The Battle of the Very Hot City-States
By Eric Ellis

(FORTUNE Magazine) - THE DUEL BETWEEN SINGAPORE AND Dubai for control of Britain's venerable Peninsular & Oriental Steam Navigation Co. is not so much a bidding war as a proxy battle joined by two tiny, rich city-states intent on invading each other's territory with fat checkbooks.

In January, Singapore's state-owned Temasek Holdings offered $6.2 billion for P&O in an attempt to wrest it from Dubai's Ports Customs & Free Zone Corp., which had all but won P&O's hand with a $5.8 billion bid last November. It's the "oriental" part of P&O, founded in 1837 to help manage the British Empire's logistics, that most attracts the two combatants. Among other assets, the company owns 29 container ports, half of them sprinkled across India and China. It's the world's third-largest terminal operator, behind Hong Kong's Hutchison Terminals and Temasek's Port of Singapore Authority, both of which have networks of their own around Asia. If Temasek snares P&O for PSA, Singapore will vault to No.1 in volume and geographic reach.

"This is very much a play on world trade," says Zafar Momin, logistics partner at Boston Consulting in Singapore. "They're both saying they can see the world economy ticking along nicely for some time and are prepared to pay to be part of it."

P&O is just the latest theater in the business battle between Singapore and Dubai, the richest of the seven United Arab Emirates. Last June the UAE's telecom monopoly, Etisalat, outbid SingTel for control of Pakistan's land-line operator PTCL. Emirates Airline, owned by Dubai's royal family, is a Singapore Airlines clone, taking passengers away from SIA on the profitable European and North American routes from Australia and Southeast Asia. Dubai promotes itself as the world's duty-free-shopping hub, a mantle Singapore has long claimed. Dubai is also constructing the world's tallest building and its biggest airport, budgeting for a fourfold increase in passenger traffic by 2015, much of it at the anticipated expense of Singapore's Changi airport. And both are investing to become technology hubs.

The two city-states, both known for their extreme heat, even boast indoor snow centers. And both are ruled by powerful families--the Lees and the Maktoums--neither of which is known for tolerating dissent. "Their model is Singapore," former Prime Minister Goh Chok Tong said last year after a trip to Dubai. "The way we organize ourselves and our can-do attitude--whatever we do that is successful, they copy and do it on a larger scale."

But it is in ports where Dubai is most spooking Singapore, threatening to become Asia's logistics power. It now has 11 terminals across the region--seven in China--after buying America's CSX International for $1.15 billion a year ago, outbidding Singapore's PSA by $115 million. The Dubai port authority has become the world's sixth-largest ports operator and, like PSA, has designs on being No.1. "We are 100% committed to this transaction," says Dubai ports chairman Sultan Ahmed Bin Sulayem. "Ours is the only serious offer on the table."

Singapore has a reputation for overspending and is not often outbid. "I get the sense they're very hungry," says Boston Consulting's Momin. Dubai has hinted at a higher offer, and brokers in London are advising clients to sit tight as P&O's share price trades up in expectation of an auction. In the end the battle for P&O will come down to who has the deepest pockets--and that may depend on which way the price of oil is going. So far in 2006 the trend seems to be up.

Small Places, Big Ambitions

Dubai is challenging Singapore for bragging rights as

the world's best transportation and logistics hub. The two tiny city-states are

even competing on indoor ski slopes.


Population: One million

GDP: $37 billion

The Boss: Sheikh Mohammed bin Rashid al Maktoum

Airlines: Emirates flies 69 planes to 54 countries. It

recently ordered another 63 jets to expand its service.

Hotels: The Burj al Arab, shaped like a sailboat, bills

itself as the world's only seven-star hotel. Rooms start at $1,000 a night.


Population: 4.4 million

GDP: $116 billion

The Boss: Prime Minister Lee Hsien Loong

Airlines: Singapore Airlines has 90 planes and boasts

the longest nonstop flight in the world: New York to Singapore in 18 hours.

Hotels: Raffles Hotel, opened in 1887, is a colonial

Singapore landmark. Rooms start at $300 a night. Top of page