BrazilDriving FDI into the Middle East's industrial sector: A 5-step roadmap
Foreign direct investments (FDI) are a crucial source of growth and investments for the industrial sector, as well as a means to continue the path towards economic diversification. Roland Berger leaders Santiago Castillo and Arvind CJ outline a 5-step approach how Middle East countries can strengthen the flow of investments into the industrial sector.
1) Set the foundation
Align ambition with national strategy, set goals, and baseline the current activities along each industrial value chain.
The first step of the journey is to set a target. In many countries, differing strategies exist from various arms of the government, ministries, NGOs, or industry associations. These strategies may only sometimes be aligned with each other or sometimes even contradict each other.
It is essential to set clear quantitative, realistic, and time-bound targets, ideally from a single entity made solely accountable by the highest entity in a country for the topic at hand.
In the GCC region, the UAE and Saudi Arabia (KSA) have already defined ambitious targets for increasing industrial GDP (>100% growth by 2030/31) and reducing dependence on the oil industry.
More often than not, there is more than one stakeholder accountable for attracting industrial investments. In this case, clear alignments within the government are necessary, for example, by creating inter-entity task forces with the mandate to decide on the matter. The typical approach for governance of industrial investments is to entrust the matter to the Ministry of Industry, the official Investment Promotion Agency, or a similar entity.
Once clear targets are defined, one can proceed with the next step, identifying one’s competitive advantages and disadvantages.
2) Competitive advantages
Gain insight into competitive advantages and disadvantages.
Every country is different in its endowed natural and human resources. When building an industrial economy, it is prudent to clarify where one's inherent competitive advantages and disadvantages lie. Trying to force, for example, a labor-intensive manufacturing operation such as wire harnesses into a country with inherently high wages would be inefficient.
For example, Middle East countries have advantages in utility cost ($0.04/kWh electricity cost for industrial customers in KSA compared to $0.1-0.3/kWh in the US and Europe). It is worth noting that although the Middle East countries may offer attractive business opportunities, they might not be as cost-effective as low-cost countries like Indonesia, Vietnam, and Thailand regarding wage rates.
The average annual salary in the low-cost countries ranges from $3,000 - $6,000, while in KSA and UAE, it ranges from $20,000 to $30,000.
Through our project experience at Roland Berger, we have found that looking at factor conditions only leads to a myopic analysis, as it leaves out many other vital parameters to potential investors. The ‘Diamond Model’ from Michael Porter can be used for a comprehensive competitiveness analysis.
Rather than solely focusing on cost aspects, the ‘Diamond Model’ addresses all relevant aspects of competitive advantages such as factor conditions (e.g., energy, talent, raw materials), related industries (necessary for building up an ecosystem), demand conditions (highlighted in our project work as probably the most important factor), strategy/innovation (e.g., entrepreneurship, science) and government (legal framework and financial power to support an industry).
For each factor, quantitative KPIs can be identified to compare a country with regional and global benchmarks.
By additionally weighing each factor with relevance to a particular industry or industrial activity, one can easily compare the attractiveness of one’s own country for a given industrial activity. This will aid in prioritizing potential investors and investment opportunities and identifying critical gaps that can be addressed with or without government intervention.
3) Investor landscape
Analyze global and local investor landscape for the targeted segments.
It is essential to understand the recent expansion activities of key global investors in the targeted value chain to create a shortlist of investors to focus on for localization. In addition, countries should identify local investors involved in the value chain and introduce them to global investors for potential partnerships.
The investor landscape worldwide differs greatly depending on the specific industry being focused on. For example, the automotive value chain is highly complex, with over 60 vehicle manufacturers and over 1,000 component manufacturers. Investments primarily focus on leading players with diversified geographical presence.
Sometimes, analysis of investor activities also showcases increasing activities by certain types of investors and regional concentration of investment activities.
Key considerations of different types of investors also need to be evaluated. When assessing automotive investors, we can differentiate investment considerations for established and new-age players. While established players look for strategic relevance and strong business, new-age players are more risk-tolerant and need equity to fund growth. They are often willing to expand into new markets to gain experience.
4) Outreach
Initiate investor outreach and localization discussions.
After analyzing the investor landscape, the next step to attract investments is launching a comprehensive outreach plan. The AIDA model, extensively used in sales and advertising, can also be applied for investor outreach:
- Attention: Initial outreach
Targeting of a holistic list of contacts to identify the most appropriate individual/team and generate leads through digital outreach (email/LinkedIn, other platforms) or in-person outreach (via events, conferences, and road shows). - Interest: One-on-one initial meeting
Aiming to discuss specific opportunities with identified leads and build an initial view of essential investor requirements for expansion. - Desire and Action
Aiming for highly targeted one-on-one meetings focused on understanding specific investor requirements, potential opportunities’ requirements, economics, and market. Investor outreach and localization discussions must be governed collaboratively.
Through benchmarking, we have seen that there is usually a three-party ecosystem responsible for investment governance: A government ministry (ministry of industry or trade); An investment attraction entity (generally reporting to that ministry); an industry association in the country (representing existing investors and their concerns).
5) Negotiations
Bridge the pain points and negotiate the investments.
For the final step action to take place, it is essential to address all the remaining pain points. These pain points can be divided into two categories: financial and non-financial. Non-financial pain points, such as efficient governance, education, and ecosystem, can be critical roadblocks requiring various governmental stakeholders’ cooperation to resolve.
In terms of financial pain points, several factors should be considered.
To negotiate the investments, countries incentivize opportunities based on their criticality and relevance for the local economy. The critical sectors can be defined based on the strategic priorities of respective governments and can be made eligible for various CapEx and OpEx incentives.
For example, India’s PLI (Production Linked Incentive) scheme defined battery-electric powertrain vehicles, electric vehicle components, etc., as the critical categories within the automotive sector and hence qualified to receive incentives equivalent to 8% to 18% of incremental sales.
Morocco’s PAI scheme defined vehicle production, stamping, wiring harness, seating, transmission, etc., as the critical sectors within the automotive sector qualified for 20% to 30% CapEx incentives and other OpEx support (training support, tax benefits, etc.)
It is imperative to carefully weigh the advantages and disadvantages of each opportunity and perform a neutral cost-benefit analysis on a case-by-case basis. All in all, one’s goal should be to establish a self-sustaining ecosystem with a “flywheel” effect. At this point, no more incentives are necessary, and investors are naturally lining up to invest in the country. Even though this is not an easy feat, many countries have achieved it (sometimes taking several decades).
Conclusion
Due to their high job and GDP multipliers, manufacturing, and industrial sectors are among the best industries to attract foreign capital.
In contrast to economies such as Hong Kong and Singapore, which can attract >30% FDI as a share of GDP, key markets in the Middle East have consistently seen a low share of around 1% - 5% of GDP over the last few years. Nonetheless, the region needs substantial investments to diversify away from oil and provide a future for a growing population.
The 5-step approach by Roland Berger can serve as a guiding principle for driving further investments into the industrial sector. Note that customization and case-by-case adjustments are needed to ensure the approach meets local market specifics. During the execution phase, there must be coordinated efforts among various stakeholders, including ministries and departments. Effective negotiation techniques should also be utilized.
