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Doing business in the Middle East and Africa (MENA)

10th of October 2014 Article by Paul Wonnacott

Paul Wonnacott is managing director and president of Vectair Systems, specialist in washroom hygiene and aircare systems. The company does business around the globe and Wonnacott has gained considerable experience in many of the world's most important markets. In this, his first blog for ECJ, he offers his views on trading in the Middle East and Africa (MENA) region.

More and more international hygiene manufacturers and cleaning companies are looking to the MENA region as a burgeoning growth market - and locally-based SMEs will often look to the region's tried and tested export routes as a traditional way of taking their business to the next level.

With its oil wealth, population growth and strong demand for all manner of industrial and consumer goods, the Middle East and North Africa (MENA) region is an attractive market for many manufacturers.

While world trade has grown at eight per cent per year in the past decade, trade in the Middle East and North Africa region grew at only three per cent. Moreover, the region's economic relationships with the rest of the world remain dependent on oil and natural resources, tourism, and labor migration, while other regions have become links in global production chains in technology, manufacturing, and other dynamic sectors.

A major consequence of this failure to integrate with the rest of the world has been slow economic growth and high unemployment.

But it has been a year of upheaval in the MENA region, and the outcome - regime change - is sparking optimism among trade analysts that some markets will become major growth markets for global trade. Nowhere is that more apparent than in Egypt, where the country's new leaders are pursuing a more populist approach than their predecessors, who enacted a series of reforms that deregulated foreign trade, modernised banking and financial regulations, and reduced corporate taxes.

And there's still a chance that the United States might offer Egypt the opportunity to negotiate a free trade agreement.

Other countries are growing as well. The United Arab Emirates, meanwhile, emerged over the last 20 years as the region's main logistics hub, with Dubai Logistics City and the Jebel Ali Free Zone among the world's most innovative projects. But other emirates, including Abu Dhabi and Sharjah, also are investing heavily in infrastructure.

As there is not a lot of manufacturing industry in Arab states, as the majority of Arab states' economies are dependent on oil production, these factors mean there is little need for protective import tariffs to prevent cheaper foreign goods from usurping local companies.

With little or no home industry, Arab states are dependent on foreign goods for everything from cars to household products including mops, buckets and brooms. Governments therefore have a strong interest in eliminating tariffs to reduce prices helping foreign manufacturers entering the region.

Trade flows in this huge geographic area have already raised living standards and wealth levels to unprecedented levels, and will continue to do so. In this sector of the world economy, things can only get better, the economists agree.

China is one industrial giant that has embraced the business opportunities in the MENA region with everything from brooms to building the world's tallest landscape, the Burj Khalifa, in Dubai. And what's the reason the UAE has the MENA region's only ski-slope? China, of course!

Some of the statistics produced in evidence of foreign trade by China in the MENA region are eye-popping. More or less at random: China imports nearly three-quarters of its oil from the Middle East; Mena-China trade has increased 50-fold in the past 20 years to nearly US$ 300 billion last year; China's trade with the region's biggest economy, Saudi Arabia, has risen 10-fold since 2003, and Saudi has now replaced the US as China's single most important trading partner, according to official figures.

At the core of this boom in trade is, of course, China's seemingly inexhaustible hunger for commodities. In MENA, this obviously means oil and gas products; in Africa, virtually anything else from precious metals to iron ore.

With Chinese growth rates in double digits for much of the past two decades, and even now, in a time of apparent slowdown, still around 7.5 per cent, China is the big buyer in southern global markets, and willing to pay in cold, hard cash - dollars, of which it has vast reserves.

The result has been the enrichment of the Middle East and rising standards of living and economic growth rates in Africa. The rest of the world may not fully appreciate Chinese low-cost manufactured goods, but in Africa they are affordable and efficient, in the same way that Japanese electronic goods were for European consumers decades ago. For the cleaning industry in general this creates its own challenges of competitive manufacturing.

There are, however, potential pitfalls in doing business in MENA, particularly when it comes to appointing local agents to distribute products in the region. Many states in the MENA region have enacted commercial agency laws which provide that products may only be distributed in that country by a local company or agent.

In some states, the commercial agency laws grant local distributors significant statutory protections which override the express terms of a distribution or agency agreement. This can often come as an unpleasant surprise to manufacturers seeking to re-organise their distribution arrangements or appoint new partners.

It should be the golden rule, always, to utilise all of the help, advice and commercial assistance that is available to any company seeking to do business in the MENA region. In the UK, for example we have the UKTI (https://www.gov.uk/government/organisations/uk-trade-investment) which works with UK based businesses to ensure their success in international markets through exports.

By the time this blog reaches you, the ISSA/Interclean Istanbul cxhibition will have come and gone. With Syria as its border this has done nothing to dampen the number of foreign countries projected to be represented or to visit this show. The last count was between 85 and 90. This further endorses that MENA is, and will continue to be, an important trading region and window of opportunity for our industry.