Global supply chain deteriorates even as Saudi logistics industry shows signs of recovery

RIYADH: Strict rules imposed by China to curb COVID-19, soaring oil prices and global demand shock have rattled tectonic plates in the international supply chain and cast a shadow over logistics activity world.

The troika revealed not only the flaws in companies’ distribution strategies, but also the lack of resilience of logistics companies to deal with the vagaries of the global economy.

“China is unfortunately going through another lockdown, which is impacting our volumes. The challenge has nothing to do with us; it comes from China itself,” Abdulaziz Busbate, national general manager of DHL Saudi Arabia, told Arab News.

The leading logistics company has seen its operating costs rise by 20% since the outbreak of the universal pandemic. The same goes for smaller companies in the supply chain.

“Before the pandemic, it cost around $2,000 to import a container from China. Now it takes almost $7,000. Commodity prices are increasing every day,” said Muhammad Omer, co-founder and CEO of Aiduk Trading, a Riyadh-based company established in 2015.

According to Bloomberg Economics, a leading macroeconomic research service, China’s supply chain has fallen significantly since April and is expected to deteriorate. What’s even worse? China’s port activity has fallen back to 2020 lockdown levels.

Global inflationary winds

The Russian-Ukrainian conflict has had an impact on the inflation rates of many food products, raw materials and raw materials. Countries neighboring Russia and Ukraine were the hardest hit – Lithuania, Estonia and Latvia suffered inflation rates of 14%, 12% and 10%, respectively.

“The combination of war and supply and demand imbalances, particularly in energy, will drive base metals, precious metals and energy together higher,” said Paul Christopher, Head of Global Market Strategy at Wells Fargo Investment Institute, Bloomberg Television.

According to Jadwa Investments’ Inflation Report, the Kingdom’s inflation is expected to increase by 2.4% in 2022 as the Russian-Ukrainian war, China’s COVID-19 lockdowns and rising food consumption will add to price pressure.

“Inflation globally is affecting us as well as rising fuel prices,” Busbate added.

Abdulaziz Busbate, National General Manager of DHL Saudi Arabia.

Shutdowns in parts of China are adding new challenges to already impacted global supply chains, driving up import costs from major trading partners such as Saudi Arabia.

Although the Kingdom’s inflation rate is expected to increase to 2.7% in 2023 – an increase of 0.5 percentage points from 2022 – it will reach the lowest inflation levels among G20 economies and the third lowest in the world, after Japan and Switzerland.

Within the G20, the Kingdom has outperformed its peers, pushing the annual inflation rate from 3.1% in 2021 to 2.2% in 2022.

Changing Market Dynamics

According to Busbate, the sector is seeing growing demand in the business-to-consumer segment.

“During COVID-19, we took advantage of our e-commerce and B2C services as most people wanted to buy online, while consumer behavior has completely changed in this current scenario,” he said.

DHL Saudi Arabia had a successful year in terms of revenue in 2020, thanks to a remarkable increase in its B2C operations.

Mohammed Omer, co-founder and CEO of Aiduk Trading.

Aiduk Trading also saw a significant increase in sales during the pandemic as people couldn’t go out and the online delivery market was booming.

“The last-minute delivery industry during the pandemic was working day and night to deliver goods to different consumers,” Aiduk’s CEO told Arab News.

However, B2B demand declined sharply in 2020 as most industries were negatively impacted by the pandemic.

“In 2020, we were 90% successful in B2C, while B2B was almost 10%,” said DHL’s Busbate.

In 2021, companies started to get back on track and B2B volume increased to 40% of their operations.

The company nearly doubled its crew in the call center to respond to the number of calls received and increased its network of drivers by about 60% to deliver their shipments daily, Busbate pointed out.

Overcome headwinds

Starting in 2015 with a 1,000 square meter warehouse, Aiduk’s warehouse today spans over 20,000 square meters, offering e-commerce fulfillment services to their customers.

Meanwhile, DHL has built three gateways in the major cities of Riyadh, Jeddah and Dammam, investing more than $50 million in the Kingdom since 2014.

A gateway is a point where freight moving from one territory to another is exchanged between transmission lines.

Jeddah’s gateway is around 15,000 square meters, while Riyadh is around 12,000 square meters.

The German logistics juggernaut is in no mood to stop as it plans to invest $8.5 million in its expansion plans in Riyadh.

The new expansion is expected to enter service by the end of the year, Busbate said.

DHL now has a 58% market share in the Kingdom, handling approximately 20,000 shipments per day.

Recovery strategy

According to Saudi Market Research, based in Riyadh, the Kingdom plans to inject $147 billion into the development of the transport and logistics industry to transform the country into a transport hub.

Saudi Arabia’s strategic location has attracted foreign players in the Kingdom’s logistics industry.

For example, US logistics giant FedEx announced its decision to invest $400 million in domestic logistics operations to attract other foreign players to contribute to the vast developments, according to the report.

The Kingdom is already the leading transport and logistics operator in the Middle East and North Africa, earning $27.6 billion a year.

The development of new business areas such as Jazan Economic City, NEOM Airport, SPARK Area and Red Sea Gateway Terminal are also fueling the Kingdom’s supply chain ambitions.

The forecast exceeds the Kingdom’s pre-pandemic levels and is expected to continue growing through 2025, when the industry will reach a value of $50 billion.