A world-class logistics hub
Express service built over time
When DHL first entered the Saudi market bringing goods into the Kingdom was a laborious process. For many years, it did not get any easier. Imports were flown to Bahrain and then trucked across the King Fahd Causeway after it opened in 1986.
Today, things have changed dramatically. Approximately, 75% of the company’s shipments are cleared by Customs in the air before they even land on Saudi soil. The causeway, once the lifeblood of the Kingdom’s trade, now represents less than 10% of DHL’s Saudi volumes. As such, the company has prospered in the country by recognizing that the express part of the logistics industry is just as advanced in Saudi Arabia as that in America, or Asia, or Europe.
The story of DHL in Saudi Arabia is the story of the company and the country as a whole. DHL has been present in the Kingdom for over 40 years. It began operations just seven years after the parent company was established in the US in 1969. DHL’s arrival in Saudi Arabia came at a time when the economy was taking off and the government’s new strategy of five-year economic plans was spurring development across the country.
It is perhaps unsurprising, therefore, that Saudi Arabia is an important market for DHL. The company has expanded to become the largest express integrator in the Kingdom, with in excess of 52% market share in revenue and 47% in volumes. It has approximately 22 aircraft rotations into the Kingdom each week. It is flying Boeing 757s on a daily basis to the two main gateways, with plans to expand further into Dammam and has a fleet of over 500 vehicles in the Kingdom.
Investing in logistics gateways
In 2016, Saudi Arabia launched its Vision 2030 plan to grow and diversify the economy building on some key strategic pillars. Among these, Vision 2030 aims to leverage the Kingdom’s unique geographical location at the crossroads of international trade routes across Asia, Africa and Europe to strengthen its role a regional logistical hub.
In this scenario, DHL is not resting on its laurels as it continues to invest in its people, its infrastructure, and its technology. The company’s vehicle fleet has been growing constantly and it continues to introduce its latest global technology to the Saudi market. In 2017, for example, the company launched a service that allows a customer to choose a change of address during the transit of shipments. The customer can also now dictate delivery time and not just the day. It is also working towards the rollout of an online shopping platform where customers can buy goods online through a dedicated DHL platform that offers secure shipping.
Moreover, in the last three years, DHL has invested approximately $60m in a number of projects, primarily enhancing its Customs clearance facilities with dedicated gateways at each of the major international airports, starting at Dammam, followed by Riyadh, and most recently Jeddah opened in September 2017. These latter two facilities have dedicated aircraft serving them twice a day, while all facilities have in-house Customs.
The in-house Customs facilities are a good example of the benefits of developing a strong and deep relationship with the Kingdom. DHL has had a relationship with Saudi Customs for 40 years and has managed to improve its market position by gaining clearance to establish its in-house Customs service. However, this is not just to the advantage of DHL. The move also pushes forward the logistics environment in the country as a whole.
Logistics companies and investors can in this respect play an enabling role for the country. DHL not only helps drive Customs practices, but also plays a role in supporting knowledge and technology transfer for the local logistics industry. The company has had a number of discussions and conversations with government bodies and had the opportunity to showcase its facilities. DHL sees itself as the first contact point with authorities when it comes to logistics and just-in-time deliveries or express platforms. At the same time, the government sees the company’s facilities in Riyadh and Jeddah as leading international-standard facilities and encourages new investors to visit the company’s facilities.
DHL’s local success has not come without challenges. Indeed, its ability to prosper is, in large part, attributable to its flexibility and adaptability. This has been evident in the last year with a significant increase in the price of fuel. In January 2018, the government raised the price of domestic gasoline and jet fuel by 80%. Given DHL’s extensive fleet of aircraft and road vehicles, the move has had a substantial impact on the company’s cost model. Some of this burden has been passed on to the customer, while the company has absorbed the rest. Nevertheless, Saudi Arabia still remains one of the cheapest markets globally in terms of the cost of fuel.
The Kingdom still has a competitive advantage in fuel feedstock, and the increase was small in the grand scheme of things, according to DHL. Indeed, fuel is still a fairly small percentage of the company’s operating cost regardless of the recent increase. DHL is sanguine about the move. The company has been in Saudi Arabia for 40 years and has had to be very flexible and adapt quickly to changes.
Future market growth
As Saudi Arabia looks to fulfill its development agenda under the Vision 2030, the opportunities for the logistics industry and express carriers are only likely to grow. Today, as much as 80% of DHL’s Saudi revenue is supported by inbound products. However, as the economy diversifies and industrialization intensifies, exports should grow, bringing new and expanding revenue streams to logistics companies like DHL. Vision 2030 aims to raise the share of non-oil exports from 16% to 50% of non-oil GDP.
Furthermore, with Amazon in talks with the government about entering the market, the local sector is positioning itself to take advantage of any growth opportunities. Amazon is already a DHL customer globally and takes advantage of the firm to bring shipments into the Kingdom. Having the global giant as a legal entity in the Kingdom, however, would likely be a game changer for DHL and other express carriers. It would probably help the company facilitate its requirements much easier and faster. The market would not only grow, but also add value to the end customer because products would become cheaper.
Such moves illustrate the growing importance of the Saudi market and its ability to meet international logistics standards. The country has come a long way since the days when trade was at the end of a causeway. As the country looks to transition into the age of digitization and automation, traditional investors such as DHL and prospective logistics players all have a major role to play.
Faysal El Hajjami, Vice-President and Country General Manager, DHL Saudi Arabia
How has your experience as an investor evolved in recent years?
I have witnessed DHL in the Saudi market evolve. I don’t think DHL would have invested in Saudi Arabia if we were not strongly committed to the Kingdom’s growth. The Saudi market is one of the large markets in our network. It is a market that is good to do business in for a number of reasons. We have a young and growing population, and we have great support from the government authorities. It is a market that has welcomed our technology and know-how, and it’s a profitable market and we’re proud to say so.
I think it is important for any investor to feel safe in a market, to feel encouraged by the government, and to feel that they can repatriate their profits. Saudi Arabia is just that. It has its challenges like any other market, but overall, if you work hard to promote your technology and services, you will succeed. It is primarily an in-bound market, but we are now working closely with the government and some of our customers to develop export products. It has been, generally speaking, an extremely stable market for us. You have a younger generation that is tech savvy and keen on international products. Just as importantly, it is also a market that has fairly high levels of disposable income.
Where do you see the potential for export opportunities?
There are a number of young entrepreneurs that are developing products and services. I have seen the opportunities these products and services create in other markets, so I believe there will be a lot of know-how and tech services that are going to be exported. Additionally, there is the medical sector. There are a number of products being produced here that will be ready for export, including pharmaceuticals. Then of course, there are the subsectors of oil and gas, whether it is plastic resins or other products. The automotive industry could be developed here and available for export, as well as the avionics sector, which the government is keen to bring to this part of the world. We are optimistic and very close to what is happening. There is much potential.
How have Saudi trade relations changed?
There has been a shift in the last decade. There has historically been a heavy reliance on the US trade lane in particular. This was our biggest trade lane. Today, there is a major shift towards Asia, including Hong Kong, China, and India. Europe is also important. Germany, in particular, is a large exporter to the Saudi market. I think there is a balanced and diversified trade environment. The US, Asia, and Europe are now all big exporters and players in Saudi Arabia. This shows on our trade lanes.
The government is seeking to make Saudi Arabia a trans-shipment and logistics hub. Is this realistic and what could the government do to attract more trans-shipment business to Saudi Arabia?
Intra-regionally, the UAE remains the biggest trade link. The UAE has managed to position itself as an entry point for cargo business. It takes bulk cargo and redistributes to the rest of the region. I think Saudi Arabia has the potential to create a similar set up in the Kingdom. For that to happen, a number of government bodies need to come together to set up the enabling environment. This would involve flexibility on visas, cohesive and aligned customs systems and processes, and many other factors. The legislative side needs to be addressed. The investor or the exporter needs to feel that the goods will enter the Kingdom on time and will reach their end user without jeopardizing the integrity of the goods. Then of course, in terms of infrastructure there should be dedicated bonded areas for air, road, sea, and potentially rail. There is also a huge demand for cool chain logistics, so there is need for refrigeration in both bonded and non-bonded areas. The infrastructure side is perhaps easier to achieve then the latter.
But is the potential there? Absolutely. Could that shorten the supply chain? Absolutely. Could that add value to the customer? It would certainly reduce the landing cost to the customer. There is a fantastic business case for this. It does not surprise me that the government is looking at it.
To what extent have Customs procedures improved in the last few years?
Without a shadow of a doubt we would not have been able to grow our volumes into the Kingdom by double digits over the last three years had we not seen flexibility of operations with the Customs authorities. Today, approximately 75% of our shipments are cleared in the air. However, there is a lot of work that our team needs to do in advance. This is why we pride ourselves on our transit time. In 2017, we achieved a record whereby 96.3% of all our shipments were received on time by the customer. We moved from 93% to 96.3%. This had never happened in Saudi Arabia. I think this model can be applied to sea freight, road freight and any other logistics platforms the Kingdom is looking to develop.
How has the growth of e-commerce and online trading in Saudi Arabia compared to other markets?
I think MENA has been recognized as the region with the highest online business growth. It will have the most growth in 2019 out of all regions. While the online segment has matured in some markets, I don’t think it has reached maturity in this market yet. We have seen in excess of 30% growth, but I don’t think we have reached the peak yet. We can comfortably say that 35% of all our business coming into the Kingdom is driven by online purchases. And it is growing by double digits.
What can you say about the potential localization of technology in Saudi Arabia?
As a global logistics network we are very systemized; we are not a standalone company. DHL Saudi Arabia’s technology is just as good as DHL US’s technology or DHL China’s technology. Saudi Arabia is a tier-one market, one of the top countries in the world. This is where technology is rolled out first. So DHL Saudi Arabia possesses the latest technology in our network. That is an advantage for our local company and the customer. We are recognizing the changes that digitization is creating and also the demands of the younger generation, especially in such a dynamic market like Saudi Arabia. We are trying to deploy locally as much as we can and as fast as we can for the Kingdom to stay ahead of the game.