Using an Agent or Distributor
The UAE legal system distinguishes between the two forms of commercial agents- the registered and the unregistered commercial agent. Local companies prefer to work as registered agents for the law favors this arrangement. On occasion, local companies will accept to go the unregistered way based on good faith, but almost always prefer exclusivity.
UAE law does not distinguish between an agent and distributor, referring to both as commercial agents. The Ministry of Economy and Commerce handles registration of commercial agents.
The provisions relating to commercial agencies are collectively set out in Federal Law No. 18 of 1981 on the Organization of Commercial Agencies as amended by Federal Law No. 14 of 1988 (the Agency Law) and applies to all registered commercial agents. Federal Law No. 18 of 1993 (Commercial) and Federal Law No. 5 of 1985 (Civil Code) govern unregistered commercial agencies. Federal law is applicable throughout the UAE.
A major breakthrough for international companies operating in the UAE is the recently announced Commercial Agencies Law 13 of 2006 making amendments to Federal Law No. 19 of 1981 for it states that a principal could terminate an agreement with an agent that does not perform upon expiration of its contract. Termination of unlimited duration agency contracts would still need to be processed through the local courts.
Selection of the right agent continues to be an important decision. Till date registered agents may not be terminated, except with sufficient cause as determined by a government committee that has historically ruled in favor of the local agent. In most cases, compensation to a terminated agent is required even if the committee rules for the foreign firm. Only UAE nationals or companies wholly owned by UAE nationals can register with the Ministry of Economy and Commerce as local agents.
Terms and conditions vary. Commissions and other forms of compensation typically depend on the amount of work required of the agent and sales volume. Responsibilities and performance measures should be clearly defined. Establish the geographic territory covered (UAE law awards automatic exclusivity to the agent in the geographic area covered by the agreement). An agent must have a presence and be licensed to operate in each emirate, as there is no blanket license for the whole of the UAE. In some instances agents have been appointed on a project basis, with the relationship restricted to the specified project terminating automatically upon reward or completion.
It is recommended that a US company retain the services of a local attorney to ensure its best interests are carefully considered when drawing up an agreement. U.S. companies have found our Gold Key Service very useful when needing to identify their local representative company
Establishing an Office
Regulation of the establishment and conduct of business in the UAE is shared at the federal and emirate levels. In general, foreign companies (except companies from GCC countries) that undertake business activities in the UAE or make their products available in the UAE can establish a presence in any of the following ways: entering into a joint venture with UAE nationals for the establishment of limited liability companies, appointing commercial agents, or setting up branch offices. Except for companies located in the free zones, at least 51 percent of a business establishment must be owned by a UAE national. A business engaged in importing and distributing a product must be either 100 percent UAE-owned agency/distributorship or a 51/49 percent (UAE/foreign) limited liability company. Subsidies for manufacturing firms are available only to those companies with at least 51 percent local ownership.
The UAE is very receptive to franchising. High per capita income, receptivity to new products, tax-free earnings and an upwardly mobile population are indicators of the future growth potential for this market. Local companies have been driven to find new and unique franchise opportunities to meet the needs of this market due to the constant announcements of truly unique projects that are being built in the UAE. Undoubtedly, this is a booming sector across industries for the UAE. Currently, franchises are operating in fast foods; dine-in restaurants; auto leasing; apparel; soft drink bottling; beauty products; hotels; toys; photography; jewelry; vending machines; dry cleaning; furniture; hardware stores; office supplies; natural health products; publications; quick printing; garden care and florists; sporting goods; retail/convenience stores; maid and personal services. Today, the largest segment in this industry is fast food with most major US fast food companies already established. There remains considerable potential for franchises of all kinds.
General contract and commercial law apply to franchise agreements as no special legislation for franchise arrangements are currently in place. A single company or individual usually owns 100% of the franchise operation rights in the UAE. In other cases, the franchisee enters into a joint venture with the franchiser to operate all outlets as "company owned" stores employing local managers
The only time direct marketing can come into play is when you sell to the end user. Under local law the international company would still need to honor the commission payable to its local agent or distributor even if they had no part in the sale. Direct sale to the end-user approach is suitable only for infrequent, low volume exports, as marketing in the UAE is very competitive.
Other than advertising in newspapers and magazines the only other forms of direct marketing in the UAE are by way of limited unsolicited mail, fax and catalog sales campaigns (with local pick-up or delivery arranged). Commercials via TV and satellite channels offer an effective direct marketing approach reaching conservative UAE and expatriate women in the privacy of their homes. This method of marketing will to some extent be impacted by the wide usage of the Internet in the UAE as it opens up an unlimited choice of products. Selling over the net will provide possibilities and accessibility to this market that were not available in the past.
Direct marketing is possible to the food processing sector, particularly in vegetable oils, including corn oil, soybean and sunflower-seed oils, beverage bases, dried pulses and a variety of food ingredients, particularly for the snack food and bakery industries. Also, the growing Hotel, Restaurant and Institution (HRI) sector, particularly the hotel and the U.S. fast food and casual dining restaurants sectors, provide opportunities for direct marketing.
Finally, the U.S. military stationed in the region could provide opportunities for direct marketing through the U.S. military’s designated prime vendor assigned for the UAE
Emphasis is given to personal relationships in the Middle East when conducting business. Maintaining a local presence offers distinct advantages. Local business and government officials prefer to deal with someone they know and trust. In a joint venture profit and loss distribution can be arranged as desired even though UAE majority ownership is mandatory. It is not compulsory to license the joint venture or publish the terms of agreement. The foreign partner can deal with third parties under the name of the local venture.
Banks, insurance, and financial companies must be run as public share holding companies requiring a minimum capitalization of Dhs.10 million (US$2.725 million). The Chairman and the majority of Directors must be UAE nationals, and a more restrictive distribution of profit is enforced. Foreign banks, insurance and financial companies can establish a presence in the UAE by operating a branch or representative office, which allows 100% foreign ownership, but, in general, limits business activities to offshore operations.
Licensing of manufacturing processes is a growing market, especially with the UAE's desire to increase the quality and diversity of local production. The total market for industrial licenses remains relatively small due to the limited manufacturing done in the UAE.
The majority of licensing in the UAE is done for the fabricating and/or marketing of trademarked items. Licensees of US sports logos, universities, animated characters, etc., are servicing a very active market with one of the world's highest disposable incomes. Licenses to sell US brand products (an authorized dealer), as distinct from a standard distribution arrangement, or US logos/names/ characters on a non-US product, are becoming very sought after, especially in the apparel market. Licensing effectively meets the current demand, especially among young consumers, for American styles.
Selling to the Government
Government buyers are either federal or emirate governments. Federal purchases are administered through the respective local authority in Abu Dhabi or Dubai. For most civilian purchases, government entities will usually only deal with firms registered in the UAE, or the particular emirate, and will favor local products over imports. Only when goods or services of acceptable quality are not available locally will the procurement authority seek outside sources. It is common for bids not to go out on a public tender, but are sent to select firms that were pre-qualified with the organization in question.
For all types of government procurement and projects, US firms are encouraged to seek a presence in the UAE and get their goods/services pre-qualified for procurement tenders.
Competition in the public sector is very strong. Besides large military procurement projects, governments in the UAE invest heavily in infrastructure projects, such as roads, power generation and distribution systems, desalination facilities, sewage systems, public housing, recreational facilities, hospitals and other medical facilities and services, schools, athletic facilities, refineries and other hydrocarbon facilities, airports, and government buildings. US goods and services enjoy an outstanding reputation for quality, but, with the exception of hydrocarbon-related industries, are under- represented in this market.
Distribution and Sales Channels
The most commonly used way of selling into the UAE is by appointing a commercial agent. Other methods used, depending on the product or service, include direct sales to the end-user; sales through an informal, non-exclusive re-seller arrangement; establishment of a company presence through a joint venture; or authorization to a local firm via a licensing or franchising arrangement.
US exporters sometimes find it advantageous to appoint different commercial agents or distributors for different emirates. Multiple agencies and distributorships may also be appointed to handle diverse product lines or services. Many UAE companies handle numerous product lines, making it sometimes difficult to promote all products effectively.
Food imports are typically handled by firms specializing in the import and distribution of food products to retailers, wholesalers, and institutional users. However, a number of the major food retailers also import directly and in some cases also act as distributors to other retailers and institutional users.
It is common for companies located in this country to use Dubai as their regional hub using warehousing facilities available at the numerous free zones to service their needs to other markets through the region.
The commercial tradition of the UAE is that of the middleman or trader acting as a conduit for goods from large manufacturers to South Asia, the Gulf, and East Africa. Today, with Dubai emerging as the hub of the Gulf, the UAE still serves those traditional markets along with those of North, South, West, and Central Africa, and the rest of the Middle East. The business style prevalent is one that puts an emphasis on personal relationships and perceptions of integrity.
Traditional approaches to business are beginning to change. There is a growing emphasis on quality, after-sales service, and maintenance requirements and costs. A new trend of impersonal businessman/consumer has changed some of the business style. However, it does not yet represent the dominant practice. Personal relationships, particularly when UAE nationals are involved, still predominate. Since these relationships take time to nurture, US firms are advised to invest time in the market with preferably a local presence or at least very frequent trips. This is not an activity that can be done long-distance. Face-to-face contact is essential. In addition, US firms should seek a local sponsor, agent, or partner with sufficient access and influence in those circles most relevant to that particular business.
In addition to personal relationships, price remains most often the dominant-buying factor. For US firms selling to traders, which are the dominant business type in the UAE, there is no substitute for price. Government procurement also places heavy emphasis on selection of the low bidder, as long as the lowest price bidder is compliant with all technical specifications.
Even though the UAE is relatively less conservative than some other Gulf States and English is widely spoken, sensitivity to local traditions and Islamic beliefs is essential. The use of Arabic in packaging and advertising is both desirable and effective (and sometimes mandatory) in marketing consumer goods.
US manufacturers and exporters enjoy an excellent reputation for product technology, quality and durability and the US market share is expected to increase. US companies face tough competition from European and Asian companies in the UAE, who generally have a larger presence in the region and/or offer comparable products and services at very competitive prices. Providing after-sale maintenance services is essential and US companies are advised to establish a presence in the UAE to be able to compete. In general, US companies with a manufacturing presence in the UAE or in any of the GCC countries are most likely to be able to compete in the UAE market, given the relatively low cost of production compared to other places.
The UAE can still be considered a cash-based country. A few private companies do offer this service but one cannot consider this to be a country very developed in ecommerce. A number of departments of the local government have successfully begun to offer e-services but in large part payment for these services is via pre-paid cards. eCompany, a wholly owned subsidiary of the national monopoly telecommunication company, Emirates Telecommunication Corporation (or Etisalat as it is commonly known) has been approved by the UAE Cabinet of Ministers to be the sole Certification Authority for the UAE offering PKI based solutions required in an e-commerce environment.
For consumer goods, price is the primary buying factor for the middle and lower classes. These market segments are served through small stores and shops in traditional souks, or markets. Retailers in this category operate under razor-thin margins--1% or 2% is common--and rely on volume. At the other end of the scale are the segments of the society with large purchasing power made up of the majority of the UAE nationals and businesses and tourists. For this group, price is not a primary buying factor and retail margins are exceptionally high. These segments are serviced through specialty shops. US exporters must be ready to use pricing aggressively to encourage market acceptance of their products main features.
The average importer markup on food products is about 10-15%. Retail food prices are generally 20-25% above import/wholesale prices.
Price plays a major role in the decision making process on all major government and commercial purchases. Companies bidding on government tenders submit Technical and Commercial proposals that are reviewed and evaluated separately. Despite the fact that the technical aspect weighs heavily with some of the more performance driven semi-government entities like the Abu Dhabi National Oil Company and the local utility companies, price continues to be a determining factor.
The relatively higher prices of US products and services can be attributed to higher quality and higher transport costs and is also an important factor making Indian, Chinese, Korean, and Japanese suppliers more competitive in this market. European companies are known to offer quality products in certain fields but because of the soaring Euro over the last year, they have been a lesser threat to US exporters.
Sales Service/Customer Support
The commercial and industrial markets are very competitive. For these markets price is also a key purchase factor, but quality, durability, and after-sales service are increasingly becoming dominant determinants for purchases by government and business. The increasing emphasis on after-sales service favors those products backed by local distributors with adequate part stocks and routine maintenance capabilities. The training of qualified maintenance and repair personnel is a critical marketing factor when catering to the more sophisticated end of the market.