Can Saudi Arabia power the New Silk Road’s economic renaissance?
The modern Silk Road — the sequence of historical trade allies spanning the Middle East to Asia — is home to eight of the world’s top 20 economies. A vibrant hub for the exchange of capital, talent and technology, trade in the region is varied and dynamic, characterized by two-way flows.
At present, the region’s share of global gross domestic product stands at 40 percent; however, we anticipate that this will grow to 48 percent by 2040 — which also means that it will offer compelling and abundant opportunities. Not surprisingly, the Middle East is fast gaining the attention of North Asian firms that have an eye for expansion
Saudi Arabia has the opportunity to leverage this exciting trajectory, but to do so it will need to execute strategic moves that connect with Asia’s fast-evolving value chain and provide a robust regional platform for Asian companies. First-mover advantage is critical, as it is this pioneering stance which may help Saudi Arabia cement its position in the region.
To understand the appeal of the region, it’s important to reflect on the dynamics which shaped its current state. Where once trade along the Silk Road focused predominantly on oil and consumer goods, the region recently underwent something of a metamorphosis in the wake of three key developments.
These include the Gulf’s new focus on investment in non-oil sectors to secure a diversified post-oil future, as well as fractures occurring in the global political landscape over the past years as a result of geopolitics and regionalization — a move which has, perhaps ironically, led to more (rather than less) connectivity in the Silk Road.
Finally, and most importantly from the Kingdom’s perspective, supply chain disruptions have encouraged countries around the world to broaden their manufacturing hubs across Asia.
This latter development spells good news for the Gulf, and Saudi Arabia in particular. Companies are looking for dependable suppliers, and with rapid technological change reshaping the global supply chain, the Gulf has its first real opportunity to capture parts of the supply chain.
As the region’s largest domestic market, Saudi Arabia has a critical part to play in building regionwide scale and ensuring the Gulf has the industrial depth to attract major global investment.
But how can Saudi Arabia ensure it is ready for the opportunity? The first step will be to integrate with North Asia’s supply chains and industrial ecosystem. Collectively, North Asia accounts for 25 percent of global exports, including 42 percent of office and telecoms equipment and 32 percent of general manufactured goods. Should Saudi Arabia succeed in establishing its own networks with these players, the country’s industrial base stands to receive a significant boost.
Opportunities are set to multiply further still, as industrial innovation in the region is having a marked effect on industries ranging from electrical vehicles to robotics and industrial Internet of Things.
In return, Saudi Arabia offers a strategic location as a springboard into the Middle East and Africa — a region which is fast gaining the attention of North Asian companies seeking inroads and expansion here, thanks to its young demographics and the pace of growth.
This translates into exciting potential for organizations involved in manufacturing as well as accompanying support services like financing, marketing and after-sales, especially those which have already invested in China and South East Asia to grow their international portfolios.
Sovereign wealth funds can also help strengthen ties and integrate supply chains. Investments can be directed towards a partner country’s key growth priorities, supporting its long-term strategic agenda, and strengthening its competitiveness. Investing into North Asia’s leading players, whether electrical vehicles or mobile gaming, will similarly bolster growth at home, while helping to bind value chains between North Asia and Saudi Arabia, as well as the wider Gulf.
Of course, it takes time to build an industrial ecosystem. While basic infrastructure and services obviously form the foundation of such an ecosystem, it can only be brought to life with free trade agreements and strategic investments to support new economic sectors, such as electric vehicles.
Barriers to trade must be removed and platforms for businesses and entrepreneurs must be created. This is the critical role of the public sector.
Saudi’s leadership should continue to support the private sector in identifying opportunities and facilitating the establishment of valuable connections via trade and investment agencies. Recognizing that the region’s connectivity is expanding beyond goods trade, it should make concerted strides towards ensuring that the flow of capital, talent, technology and data are all supported by well-structured agreements. In many cases, this may require revisiting and revising agreements that were negotiated a decade or more ago.
This plays to the advantage of the Gulf and Saudi Arabia — and, at a time when concerns around deglobalization is growing, the region will certainly welcome the prospect of tighter commercial relations
A state-led approach to building an industrial base, accompanied by a robust private sector, and underpinned by strong relations with Asia’s major industrial economies will help to reshape the New Silk Road, with Saudi Arabia in a lead position.
• Ben Simpfendorfer is a partner at management consultancy Oliver Wyman based in Hong Kong. The author of The New Silk Road, he leads the Oliver Wyman Forum in Asia Pacific, the firm’s think tank for senior leaders, and co-leads the firm's Asia-Middle East initiative.