The GCC can become the new “vanguard of the global economy” by strengthening + diversifying its supply chains

GCC countries could leverage the reconfiguration of global value chains — but they need to act fast: Global value chains (GVCs) across the globe are shifting away from being cost focused, and being reconfigured to be more resilient, agile, and sustainable. Consultancy firm Strategy&’s Reconfiguring Global Value Chains report (pdf) looks at how the GCC — made up of Qatar, Saudi Arabia, Bahrain, Oman, Kuwait and the UAE — can take advantage of this occurring shift and use it to boost their competitive “green advantage” and become a global GVCs hub, potentially generating an estimated USD 300 bn in foreign direct investment (FDI), creating 150k jobs, unlocking USD 25 bn in non-oil exports annually, and possibly offsetting 75 mn tons of CO2 emissions, according to the report.

But first, what are GVCs? A global value chain encompasses the different stages of the production processes across different locations and countries, according to the Organisation for Economic Development and Cooperation (OECD). Some 70% of global trade today involves GVCs, according to the OECD, as services, raw materials, and parts used to produce goods cross borders back and forth, and once put into a final product, is shipped to consumers all over the globe.

What’s changing about how GVCs work today? GVCs in the past have tended to focus on cost reduction — no matter how complex the supply chain could become to accommodate that — with “little end-to-end oversight or management,” the report says. The problem with this type of GVC is it’s prone to disruption from exogenous factors such as pandemics, supply constraints, energy price volatility, and logistics bottlenecks, according to the report.

The last few years have shown that the cost-focused GVC model is not sustainable: The covid-19 pandemic drastically impacted trade, and the Ever Given which blocked Egypt’s Suez Canal cost some USD 57 bn halt in trade, are prime examples of those disruptions. The shift has caused “companies to relocate key elements of their GVCs,” the report writes. This leaves the chance to attract these relocating companies up for grabs.

The GCC has it all — but the window “could be fleeting”: The GCC benefits from plenty of competitive advantages, including an abundant and cost-competitive supply of green energy, its geographic location, robust industrial and logistics infrastructure, greenfield megaprojects, talent, research and education, the report lists. But these all need to be leveraged quickly, because other countries are “competing vigorously” to attract relocating GVCs, the report states. If GCC governments and their stakeholders act collaboratively — and fast — they can position the GCC as the “vanguard of the new global economy.”

So what needs to be done? Start by improving “backward GVC participation.” GCC countries are strong on “forward GVC participation,” which involves exporting basic resource-based goods such as oil and basic chemicals, the report writes. Backward participation, on the other hand, involves importing raw materials to produce complex components or finished products such as semiconductors or electronics, it adds. Saudi Arabia’s current backward participation rate is just 4%, falling comparably low next to the top 15 exporting countries in the world. Improving its rate would “bring GVCs to the region and boost domestic productivity,” the report says.

GCC countries should focus on attracting downstream manufacturing “to develop high-value-added end products,” such as exporting hydrogen, the report says. Diversifying from oil and gas exports to green energy can also help GCC countries develop localized industries for competitive products like green steel, ammonia, glass manufacturing, according to Strategy&. By capitalizing on the GCC’s expected hydrogen production is predicted to attract USD 200 bn in FDI by 2030, with USD 45 bn potentially coming from ammonia consumption, and USD 155 bn from steel consumption.

More potentially attractive industries for GCC countries includesynthetic pesticides, steel automotive parts, cotton yarn, carbon fiber, alternative proteins, titanium aerostructures, graphene, polysilicon, recycled plastics and silicon wafers. All of these industries are energy-intensive — making the oil-rich GCC countries a suitable candidate — and have their raw materials readily available across the GCC, according to the report. Attracting companies to produce these products can create 150k jobs across the GCC and generate USD 300 bn in FDI, and unlock USD 25 bn in non-oil exports.

More public-private sector and government-to-government collaboration across the GCC is also more important: GCC countries need to enhance government-to-government collaborationby benefiting from each country’s competitive advantages, where one could supply the energy and another could supply labor, the report says. Cooperation with the private sector is also important in order to identify priority sectors and develop financial incentives — like grants and subsidies — to help them grow, the report adds.

GCC governments also need to create an agile and consistent regulatory framework that will facilitate business, drive growth and innovation, and reduce risk, the report says. Flexible regulation should also be implemented in priority industries and sectors in which GCC have competitive advantages.

Implementing a public-private supply chain control towercould also help generate accurate forecasts for critical products in the GCC, and measure the resiliency of product channels, the report says.

Building and training talents is also key: The report also highlights the importance of training and providing skilling and reskilling programs for workers in the priority export-focused sectors in which they wish to develop resilient GVCs. For example, oil and gas laborers could be upskilled and acquire knowledge in renewable energy and green hydrogen fields instead, the report adds.

The role of sovereign wealth funds is also vital for creating an attractive environment for resilient GVCs, by investing in companies and sectors that help complement the priority sectors identified by the government, the report explains.