SMEs entering emerging markets, an example: Italian company sets up manufacturing facility in Sharjah, United Arab Emirates

This month I would like to focus my attention on the backbone of many economies: SMEs and I would like to share information about a real life example. SMEs often represent the large majority of a country GDP and in spite of the countless volumes written by governmental authorities with regards to their support to this sector, entrepreneurs often find themselves alone when facing new markets and tough choices.

Therefore this month I want to share with you the experience of a company that has been successful in setting up in the United Arab Emirates and has overcome all challenges brought about and it is now well on its way to be a leader in its industry.

As with some of my other postings I think that the experience that I am about to share is confirming the trends that I have been signaling all along in this blog:

1. Geopolitical balance of the world shifting east bound from Europe towards the Indo-Chinese part of the world;
2. Competitiveness loss of key European countries;
3. Subsequent delocalization of manufacturing from Europe towards emerging markets and know-how transfer along with it;
4. Rise of manufacturing quality standards from emerging markets, especially India & China to increase the competitive pressure in point (2).

Below is the experience of a company of Italian DNA that has made the strategic decision to manufacture its products in Sharjah, United Arab Emirates to take advantage of the favorable business environment its key location  enabling efficient flow of goods in and out of a high-growth geographical area.

Company Name: Floor System Company
Website: http://www.fsco.ae
Location: Hamriyah Free Zone - Sharjah (http://www.hfza.ae)

Floor System Company is a manufacturing enterprise of raised access floor intentionally wanted and placed in what today is considered the world?s hub and the focal point of International commerce.
The Company is new born but with roots that all the way back to the late 70?s when the concept was bravely introduced in Italy.
The whole concept allows all the commercial buildings to adapt to a fast turnover of tenancy and therefore seen as a flexible space layout where the raised floor is a plenum for all power distribution and underfloor air conditioning today seen as a very GREEN concept.

Following is an interview with Mr. Augusto Di Pietro, managing director and shareholder of Floor System Company that has been an integral part of the project of creating and commercializing his company in the Middle East.
This adventure presented him with new challenges and problems that he overcame with a lot of hard work and patience.

I am sharing Mr. Di Pietro's experience on this blog so that additional companies can benefit from it. In fact, regardless of industry, many of the problems faced by start-ups are common to all.

1. Mr. Di Pietro, when did you mature the idea of setting up a business in the Middle East? And what were the drivers of your decision?
The problem arose when NESITE (the mother Company) was loosing market share to it?s competitors who had already delocalized in China, therefore the need to make a strategic choice on behalf of the Holding. Why the choice of the UAE? Well , I was acquainted with the area and the Emarati community and furthermore today we sit in the middle between the two major manufacturers of  raised Access Floor (China & Europe), this gives us a great advantage of lead time with the upcoming projects in the whole of the middle east being able to supply a product on a Just On Time basis .

2. Did you find good support and knowledge of the emerging markets in your country of origin?
We have had no support or help whatsoever from Italian Governmental institutions: neither in Italy nor in the UAE.  I am ashamed of it because I love my country but it is not a surprise that we are the first manufacturing Italian company in the UAE.

3. What challenges did you face at the beginning?
The fear of not knowing the local legislations , the rules, the regulations and the way of doing business in this area.

4. Are there any challenges that came your way that you really didn't expect?
Most of them because it was a discovery everyday and having to adapt and align the to the system.

5. Now that the start up phase is over are you planning to expand your presence here? Are there plans that you can share with us?
Yes we do have expansion projects and very ambitious ones but we have to take it one step at a time. I would love to here that more businessmen in Italy would have the courage to delocalize production because the difficulties are now known and can easily be overcome.

6. What surprised you the most throughout your experience?
The friendship and the availability shown on behalf of the Hamriyah Authorities, the Sharjah Chamber of Commerce and various other Government Institutes who are proud to have us in their Emirate and have taken us under their umbrella.

7. Having made the move yourself and living now in a new country, what do you recommend to the companies that are considering entering the emerging market economies?
To hurry up or they will be latecomers.

8. If you had to redo this experience all over again, what would you change or do differently?
It was a hard experience but taught me many other aspects of life so I wouldn't change absolutely anything.

9. Given your on the ground experience and the macro economic changes in place: how do you see the future for this region?
I always want to think that what will give us the leading edge for the next ten years will be the fact that we were not here when the economy was booming but arrived in the midst of the crisis therefore we know how to deal with the survival mode. The way of doing business is changing and only the Companies that readapt will survive.

10. During my trips in Europe I often get the vision from European companies that the technology gap between the old Continent and the rest of the world remains far and wide, vice versa my on the ground experience tells me that Indian and Chinese companies are leapfrogging very fast. What is your experience in this matter?
I'm not back in Europe sitting and waiting for them to take over, I'm fighting back and succeeding because we can do better. This is the centre of the world and we have to be here.

I will be happy to provide additional information to any reader interested in knowing more about Mr. Augusto's experience or settling in the emerging markets.

Tariff increase by EU for petrochemicals good from UAE, Pakistan & Iran

As reported by "The National" the EU bloc has applied significant tariffs on to petrochemicals product of UAE, Pakistani and Iranian origin.

The duties imposed are for four to six months and may be extended to five years. They are as high as €142.97 (Dh640.89) a tonne.

Petrochemical subsidies have been a central sticking point in negotiations over a free trade agreement between the EU and GCC. European policymakers argue petrochemical companies in the GCC have an unfair advantage over EU producers because of the lower price of oil, which is the result of government subsidies. They claim this helps to make GCC goods artificially competitive against EU products.

These protectionists moves are just an effect of the worsening economic situation in Europe and doesn't spell good news for some of the manufacturing companies that rely on European demand and will force the latter to find new ways to increase their competitiveness, or perhaps cry for additional oil subsidies.

Full article on The National here.

UAE: traditional banking and venture capital in a knowledge based economy

I have been doing some reflecting lately on the economic development choices available to the UAE as a country and further at the emirate level. The necessity for diversification from oil driven economy has been stated multiple times and while it may be true for most of the countries in the GCC including the Abu Dhabi emirate for others like Dubai and all of the Northern Emirates the name of the game has always been trading. Needless to say, diversification remains a fundamental aspect for these economies in spite of the fact that the driver is different.

As recently pointed out in an interview Dr. Fabio Scacciavillani, director of Macroeconomics and Statistics at the Dubai International Financial Centre: “Advanced sectors in the twenty-first century will be based less on the combination of labor and machinery and more on the values of ideas and the business acumen required to translate them into commercially viable operations”.

The UAE has therefore embarked in the development of high value add industries which are knowledge driven other than heavy industries that are driven by availability of raw materials and cheap labor. In the global economy it has become almost impossible to compete with Chinese and Indian manufacturing costs. Some might argue that some of the external costs associated with bureaucracy, language barriers and relatively unfavorable foreign investment laws in these countries create a more even playing field still the ground to cover from cost-structure perspective remains significant.

The development of a knowledge based economy relies on few key ingredients, the most important of which is obviously “knowledge” both created throughout a solid educational system as well as imported via hiring of a highly specialized work force. Further, the legal system needs to provide the necessary framework and certainties to encourage risk taking and entrepreneurship as well as protect the ownership of intellectual property: probably the single most important asset in a typical knowledge based economy.

While “intellectual property” management and the educational systems would certainly deserve their own article and analysis, for this posting I would like to focus my attention on the type of banking system required to support the knowledge based economy of the future. Access to start up capital is a vital component for the development of a strong economy, but traditional lending seems ill equipped to provide the right valuation to knowledge-based start up. In fact traditional lending is still based on the valuation of tangible assets, in fact often times entrepreneurs need to provide collateral unrelated to their business venture to be able to get its appropriate financing. In other words, visionary entrepreneurial attitude doesn’t score high with loan officers and credit committees. The latter focus mainly on calculating risks privileging residual equity in case of bankruptcy instead than calculating project risk based upon a market based analysis and business potential.
In a high risk entrepreneurial environment the rules of traditional lending just don’t match market needs. And that is where government bodies with their regulatory powers, banks and equity funds will need to step in to fill the gap by growing a more sophisticated and structure venture capital industry. Venture capital firms provide much needed equity for innovative start ups, not loans. VC firms compensate for the higher risks by taking an ownership stake in the enterprise and dividing equity rounds based upon project milestones often taking a tangible role in the direction or development of the project.

If GCC banks want to meet the demands of a growing and more specialized knowledge based economy they must outfit themselves with experts with the capabilities and experience to analyze, evaluate and rate business plans in order to maximize returns for the bank and in turn provide entrepreneurs with much needed startup capital. As part of this model financial institutions playing in this field must also formulate clear exit strategies that would allow start ups to transition to traditional, and less onerous, debt upon reaching of their maturity stage and in turn allow the equity providers to cash in after the initial and more risky incubation process is over.

So, while banks and lending institutions face the challenge to modernize and meet the challenges brought about by knowledge based economy, regulatory and government bodies on the other have the difficult task to create the transparency laws and mechanisms required for the markets to operates and flourish, and that includes among others: adoption of shared accounting rules, enforcement of penalties for any wrong doing, creation or enhancement of investor friendly procedures.

The UAE government both at the federal and emirate level has taken significant steps already to meet the challenges on hand. It would be great for many entrepreneurs and visionaries in a variety of industries if the banking systems would quickly follow suit providing the equity partnership that is required by them. Any delay would turn into an opportunity for the many venture capital firms in the US and Europe that could step in matching knowledge and processes with capital existing in the GCC. That would be a lost opportunity for lenders already operating in this region.

The New Silk Road

An old history of trade that dates back to more than 3,000 years ago is revitalized today by a new stream of goods, commodities and money invested in energy, infrastructure and manufacturing projects.


While the first person who used the term "Seidenstraße", literally "Silk Road", was the German geographer Ferdinand von Richthofen in 1877, the Silk Road (or Roads, as it appears that we are actually talking about a whole network of routes and not just one road) dates back to the 5th century BC. These routes, extending more than 4,000 miles, have represented important paths, through which ideas and inventions, as well as goods and also diseases , spread from China to India & South East Asia, the Middle East and the larger Mediterranean.


Furthermore, while their relative importance is cause of debate, all scholars agree that the exchange of ideas, traditions and goods moving across the Silk Roads fast tracked the flourishing of the complex civilizations of China, Persia, India, Egypt, Arabia and Rome and, in several ways, helped lay the foundations of the modern world.


Over the centuries, the roads evolved, and new routes were added, especially when naval travel became more and more important.

Map information

This map indicates trading routes, used around the 1st century CE, centred on the Silk Road. These routes are largely valid for the period 500 BCE to 500 CE. [i]

The importance of the Silk Roads became less and less relevant as the world’s economic centre shifted westward, with the rising importance of the Americas, especially North America.

However, a new revival of commerce and investment has been in progress for the past 15 years and accelerating its pace tremendously since the beginning of the new century.

A few variables have contributed to the renewed importance of the New Silk Road: the growing importance of China as the heart of global manufacturing, the tragic September 11 2001 events, the rise of Indian economy, the uncontrolled expansion of credit in the Western societies, the available liquidity among GCC countries, and last but not least the long term demographic trends in the so called G7++ countries. [ii]

The current economic uncertainties haven’t been able to reverse well settled trends. Commerce between Asia and Middle East has been growing at a staggering rate of 30% a year. Since 2006, Asia has been the largest trading partner of the Gulf Cooperation Council, and as of 2007, Asia accounted for 55% of the total $758 billion in trade. [iii]

Further examples of how countries have become interconnected can be seen in the desire of GCC countries to play a permanent role in the development of the natural trading partners surrounding them. Khalid Al-Muhairy left his post, as fund manager at Abu Dhabi Investment Authority, to set up his own asset management fund, Evolvence, solely focused on India. The fund, which is now worth $400 million, has successfully funded Indian businesses in construction (Chennai), high tech pharmaceuticals in Hyderabad, and a private cancer-treatment centre run by US trained doctors in Bangalore.

Smaller Moroccan and Algerian companies have manufacturing facilities in China for shoes, toys, garments and more. The wholesale market of Yiwu in South-eastern China has become the centre of commerce for many Middle Eastern traders to the extent that city administration has built Mosques to accommodate the needs of Muslim travellers and residents, and road signs have been posted in Arabic as well as Chinese and English.

As Western economies tend to present less and less appeal, the large GCC sovereign funds are evaluating investment opportunities in Asia. ADIA (Abu Dhabi Investment Authority) aims to have 8% to 12% of its total fund value invested in Asia.

Conversely, to witness the fact that the ties developed are mutual, Asian companies are building more and more of a presence in the Middle East as well. China has invested billions of dollars in the oil sector in Africa, especially in Algeria and Sudan and state-owned and private Chinese construction companies are now executing infrastructure work (roads, bridges, etc.) across the entire GCC and Africa.

China’s exports to Egypt have quadrupled since 2003, roughly 18 times the value of Egyptian exports to China. The Egyptian government is trying hard to make Egypt the destination of Chinese investment to compensate for the balance. The aspiration is to have Egypt as an export hub for Chinese companies. North East of Cairo, TEDA, a development agency based off the port of Tianjin is building a manufacturing zone. The objective is to attract large Chinese companies to be able to employ 10,000 Egyptians and 1,000 Chinese employees.

HSBC has recently decided to move its principal office from London to Hong Kong, a move that underlines the importance of Hong Kong as a key global financial centre. More recently Abdualla Al Awar, CEO of the DIFC Authority, has declared to .Commerce publication: “…we’ve seen the investment flows have shifted recently. In the past three years there’s been a west to east flow of investments, but maybe that position is changing now. We’ve seen more interest coming from the East Asian market and from within the region. If, for example, someone wants to access Africa, they will use Dubai. The flows are more East to East now – east to the Middle East, and the reverse.”[iv]

More and more examples can be found in newspapers, consulting papers, and so forth. The evidence of a New and powerful Silk Road is everywhere.

The camels of the old paths carrying precious stones and carpets have been substituted by oil tankers, large Airbuses landing in billion dollar airport hubs, and wire transfers. As the West grapples with fixing structural problems, the New Silk Road can prove to be the fertile ground for a new economic revival.

New economies, rich in resources, are going to play a role as well: Kazakhstan, Uzbekistan, and Tajikistan are all looking at opportunities to develop new ties and relationships within the region.

Furthermore, as common interests grow and countries become more and more interdependent we will be able to avert the risk of political destabilization.

It is within the parameters of this quickly evolving environment, that agents of economic development, such as free zones, become more and more relevant, as they provide the perfect vehicle for companies to expand their reach and take full advantage of the New Silk Road which has emerged.

Image: courtesy of Business Week Online

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[i] Wood, Francis (2002). The Silk Road: Two Thousand Years in the Heart of Asia. Berkeley, CA: University of California Press. pp. 9, 13–23. ISBN 978-0-520-24340-8.

[ii] Geographical labels for regions are adapted from the Geography of Ptolemy (c. 150 CE), some trading centre names date from later (c. 400 CE). Relying on Ptolemy's names is wrong but neutral. The following contemporary trading centres (or possible trading centres) are not marked: Red Sea - Myos Hormos, Berenica, Ptolemais Theron, Adulis, Muza, Ocalis, Aualites, Malao. Arabia - [South] Saue, Sana, Saphar, Eudaemon Arabia, Cane, Mosyllon, Moscha. Persian Gulf - Asabon, Charax, Gerra, Ommana, Apologos. Persia - Persepolis, Alexandria Areion, Kandahar. Africa - [East Africa/Kush/Axum] Coloe, Axum, Akhmim, Panopolis, Aromaton Emporion, Opone, Sarapion, Dongola. [Mediterranean] Cyrene, Leptis Magna, Carthage, Caesarea, [Beyond map] [East Africa] Juba, Maji, Sennar, [Trans-Saharan] Sijilmassa, Tamanrasset, Murzuk, Tingis. Europe - Gades (Cadiz), Augusta Treverorum (Trier), Aquileia, Ostia, Athens. India - [Arabian Sea] Horaia, Barbaricum, Barake, Astakapra, Suppara, Kalliena, Semylla, Mandagora, Palaepatmae, Melizeigara, Erannoboas, Byzantion, Naura, Tymdis, [Central] Paethana, Tagara, [South] Muziris, Nelcynda, Bacare, Balita, Colchi, Palaesimundu, [East] Argaru, Poduca, Sopatma. Silk Road - Ecbatana, Yarkand, Jiaohei, Kitai, Kaifeng. (Note - both summer and winter routes around the Takla Makan are shown). China - Chengdu, Kunming, Cattgara. South East Asia - Trang, Thaton. The routes between most of these unindicated sites are not marked, notably the extensive European/Roman routes and the other routes in Persia beyond the Silk Road. Another route not indicated is the Scythian route running from China to the Black Sea. The large number not marked on India are the minor sites listed in the Periplus of the Erythraean Sea.

[iii] See previous article for additional relevant information.

[iv] Data from Standard Chartered Bank.  http://www.businessweek.com/magazine/content/08_46/b4108046852388.htm

[v] .Commerce Middle East Business Analysis, Issue 35,  November 2009. Pp. 25.