By Tarek Sultan
Vice-Chairman of the Board, Agility
- Investment is pouring into Gulf startups from domestic and foreign sources.
- Start-up friendly policies, access to funding and the multiplier effect are just a few of the reasons for this growth in investment.
- Powerful local and global economic currents are benefitting the Gulf states.
This is a golden age for startups and entrepreneurs in the six countries of the Gulf Cooperation Council (GCC). Geopolitics, technology, climate urgency and daring national agendas across the region have combined to create what might be the most favourable conditions that small businesses anywhere have ever enjoyed.
Private-sector expansion is the key to national ambitions in all six countries. Increasingly, Gulf leaders will be looking to small business and entrepreneurs as engines of job creation and innovation.
The time is right. The ecosystems that Gulf countries established to nurture, fund and scale digital startups are maturing. Gulf funders — from sovereign wealth funds to venture capitalists to family offices — are looking to write checks to entrepreneurs closer to home. Regulatory fine-tuning is creating new openings for smaller companies that have struggled to compete. Massive infrastructure, energy and technology projects are having a spinoff effect for local businesses and specialized service providers. Finally, powerful currents in Gulf trade, foreign investment, research and e-commerce are all working in favour of SMEs.
Five reasons the time is now for startups and small businesses in the Gulf
1. Funding
Simply put, there’s more money from local and international sources looking to invest in young, innovative Gulf companies.
The Gulf’s sovereign wealth funds have more than $4 trillion in assets under management, a record. They account for more than 40% of global SWF wealth, and their investments comprised 40% of the global sovereign investment total through the first nine months of 2024. Increasingly, Gulf fund managers are looking to invest more at home so that they can drive private-sector growth at the heart of the region’s national strategies.
Saudi Arabia’s Public Investment Fund (PIF) is shifting the balance of its portfolio to focus less on international holdings and more on investment in new industries and projects in the Kingdom. PIF Governor Yasir Al-Rumayyan said in October that the fund will trim its global holdings to 18% of its portfolio, down from 30% in 2020.
In other cases, Gulf sovereign funds are putting money into young companies with innovative ideas that can aid home-country economic diversification. Abu Dhabi’s Mubadala recently invested in Odoo, a Belgian company that offers single-platform software for small and medium-sized companies.
Venture capital investment in the GCC quadrupled from 2017 to 2022 and continues to outpace growth in most other geographies, increasing at a 24% compound annual growth rate. Investment is pouring into Gulf startups in AI, specialized online marketplaces, climate tech, delivery apps, fintech, edtech and investment platforms.
At the same time, overseas funds such as US-based ScienceWerx are putting down new roots in Saudi Arabia and neighboring countries so they can be first movers in AI, biotech, healthtech and other emerging fields. Similarly, Brookfield Asset Management says it is raising at least $2 billion for a new Middle East-focused private equity fund with PIF and other partners.
2. Multiplier effects
The vast majority of small businesses in the Gulf aren’t the kind to attract direct investment from sovereign funds and venture capitalists. But most can expect to be lifted by the “agglomeration” or multiplier effect that flows from the staggering amount of investment and spending across the region, particularly in mega-projects, logistics infrastructure, AI, clean energy and climate adaptation.
In the US, where most of the research on multiplier effects has been done, there is a clear correlation between investment and increased demand for local goods and services; increased productivity; and job creation. The addition of one highly skilled job in an urban area creates 2.5 jobs in other sectors dominated by smaller businesses: construction, food service and other localized roles.
3. Regulatory incentives
Gulf governments are using their policy levers to create new jobs, expand private-sector growth and boost investment. Among all the carrots and sticks being deployed by policymakers are loads of advantages and opportunities that benefit smaller businesses. Some examples:
— In the UAE, where there are nearly 50 economic free zones, operators are competing to create the most business-friendly conditions. The Ajman NuVentures Centre Free Zone, the newest in the Emirates, promises to grant business licenses online in 15 minutes and issue two-year visas for investors within 48 hours.
— In Saudi Arabia, one of the main drivers of growth in the small business sector has been the Kingdom’s sweeping push to make it easier and more attractive for women to join the workforce. Since 2017, the Kingdom has lifted the ban on women driving, introduced anti-harassment laws, expanded female legal autonomy, introduced childcare and transportation subsidies for working women, mandated equal pay and prohibited termination of pregnant women. Today, women own 45% of small and medium-sized businesses in Saudi Arabia. The rate of female participation in the labour force roughly doubled to 35% between 2017 and 2023.
— To create jobs for their citizens, Gulf countries are requiring private companies to meet hiring quotas and maintain a certain percentage of nationals in their workforce. In the UAE, small businesses can qualify for grants, subsidies and reduced fees by taking part in labour force Emiratization.
— Saudi Arabia’s Regional Headquarters Programme, intended to get multinationals to establish their regional head offices in the Kingdom, will add to the multiplier effect by sending global companies in search of Saudi partners for everything from local recruiting to branding, advertising and marketing.
4. Promotion and skills development
Gulf countries are getting better at figuring out what startups and small businesses need. Where non-energy exports used to be negligible, they are now aggressively promoted by the Saudis, Emiratis and other GCC governments.
In Kuwait, which licensed 6,700 new companies through the first three quarters of 2024, the National Fund for SME Development recently launched its Mubader Plus programme, offering workshops, counseling and other assistance to budding entrepreneurs.
Dubai’s Expand North Star, with 70,000 in attendance in 2024, is the world’s largest tech startup and investment event.
5. Powerful tailwinds
Gulf leaders are embracing the post-World War II US innovation model, which uses government money to fund university research that can produce ideas later scaled and commercialized by the private sector. GCC countries are establishing or expanding universities and pushing them to innovate through partnerships with leading international research institutions or alongside Gulf counterparts through platforms such as the Qatar-led My Gulf University.
Trade trends are also working in favour of SMEs. The UK and six GCC countries are nearing completion of a new free trade agreement valued at $73 billion annually. A new FTA with the UK is likely to accelerate economic integration among the six countries, as will Gulf e-commerce, which continues to outpace other regions in annual growth.
Not to be overlooked is the China factor. Chinese companies are looking to the Gulf as the place where they can diversify their manufacturing base, invest in renewable energy and hydrogen production and become EV market share leaders. Chinese investment in Gulf-based AI and tech development is making the GCC a hub for digital transformation and commerce.
For entrepreneurs, startups and small business in the GCC, it’s never been a better time.
This blog was originally published by the World Economic Forum.
By Agility Vice Chairman Tarek Sultan
As I head to Saudi’s FII conference, known as “Davos in the Desert” this week, I am reflecting on the pace of change I’ve personally witnessed in KSA.
Saudi Arabia’s progress in its journey to becoming a Tier 1 global logistics hub has been impressive. It’s clear the Kingdom is already ahead of many key targets and on course to meet many more, diversifying its economy and enhancing its global profile.
Agility has been investing in Saudi Arabia for 20 years. The scale, resources, resolve, and pace of reform we have seen in Saudi Arabia in recent years has been particularly exciting. In our view, Saudi Arabia is one of the most attractive markets for logistics investments in the world today.
Agility is investing in KSA around the following areas:
- Building essential infrastructure. We’re building a world-class logistics and distribution park near Jeddah. We’ve committed SAR 611 million ($163 million) to the 570,000 SQM project, an ultra-modern facility to go with the state-of-the-art Agility Logistics Parks already serving Saudi companies and multi-nationals in Riyadh and Dammam.
- Improving Air Travel. Our Menzies Aviation business is the world’s largest aviation services company. It has partnered with Saudi Logistics Services (SAL) to improve passenger services, cargo handling and warehousing, and airline hub management for Saudi-based airlines.
- Speeding the low-carbon transition. The Agility Logistics Park in Riyadh features the GCC’s first EDGE Advanced-certified warehouse (Excellence in Design for Greater Efficiencies), meaning it is zero-carbon ready and at least 40% more energy efficient than others in the market. Tristar also is building the Kingdom’s first LEED-certified green building for dangerous goods (DG), in Modon Dammam Second Industrial City.
- Investing in Saudi innovation. Through our venture capital arm, Agility Ventures, we have invested in Saudi Arabia’s entrepreneurs and digital innovators, such as e-commerce enablement innovator Zid and digital road freight platform Humoola. We are also helping bring transformational global health technologies to the Kingdom, through partnerships with companies like AiZTech Labs, which has developed breakthrough medical testing using selfies of the eyes taken with mobile phones and Bexa, a company pioneering innovative breast cancer screening technologies.
- Powering e-commerce. Our Shipa group of companies include Shipa Delivery, one of the Kingdom’s most advanced last-mile delivery providers, and Shipa E-Commerce, a leader in cross-border fulfillment. Shipa provides both domestic parcel delivery and cross-border shipping to and from the GCC and Saudi Arabia.
- Enhancing energy-sector efficiency and safety. Agility affiliate Tristar Group works with Aramco, SABIC, and others in the energy sector to modernize equipment, vehicles and storage facilities used in the handling of chemicals, cryogenic gases and hazardous goods — essential industrial feedstocks.
- Strengthening Saudi companies. United Stars, Tristar’s Saudi JV, earned the highest score among multi-nationals in Aramco’s In Kingdom Total Value Add (iktva) program. The program’s goal is to build a world-class supply chain while cultivating local business and retaining at least 70% of all procurement spend within the Kingdom. United Stars focuses on recruiting, coaching and developing strong Saudi teams.
When it comes to Saudi Arabia’s growth potential, Agility is an investor, partner, and supporter.
Anyone who has shipped internationally in the past knows the customs clearance process can be time-consuming and complicated.
This is even true for the customs clearance authorities, who have to deal with outdated paper-based customs procedures. The lack of efficiency and technology in customs clearance leads to several hindrances, from shipping delays and increased costs.
It’s time to modernize the customs clearance process through innovations like digitization and single-window software solutions. Adopted into the customs process, these solutions can revolutionize international shipping and global trade.
What are the benefits of customs automation?
Customs digitization or automation transforms manual, paper-based customs clearance procedures into automated and electronic systems. It makes use of different platforms, the most prominent of which are:
- Electronic Data Interchange (EDI) – enables the electronic exchange of data and documents between traders and customs authorities.
- Automated Customs Declarations Processing – streamlines the customs declaration process by automating valuation, origin determination, duty calculation, and tariff classification.
- Risk Management Systems – assesses and manages risks involved in international trade.
- Single Window Systems – centralizes platforms for submitting and processing documents and information.
- Customs Management Information Systems (CMIS) – automates customs management, revenue collection, intelligence gathering, reporting, risk assessment, and performance monitoring.
These systems allow for electronically processing, managing, and analyzing shipment data. As a result, they help streamline the entire process, making it faster and quicker to transport goods across international borders.
Customs digitization involves the use of modern advanced technologies, including artificial intelligence, cloud computing, and data analytics, among others, that allow for the following functions:
- Electronic data submissions
- Data validation
- Risk assessment
- Customs declaration processing
- Trade facilitation and clearance
- Integration with other trade-related systems
- Data analysis and reporting
- Security and compliance
At the core of customs digitization is a single-window software solution, which is a centralized platform for all trade-related documents and information. This solution creates a single touchpoint for customs administration, eliminating multiple interactions and paperwork.
Customs digitization yields a range of benefits for the customs authorities, importing and exporting countries, carriers, and shippers worldwide, such as:
- Modernizing customs operations
- Improving transparency
- Reducing costs
- Promoting efficient trade facilitation
- Improve trade compliance and risk management
A country’s level of import and customs automation will speak volumes about its economic competitiveness, governance, and overall trade environment. It also allows them to facilitate international commerce better and develop good trade relationships with other nations.
As such, countries around the world should embrace automation in their customs clearance processes to solidify their position in the global shipping market.
What does the single window mean for businesses?
The single window aims to establish a single, centralized platform where all customs clearance processes will be conducted. It will become a business’s single point of entry where it will submit all trade-related documents and information required to ship its goods to another country.
This system will follow a streamlined process that begins with the business registering on the platform and preparing its customs documents. The business then submits those documents in the single-window platform, which will be verified and processed by the relevant customs authority. During processing, the platform will also allow the parties to collaborate and share information, as well as provide status updates and notifications on the shipment’s progress.
The customs clearance process also takes place within the single window platform, allowing authorities and relevant agencies to work together to review documents, assess compliance, profile risks, and determine the applicable fees, duties, and taxes.
The single-window concept of customs digitization offers a range of advantages for businesses, whether they act as importers, exporters, or other parties in the international trade process. Among these benefits include:
- Simplified documentation submission and processing
- Enhanced clearance efficiency and speed
- Facilitated planning and improved predictability in their trade operations
- Reduced costs associated with paperwork, manual processes, and customs clearance delays
- Assured compliance and accuracy of data, documents, and information
- Increased transparency in the trade process
How to accelerate digital trade in developing countries?
Accelerating the process of customs clearance and international trade creates a massive impact on a country’s economic growth and trade competitiveness.
To facilitate digital trade, a nation must enhance its digital infrastructure by investing in internet connectivity, broadband networks, and mobile coverage.
In line with this is the need to develop digital skills among its workforce, create regulatory frameworks for digital trade, enter into agreements with other countries, and improve the facilitation of its customs processes.
Endeavoring all these initial roadblocks will prove to be a lucrative venture for developing countries, allowing them to reap the benefits of an effective digital trade system, such as:
- Market access and global reach
- Economic growth and job creation
- Inclusive economic participation
- Access to capital
- Data-driven decision making
The WTO also has a role to play. Particularly, it can contribute by providing countries with a platform to develop rules that will govern digital trade.
The WTO can also make efforts to advance trade liberalization, foster interoperability, address data governance, facilitate collaboration with stakeholders, and promote digital trade inclusion.
What is the role of technology in enhancing international trade?
The international trade processes have, for too long, been relying on manual paper-based procedures that are proving to be inadequate and inefficient in today’s digital age. It’s time for the industry to utilize technological innovations to automate trade processes and reduce manual burdens.
Technology can enhance international trade efficiency by digitizing customs processes, logistics management, and supply chain tracking, among others, minimizing delays and reducing costly errors. This advancement helps make the industry more efficient, expands market access, promotes trade diversification, and contributes to economic growth.
The adoption of technology in international trade should also make way for facilitating the diffusion of knowledge and technologies, which will catapult a country’s integration into the global trading system.
Technology is a transformative force that is set to revolutionize international trade. It has a long journey to reshape traditional practices in the industry, but its adoption will pay off in dividends, expanding opportunities and driving economic development for countries worldwide.
Revolutionizing Trade with Customs Digitization and Single Window Software Solutions
Customs digitization and the implementation of single window software solutions have and are continuing to bring about advancements in emerging markets. They are revolutionizing the international trade process, enhancing transparency, efficiency, and competitiveness.
These solutions are helping emerging markets overcome barriers and streamline their customs procedures. They reduce paperwork, minimize bureaucratic hurdles, and speed up the clearance of goods. Businesses then enjoy faster and more predictable customs procedures, which benefits their supply chain management and financial stability.
Want to learn more about customs digitization and single-window software solutions?
Contact us today to speak to our experts.
The Suez Canal Economic Zone is a testament to Egypt’s efforts to become a key player in the global economy. It was created to serve as a hub for international commerce, innovation, and industrialization and has become attractive to both foreign and domestic investors. In turn, the Suez Canal Economic Zone has become Egypt’s catalyst for economic growth.
In this article, we uncover all the vital information about the Suez Canal and its economic zone and why it’s vital for the Egyptian economy and global commerce.
Building the Future: Agility’s $60M Logistics Hubs in Egypt’s SC Zone

Where is the Suez Canal and Why is It So Significant?
A man-made waterway, the Suez Canal is located in Egypt’s Isthmus of Suez. It separates the continent of Africa from the Sinai Peninsula and connects the Red Sea and the Mediterranean Sea. The Suez Canal is 120 miles (193 kilometers) long.
The location of the Suez Canal makes it very significant in international shipping. It’s positioned so strategically that it proves a shorter route for maritime trade between the continents of Asia, Europe, and Africa. Before the Suez Canal, shipping vessels would need to go around Africa’s Cape of Good Hope to reach their destination, which lengthens their journey by thousands of miles and several days.
The Suez Canal, however, made passage through the Mediterranean and the Red Sea faster and more efficient. The construction of the canal reduced travel time and distance, in effect revolutionizing global trade by facilitating the fast movement of goods and resources.
Today, the Suez Canal is a vital link to get goods around the world. About 10% of global maritime trade passes through it. This, in turn, has helped boost Egypt’s economic growth and global integration, opening up new markets for global trade.
The Suez Canal is especially important for the transport of goods from the energy sector. It serves as the main gateway for transporting oil and liquefied natural gas from the Middle East to other countries worldwide. It makes tanker trips shorter, which reduces the cost of transportation and, consequently, the prices of fuel and energy resources. Without the canal, it would be difficult to achieve a steady supply of oil and LNG around the globe.
Why is the Suez Canal Important to Egypt’s Economy?
The Suez Canal has been a critical development that helped drive Egypt’s economy forward. Aside from generating revenue, the canal also opened up employment opportunities for locals. Here are key points that make the Suez Canal highly vital to the Egyptian economy:
- Generates revenue – The Suez Canal helps Egypt earn revenue through tolls and transit fees collected from vessels that pass through the canal.
- Centerpiece of the economy – The canal is Egypt’s economic centerpiece, attracting investments to the country and leading to the development of services and industries. These include ports and logistics operations.
- Facilitating trade – The canal’s primary importance is its ability to facilitate international trade, making an efficient global trade route. It gives Egypt a geographical advantage, making it a key trade hub for shippers to reduce shipping costs and transit times.
- Employment opportunities – The opening of the canal brought about an influx of job opportunities for Egypt’s labor market. It provided jobs to thousands of skilled workers to assist in the canal’s maintenance, operation, and administration. Several industries associated with the Suez Canal also opened up doors to employment, including logistics, manufacturing, shipping, and tourism.
- Economic diversification – The Suez Canal allows Egypt to diversify its economy by attracting businesses to invest in Suez Canal’s proximity. These investments come from various industries, from manufacturing and agriculture to technology and energy.
- Infrastructure development – In the vicinity of the Suez Canal grew a range of infrastructure, including logistics centers, industrial parks, and special economic zones. These make Egypt’s economy more competitive and attractive to businesses worldwide.
- Regional development – The Suez Canal benefits the Egypt economic zone, and its impact spills over to its surrounding regions. It opened doors for development in neighboring areas due to businesses investing and developing infrastructure within close proximity to the canal.
What is the Suez Canal Economic Zone?
The Suez Canal Economic Zone is the Egyptian government’s development project that aims to improve the economic potential of the Suez Canal. It was established to diversify the canal’s ecosystem in order to attract more investment, innovation, and industrialization.
The Suez Canal Economic Zone is strategically located on both sides of the Suez Canal, stretching from the Mediterranean Sea to the Red Sea. This makes it positioned optimally for global trade between Asia, Africa, and Europe. The Suez Canal Economic Zone provides access to international shipping routes.
In line with its objective to foster economic growth, the Suez Canal Economic Zone also contributes to creating job opportunities and promoting sustainable development. It’s increasing its efforts to contribute to environmental conservation, with most facilities adopting sustainable practices and green technologies.
The Suez Canal Economic Zone uses a multi-sectoral approach, putting its focus on industries like agriculture, energy, logistics, manufacturing, technology, and tourism. Its vicinity is filled with ports, logistics centers, specialized economic zones, free zones, and industrial parks, all helping it facilitate international trade and industrial activity.
It encourages foreign businesses to establish operations in Egypt using the canal’s strategic location for international shipping as leverage. In support of this, the Egyptian government has also implemented reforms and objectives to further the Suez Canal Economic Zone’s mission. Among these include enhanced infrastructure development, simplified procedures, regulations, and certain tax exemptions.
Supporting the Development of the Suez Canal Economic Zone
The Suez Canal Economic Zone is a vital development for international trade. To support its growth, the Egyptian government, international organizations, and financial institutions should endeavor to provide support in the following areas:
- Promoting investment and infrastructure – Promote investment opportunities in the Suez Canal Economic Zone through trade missions and investment forums, among others.
- Policy and regulatory support – More favorable policies from the Egyptian government to create a business-friendly environment.
- Develop skills and training – Invest in human capital development through programs to build technical skills and promote knowledge transfer.
- Research and development – Implementing research and development activities within the zone, such as innovation hubs, technology transfer programs, etc.
- Collaboration and partnerships – Partner with global governments, businesses, and organizations to share resources, expertise, and experience.
To support the development of the Suez Canal Economic Zone, governments and global businesses must work together to unlock the full potential of the development and contribute to Egypt’s economic growth and international shipping.
Want to know how Agility is helping modernize the Suez Canal Economic Zone? Click here.
Logistics industry executives are bullish about the African Continental Free Trade Agreement but concerns are rife around its implementation. Geoffrey White, CEO of Agility Africa joins CNBC Africa to discuss what the core value chains need to speed up the implementation of the trade pact.
In this episode I am joined by Ronald Philip, Senior Director Strategic Planning at Agility. Ronald shares a great insight to the data center market in the Middle East and Africa region, as well as providing an update on Agility’s recent data center campus site announcements.
First, we discuss Ronald’s career and how he made the progression to working in the data center sector.
We then discuss the recent announcement by Agility to develop data center campus sites in the Middle East & Africa regions. Ronald outlines the locations of the sites, why these locations were identified, the strategy around the developments, and the types of customers attracted to these sites.
Finally, we discuss the Middle East & Africa regions: how they are developing as data center markets, and why connectivity is so important to the people living across the region.
This is a great insight to the rapidly changing markets of the Middle East & Africa.
Learn more about Data Center Campuses by Agility.
This blog was originally published by Inside Data Center Podcast.
By Tarek Sultan
Vice Chairman, Agility
There can’t be a time in human memory when travel, shipping, trade and commerce have been jolted as badly by severe weather and extreme climate events as in recent months.
In China this past summer, scorching heat forced power cuts and factory shutdowns. Apple, Foxconn, Toyota, Volkswagen, Tesla and others suspended operations, cancelled orders or took other emergency measures.
Low water on the Rhine River crippled German barge shipments as Europe experienced its worst drought in 500 years. In the United States, water levels fell so low along the Mississippi River and tributaries that farmers and others were left without routes to market for agricultural and industrial goods as barges were grounded, blocked and delayed. Dry weather and snarled transport are expected to push U.S. wheat exports to their lowest levels in 50 years.
Punishing climate-related events contributed to India’s decision to ban rice exports and caused the destruction of much of Spain’s olive crop. Historic floods left 7 million people homeless in Pakistan and displaced 1.4 million in Nigeria overnight.
“Climate change and the extreme weather it spawns are making it harder for tangled supply chains to sync up with a slowing global economy,” Bloomberg says.
At some point, post-COVID supply chains may come back into some sort of equilibrium, but don’t expect an end to ruinous climate events. This past summer was the second-warmest on record for the Northern Hemisphere. The world has not experienced a cooler-than-average year, compared with the 20th century average, since 1976.
Axios reports that a climate migration has begun. It says a number of manufacturers, hospitals, airlines and other businesses are looking to put critical infrastructure and operations on higher ground to avoid coastal flooding and storms.
“Companies large and small, some with longtime roots in their neighborhoods, are on the hunt for new real estate that is less prone to weather and climate extremes,” Axios says.
Skeptics, of course, are vocal as ever. Some warn that climate policy is the real threat. “Anyone who still thinks climate change is a greater threat than climate policy to financial stability deserves to be exiled to a peat-burning yurt in the wilderness,” one wrote recently.
Hardly. Instead, it would be foolish not to be giving serious scrutiny to your business and any vulnerability it might have to climate extremes. Some questions to ask as you do:
1. Do you need to “harden” buildings and infrastructure?
Do you need a new home for essential operations in order to safeguard against flooding, high winds, catastrophic storms, rising sea levels or drought-driven fires?
2. Are you too water-dependent?
Do you rely too much on hydropower or on inland river transportation? What’s your backup?
3. Are extreme high temperatures putting employees at risk?
How are you safeguarding them? What about your vehicles, equipment, raw materials and finished products?
4. How well do you truly understand your supply chain?
Have you mapped your T1, T2 and T3 suppliers? Do you know where they get their inputs? How vulnerable are your sourcing and transport? Do you have built-in redundancy?
5. Do you have a handle on carbon taxes?
Do you know where you might face the prospect of higher taxes simply by moving the same goods across the same borders? Or where carbon taxes could come into play when you are sourcing from and selling into new markets?
6. What if you have to move?
Can you afford to shift locations of key operations? Do you have a new location in mind? Can you find the right employees there? What kind of reputational damage would you face if you left or shrunk your footprint in a community where you have roots?
7. What’s your plan if suppliers or carriers negate agreements through force majeure?
Finally, are you committed to change? Are you all-in on the battle to reduce emissions and work toward a safer, cleaner, greener world?
WTO chief Ngozi Okonjo-Iweala says we’ve entered an era of “re-globalization.” By that, she means companies are de-concentrating production to guard against the supply chain turmoil caused by the COVID pandemic and the war in Ukraine.
Businesses are choosing redundancy and resiliency over low cost because they think supply chain disruption will be with us for a while and because they want to protect against future shocks. The result, Okonjo-Iweala says, is the remaking of companies’ global footprints and supply networks.
Re-globalization raises lots of big questions. Among them:
Who benefits?
Okonjo-Iweala says the trend could benefit developing countries. “It could bring them into the mainstream of globalization,” she says. “We see at the WTO a clear opportunity for decentralization to go to countries that normally don’t benefit from the global supply chain and could be brought in.”
To date, companies uprooting from China, Vietnam and other Asian manufacturing hubs seem to be opting for established regional production hubs and domestic reshoring rather than setting up shop in markets they see as riskier or untested. India, Turkey, Israel and Mexico, for example, have positioned themselves as alternative production centers for home goods and furniture, luring Overstock, La-Z-Boy and others looking to build new supply lines after battling endless delays out of Asian ports.
Manufacturing decentralization and “future-proofing” are causing pains of their own. Often, the issue is less about final assembly and proximity to markets than ready access to raw materials and proximity to suppliers. High-tech companies have invested in new production facilities in India only to encounter turbulence there: Foxconn and Wistron have faced labor unrest; Apple has run up against logistics problems and unfriendly export policies.
There’s a clear gap between what CEOs want to do and what they will do. A survey by the consulting firm Kearney found 70% of American manufacturing CEOs were considering or expect to move production to Mexico – but only 17% had done so.
Who gets hurt?
In 2019, China accounted for nearly 29% of global manufacturing output. Efforts by businesses to spread and decentralize their production are almost certain to come at China’s expense and potentially hurt other Southeast Asian manufacturing hubs such as Vietnam, Thailand, Indonesia and Malaysia.
Russia’s invasion of Ukraine makes losers of both countries. Global buyers of Russian grains, fertilizer and minerals have been sent scrambling for new suppliers. Many may make their new arrangements permanent in light of the huge array of international sanctions now aimed at Russia. Similarly, customers that bought Ukrainian agricultural goods and auto parts also have seen supplies dry up and might be wary of relying on Ukraine in the future.
Inflationary pressures arising from pandemic chaos and the Ukraine conflict have rippled to unexpected places. One example: Indonesia, supplier of 60% of the world’s palm oil, cut off all exports in late April. It said Indonesians could no longer afford cooking oil because of a surge in global demand for edible oils caused by the loss of Ukrainian sunflower oil shipments.
Is the world shrinking?
It seems that way to many.
In his annual shareholder letter, BlackRock chief Larry Fink recently warned: “(T)he Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades. We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward.”
Adam Posen, head of the Peterson Institute for International Economics, predicts that the world economy will split into blocs, “each attempting to insulate itself from and then diminish the influence of the other.” He predicts that “with less economic interconnectedness, the world will see lower trend growth and less innovation.”
Friction between China and its U.S. and European trading partners suggests that rival blocs are already emerging. U.S. Treasury Secretary Janet Yellen recently spoke of the need for “friend-shoring” — production relocations to countries “we know we can count on.” She warned against allowing countries to gain leverage in key raw materials, technologies and other products that would allow them to disrupt the U.S. economy.
Appliance maker Whirlpool is one company that says it is preparing itself for a “less global” world. Whirlpool is reviewing its businesses in Europe, the Middle East and Africa, and reassessing its mix of products and brands. CEO Marc Bitzer says the company sees less advantage in global scale and more in building its strength in individual countries and regions.
Does re-globalization hurt the global economy?
Not necessarily. Supply chains are always in flux, always evolving. And that’s healthy. Putting aside the pandemic and Ukraine conflict, there are profound structural changes taking place today and many of them could help bring about a cleaner, fairer, more prosperous world.
BlackRock sees “permanent transformations unlocking exponential growth opportunities.” One is the increasing spending power of millennials – particularly those in emerging markets. “Millennials have entered their peak spending years. Emerging market consumers and millennials are driving more than 50% of global spending,” says BlackRock’s Alex Eldemir.
McKinsey describes it as the changing geography of demand. The rising middle class in developing countries is accounting for more and more consumption. McKinsey says emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025; developing countries will account for more than half of global consumption by 2030, signaling their growing role in the flow of goods, services, finance, people and data.
Keep in mind that the demand shift, triggered three decades ago by China and its Southeast Asian neighbors, has barely begun in India, Africa and the Middle East, all of which will be dominated by youthful populations hungry for jobs that offer higher living standards, connectedness, and upward mobility.
At the same time, BlackRock sees regulation, technology and consumer demand driving a powerful “industrial renaissance” that is just beginning. In the supply chain, that involves new digital platforms, AI, blockchain, IoT, manufacturing automation, and 3D printing, all of which are radically lowering the cost of logistics and production.
Even more broadly, though, climate awareness and geopolitical friction are driving energy and materials revolutions that will change every facet of our lives, from how we travel and eat, to where we live and what we wear.
Re-globalization will be what we make of it.