Future of Saudi Arabia - GCF 2015 - keys to being more competitive in drive to diversify economy

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Future of Saudi Arabia - keynote at Global Competitiveness Forum (GCF 2015) organised by SAGIA.  Comments by Patrick Dixon, Chairman Global Change Ltd, following keynote at the Riyadh event.

With a young and rapidly growing population, a key government objective is to create several million new jobs over the next few years, for nationals rather than for migrant workers.  Indeed the future well-being of the nation may depend on being able to generate enough new jobs, particularly for those from 18-30 years old.  While national policies have been developed to encourage companies to employ local people, Saudi Arabia is also looking to stimulate growth of local business and encourage inward investment.

The good news is that there are many reasons to be confident about the ability of Saudi Arabia to generate several million new jobs over the next decade.

Need a world-class keynote speaker on competitiveness in the Middle East? Phone or e-mail Patrick Dixon now.

Here are some key factors which will impact Saudi Arabia's future:

RAPID CHANGES IN GLOBAL EVENTS

Our world is changing faster than you can hold a board meeting.  Just look at what happened in 2014 and early 2015 with Russia - Ukraine tensions and collapsing oil prices as just two examples. That means a dynamic approach to strategy, and agile leadership.

ENERGY EXPORTS WILL MAKE DIVERSIFICATION HARDER

In 2003, the UN published important research showing the impact on economic growth of mineral resources.  The global study showed a clear pattern: nations with huge mineral / oil / gas resources tended to have higher exchange rates as a result (as other nations buy currency to pay for them). This means that every other export becomes more expensive, so national businesses have to work a little harder than they would need to if the nation had less resources to export.

EXPECT A LARGE PRICE CORRECTION IN ENERGY PRICES

Here is a relatively simple way to make sense of complicated oil price changes.  Following 9/11, the US government made a huge commitment to become self-sufficient in oil and gas as soon as possible.  This helped create a climate for innovation and investment that in turn led to the astonishing growth of shale oil and gas production.

In just 5 years, global gas reserves leapt from 60 years at current rates of consumption, to 200 years - all because of shale innovation in just one nation. If the trends of 2010-2013 continued to 2020, the US would have overtaken Saudi Arabia as the second largest oil producer in the world after Russia. The result was a glut in US gas prices because there was no infrastructure in place to export such volumes.  That in turn led to bankruptcy of over 60 coal fired power stations in America, and a global fall in coal prices.  And partly as a result of that, nations like Vietnam have enjoyed a boom in lower cost power generation from coal.  So we see that all global energy prices connect together.

Something had to give.  If the whole world continued to produce as much oil as in the past, then clearly prices were going to fall as a result of shale output, because global demand for oil was relatively constant.  And that is a major reason why oil prices have fallen recently from above $100 a barrel to below $60.

But lower oil prices mean lower costs for manufacturing and transport, and that means higher global economic growth, which in turn will stimulate oil consumption at just the time when some shale producers have been forced out of business, and other energy companies have scaled back investment in production.

So it is clear that there is a significant risk that oil prices will not only recover, but will shoot far beyond recent highs, which in turn will add inflationary pressures, dampen down global growth, and could even precipitate a future crisis.

In the meantime, low energy prices will be particularly painful for Russia, on top of American and EU sanctions, and will also erode reserves of every other major oil producing nation.

DEMOGRAPHICS WILL DRIVE THE FUTURE

Show me the demographics of any nation or region and I will tell you its future.  85% of the entire world's population will be found in emerging markets within 10 years.  Take India for example, where half the population are under 25 years old, compared to Italy, with a rapidly ageing population where there will be over 1 million people older than 90 by 2026.

A key competitive advantage of Saudi Arabia is a young and well educated population. Over 200,000 students are studying in Universities abroad, mostly supported by government scholarships, investing in a new generation of highly skilled and globally aware leaders for tomorrow.

CHINA WILL PRICE ITSELF OUT OF MARKET FOR MANY GOODS

Another key competitive advantage for Saudi Arabia and many other Arab nations will be low cost of labour.  In China, wage inflation for many industries has been running at more than 10% a year, while salaries of experienced Chinese executives have sometimes doubled in a single year.  Many manufacturers outsourced jobs from America and Europe to China, because labor costs were around half that back home.  

But we need to add the costs of managing long supply chains, costs for misunderstandings and miscommunications, costs for local labour regulations, which all narrow the gap.  When you then factor in year-by-year inflation of around 10% you can see the price advantage is rapidly disappearing.  I was at a conference recently in Slovenia where Human Resource experts calculated that Slovenia manufacturing costs were now less than China and Poland. If that is already the case today, what about in two to three year's time?  Even more so if the Remnimbi rises in value against the Euro or US$.

GLOBAL SUPPLY CHAINS ARE BECOMING SHORTER

Many of the world's largest manufacturers are moving rapidly to shorten and simplify supply chains, to reduce costs and risks following a large number of crises, interruptions and unforeseen events.  Saudi Arabia is so much nearer key markets such as Russia, EU, Turkey.  Nations with access to a large port have a competitive advantage over those that do not - a port can generate an additional 25% of international trade.  This is mainly because road transport is so costly.  You can often ship a container 6000kms by sea for the same price as 150kms by road.

TECHNOLOGY IS CREATING HUGE OPPORTUNITIES FOR ENTREPRENEURS

Infotech, nanotech, biotech - all kinds of new technologies and innovations are merging together in exciting ways to drive next-generation products.  Many of these technologies can be developed in small teams, small laboratories, small companies.  They are ideally suited to Saudi Arabian entrepreneurs: young men and women with vision and passion for invention, with specialist training and access to clusters of other experts in related fields.  Government has a key role in encouraging science parks, University collaborations, Free Trade Zones and so on.

Take innovations such as the Internet of Things, Big Data, Cloud Computing: these are all areas where two or three young people can set up a company rapidly, with little capital required, providing world-class services through Apps and other platforms.

See also: Video at Saudi Festival of Science and Creativity - part of government commitment to education and job creation.

Need a world-class keynote speaker on competitiveness in the Middle East? Phone or e-mail Patrick Dixon now.


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