The drive for smaller supply chains creates new opportunities for Saudi Arabia
It’s always worth remembering what German economist Rudi Dornbusch said — things take longer to happen than you think they will, and then they happen faster than you thought they could.
Historically, global supply chains were built to maximize returns by cutting labor costs and lowering overheads. However, the COVID-19 pandemic exposed the fragility of far-flung supply chains. Companies across more than 80 percent of sectors across the world have experienced supply chain disruptions over the last two years. This prompted more than three-quarters of them to bring production closer to home, closer to consumers, or to redirect goods and parts to strategic allies.
The argument against re-shoring has always been made on the grounds of lost efficiency and disastrous costs. However, cheaper countries don’t seem as cheap anymore, while tax arbitrage has narrowed.
Also, national security is growing in importance as are the environmental, social, and corporate governance concerns of the high carbon footprints associated with long supply chains and problematic employment practices. As the world becomes a more connected place the need to protect and secure basic infrastructure — such as electrical grids, nuclear plants and air traffic control systems — becomes imperative and points toward a longer-term need to become more self-sufficient.
A growing awareness of the uneven benefits of globalization has also triggered nationalist pressures to make the world more local. Finally, growing concerns about global warming, especially among millennials, is pushing for goods to be produced closer to where they are consumed.
Now is a good time to break with the past as rising wages, stricter environmental norms, a complex regulatory framework, availability of a high-skilled labor force, access to cheap energy and the Kingdom’s focus to transform into a high-skill service-oriented economy provides the impetus to make this transition.
Saudi Arabia is keen to relocate international supply chains to the Kingdom. And that can be well worth the effort, given the country’s large tourism projects, cheap energy, young talent and increasingly predictable operating environment. The news in March of Taiwan’s Foxconn Technology Group, the biggest assembler of Apple iPhones, is in talks with Saudi Arabia about jointly building a $9 billion plant is a testament to this.
The reshoring of manufacturing facilities can have a multitude of far-reaching effects and can boost a country’s long-term growth. Saudi Arabia as a destination for re-routed supply chains could benefit from increased capital spending, lift productivity and the creation of secondary and tertiary economies. Also, what’s good for an economy is good for the financial services that serve that market. Any sustained recovery in capital spending and manufacturing would have multiplier effects on the broader economy — which includes higher wages, greater research and development spending, higher tax revenues and the creation of industrial clusters. Also, about six indirect jobs are created for every new job in manufacturing.
The pandemic has acted as a catalyst for many of these changes. A good example is the Red Sea Development Company which partnered with AlKifah Contracting Company to work with precast concrete panels at a purpose-built new factory at the project site in December 2020. This was a necessary exercise to ensure business and construction continuity during the pandemic, but now it could be seen as a competitive advantage, because building a manufacturing plant often leads to the development of an industrial cluster over time.
The Russia-Ukraine conflict, combined with the other disruptions over the past two years, means there will be continuing disruptions to supply chains, even as firms re-evaluate such practices as single sourcing and just-in-time delivery. Shifting the entire supply chain for a company is a complex task, but firms now need more resilient links in their chains. Leaving China, or any other global manufacturing hub, will not be easy but then again, Rome was not built in a day.
• Aradhana Khowala is a global authority on the luxury travel and tourism industries having worked across 75 countries. She is currently the chair of the global advisory board of The Red Sea Development Company.