How the GCC can capitalise on assets to become a global centre for value chains

Region is well placed to make the most of its attractive geographic locations and abundant supply of green energy

Terminal tractors line up as they are loaded with containers from a cargo ship at DP World's fully automated Terminal 2 at Jebel Ali Port in Dubai, United Arab Emirates, December 27, 2018. Picture taken December 27, 2018. REUTERS/ Hamad I Mohammed
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The value chain for an iPhone includes components from suppliers in 43 countries, which get shipped to manufacturing facilities in a few key locations and then back out to warehouses and retailers around the world.

That might be an extreme example, but most complex products these days have complex global value chains (GVCs) — the set of activities required to bring a product from conception to customer. And GVCs are changing in ways that create opportunities for the Middle East region.

Previously, GVCs — a dominant feature of global trade — focused primarily on cost. Today, companies are reconfiguring them to be more resilient, agile and sustainable.

GCC countries are well placed to capitalise on this opportunity, as they possess an abundant and cost-competitive supply of green energy. The region is also geographically attractive, with strong industrial and logistics infrastructure, including ports and airports.

Yet the opportunity could be fleeting. Gulf nations must move fast.

Several factors are changing the GVC landscape. Supply concentrations and shortages, often due to logistical bottlenecks, are more likely to cause production disruptions.

Volatility in energy prices is also a hindrance, considering that natural gas prices in Europe increased tenfold from 2020 to 2022.

Environmental sustainability and net-zero aspirations are pushing companies to move their manufacturing to places that can enable that, especially in hard-to-abate sectors such as steel and aluminium.

Government regulations also are reshaping supply chains. In the US, the Inflation Reduction Act includes financial incentives to grow the green manufacturing base. Europe’s recently announced Net Zero Industry Act has similar aspects. Both will reshape GVCs for global manufacturers.

Supply chains are ready for disruption, according to VC - Business extra

Supply chains are ready for disruption, according to VC - Business extra

However, keeping in mind the fundamentals of competitive advantages, the GCC is in the best position to become a global centre for GVCs that are carbon- or energy-intensive.

Electricity tariff and gas prices have remained stable across the region and are far lower than in other markets. That advantage carries over into renewable energy.

The GCC also has comparatively low energy production costs. By 2030, the region is projected to generate 12.2 million tonnes of green hydrogen each year. Rather than exporting that hydrogen, it could develop circular and green manufacturing clusters to attract industries.

There are 11 priority GVCs for the region. These include silicon wafers, recycled plastic, green steel, titanium aerostructures, and more disruptive plays such as precision fermentation, which can convert energy and some ingredients into protein and other food sources with little environmental impact, among others.

Attracting companies to manufacture these products in the GCC could generate $300 billion in foreign direct investment, create 150,000 jobs, and unlock $25 billion annually in non-oil exports — and potentially offset 75 million tonnes of carbon dioxide-equivalent emissions.

Stakeholders in the GCC region should take the following steps to seize this opportunity.

Governments should partner among themselves to reinforce each country’s competitive advantages and develop agile, resilient and sustainable GVCs. They should join with business to develop targeted measures for each priority GVC component. These can include financial incentives such as capital investment grants, subsidised inputs, financing and demand guarantees.

For instance, in April last year, Saudi Arabia signed an agreement with car maker Lucid Group, guaranteeing the purchase of at least 50,000 electric vehicles over a 10-year period.

Government-to-business partnerships can lead to a more agile regulatory environment. Such partnerships can fast-track the development of human capital in the region, for example, through vocational training and reskilling initiatives.

Governments can also fund innovation efforts and develop circular, technology-enabled industrial cities and special economic zones centred on priority sectors.

They can bundle these initiatives into large-scale programmes, such as the EU’s Green New Deal, to manage interdependence among various programmes and generate a bigger environmental impact.

Along with enabling investments, sovereign wealth funds (SWFs) can also move to ensure a secure and steady supply of the critical raw materials needed for key sectors. These include lithium, cobalt, nickel and copper.

SWFs may need to invest in large mining companies that have significant shares in multiple target metals to ensure that local companies have a reliable supply, given the limited availability of such metals in the region.

Private sector companies in the GCC can also take a number of steps to increase their participation in GVCs. They can pursue joint ventures and partnerships with OEMs (original equipment manufacturers) and their tier one suppliers in the 11 major product categories.

The objective of these efforts is to make low-risk investments through technology transfer and technical offtake arrangements.

Companies worldwide are already redesigning GVCs and seeking opportunities. The GCC region can become a GVC hub across industries, leading to significant economic development and diversification, but the time to act is now.

Dr Yahya Anouti and Georges Chehade are partners with Strategy& Middle East

Updated: April 18, 2023, 3:09 AM