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E-Commerce Start-Ups Challenges in the UAE
Introduction
E-commerce is a quickly-growing economic phenomenon. With Internet penetration levels growing around the world, and more and more people getting access to it via their laptops, personal computers, and smartphones, it is natural for Internet commerce to follow suit and expand. Numerous companies are adopting e-commerce in order to adapt to the realities of the modern market. Nowadays, it is customary for any self-respecting enterprise, whether big or small, to allow ordering their goods and services through the Internet, to be paid for in cash or via a credit card. The availability, ease of access, and the possibility to order goods without leaving the comfort of ones home are what attracts customers to e-commerce, making it a very lucrative market.
Out of all the countries located in the Gulf Region, UAE was considered one the most promising places for e-commerce development. The country offers a very developed infrastructure and a very informed and developed population. According to the infographics provided by Global Media Insight, 91% of the local population has access to the internet ( UAE Internet ). The total count exceeds 8.8 million users.
Out of that number, 76% are mobile internet users, and every second UAE citizen possesses an active social media account ( UAE Internet ). These factors suggest a very promising market for internet commerce, as active internet users mean an abundance of orders and customers, and a lively social media network would provide companies and businesses with personal preferences of the users, resulting in more dedicated and accurate advertising.
Despite these promising conditions, the state of E-commerce in UAE remained relatively benign throughout 2014-2017, experiencing very slow and modest growth. As of 2014, the total value of E-commerce in the country was estimated at around 2.5 billion dollars (DCuhna). However, many predictions state that the total value of the Internet industry in the country will grow exponentially in the next year, reaching a total of 18 billion by the end of 2018 (DCuhna).
The purpose of this paper is to analyze the factors that stifled the growth of E-commerce in UAE, define the reasons for its expected growth, research and underline the difficulties faced by the local SMEs when adopting E-commerce, and develop a list of recommendations for overcoming these difficulties.
A Brief History of Internet Development in the UAE
UAEs vast and all-encompassing internet network was not constructed overnight. It began in 1995, when Etisalat the countrys leading and only wired and wireless communications provider, began building up the infrastructure required for internet communication within UAE. As it was the only company in the country with the monopoly over all communication, it was in charge of constructing one of the most modernized Internet systems in the Middle East ( History ).
The Internet boom in UAE happened between years 2002-2005. The world had just emerged out of the recession that happened in the year 2000 and began investing in new technologies again ( History ). High oil prices motivated UAEs economic growth and promoted the prosperity of its citizens. This was very beneficent for internet communication development, as not only the people were able to afford to connect to the internet web, but local companies and businesses were motivated to do so as well. The construction of Dubai Internet City in 1999 and the admittance of foreign technologies into the market facilitated internet growth even further, as Etisalat was enabled to profit from foreign experiences and technologies while maintaining its solid monopoly over all communication ( History ).
By 2009, the construction of an efficient and all-encompassing internet network within UAE was complete. However, any further development was mitigated by the financial crisis of 2009, which was followed by the oil crisis of 2014. Despite these negative influences, UAE maintains one of the most developed internet networks within GCC up to date, with the majority of the population having access to the Internet from their computers, laptops, and mobile devices ( History ).
Current State of Affairs in the UAE
As it stands, UAE has a well-developed and complete internet system that is able to provide both wired and wireless access from any point in the country. Services offered to customers are considered to be one of the fastest in the Middle East and the world, with Etisalat actively working on increasing its bandwidth. At the same time, internet services in UAE are known to be some of the most expensive in the region.
Due to a lack of competition reinforced by Telecommunication Law No.1, also known as Etisalat Law, no other company is allowed to provide wired and wireless communication without a license from Etisalat ( History ). This lack of competition means that no other company could offer similar services at lower prices, thus eliminating free-market self-regulation. Standard internet speed for cable internet in UAE varies from 10-50 Mbps, while the standard speed for mobile internet devices is 24 Mbps. Annual fees for DU and Etisalat range between 250-500 AED, depending on the quality of the service package ( History ).
Despite priding itself on the availability and quality of access, Etisalat imposes censorship laws on the populace, blocking access to sources of information deemed questionable or dangerous to the traditions and beliefs of the UAE (Sengupta). These pages include political sites, information sites, certain religious information sources, and even such widely used resource as Wikipedia. According to statistics, around 25% of all access attempts in UAE are being denied (Sengupta). The ban can be easily overcome with the use of proxies or a VPN. However, it is considered to be an offense punishable by law. While the use of a VPN is unlikely to get anyone persecuted, the use of a VPN to access banned sites may lead to additional charges.
Due to being an important information and finance hub, UAE is a constant target for internet attacks. According to The National, UAE is the second most targeted country in the Persian Gulf, right after Saudi Arabia (Al Bustani). The reasons for that include high availability of internet devices, such as smartphones. At the same time, the population maintains relatively low standards of personal security. Antiviruses are not seeing constant use, and every second person in the UAE uses unsafe methods of storing passwords (Al Bustani).
Lack of internet literacy in conjunction with the high availability of the services make UAE a very tempting target for hackers. Extortion viruses are very common, locking away computer files and forcing individuals and companies to pay ransom in order to get them back. The size of these ransoms, according to Kaspersky, sometimes exceeds 1500 euro (Al Bustani).
Why is E-commerce in the UAE so Slow?
In order to answer the question of why E-commerce in the UAE had a rough start, we must analyze it not only from a national perspective, but also consider macroeconomic factors that affected its development in the country. In this section, we will present internal and external factors that contributed to slow development rates of E-commerce within the UAE.
The greatest macroeconomic factor to affect E-commerce in the country is related to the world financial crisis of 2009 and the oil crisis of 2014 (Cronin). The emergence of E-commerce around the world coincided with these two crucial events, which affected the economy of UAE in a negative way.
Ever since 2009, the countrys economy experienced a recession. The crisis of 2009 hit UAEs banking sector and contributed to the expulsion of foreign banks from the country financial giants like Standard Chartered, Lloyds Banking Group, the Royal Bank of Scotland, and Barclays, which operated in the country since 2005, began selling their assets to the local banks and financial institutions, and removed themselves from the market by 2012 (Cronin).
The oil crisis of 2014 hit the second pillar of UAE economy the oil industry. Although the country did a good job of diversifying its economy, circa 30% of its GDP revolves around oil exports, revenues from which were cut in half (Cronin). These events, combined, are the reason why UAEs economy is in recession. This is directly connected to the development of E-commerce during times of crisis, people become more conservative and less willing to spend money on commodities they have no immediate need in.
This conservative spending affects E-commerce growth rates. The issues that stifle the growth of E-commerce are also affecting the development of E-banking system within the country after the string of crises, many people within UAE fell back on more traditional banking transaction systems (Cronin). The connection between E-commerce and E-banking is very important, as E-commerce largely relies on online payments to function, and the populations unwillingness to trust banks with their financial operations affects all affiliated systems as well.
Another important factor to consider is the lack of internet security. E-commerce revolves around trust, security, and confidentiality of financial transactions between the customer and the company. If the current E-commerce model cannot ensure all three, then the customers would be very reluctant to trust such ventures and conduct online purchases. Basically, the users are afraid that their money would be stolen, their credentials compromised, and their personal information would end in the hands of third parties.
These fears are not baseless. As it was mentioned in the previous section of this paper, the state of internet security, even despite numerous censorship laws, remains relatively low due to internet illiteracy and naivety of the users. At the same time, the past few years were notorious for the emergence of cyber-warfare, with many companies and businesses, big or small, being subjected to malicious hacking attempts. The latest example is the WannaCry virus, which hit over 250,000 enterprises around the world. UAE is a financial hub and a primary target for hacking attempts (Al Bustani). The users are aware of it. It is the reason why they are not so eager to use E-commerce sites and make online purchases.
UAEs internet censorship laws and lack of competition in the internet provider sphere may have an effect on the countrys E-commerce. Internet censorship of any kind that inconveniences the end users inevitably hampers the Internet economy, as it limits access to sources of information and, sometimes, even E-commerce facilities inside and outside the country (Sengupta). Large E-commerce platforms such as Amazon and several others are reportedly being sanctioned due to not entirely corresponding with the countrys safety laws and economic agendas, which cause further traction.
The high prices for the internet services are another factor that hampers E-commerce, as it is sometimes too lucrative to operate a full-fledged internet shop, especially when attendance rates remain relatively low. Other countries in the GCC have a similar situation, According to Gulf News reports, only 15% of all businesses in the region have a permanent online presence (Cronin).
Lastly, decreased growth rates of UAEs E-commerce can be attributed to the attitudes of the local populace. Despite being relatively advanced and possessing all sorts of gadgets that allow near-instant Internet access from virtually anywhere in the country, the majority of the population remains relatively conservative, when it comes to e-shopping. According to Gulf News, the majority of the population still prefer brick and mortar shops to make their purchases in, and view E-commerce sites and company internet presence to be complimentary to the mainstream retailing system (Algethami).
This is understandable, as buying certain products through the internet poses certain risks to the end users. While airline industries thrive from online ticket sales, and food stores offer delivery services, which are very handy and convenient for the end users, the majority of products available on the internet do not adhere to the same standard. Purchasing clothes in E-shops, for example, is not very comfortable, as the customer has no ways of inspecting the products quality or try it on until said product is delivered to their doorstep.
Delivery takes times, and should they dislike the product upon receiving it, sending it back would only cause unnecessary delays and complications, which could be easily avoided by visiting a local retail shop. According to Rammohan Nair, director of strategic accounts for the Middle East and India at Retail Pro, while it is possible that E-commerce will see a significant increase in the next few years, it will always remain on complementary position to the regular shopping experience (Algethami). He stated that the role of E-commerce would largely be limited to providing customers the information about the product and letting people know where they could buy it (Algethami).
Challenges of E-commerce to SMEs
The challenges that Small-Medium scale enterprises (SME) face on the UAE market are largely similar to the challenges E-commerce currently faces as an industry. The three major challenges are (Sengupta):
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Security of personal effects and transactions.
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Payment options.
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Logistical and Legal problems.
The first major challenge is that of security of both transactions and personal effects of the customer. With hacker and virus activity in the region, it means that a business would require investing in an expensive security and anti-virus software, as well as protected e-management systems and cloud services to provide backup files in case of a security breach. These expenses pose an additional barrier for SMEs for starting their E-commerce platform (Sengupta).
Providing payment options to the customers poses an additional problem for SMEs. According to surveys, the majority of customers prefer the pay-on-delivery system, which means that the customers would pay for the product in cash and only once it has been delivered and inspected (Sengupta). This is understandable, as many customers are afraid of fraud and are distrustful of any internet purchases, and wish to secure themselves.
However, the prevalence of pay-on-delivery means unnecessary interruptions to the companys cash flow, as it takes time for the payments to reach the company. Online payments, on the other hand, are more sought-after, as they offer immediate cash for the company to operate with, thus allowing for more fluid and responsive management. This is especially true with large-scale and expensive deliveries.
Logistical and legal problems for SMEs are associated with the UAEs laws, customs, and constraints placed on E-commerce. Logistical challenges are largely related to delivery costs, as well as shipping and importing products from abroad, which affects the end price for the customers. Legislative challenges involve getting a license from the Department of Economic Development (DED), in order to establish a web-based company (Sengupta).
Other than that, UAE legislation demands all local companies to have a physical office to be considered legal (Sengupta). This creates potential barriers for any potential SMEs seeking to open an online shop. Unlike in UAE, other countries abroad do not necessary require opening any physical offices to register an E-commerce site. These companies would be in advantage when compared to those originating from the UAE.
The majority of these factors and challenges are largely outside of SMEs control and are unavoidable. The only thing that prospective E-commerce enterprises in UAE can do is adapt to these circumstances to the best of their ability. The most important thing they should focus on in order to prosper is to build trust between themselves and their customers. Investing in internet security, promoting internet literacy, and offering benefits and discounts to those customers who would choose online payments over payment-on-delivery would help improve their standing, earn more customers, and optimize their cash flow.
Laws and customs of the UAE are to be obeyed, as the legal system serves as a foundation of trust between businesses and customers. Logistical complications can be partially avoided if the products offered by the company are produced domestically rather than imported from abroad. This will allow saving money on delivery costs and reducing the price for the end-users, thus attracting more customers and helping out the local economy in the long run.
Conclusions
Despite UAEs vast and developed Internet infrastructure and a great number of active Internet users, the country still has plenty of barriers that hamper the growth of its E-commerce sector. These factors are complex and numerous and range from those outside of the governments control (macroeconomic factors) to issues that are either influenced or directly caused by restrictive laws and poor decisions.
It is inevitable that E-commerce within the UAE would grow, as customers would become more used to the innovative market model. However, it is possible to hasten that growth by removing the barriers standing in its way. Removing legislative and administrative barriers to the registration of E-commercial enterprises by SMEs, revoking restrictive E-censorship laws, and promoting cyber-security among businesses would allow the UAE to make use of the countrys E-marketing potential.
Works Cited
Al Bustani, Hareth. The Underworld of the Internet: The UAEs Struggle with Cybersecurity. The National. 2015. Web.
Algethami, Sarah. UAE Retailers Slow to Embrace Ecommerce. Gulf News. 2016. Web.
Cronin, Sean. Economic Uncertainty and Online Shopping Contribute to Dubais Changing Retail Landscape. The National. 2015. Web.
DCuhna, Suparna Dutt. E-Commerce Gains Ground on Malls in UAE with $2B in Online Sales. Forbes. 2016. Web.
History. Etisalat. Web.
Sengupta, Amitayu. SMEs and E-Commerce: Challenges and the Way Forward. LinkedIn. 2016. Web.
UAE Internet Social & Mobile Statistics 2015 Infographics. GMI. 2015. Web.
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