The Persian Gulf’s new development plan is a chance for Polish companies

Countries of the Arabian Peninsula purchase goods from Europe worth almost EUR400bn but Poland's share in these sales is only 0.4 per cent.
The Persian Gulf's new development plan is a chance for Polish companies

Polish cosmetics are well known in these countries.

Polish cosmetics are well known in these countries, but even in this industry, our companies are not taking advantage of the existing opportunities. The new economic strategies on the peninsula suggest a need to revise the Polish approach.

At the end of May, almost 30 Polish cosmetics companies participated in the international trade fair in Dubai. For many companies, also outside of the cosmetics industry, trade fairs on the Arabian Peninsula are nothing new – they have been regularly presenting their products in the region for a number of years. They have already managed to establish commercial relationships with selected member states of the Gulf Cooperation Council (GCC) which includes Saudi Arabia, Bahrain, Qatar, Kuwait, Oman and the United Arab Emirates.

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On the Arabian Peninsula, you can currently buy products from Sante (producer of healthy food), Grycan (producer of ice cream), Nałęczowianka (producer of a mineral water), Kazar (producer of shoes and bags), as well as clothing from Reserved. Polish cosmetics have the largest representation in these countries – Dr Irena Eris , Eveline Cosmetics, Inglot and Oceanic are popular among the Arabic ladies.

Data of the Central Statistical Office of Poland (GUS) concerning Polish exports shows that trade exchange is developing very dynamically. In 2015, the value of Polish goods sold to the GCC states amounted to more than PLN6bn.

Over the past five years, exports to GCC countries grew at an average rate of 33 per cent per year. The biggest trading partners of Polish companies are the United Arab Emirates and Saudi Arabia – in the past year they purchased, respectively, 49 per cent and 40 per cent of Polish goods sold to the countries of the region. The major share of the exports are various types of electrical machinery and equipment. Goods exported to the countries of the Arabian Peninsula also include furniture, cereal products, all kinds of confectionery products, tractors, dairy products, medicines and paper. Cosmetics represent only 2 per cent of the whole exports.

Blooming flowers of the desert

With each passing year, more and more Polish businesses become aware of the potential of that region. It mainly stems from the massive purchasing power of the countries of the Arabian Peninsula. According to the World Bank, in 2014 the average per capita GDP of the six countries amounted to over USD 46,000, which is four times the global average (the highest value was recorded in Qatar, where the GDP per capita amounted to over USD96,000).

The need to diversify the economies of the Gulf Cooperation Council states, which are based on the exploitation of oil and gas, is also of considerable importance. Incomes derived from the energy sector are spent not only on all sorts of luxury goods, but also on the development of other industries that are supposed to ensure the sustainable development of the GCC states.

In desert areas, food production is very difficult, if not outright impossible (or not economically viable). All of that means that the countries of the Arabian Peninsula are the perfect importer ‒ they need virtually everything.

The published development strategies of the individual economies (based primarily on diversification) provide hope for Polish expansion in the region. In accordance with the principles of “Vision 2030” (a document published in April 2016), Saudi Arabia is supposed to undergo an economic transformation thanks to the development of renewable energy (a three-fold increase of this sector is planned), digital and traditional infrastructure and enterprises manufacturing industrial equipment. The share of retail trade is also supposed to increase. Saudi Arabia also wants to become a logistics center in the region. Further investments in the mining sector and tourism are also planned.

The remaining states have a similar plan. The GCC countries are betting on logistics due to their location (connection between Europe and Asia). They are also attractive in terms of tourism. Renewable energy also has a chance to develop due to the high levels of solar insolation. It is desired, because the inhabitants of the region are aware of their limited deposits of natural resources. It is also necessary to develop the industry, which will allow for reducing imports, but above all, will provide jobs (currently a significant percentage of citizens of the GCC countries is employed by State entities or lives off the profits generated by the companies owned by them).

The implementation of these objectives is possible only on the basis of products purchased from abroad, which are necessary for the construction of factories, roads, or the equipment of hotels. Regardless of their efforts, the GCC countries will always have to import food (even if its production in the region increases, it will never be sufficient). Therefore there are enormous opportunities for cooperation between Polish and Arab entities.

Business in Arabic

Polish goods are cheaper and have equally good quality, however, that alone will not be enough to enter the markets of the Gulf Cooperation Council states. The establishment of economic cooperation with the states of the Arabian Peninsula is not easy due to their cultural specificity and economic protectionism. All aspects of life are governed by the Sharia law. We should also add to this the Arabic style of negotiating. In contrast to business talks conducted in the American style, meeting with Arabs are long, full of pleasantries, and for a long time devoid of specific arrangements.

Financial issues should not be addressed at the first meetings – the most important thing is to build a relationship. In Arabic countries, everything happens at their own pace and we cannot speed up this (months long) process. Payment deadlines often reach half a year, and product specifications do not depend on generally accepted standards but the needs of the buyer.

In addition to cultural matters, the regulations of the individual GCC states regarding entry on the market are also an important barrier. The easiest form of distribution of own products on the markets of the countries of the Arabian Peninsula is to sell these products to a local entity ‒ it acts as the importer and deals with all the formalities and charges (also in the case of a franchise, which is used, among others, by LPP or Inglot). A local representative (preferably employed in accordance with the local law), who deals with contacts with potential partners, could be helpful in this process.

Difficulties arise when a given entity wants to distribute its products in the GCC countries on its own. In the United Arab Emirates, the administrative procedures and the costs of establishing an economic activity are considered to be less burdensome. In order to be able to conduct a business activity in that country you have to obtain a license for the particular profile of the company’s activity. In order to obtain the license, it is necessary to involve a local entity in the company’s activity in the form of a majority shareholder (in some cases it is even 100 per cent). This is a serious constraint, especially when it comes to control over the activities of the company.

Finding a local partner may also cause difficulties (a time-consuming process, the issue of reliability of the potential majority shareholder). The lack of participation of local entities is possible in the case of activities carried out in a special economic zone. However, trade between the zones and the remaining part of the country’s territory is treated as foreign trade.

Untapped potential

Although the increase in trade between Poland and the members of the Gulf Cooperation Council seems impressive, taking into account the total value of goods imported by the member states of the Gulf Cooperation Council, Poland’s share is very meagre. According to the European Commission’s Directorate-General for Trade, in 2014, the states of the Arabian Peninsula have purchased goods worth more than EUR370bn. In this time, Poland sold goods to these countries for less than EUR1.5bn, that is 0.4 per cent of the imports of the GCC states, despite the fact that the European Union as a whole is the largest trading partner of the countries of the Arabian Peninsula.

In 2015, the value of goods produced in the EU sold to the GCC countries amounted to EUR111bn, which is approx. 30 per cent of the total value of goods imported by the countries of the region. The share of Polish products in the total value of goods exported from Europe is approximately 1.3 per cent. This is very little compared with our neighbors from Germany, who in 2014 exported good worth over EUR20.3bn to the United Arab Emirates and Saudi Arabia alone.

The author is an analyst of the Centre for International Initiatives and a junior analyst at the BZ WBK Brokerage House.

Polish cosmetics are well known in these countries.
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