JEDDAH – While the GCC economy has largely rebounded from the global financial crisis, the manufacturing sector still hasn't regained its full momentum. Manufacturing suffered in the 2009 downturn, with revenue for listed GCC manufacturers excluding petrochemicals dropping by 11 percent, Cyrille Fabre and Dr. Yasar Jarar, partners in Bain & Company's Dubai office, said in a research work. But when manufacturing bounced back, gaining a healthy 15 percent in 2011, some key sectors were still underperforming. The reality is that metals, construction materials and machinery equipment have all failed to return to pre-recession levels. Throughout the GCC, manufacturing remains relatively under-developed, especially when compared with other nations. Manufacturing's share of the region's GDP is 10 percent contrasted with 30 percent in China, 27 percent in Korea, 27 percent in Singapore, 17 percent in Germany, 19 percent in Japan, and 16 percent and 15 percent in Egypt and India respectively. It's not only a relatively small sector, but it also remains heavily reliant on energy-intensive industries, which account for over two-thirds of the manufacturing GDP. State-owned enterprises generate the bulk of the manufacturing output. Given that starting point, the GCC governments' goal of doubling manufacturing's share of the GDP within ten years is extremely ambitious. To achieve this objective, manufacturing GDP would need to grow at over 13 percent annually for ten years, similar to China's extraordinary performance over the last decade. To understand what it will take to develop the region's manufacturing, we interviewed executives in the GCC and overseas as well as government agencies. We also analyzed market data and examined the performance of companies throughout the region. Among the conclusions: reaching full potential for manufacturing requires a new industrial model. Continuing to push the development of primary energy-intensive industries through large-scale investment by state-owned enterprises is necessary but won't be sufficient. GCC governments need to implement new policies and practices that facilitate private sector development of large secondary industries such as machinery and equipment or aluminum end products. In the new model, governments throughout the region will need to play a major role as incubators of transformation. They must support growth by leading highly capital- and energy-intensive projects that couldn't be accomplished otherwise, while at the same time enabling the private sector to capture opportunities in other sectors. To encourage this growth, governments need to ensure that private sector investors have access to six critical resources: energy, raw materials, capital, markets, technology and talent. Based on our research, we identified several key initiatives that could improve access to these resources and help turn the GCC into a manufacturing powerhouse. Access to energy. As production increases, demand for domestic energy could more than double by 2030. Meeting that demand without reducing hydrocarbon exports is a major challenge. To overcome it, GCC governments will need to not only increase and diversify the region's energy supply but also improve energy efficiency standards and reduce waste in domestic energy consumption. Access to raw materials for downstream industries. Only about 20 percent of the aluminum and 15 percent of petrochemicals produced in the region are converted locally into end products such as aluminum window frames or plastic bottles. The development of downstream industries in the region is limited by a narrow range of upstream products and by relatively uncompetitive prices offered to local downstream companies. For instance, because of their large scale, Chinese plastic companies can buy petrochemical material from GCC producers at a lower price than GCC companies. GCC governments will need to encourage upstream producers to provide more incentives, technical and marketing support to regional downstream players. Access to capital for private manufacturers. Despite the abundance of liquidity in the region, obtaining loans can prove challenging for industrial companies, especially in the Lower Gulf (UAE, Qatar, Kuwait, Oman). For example, the World Bank has given the GCC countries a low ranking for “ease of getting credit” – the GCC countries range between 48 and 100 out of 183 countries. To improve access to capital, Lower Gulf countries should develop specific industrial financial schemes similar to the Saudi Industrial Development Fund. Access to a regional market for GCC products. Replacing imports with locally produced goods is difficult because of the relatively small market size of individual GCC countries. For many products, investors need to target the broader regional market to justify setting up a factory. But trade barriers with Middle Eastern countries restrict exports. Our research determined two major actions that GCC governments can take to overcome this obstacle. First, implement policies that deliver the benefits of a more integrated market in the GCC and the broader region, similar to the Mercosur in South America. Second, develop local content programs that give some preference in public bids for “Made in GCC” products over imports. Access to technology and talent. Facilitating access to energy, raw materials, capital and markets will enhance opportunities for local manufacturers. However, local manufacturers also need the technology and capabilities to seize those opportunities. We identified three government initiatives that will boost the capabilities of local manufacturers. First, mandate that the procurement departments of major state-owned enterprises develop the capabilities of their local supplier base by providing technical support and long-term procurement contracts. Second, attract foreign manufacturers to fill gaps in the existing supplier base. Allowing 100 percent foreign ownership for these activities is a critical success factor. Third, beef up vocational training programs to help build a more skilled workforce for local companies. These five steps will help GCC countries build a manufacturing industry that is strong and globally competitive. It will take time and careful management, but the prize is within grasp: a more diverse, resilient economy that makes “Made in the GCC” a common sight on products across the region. — SG
