UAE economy's agility is key to navigate through COVID-19

The United Arab Emirates' ability to adapt quickly to sudden changes in the global business environment are expected to help its economy navigate through an unprecedented challenge posed by the disruption of the coronavirus pandemic, an expert panel explained on a recent HSBC Navigating Business webinar.

Joined by Hira Industries & PDS Group, the webinar panel discussed the resilience and responses of companies to the COVID-19 disruption, business models, strategies and outlined what the new post-pandemic world might look like with changes to trade, business and life.

“This is not the first time we have faced the challenge of change,” says Abdulfattah Sharaf, Group General Manager & CEO for UAE & International at HSBC MENAT. “From fishing and pearling, to oil, sea ports and airports, and now a global financial centre - the UAE has always learnt to adapt to changing norms and expectations of the next generation,” he adds.

While COVID-19 has impacted economic activity across the Gulf Arab region at a time of weak oil prices, strong foundations of the fast digitising UAE economy combined with business innovation opportunities arising from the pandemic are brightening its longer-term outlook.

"We are being stretched, but we will not break. Some of the data and projections are worrying, but at the same time we have seen even more digital migration and investment in the UAE and this is the agility that will see us through, future-proofing our next chapter,” says Sharaf.

The fast urbanising cities of the UAE will be fertile places for the new future, once the pandemic has played out as many have already embraced sustainable development.

The UAE's economy has been diversifying quickly in recent years with the government gearing up to the Expo 2020 , showcasing Dubai as a dynamic future-focused city with cutting-edge infrastructure and innovation.

In Abu Dhabi, Masdar City has been a testing ground for sustainable technologies with one of the largest concentrations of low-carbon buildings in the world.

"On the one hand of course COVID-19 is a health emergency and human crisis, on the other hand it is an economic shock that will lead to a slowdown that could be difficult to navigate," said Professor Greg Clark, HSBC’s Global Head of Future Cities and New Industries.

"But, the third way to look at it is that it is an opportunity to make some changes. I expect that the rapid uptick we had in digitisation in the pandemic will actually lead to new opportunities in the country itself," he explains.

Professor Clark indicates that there are seven themes (see infographic attached) that are emerging from the COVID-19 pandemic so far that could be significantly influencing how the new normal will be different to pre-COVID.

One is how to change the supply chain and trade routes in order to secure national and regional resilience in terms of supply of critical goods, which could lead to on-shoring, re-shoring or near-shoring.

Another is the massive uptick in digital utilisation and transformation that has accompanied the period of lockdowns, whether it is distance learning or virtual conferencing, online consumption and the delivery of goods. Consumer expectations and behaviours have shifted.

The importance of human health and healthy living has also come to the fore as the coronavirus pandemic revealed the underlining inadequacies and inequalities in healthcare in the world, Clark adds. This theme is linked very closely to issues such as air quality, low carbon, as well as human consumption and food chain connections.

New social distancing norms also open the opportunity to reconfigure some of the gathering places such as sport stadiums, shopping malls, densely built offices as well as transportation systems.

The pandemic has also changed the role of governments in people's lives, with a new pattern emerging in terms of how much personal data is being shared and how we use technology to ensure health security.

A new social contract is also emerging with more solidarity among people living and working together, which could also become a part of the new normal, according to Clark.

During the session, Hira Industries and PDS Group showcased their responses to the pandemic challenge and opportunities in their markets.

For Hira Industries, which has been trading and manufacturing products for the construction sector in the UAE since 1980, the slowdown in the highly-cyclical industry is not a surprise, coming from an eight-year construction high, but the coronavirus brought the slowdown unusually fast.

The company, which has eight factories in the UAE and three in India, is now expecting the next three years to be challenging, before construction starts to increase again in line with forecasts of the upcoming UAE population growth over the longer-term. The company is constructing two new factories in Asia - Pacific region.

In a typical cycle, the UAE construction sector has been going through five-six years of boom, followed by three-four years of slowdown since early 1990s,” says Girish Hiranandani, Hira Industries Co-CEO.

Hira Industries' strategy has been to keep the D/E ratio extremely low to ride out the wave of late payments easily. They have achieved this by keeping the capital retention high with low dividends.

Despite the pandemic, which sent shockwaves across businesses globally and made tens of millions unemployed, Hira Industries has not laid off any of its 1,500 employees and is still recruiting in new markets, saying losing talent would make it suffer in a long-term and make recovery harder. ”Infact, we have more employees in July than we had in March” said Hiranandani.

”We are not conserving cash, but keeping banking lines open and investing for the long-term. Launching new products and cross-selling more to existing relationships and markets is another of the company's strategies during this time.

"We went through a massive CapEx in the last slowdown, which really gave us capacity to take advantage of the 2012-2019 growth cycle. We are going through an even bigger CapEx now mainly outside the Middle East but with limited capex within the Middle East as well," Hiranandani adds.

Hira Industries is also focusing on niche products, ways to increase its already high market share in the UAE and is even looking for potential acquisitions and opportunities to enter new markets to smooth out the industry's cyclicality. While the market size may retract somewhat, it will grow back again, surpassing even that of 2019 in a decade,” references Hiranandani.

“The experts usually over-estimate the short term downside and under-estimate the long term upside. Within the next decade the market size will be much bigger than what it is today” adds Hiranandani.

For PDS Group, which is running an on-boarding platform for entrepreneurs to source and produce apparel for the world's leading retailers and brands, the response to the coronavirus challenge focuses on managing risk and future cost control.

It’s crucial that we were able to bring cash into the system, so later we do not face any issues," explains Pallak Seth, PDS Group Vice Chairman & Founder.

The company, whose revenue is estimated at US$1.05 billion in FY 2019/20, also set out to minimise net-worth dilution in order to keep its balance sheet strong and meet all statutory liabilities and compliances, as well as its banking commitments.

It also reached out to its customers and employees to keep their confidence up, eager to retain its top talent and ensure it can scale up its business as soon as the situation normalises.

The pandemic also presents an opportunity to take over smaller companies in the industry and on-board them on the PDS platform and it is also a good time to push ahead with restructuring considered before COVID-19, Seth adds.

At the moment, PDS Group is applying the so called 6 C's framework in its risk management, covering Credit, Compliance, Currency, Compliant Capacity, Customer Dependency and Cost.

As for customer dependency, for example, the company wants none of its customers contributing more than 15 percent to the whole group's revenue. Currently, its top 20 customers contribute to approximately 70 percent of the total revenue.

Another approach that has been helping PDS Group was the introduction of collaborative tools such as a joint profit and loss statement (P&L) to enhance partnerships among its on-boarded entrepreneurs.

"Just in the last 12 months, based on this collaborative business model, we probably generated US$200 million of revenue as people got aligned," Seth ends.