Searching for the next Dubai
An inside look at how a huge Middle Eastern company wants to remake the developing world in its hometown's image.
(Fortune Magazine) -- It's always tough driving in the wilds of East Africa. But in the tiny country of Djibouti, our driver explains, it's tougher than usual. "Djiboutian goats don't scare," he says, holding down the horn and swerving. We're driving 100 mph the wrong way down a winding road through terrain so apocalyptic that British soldiers, back when they ruled the world, nicknamed this parched earth the Furthest Shag of the Never-Never Land.
Sultan Ahmed bin Sulayem, a slight man of 53 with rugged features and a serious face, rides shotgun. He is the founder and chairman of Dubai World, a holding company that, he says, has $100 billion in assets, including one of the world's largest port operators, a mammoth private equity house, retailer Barneys New York, and the developer of Dubai's odd palm-tree-shaped islands. (You also may remember that one of its subsidiaries had control of six U.S. ports until Congress objected to handing the keys to a Middle Eastern company.)
Bin Sulayem is on his way to Lake Assal, a giant salt lake that could be the capital of Never-Never Land. Hidden in a crater some 500 feet below sea level, it looks almost prehistoric, with turquoise water lapping on vast expanses of blinding-white salt flats surrounded by black volcanic peaks. It's here, more than an hour from electricity or running water, that bin Sulayem says he wants to build a five-star resort complete with a spa and golf course.
He admits there are complications. For one thing, how do you build a golf course on what looks like a polar ice cap? "No problem," he says, the salt crunching under his feet like fresh snow. "We will just paint the golf balls orange or black." Swimming might be a different matter. "The last time I was here I went right in," he says as he walks up and dips his hand into the warm, silky water, the planet's saltiest. "But with this wind the water will get in our mouths, and it will burn."
Bin Sulayem sees Djibouti (pronounced ja-boo-tee) as a future Dubai - a sort of rags-to-riches story in the making. It sits on a strategic port at the mouth of the Red Sea, and has untouched beaches and that bizarre salt lake. Of course it also has little fresh water, a nearly 60% unemployment rate, and a chief export business of skins and hides. But in the past few years Dubai World has invested more than $800 million here, in projects such as a new port and free-trade zone, a luxury hotel, and paved roads. It even bought an airline to be the country's national carrier.
It sounds crazy unless you consider what happened in bin Sulayem's hometown. Just 30 years ago Dubai wasn't much more than a struggling stretch of desert with a tiny bit of oil. Today, thanks to companies like Dubai World, it is a bustling mecca of Las Vegas-style tourism and New York-style capitalism with countless luxury hotels, dozens of skyscrapers, and 20% GDP growth in 2006. Bin Sulayem believes he can recreate that magic in Djibouti - and in many other unlikely places.
As we're heading back to his Kempinski Djibouti Palace, his phone rings. It is his pilot. "We should look at the national parks we just purchased," he says. "Want to go to Rwanda?"
The Dubai story is remarkable: A small city-state running out of oil saves itself by building an international port, audacious "seven star" hotels, and indoor snow skiing. But recently, as the emirate's extraordinary growth has begun to flatten, its ruler, Sheikh Mohammed bin Rashid Al Maktoum, decreed that three of his big companies - Dubai World, Dubai Holding, and Emaar Properties - expand their reach. "He said, 'Get out of Dubai and then prove that you can be successful,'" bin Sulayem says.
Dubai has little choice: It needs to invest outside its borders to maintain stability and keep growing at home. For a Gulf country, that typically means throwing gobs of cash into so-called sovereign wealth funds, which mostly make passive investments in equities and government bonds. But Dubai has more than cash to invest abroad - it has expertise.
So while petroleum-rich Persian Gulf states like Saudi Arabia, Kuwait, and Abu Dhabi acquire chunks of companies like Citigroup (C, Fortune 500), Dubai is on an international building spree. And it's not just hotels and tall buildings - the emirate's companies are selling the developing world nothing less than promises of Dubai-style economic success. Its developers are building a $27 billion city in Saudi Arabia, $20 billion worth of luxury projects in Algeria, resorts in Morocco, housing in Vietnam, ports in Indonesia, free-trade zones in Senegal, and game parks in South Africa. "Dubai is seemingly so successful that it has become a brand to these countries," says Christopher Davidson, a professor at Durham University in England who just published his second book on the United Arab Emirates. "Governments want to have a little bit of what Dubai's been able to do at home, and Dubai needs to find places to keep growing."
That explains why Dubai World's chairman finds himself spending so much time in places like Djibouti. Though his company has substantial stakes in decidedly First World holdings such as MGM Mirage (MGM, Fortune 500) and Britain's Standard Chartered Bank, bin Sulayem sees real prosperity in the Dubai-ification of the world. His formula: Run a country's port, establish free-trade zones, and build luxury hotels and housing nearby. Sometimes countries simply give land to Dubai World to develop; in other instances the company acquires or leases property, usually at rock-bottom prices. The real money, bin Sulayem reckons, will come when these countries prosper and attract even more foreign investment. That's when the developer of these mini-Dubais will see the value of its original investment truly multiply.
Wheels up for Kigali is at 7 A.M. It is Sunday, and bin Sulayem looks wiped. Dubai World has just purchased rights to develop resorts in two of Rwanda's decrepit national parks, and he has yet to see one of them in the daylight. "Most companies will say, 'Why bother?'" he says. Bin Sulayem speaks fast and gestures wildly when he's excited - something that happens often. "They say, 'Why bother with such small projects?' But that's where they are wrong: The best stuff always starts small."
More than a decade after a brutal civil war and genocide ravaged this country, Rwanda is stable, but its business sector is largely undeveloped. After hearing bin Sulayem speak at an East African economic forum in Djibouti two years ago, Rwandan President Paul Kagame became convinced that Dubai was the model he should try to replicate - essentially buying the premise that high-end tourism can jump-start an economy. After a year of lobbying by Rwandan officials, bin Sulayem visited last October. A week later Dubai World agreed to invest $230 million. A week after that, engineers, architects, and planners started arriving.
Akagera National Park, isolated on the country's border with Tanzania, is quintessential African savanna, with tall grass and rolling plains. Speeding through the park in 4×4's, we make a left at a sign that reads GIRAFFES. (We see a few.) The amateurish signage and overall neglect surprises bin Sulayem, who owns parks in South Africa. "My God, if you go to Disney's Animal Kingdom, the African safari experience is better than that," he says later. "I want to bring the South Africans. They know what to do - what plants to put in, what animals to put where."
It will take some time before Dubai World - or Rwanda - sees much of a return on the investment. Hotels have to be built, parks need to be redesigned, and the airport must entice more airlines. But Vincent Karega, Rwanda's minister of state in charge of industry and investment promotion, is optimistic, saying the country will have 100,000 tourists by 2010. (Last year it had 21,000.) After that, he says, the economy will boom. "I have no worries," Karega says. "These Dubai companies have done all this before."
When bin Sulayem was growing up, Dubai was not much more than a small trading and pearl-diving port around a creek. Many of its residents lived without electricity or running water in simple thatched huts. While bin Sulayem's family had a modest house - his father was a government minister - he remembers there was little to do. One popular pastime was trying to swim across the creek without being whacked by the oars of the wooden ferryboats known as abras.
The pace didn't quicken until oil started flowing in the 1960s. After the British pulled out in 1971, Dubai became one of the seven members of a federal United Arab Emirates. But since Abu Dhabi, 90 miles north, had about 90% of the UAE's oil reserves, Dubai's rulers had to think of other ways to grow their economy. The emirate, which doesn't collect income tax, welcomed expatriate workers and invested heavily in what were then bold infrastructure improvements: a massive airport, a large dry dock, and, in 1976, the world's largest man-made port, some 30 miles from the creek.
Around this time bin Sulayem graduated from Temple University in Philadelphia. His first job was as a customs officer at the new, empty port. "We were so bored," he says, "that if someone barged into our office by mistake, that was an exciting day." One such mistaken visitor suggested that tea would be a good industry to lure into the port. Since it is a commodity that traders buy from different markets, the thought was that if Dubai could create a free-trade zone - or an area where foreign companies could manufacture and trade without taxes or tariffs - then companies would blend the tea there.
Bin Sulayem was enticed by the idea. So during one summer vacation he bought an around-the-world plane ticket and flew to wherever free zones were popping up - Hong Kong, South Korea, Singapore, Taiwan, Honolulu, Dallas, New York. When he came back, he was so convinced that this was the key to Dubai's success that he personally pushed a proposal to Sheikh Mohammed, now Dubai's ruler, to build one near the port. (The government had studied the idea before but had never acted.) Sheikh Mohammed told the young man, "So if you really believe in it, you go run it.'' Bin Sulayem adds: "I was 30."
The enormous new port, along with the free-trade zone surrounding it, grew fast, thanks to its geographically central location and world-class facilities. At first there were no tea blenders, but British Petroleum (BP), Bridgestone (BRDCY), and Sony (SNE) soon established distribution and manufacturing facilities. The port's growth, coupled with the success of the airport and Emirates Airlines, helped create a demand for housing and hotels - particularly beachfront resorts.
In 1997, Sheikh Mohammed asked bin Sulayem to find a way to increase Dubai's coastline. The young executive found an architect who sketched plans for a circular island with seven kilometers of beachfront. Sheikh Mohammed was unimpressed. "Seven?" he asked bin Sulayem. "Why not 70? It doesn't have to be round."
The solution: Bin Sulayem dredged nearly 100 million cubic yards of sand from the Persian Gulf, along with seven million tons of rock, to form a man-made island in the shape of a palm tree; each frond has its own beach. Bin Sulayem and his family live in the resulting creation, the Palm Jumeriah, which more than doubled the coastline of Dubai and created waterfront condos and homes for 60,000 people, plus 35 hotels. It sold out so quickly - within a week - that Dubai World's real estate arm, Nakheel, broke ground on two additional palms, each bigger than the previous one. And as if that weren't enough, Sheikh Mohammed got it into his head a few years ago that he wanted even more. "He says to me, 'Why don't we build the world?'" bin Sulayem recalls. We were sitting in his Dubai office on the 47th floor of the Emirates Towers. From there a visitor can sometimes see the result: a maze of some 300 islands clustered in the shape of the seven continents. They called it the World.
Now bin Sulayem wants to bring a bit of worldliness to places Western developers often find too risky. "Many of these African countries believe the only way to develop their economy is if the World Bank helps them," he says. "That's wrong. If you open your market and you encourage foreign capital, you'll give confidence to many of your people to invest back in the economy."
It is an optimistic, classically Dubaian point of view. This isn't surprising, given that the emirate's companies have thrived in their home market where land is largely free, regulations are few, and friends and favors are plentiful. Doing business outside this mirage is not as idyllic. Mohamed bin Ali Alabbar, chairman of developer and Dubai World rival Emaar Properties, says that in Morocco, for example, he has found it difficult to find and manage contractors that can build housing with the speed and quality Emaar is used to at home. "I wish I had more people," he says over tea at his new Palace Hotel, in the shadow of the Burj Dubai, which Alabbar claims will be the world's tallest building. "I wish we had more firepower."
And yet Morocco, where Emaar first broke ground in 2006, offers early evidence that the Dubai experiment is working. Nicholas Maclean, managing director of CB Richard Ellis in the Middle East, says the Emaar projects are attracting other foreign investors, including European expats buying residential properties. "Their timing has been incredible," he says.
But analysts say Emaar and Dubai World may be spread too thin. As these companies operate farther afield, they may have trouble managing and executing their projects, not to mention being profitable. Indeed, last year publicly traded Emaar posted net income of $1.8 billion on revenue of $4.8 billion, but its expenses rose 51%, partly reflecting the higher cost of operating in new markets. (Dubai World, which is wholly owned by the government, does not release its numbers.)
None of this slows down bin Sulayem. On a warm December day in Djibouti he drives out to see the new port he's building there, which he hopes will become Africa's largest. As he drives away, he admits it will take some time for this investment to bear fruit. "I'm a believer that anything long term is good," he says. "Short term is not relevant."
By that rationale it makes sense that bin Sulayem's favorite hobby is endurance horseracing. It's an extreme sport that can involve riding 100 miles through the desert for ten hours straight. "You have to learn to pace the horse," he says. "If you walk, you never finish." In a 160-kilometer race through the UAE in January, bin Sulayem finished even after falling off his horse and injuring his ribs so badly he was unable to breathe fully. No matter. Two days later he announced he would build the Universe, a man-made archipelago off Dubai in the shape of the solar system, with the sun and the moon and a string of planets in between. The World is obviously not enough.