The GCC region is one of the most digitally connected geographies in the world. Even the most superficial anecdotal observation quickly reveals the passion of the regional consumers for digital gadgets. On most indicators of digital penetration, the region decisively outshines most of the rest of the world. For instance, mobile phone subscriptions far outnumber the population: by 1.3 times in Kuwait and as much as 2.1 times in Bahrain and the UAE. This compares to parity for the world as a whole. Similarly, broadband subscriptions are internationally high.

This “digitisation of the Gulf consumer” is partly the result of years of deliberate infrastructure investment with the goal of boosting connectivity within and without the region. The regional economies have, for a long time, recognised the strategic significance of communications technology and proactive regulatory reform. This was pioneered in Bahrain at the beginning of the new millennium. These reforms have given the Gulf countries a competitive telecommunications market place with a number of active players. Several of the regional mobile operators are substantial companies active in multiple jurisdictions within the region and beyond. Most of them have embraced innovation and shifted their focus more and more towards creative content generation.

But as dramatic as the forward march of the digital culture over the past decade or so has been, its triumph in the Gulf remains uneven. While regional consumers have embraced these innovations, in other areas, the GCC tends to remain a recipient, rather than a source of technology. Its global outperformance in the consumer space is not matched by its standing in other areas, with some exceptions. The regional governments have made impressive progress in terms of adopting digital solutions and moving key planks of service delivery to the net. For instance, Bahrain’s government is championing a cloud first policy to drive efficiency and integration within the public sector. But again, most of these solutions are being procured from elsewhere.

Digitisation in the commercial sector remains uneven. The telecommunications companies have naturally been enablers and drivers of digital initiatives. Similarly, payments systems and other areas in financial services are beginning to see forward momentum, and Fintech is generating growing excitement across the region. However, the onward march of digitisation is far less obvious in other major sectors such as manufacturing, which remains an important element of the regional non-oil economy, not to mention a key focus for new investments.

There is every reason to believe, however, that the wave of digitisation sweeping across the region set for its next phase. This is partly the case because innovation today coincides with economic realities that are calling some of the established business models in question. Old assumptions in the regional corporate sector are being challenged by the scaling back of universal subsidies and the introduction of the value added tax among other revenue diversification initiatives. These factors, along with the broader economic overhaul, are pushing companies toward greater dynamism and an unprecedented focus on productivity. New thinking is required to achieve margins and protect returns in a less predictable environment. Under the circumstances, innovation will be driven not just by growing supply of products and solutions but also – importantly – by increasing demand for them.

Companies in the region are beginning to take an active interest in the Internet of Things or Industry 4.0, which is often held up as the Fourth Industrial Revolution that promises to fundamentally transform the way manufacturing and related businesses are conducted. This innovative technology involves digital “cloning” of companies and value chains to achieve real-time data collection, better integration of different elements of the value chain, and ongoing optimisation. This model promises a number of benefits. By better leveraging real-time data through digitisation, companies can make well-informed decisions swiftly in all areas of their operations. Similarly, the monitoring of quality and performance can become seamless and instantaneous.

A number of factors now account for the growing GCC interest in Industry 4.0. For one thing, as novel as this paradigm shift still is, it is not likely to remain an “optional extra” for much longer. Globally, PwC estimated in 2016 that the level of advanced digitisation at companies was 33 per cent. However, this proportion is expected to more than double to 72 per cent by 2020. As Industry 4.0 increasingly established itself as the norm, not embracing it will come at a mounting cost.

Networking into global value chains has always been a logical fit for the GCC. The GCC is one of the most open geographies in the global trading system and can best maximise its economic potential by safeguarding and further developing this openness. The exceptionally strategic location of the region combines with a fairly limited population base and a relative narrow resource profile. These factors mean that the region can unleash the most value through connectivity and effective integration into trans-national networks. By finding their logical niches and maximising quality, timeliness, and reliability, GCC companies can leverage Industry 4.0 and make themselves ever more critical cogs in value chains across a large geography.

For the local manufacturing sectors, Industry 4.0 will open new avenues further down the value chain. For instance, the local aluminium producers will be able to support new kinds of downstream activity. With flexible manufacturing, the GCC could even position itself as a service hub for various other geographies. For instance, in hydrocarbons, the region, which is investing heavily in increasingly complex downstream operations, could potentially harness Industry 4.0 to support nimble, responsive trading activity between different kinds of distillates based on changing demand and needs.

As the region modernises and further expands its manufacturing base, innovations in Industry 4.0 can be integrated into new ventures since their inception to maximise the potential of smart manufacturing and connectivity in value chains. This way, the new investment opportunities can become champions of the industrial paradigm shift taking full advantage of the lack of legacy issues. This will unleash new opportunities for investment and profits as digital modernisation coincides with a review of business models.

Perhaps the most important and enduring advantage of this wave of digitisation will be the transition to a more dynamic corporate paradigm. Data integration and real-time analysis will drive flexibility and efficiency. This, in turn, will increase the perceived value of investment in innovation and R&D. Indeed, globally the manufacturing sector accounts for the lion's share of R&D spending, and this is currently an area where the GCC continues to lag behind much of the rest of the world. Similarly, as data becomes easier to generate, it will also be easier to make use of it in new and different ways. There will be growing demand for automation, coding, and data analysis. These are all areas that promise attractive, well-paid employment opportunities that can appeal to the local population. The same is true for the new openings for entrepreneurship. Ultimately, the wave of digitisation entails a slew of opportunities for locally relevant innovation and adaptation and new ways of reinventing the GCC corporate sector for the needs of the 21^st-century economy. As much as it may have been the GCC consumer that drove the initial triumphs digitisation, the next wave of change has the potential to be a key enabler of the regional economic paradigm shift towards a productivity- and innovation-led economic model.

About the author

Jarmo Kotilaine is chief economist at the Bahrain Economic Development Board