Emirate re-engineered
By Andrew England
Published: October 22 2009 23:54 | Last updated: October 22 2009 23:54
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| Managed development: a labour ministry official inspects an Abu Dhabi construction site. At least $300bn in infrastructure and property projects are planned for the emirate |
When Saeed Alromaithi’s friends phoned him at his new place of work, they would often have a chuckle. They could hear the clank of heavy machinery in the background or the roar of a steel plant’s furnaces. “They used to make fun of me when they called and heard all this noise,” says Mr Alromaithi, his blue work jacket and jeans a contrast to the pristine white robe that is the uniform of most of his fellow Emiratis.
Their reaction is not surprising. Since the 1970s, when a spike in oil prices brought wealth to the Gulf, its nationals have gained the reputation for avoiding work that might risk an encounter with sweat or dirt, preferring instead the air-conditioned office suites of, say, a state oil company or sovereign wealth fund. Governments provided social safety nets that hoovered up graduates and dealt out public sector jobs for life.
That
is a phenomenon some of the region’s leaders now seem to have grasped
is unsustainable as populations swell and they look to a future when
oil runs out. The need to diversify economies and develop private
sectors has become a common theme.
But Abu Dhabi – where Mr Alromaithi is vice-president of operations at Emirates Steel Industries – is pushing ahead with arguably the most ambitious programme of all. More than $300bn (€200bn, £181bn) worth of infrastructure and property projects have been announced for the UAE capital; billions more dollars are also being spent by state investment vehicles to tap into the latest technology and lure businesses to the emirate.
No longer the retiring, sleepy place that was happy to let the smaller Dubai grab attention with its mega-projects, Abu Dhabi plans to be an internationally recognised metropolis by 2030, with a mix of high-end cultural tourism, technology and other industries that are capital- and energy-intensive. It is benchmarking itself against what it describes as “transformation economies” such as Singapore, New Zealand and Norway – small countries that have pursued successful development models.
HOW TO DIVERSIFY
A capital that is avoiding many – but not all of Dubai’s errors
“We will learn from Dubai’s mistakes.” Thus spoke one of Abu Dhabi’s leading powerbrokers a few years ago as a new generation came to the fore in the emirate, keen to emulate the success – and avoid the pitfalls – of its brasher neighbour.
In many ways the United Arab Emirates’ capital has done just that. Dubai, built on trade even before the discovery of its modest oil reserves, has in recent decades turned itself into an entrepreneurial hub encompassing tourism, transport, services and finance. But, with its grand ambitions and dependence on debt, it has come somewhat unstuck during the credit crisis. By contrast, Abu Dhabi’s vast oil and investment wealth have given it the luxury of time and greater resources with which to plan.
While Dubai built beach resorts and city h
otels for tourists from Europe, the Gulf and Asia, the capital has foc
used on higher- spending leisure and, later, branches of the Guggenheim and Louvre museums are intended as a testament to that vision. Abu Dhabi has pursued industrial developments, from petrochemicals to steel, to tap into its cheap energy resources; Dubai has focused on services and trade.
But Abu Dhabi is also trying to move into sectors that helped Dubai to transform itself so successfully over the past decade, such as the media. The capital’s new and well funded film festival and art show compete with established events in Dubai – although the jury is out on whether these schemes will flourish in the same way. Finance could also become a pillar of the emirate’s diversification as it launches bespoke buildings in the Sowwah Square development aimed at the banking community. International institutions that set up in Dubai’s financial district are already wondering if they might have to open offices in the capital, which is the source for more business than indebted Dubai.
Yet the UAE capital has failed to avoid two of Dubai’s most obvious problems: clogged traffic and housing shortages. As in Dubai a few years ago, public transport has lagged behind population growth; inhabitants must wait another six years for a metro system.
When they meticulously planned the city’s future – but failed to deliver enough houses and offices to meet demand created by its myriad developments – Abu Dhabi’s new generation of leaders provided an unintended fillip for Dubai’s blighted property market. The area closest to the capital turning into a dormitory for Abu Dhabi workers willing to tolerate a three-hour drive each day for lower rent.
Simeon Kerr
In doing so, the emirate is targeting sectors that helped drive the Asian “tiger” economies, combined with construction projects that draw comparisons with brash Dubai. The difference is that Abu Dhabi’s greater oil riches mean it is doing so from a more solid financial position.
As young Emiratis produce high-technology components for customers including Airbus, say, Abu Dhabi could in future see wealthy tourists spending a day on a “cultural island” at the Louvre and Guggenheim museum offshoots it will host. Next, visitors might hop over to a space port and experience a sub-orbital flight. At least, that is the dream.
Few doubt that Abu Dhabi has the wealth to push forward with its goals. It is endowed with the world’s second-highest level of combined oil and gas reserves and production per head, after neighbouring Qatar, according to Moody’s, the ratings agency.
For decades, its rulers tucked away surpluses in the Abu Dhabi Investment Authority, generally regarded as the world’s largest sovereign wealth fund with estimated assets of around $400bn. Nominal gross domestic product per capita soared to $87,000 last year, making it one of the richest locations in the world.
Recent spending has reached far and wide in its quest for talent and expertise. Last month, Abu Dhabi added to its collection of assets when Advanced Technology Investment Company announced it was acquiring Chartered, the Singapore-based semiconductor manufacturer, in a deal with a total value of $3.9bn. Atic emerged from nowhere last year with the announcement that it was investing $2.1bn in a new US-headquartered semiconductor manufacturer with AMD . Atic is spending up to $6bn to build new fabrication facilities in Germany and New York.
The deals give Atic global exposure and a chance to take on Taiwanese chipmakers’ dominance of a market that requires the deep pockets that Abu Dhabi boasts. In less than a year, it has gone from zero to controlling 18 per cent of the industry’s outsourced contract manufacturing.
The target is to reach a 30-40 per cent market share within three to five years, acknowledging that it will take at least five years before there is a return on investment, says Ibrahim Ajami, Atic’s chief executive. A local fabrication facility is also part of his plans. “This is about bringing highly sophisticated people; this is about training a new generation of engineers, scientists, of operators and it’s about installing a complete new mindset of how we work and what we produce,” Mr Ajami says.
Atic is just one of a growing stable of investment entities pursuing similarly lofty goals. Deals by others such as Mubadala and Aabar include the acquisition of stakes in Daimler of Germany and Virgin Galactic, Sir Richard Branson’s space tourism project, as well as ventures with EADS, General Electric and Rolls-Royce.
The transformation under way can be traced to the 2004 death of Sheikh Zayed bin Sultan al-Nahyan, the UAE’s founding father. That ushered a new generation into power, led by Sheikh Khalifa bin Zayed al-Nahyan, UAE president and Abu Dhabi’s ruler, and Sheikh Mohamed bin Zayed al-Nahyan, the crown prince.
Sheikh Mohamed, a 48-year-old Sandhurst graduate, and a small group of trusted technocrats are seen as the driving forces behind the evolution. Mr Alromaithi at ESI can in many ways be held up as a model of what the leaders are seeking to achieve. The 34-year-old, a UAE flag on his hard hat, graduated in engineering in the US, took an office job with ESI’s parent company and then, looking for new challenges, moved to the steel plant itself, working his way up to the executive committee.
“We are looking at industries that have a high capital component and a high energy component and these are two competitive advantages we have,” says Khaldoon al-Mubarak, chief executive of Mubadala. “Then you look at the Emirati component and we are looking at industries that are not labour-intensive and here we are able to attract the right quality of Emiratis, train them and then put them in that cost mix.”
Yet the potential pitfalls ahead as Abu Dhabi attempts to move beyond basic industries such as steel and petrochemicals to increasingly technical areas are huge. One main issue will be Abu Dhabi’s limited human resources, as many senior officials already have multiple roles.
Then there is the UAE’s education system: so weak is it that about one-third of the higher education ministry budget is spent bringing high school graduates to a level where they can attend a local university. And while Singapore embraced dual citizenship to retain skilled workers over the long term, the UAE has yet to follow suit in spite of its already heavy reliance on expatriate workers.
Cyrus Behbehani, a senior Middle East executive at Morgan Stanley, the US investment bank, says that if setting up onshore semiconductor facilities were to be an independent undertaking, “it would never be economic or achievable”. But as part of a “global cluster and enterprise”, the odds that Atic will be able to execute such a transfer have dramatically increased. “This has similarities with the Korean conglomerates in the 1990s, focusing and investing heavily and counter-cyclically when others were down in the memory chip sector and then in the semiconductor sector,” Mr Behbehani says.
Another banker, however, predicts challenges for Abu Dhabi’s goal of establishing itself as a manufacturer of aerospace components in particular. “It’s not that you’re dislodging it from France. You’re actually competing against the Koreans,” he says. “Even if you have cost advantages with the west, I don’t see how you can have cost advantages over the east.”
Still, observers say that Abu Dhabi is right to be seeking to modernise – and that now is a good time to do so. The oil boom has topped up its investment war chest, and the global financial and economic crisis then meant it was one of the few left standing with capital to take advantage of depressed asset prices. Ultimately, though, the test will lie in implementation and execution – and whether the right sectors have been identified, as the emirate is starting virtually from scratch.
“It’s a bit like your three-year-old son saying he wants to become an astronaut and now he’s applying for an engineering degree. He might not prove to be quite so good at maths, or he might have vertigo,” says another international banker. “But it’s good to see him trying rather than saying ‘my dad is rich’ and asking for a new car.”
Government officials, who insist they should be judged over the long term, acknowledge the risks. “We have a clear vision but we are still learning so it will require fine tuning,” says one. “Some of our choices might turn out to be wrong but our wealth of natural resources gives us a cushion and the luxury of time.”
The alternative would be to live life within a closed economy, cash invested overseas and laws that guarantee Emiratis a government job “so you create a society where nobody needs to work”, he adds.
“Right now we are comfortable with our resources, but you see the likes of Argentina and Brazil 100 years ago, they had resources that disappeared, so we are preparing ourselves for the future. There are always issues with implementation, but this is the right path. It’s better to take the bitter medicine now, when you have the resources, than when you are forced to.”
Yet some Emiratis are concerned that they can already taste that medicine. The pace of development is prompting questions about whether nationals, which represent only about 20 per cent of the UAE’s population, risk being diluted by the arrival of ever more foreign workers and finding themselves, and their culture, pushed to the margins.
“OK, we have a semiconductor factory. Who will work there? They will bring more expatriates. [The pace of change] is not gradual, giving us enough time to be absorbed,” says a civil servant. “Just imagine 10 people in your home, eating your food, visiting your bathroom. You don’t have enough space.”
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