I. COMMERCIAL OVERVIEW A. Overview of Import Market The United Arab Emirates enjoys one of the world's highest annual per capita incomes - over $17,500. Since it has few resources other than oil, the U.A.E. imports over 90% of the products it consumes. Of these imports, about 20 percent are reexported. The U.A.E., with its strategic location, is the major entrepot in the Arabian Gulf region. It has modern communications facilities, seaports, and international airports; its own international airline, a world trade center, free trade zones, and a strong banking system. Trading activities extend throughout the Arabian peninsula, Iran, the newly independent states of the former Soviet Union, the Indian sub-continent and Africa. Due to the quality of life, and the growing recognition that one must be near a market to best exploit it, a growing number of U.S. companies have established regional operations based in the U.A.E. B. Brief Synopsis of Commercial Environment The commercial environment can be characterized as highly competitive, and remarkably laissez-faire, particularly in the northern emirates which include Dubai. Traders operate on very thin margins, and haggling over prices is the norm. Combined with a nominal import tariff of one percent (to increase to four percent on August 31, 1994), the U.A.E. can be characterized as a large duty free shop. With the advent of entities such as the Jebel Ali Free Trade Zone in Dubai, we have seen a diminution in the use of exclusive agency agreements. International firms can establish wholly-owned, independent distribution centers in free trade zones and appoint as many "re-sellers" as the market will bear. This practice is particularly effective for marketing all types of consumer goods, as well as computer hardware and software. In Abu Dhabi, by far the largest and most wealthy of the emirates, we are seeing growing pressure to strengthen commercial agency laws, and to mandate that all trading companies be at least 51 percent-owned by U.A.E. nationals. Trading companies operating in Abu Dhabi without the mandated national ownership share, may in the future find it difficult to renew annual trade licenses. C. Host Country Business Attitude toward the United States Business attitudes toward the U.S. are generally favorable. Perhaps the best reflection of this is the fact that the U.A.E. currency, the dirham, has been tied to the U.S. dollar for more than 20 years. This is a major commercial advantage enjoyed by U.S. exporters. Competitor nations constantly face currency fluctuations, and thus foreign exchange risk, in their commercial undertakings. American products have long enjoyed a reputation for quality in the Middle East. Major U.S. manufacturers of automobiles and brand name appliances are renowned for the reliability and durability of their products. Negative attitudes towards smaller U.S. firms unfamiliar with exporting are occasionally expressed. Local traders don't understand the unwillingness of smaller U.S. firms to accept letters of credit, or to even arrange for shipment of goods. User friendly one-stop shops located in major U.S. export centers should go a long way toward familiarizing the small to medium-sized exporter with international trade documentation and export procedures. D. Major Business Opportunities The best business opportunities are concentrated in the major projects planned or underway in the following industry sectors: (A) Oil and Gas field Machinery & Services; (B) Water Resources Equipment; (C) Electric Power Generation; (D) Architectural/Construction/Engineering/Services; and (E) Defense and Military Equipment. The U.A.E. began a multi-billion dollar development effort shortly after the 1990-1991 Gulf War to increase its maximum crude oil production capacity to 3.5 million bpd, well above its OPEC quota of 2.16 million bpd. At this writing sustainable production capacity is now said to be 2.6 million bpd. A further investment of about USD seven billion may be required over the next five years to reach the 3.5 million bpd figure. Further investments in electric power generation and water desalination projects will be required to service the needs of a growing population and the resultant boom in residential and commercial building construction. U.S. defense contractors see the U.A.E. as a small but promising market for defense items such as frigates, helicopters, fighter aircraft, military trucks, command and control systems, and even military motorcycles. Contract awards in excess of USD 10 million incur an "offset" obligation. Indeed award decisions can be tempered by the quality of the commercial joint venture offset proposal. A summary of prospective major projects follows: ELECTRIC POWER GENERATION/WATER RESOURCES Project: Taweelah Power Station Phase "C" Client: Abu Dhabi Water & Electricity Department (WED) Cost: USD 450 million Status: Project involves construction of a 400 MW power station and 100 MGPD of water desalination. Prequalification of international consulting companies began in early 1994. Project: Al-Awir Power Station Client: Dubai Electricity & Water Department (DEWA) Cost: USD 165-190 million Status: DEWA plans to build a 400 MW open-cycle gas turbine power station. Prequalified consultants were invited to bid in early 1994. OIL AND GAS FIELD Project: Expansion of Ruwais Refinery Client: Abu Dhabi National Oil Company (ADNOC) Cost: USD 1.2 billion Status: Project may take five years to complete and will increase production capacity to 450,000 bpd of refined product oil through the upgrading of hydrocrackers. The Supreme Petroleum Council is expected to give go-ahead soon. Project: ADNOC Joint Venture Petrochemical Project Client: Abu Dhabi National Oil Company (ADNOC) Cost: USD one billion Status: Project is in early planning stage Project: Construction of LNG Facility Client: Abu Dhabi National Oil Company (ADNOC) Cost: Not known Status: Project is in early planning stage Project: Modernization of Offshore Control Systems(MOOCS) Client: Abu Dhabi Marine Operating Company (ADMA-OPCO) Cost: USD 75-90 million Status: Engineering, procurement and construction companies are being prequalified. Project involves SCADA, telemetry and automation. Tender was issued in the first quarter of 1994. Project: Arab "D" Development Client: Abu Dhabi Marine Operating Company (ADMA-OPCO) Cost: USD 100 million Status: Engineering procurement and construction supervision of six jackets, wellhead platforms, submersible pipeline laydown. Tender was issued to prequalified firms in April 1994. Project: Pilot Gas Injection Client: Zakum Development Company (ZADCO) Cost: USD 100 million plus Status: Project involves compression of gas from Umm Al-Dalkh fields to 5000 PSI. Project is expected to be tendered in 1994. Interested companies may prequalify with ZADCO. Only prequalified companies will be invited. ARCHITECTURAL/CONSTRUCTION & ENGINEERING Project: Hudayriat Island Dredging Client: Public Works Department (PWD) Cost: USD 90-120 million Status: Only prequalified and approved contractors capable of dredging an 11 meter deep, 200 meter wide channel from Abu Dhabi's Mussafah area to the sea will be invited to bid by late 1994. Project: Grand Mosque Client: Public Works Department (PWD) Cost: USD 400 million Status: Mosque complex comprises of a main prayer hall capable of accommodating 8,000 worshippers, two secondary prayer halls, courtyard for 12,000 people, conference and meeting halls, an institution for the teaching of the Holy Qur'an, museum, administrative offices and residential accommodation. The mosque will feature three main domes, 68 meters high, and six minarets, each 100 meters high. E. Major Roadblocks to Doing Business The U.A.E. has a strong commitment to free enterprise and imposes minimal restrictions on trade. Certain imports are restricted including alcoholic beverages and pork products which are imported only by a few licensed firms. The importation of firearms and unlicensed drugs is prohibited. The most significant trade barriers in the U.A.E. result from the country's participation in the Arab Boycott of Israel and the lack of protection of intellectual property rights. In the latter case, the UAEG has passed new federal laws and implementing regulations granting IPR protection for patents, trademarks and copyrights. The federal government and the Dubai municipality have been extremely cooperative with U.S. Embassy and Business Software Alliance efforts to stamp out trade in pirated and counterfeit goods. Arab Boycott of Israel The U.A.E. participates in the Arab League's economic boycott of Israel which prohibits direct trade with Israel as well as transactions with third-country firms found to have certain economic relationships with Israel. The U.S. government opposes restrictive trade practices and is pushing Arab League member states to abolish the boycott. U.S. legislation prohibits U.S. firms and individuals from taking certain actions that further the boycott and requires firms to report boycotting states' efforts to solicit boycott-related information. Usually, these requests for boycott-related information appear in tender documents, agency agreements and letters of credit. In many instances, arrangements can be worked out to enable exporters to transact business without violating U.S. antiboycott laws and regulations. Normal trade dealings are usually unaffected by the boycott, and U.S. firms successfully sell to both Israel and the U.A.E. The U.S. Department of Commerce seeks to minimize the adverse impact on U.S. trade of the Arab boycott practices by providing assistance to U.S. firms directly involved. Exporters confronted with boycott problems are advised to discuss them with the Office of Anti-boycott Compliance or to seek competent legal counsel. Contact: Dexter Price, Deputy Director Room 6098 HCHB Office of Antiboycott Compliance U.S. Department of Commerce 20230 Tel: (202) 482-2381 Fax: (202) 482-8913 Lack of Intellectual Property Protection The U.A.E. has not become a signatory to any of the main international intellectual property rights (IPR) accords; however it has taken major steps to ensure IPR protection. Trademarks: On January 12, 1993, federal law number 37 (trademarks) took effect and was followed by the issuance of implementing regulations (ministerial decision number six), dated February 2, 1993. The UAEG now has an office in the Ministry of Economy and Commerce which is accepting trademark registration applications. The trademark law provides protection for 10 years, with a possible renewal after that. Owners of registered trademarks have the right to file legal actions in U.A.E. courts in cases of infringement. The courts are empowered to attach, seize, destroy or re-export counterfeit goods. Criminal penalties can include fines and/or imprisonment. The degree of enforcement of the new trademarks law rests very much on private sector initiative. The Fair Trade Committee of the American Business Council in Dubai is actively involved in seeking out counterfeit products in the market place and is the best point of contact for U.S. firms with trademark infringement problems (Tel: 971 4 314735, Fax: 971 4 314227). Copyrights: Federal law number 40 of 1992 (copyrights) came into force in July 1993. However, the World Intellectual Property Organization (WIPO), strongly suggested numerous changes to the proposed law. The UAEG is working to implement WIPO recommendations so that the U.A.E. can be a signatory to the Berne Convention on the protection of literary and artistic works, which 96 countries have now signed. Major efforts are also underway to stamp out trade in pirated audio/video cassettes and computer software. The Business Software Alliance has been particularly effective in the latter. With the passage and implementation of a credible copyright law, U.S. producers of legitimate audio/video cassettes have entered the market and should be able to spearhead efforts to identify and eliminate pirated products. Patents: Federal law number 44 of 1992 came into effect on January 15, 1993 and protects new inventions, original improvements, new concepts, trade secrets and industrial know-how, and industrial patterns and designs. The UAEG Ministry of Finance and Industry will house the patent office. Implementing regulations are expected shortly. F. Nature of Local and Third Country Competition The U.A.E. is an extremely price sensitive market. Consequently, international exchange rates play a major role in purchasing decisions. Because the U.A.E. dirham is tied to the U.S. dollar (USD 1.00 = DH 3.671), the U.S. has an advantage in that U.A.E. importers know their costs will be fixed as long as the U.S. supplier maintains his price. A review of U.A.E. comparative import figures for calendar years 1992 and 1993 reveals that competitor nations with strong currencies, e.g., Japan and Germany, saw their exports to the U.A.E. decline three percent and 11 percent respectively. Conversely, two other OECD member nations, the U.K. and Italy, which underwent major currency devaluations, saw their exports to the U.A.E. increase six and 13 percent respectively. U.S. exports to the U.A.E. increased 4.5 percent during the corresponding period. It is noteworthy that the most rapidly growing exporter countries to the U.A.E. are the emerging nations of India, China, and South Korea (28 percent, 14 percent, and 13 percent, respectively). Imports from these countries account for much of the transshipment trade to the newly independent states (NIS), Africa and south Asia. Major project activity in the U.A.E. continues unabated. Indeed it is very much a "buyer's market" for local entities seeking a wide range of architecture, engineering, project management, and construction services. For the largest and most technically challenging projects, usually only a limited number of well-known international companies are invited to take part. Repetitive rounds of tendering are common when bids are above the amount budgeted. The successful low bidder may discover at the end of the day that his winning bid left little provision for profit.