had extensive exposure to the West, and will often have received their professional educations there.
In other cases, your business counterparts will themselves be Westerners, or will be from non-western, non-GCC nations such as India or Pakistan. English is the common business language, and the cosmopolitan nature of GCC culture means that doing business here can actually be easier than in many emerging markets.
Paul L’Heureux has additional advice for the GCC-bound exporter. “Get used to the idea of frequent travel to the market, because you’ll need to visit it regularly. Be sure to use the trade commissioners in the local Canadian consulates to help you understand the
GCC business environment. And be persistent, because you may need up to five visits to obtain an order.”
But don’t lower your margins just to get a deal, L’Heureux cautions. “The higher costs of doing business in the GCC will erode your margins – you may have to open a regional office, for example, because many GCC firms prefer to deal with someone who has a local presence.
In general, try to think of the GCC as a permanent place for your firm, since you’ll need considerable time to develop your brand and reputation there.”
The GCC is playing an expanding role in the world economy, not only because of its oil resources, but also because of its vast pool of capital.
“The GCC’s sovereign investment funds are among the most powerful economic tools ever created,” says David Hutton. “We have to decide how Canadian companies can harness this capital and tie it to the GCC’s needs for our products, technology and expertise. Our companies have barely begun to tap the potential here, and the promise of this market is nothing less than extraordinary.”
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Photo: Courtesy of Crystal Fountains
Photo: Courtesy of Rotoflex
