Middle East looks to advanced manufacturing

11 July 2022
Localising technology and digital manufacturing are major opportunities for economic growth and greater supply chain resilience

Economic diversification is imperative for the Middle East. The region’s overdependence on petrochemicals in manufacturing is a widely acknowledged risk that weakens resilience and could impede future economic growth. The industry contributes 24% of GDP in Saudi Arabia and 16% in the UAE in terms of oil rents, compared with less than 1% in the U.S. and China.

Middle East governments need to decide which tech segments within the vast technology universe—and even which product families within segments—they want to pursue with large-scale projects, and provide ample support to attract global tech companies as occupants.

Ambitious programmes

In recent years, some Middle East countries, chiefly in the GCC, have launched ambitious programmes to diversify and expand their manufacturing. These countries seek to meet national and regional demand, and position themselves as export platforms. Typically, these projects are part of a state-led master economic development plan.

Countries are prioritising technology for localisation because of its growth potential and strategic importance. At present, high-tech manufacturing is concentrated in a handful of countries (none in the Middle East), whose companies function as providers to the world.

The Covid-19 pandemic has highlighted the region’s susceptibility to supply chain disruptions and tested its resilience, making it sometimes difficult or impossible for companies to secure the technology on which they depend.

Manufacturing opportunity

In response, governments and regional authorities are accelerating their localisation initiatives, as are large, global tech manufacturers with similar interests.

Three categories of manufactured tech products, with a combined Middle East market size of roughly $125bn, are well-suited to Middle East localisation opportunities. These are:

  • Advanced materials such as nanomaterials, smart materials, and bioplastics;
  • Advanced components such as electronic semiconductor components, and battery components; and
  • Advanced finished products such as general-purpose robots, space systems, IoT [Internet of Things] devices, and 3D printers.

Some of these products are disruptive and innovative; others are mainstream but satisfy the pressing needs of regional companies in numerous sectors.

Fierce competition

Competition among countries will be fierce as they stake claims on lucrative tech segments, gain first-mover advantage, and attract tenants. Already in the Middle East, Neom Tech & Digital Company, founded in 2021 as the first subsidiary to be established out of Saudi Arabia's $500bn Neom city project, is building advanced digital infrastructure. Likewise, the industrialisation and innovation strategy of the UAE, led by projects by Abu Dhabi's Mubadala Investment Company, is focused on the localisation of high-tech products.

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In this environment, Middle East governments must target first those localisation opportunities that have confirmed market potential and grant them the right to win. Experience elsewhere indicates that governments should select products that:

  • Have captive and sizeable national and regional demand; 
  • Are in markets that are not yet highly concentrated;
  • Can be manufactured cost competitively in global terms; and
  • That could create potential network effects for additional manufacturing localisation opportunities.
Ecosystem facilitation

Next, after identifying the right opportunity, Middle East governments must put in place a supportive ecosystem. Financial incentives may include direct subsidies to lower upfront capital expenditure requirements, and indirect subsidies such as tax breaks to reduce long-term operating expenditures. Governments will also need to ensure seamless integration into global supply chains, enabled by reliable and modern physical infrastructure for road, sea, and air transport, and by digital networking capacity.

Likewise, regulatory and policy reforms targeted at the technology sector can help lure potential tenants to the region. These could include support for technology adoption, ensuring data security, and protecting intellectual property. Similarly, pure water, enabled by investments in desalination plants if needed, and high-quality and stable electricity, are prerequisites for a successful ecosystem.

Choice of tenants

Finally, to bolster their chances of success, governments should choose tenants carefully, giving priority to those that hold leadership positions in their industries and that can attract other companies into their operating sphere by virtue of their prominence. Likewise, companies that invest significantly in research and development (R&D) warrant special consideration. These companies are more apt to retain their leadership position and remain viable over the long term, given the pace of change in the tech industry. Companies that can demonstrate a strong financial position and have prior experience with greenfield localisation projects are more apt to possess the capabilities and resources to succeed.

As competition intensifies to establish tech manufacturing and satisfy captive and global demand, Middle East governments must move fast. They need to select those areas – materials, components, or products – where they have a right to win, and create the ecosystems to enable companies to thrive.

This article was produced by Alessandro Borgogna and Chady Smayra, partners, and Maha Raad, principal from Strategy& Middle East, part of the PwC network.

 

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