The remote desert town of Ras Al-Khair, located on the eastern coast of Saudi Arabia, has become an unlikely competitor to China, and its role as the world’s pre-eminent manufacturing powerhouse. The move in 2009 by Bechtel, a US-based construction company, to create what will be the world’s largest aluminium smelter in Ras Al-Khair under the Saudi government’s auspices, is expected to see Saudi Arabia become the world’s leading producer of aluminium cans, while making it less reliant on the oil sector.
Indeed the project, which is estimated to be worth $4bn, was constructed to provide operating facilities for Ma’aden, a Saudi Arabian conglomerate, and Alcoa, a US-based aluminium maker, which formed a joint venture to manufacture cans. Once complete, the complex could produce up to 1.8 million tonnes of aluminium per year, according to the Saudi Arabian government’s website.
Yet far from being the exception, the Saudi Arabian government’s efforts to establish the country as a manufacturing hub have been part of a wider shift in the Middle East and north Africa (Mena) region to economically diversify through developing a large manufacturing base. The decision in 2012 by French carmaker Renault to construct what is now north Africa’s largest car factory in Tangier, on the northern tip of Morocco, came about as the result of the Moroccan government’s efforts to attract foreign firms to the Tangier Free Zone, through offering a strong infrastructure as well as tariff exemptions to new foreign firms.
“The $1.5bn Renault factory has an annual production capacity of 400,000 cars, and it will meet a large share of demand for cars across west Africa,” says Florence Eid, founder and CEO of Arabia Monitor, a UK and Middle East-based consultancy company. “Other international manufacturers, such as Dell and Bombardier, are also undertaking major investments [in north Africa].”
Over the past decade, manufacturing activities have made a significant contribution to the Mena region’s GDP growth. The World Bank estimates that the manufacturing sector in Mena, which grew rapidly between 2000 and 2008, enabled the region’s GDP to expand from an average of 1.84% between 1990 and 1999, to an average of 4.74% between 2000 and 2008. At the start of 2009, manufacturing represented 12% of Mena’s GDP.
“An important trend that we have witnessed is the diversification away from oil and gas,” says Masood Hassan, a partner at PwC’s Middle East office. “The next big commodity, in terms investments, is the manufacturing sector. Another trend that we have witnessed is the need to move up the value chain, into higher-value-added areas such as automotives, retail and pharmaceuticals.”
A varied environment
FDI into the Mena region as a whole has traditionally been drawn to the hydrocarbons sector, as well as large real estate developments. Data from greenfield investment monitor fDi Markets shows that investors are continuing to focus on these two sectors, as between 2003 and 2013, the real estate and coal, oil and gas sectors attracted the highest levels of FDI investment, worth a combined $463bn. Yet Ms Eid maintains that such a focus on macro trends misses radical shifts in FDI strategy that have been consistently unfolding on a micro level.
“There is a tendency to paint the region with a broad brush, but the outlook varies widely,” says Ms Eid. “Investors in Mena today are re-stacking their cards, divesting from some countries but reinvesting in others. Our analysis revealed that the most high-value-added class of opportunities in Mena was in the Gulf Co-operation Council [GCC] economies, where there are fairly well-developed financial systems and broad political stability. Beyond that, we found that the manufacturing sector was second largest contributor to GCC output, at 8.9% of GDP in 2011.”
A closer examination of the business activities of companies illustrates a significantly different picture, as fDi Markets reveals that during 2003 and 2013, while construction attracted the most, worth $335bn, manufacturing attracted the second largest amount of capital, worth $330bn. In contrast, extraction activities attracted just over $105bn in investment, illustrating that companies have been increasingly expanding their manufacturing operations in the region.
A reason for this shift has been efforts by the region’s governments to put in place supportive infrastructural and regulatory frameworks to increase foreign investor confidence. fDi Markets data shows that Saudi Arabia and the United Arab Emirates are the leading regional destinations for greenfield FDI, and according to Mr Hassan, both governments’ efforts in actively implementing business-friendly policies have paid off. “Openness to trade is critical and Saudi Arabia and the UAE have been at the forefront of improving their regulatory environments and making life easy for investors,” says Mr Hassan.
Indeed the Saudi Arabian government’s efforts in modernising Ras Al-Khair have been part of a wider strategy where it selected specific sites across the country to become national growth clusters. Forming part of its National Industrial Clusters Development Programme, the government worked to attract FDI into five manufacturing sectors – minerals and metals, automotives, plastics and packaging, home appliances and solar energy sectors – and for its efforts the country witnessed a significant influx of FDI. The move by Japanese carmaker Isuzu Motors to build its first Saudi Arabian automotive assembly plant in 2011 set the country on the path of being a self-sustaining producer of value-added manufacturing.
Additionally, the emirate of Dubai in the UAE is another example of a city that has successfully crafted a reputation as one of the world’s leading hubs for aerospace components. The commercial success of the Emirates Airlines, coupled with the establishment of the Dubai Airport Free Zone (Dafza) in 1996, was integral in entrenching foreign and local manufacturing operations in the city, and while Dafza today is home to more than 1600 companies in sectors as diverse as aviation, pharmaceuticals and ICT, Dubai’s Department of Economic Development says that the manufacturing sector contributes to 13% of Dubai’s GDP.
Several countries across the region have experienced success in emulating the strategies of Saudi Arabia and the UAE; fDi Markets data reveals that Egypt, Qatar and Algeria ranked third, fourth and fifth in attracting the most greenfield manufacturing FDI. Yet commentators have cautioned that countries which scramble to open their manufacturing sectors to outside investment, without initially developing a strategic approach to attracting high-value-added FDI, face a significant threat of falling into a vicious low-income and low-value added manufacturing trap.
“The question of low-cost operations is a real challenge,” says Mr Hassan. “The Middle East has become a dumping ground for [cheap] labour. What may happen is foreign companies’ demands for cheap labour may be satisfied and countries may end up hosting operations that do not add significant value apart from churning out manual work. Countries need to understand that manufacturing without a knowledge economy is nothing. They need to develop the intellectual capital and the manufacturing sector in order to attract firms in high-value-added industries.”
Additionally, observers have maintained that although Mena as a whole has considerably recovered from the Arab Spring uprisings experienced in 2011, the region still has trouble shaking off its negative image for political instability. Ongoing episodes of unrest, most notably in Syria, could continue to deter FDI into the region’s manufacturing sector.
“Overall, the growth outlook is rather sluggish, with aggregate growth of the region forecasted to be around 2.8% in 2014,” says James Babb, the clients and industries leader at Deloitte Middle East. “Continued uncertainty with the spillover effect of Syria’s civil war could further impact investments, especially in Algeria, Libya, Yemen and Morocco.”
Yet Ms Eid maintains that the advancements made so far will endure. Pointing to Algeria’s nascent manufacturing sector, she says that although some countries in the region will develop a niche in catering to labour-intensive manufacturing activities, while others will specialise in more high-value-added operations, all efforts to diversify will ultimately boost GDP growth, through offering the local labour market alternative forms of employment, while also enabling the region’s major oil exporters to diversify and prepare for a future without oil.
“Algeria has stepped up efforts to diversify its economy since the Arab Spring and the In Amenas oil plant terror attack,” says Ms Eid. “For example, its 2014 budget approved by the parliament passed a law to boost car production in collaboration with Renault. Over the next decade, Mena plans to invest about 7% of its GDP on infrastructure. This opportunity will be too good to miss [for investors].” n