China’s BRI a catalyst for tech innovation in the Arab Gulf

The Belt and Road Initiative (BRI), China’s development strategy to enhance connectivity and cooperation among Eurasian countries, has generally been viewed as an initiative to build physical infrastructure such as railways, ports and highways.

Less attention is paid to what is becoming an increasingly key focus of the BRI for the Chinese government, and in turn for Chinese companies: digital infrastructure.

This focus on digital infrastructure – foundational technologies and services integral to enabling digital connectivity and communication – offers a unique opportunity for the Arab Gulf, a region that, like China, is actively seeking to expand its local technology resources. Properly addressed, the Gulf can leverage China’s BRI to accelerate the region’s emergence as a global technology center.

When China launched the BRI in 2013, physical infrastructure was center stage. Pakistan’s Gwadar port and Kazakhstan’s oil pipeline became the symbols of China’s plan to invest up to US$8 trillion over the next two decades with the goal of connecting China to the strategic markets to its west.

Digital infrastructure

Less attention has been paid to the importance of digital infrastructure in the BRI. In a BRI Action Plan released in March 2015, Beijing announced its vision to develop an “information Silk Road” to promote digital trade and information exchange among Belt and Road countries.

In response, state-owned telecom giants China Telecom, China Unicom and China Mobile embarked on massive digital infrastructure projects to construct cross-border optical cables and mobile networks in BRI countries.

Unlike physical infrastructure and natural resource projects which have traditionally been dominated by state-owned enterprises (SOEs), digital infrastructure invites the participation of China’s private sector. Major tech conglomerates like Baidu, Alibaba, Huawei and Tencent and industry leaders like Didi, Toutiao and Kuang-Chi have joined the fray.

Faced with an increasingly saturated market at home, China’s tech titans are turning to fast-growing markets with friendly business cultures along the Belt and Road – markets where tech sectors like e-commerce, mobile banking, digital health and smart city solutions are primed for massive growth.

For these Chinese tech companies, the Arab Gulf is highly attractive. With more than 170 million internet users, the Gulf’s digital markets are set to explode in the coming years. As an example of this, the e-commerce sector in the region is expected to grow annually by 20% through 2021.

Mobile payments are another major growth market, as the Middle East has the lowest percentage of adults with bank accounts in the world. In less than a decade, Chinese tech companies transformed their domestic market from a cash economy into the world’s largest e-commerce market, driven by mobile payments and digital banking; and they are primed to do the same outside the Mainland.

The Gulf is also a friendly region for Chinese companies and critical for China’s economy. As the largest consumer of the region’s energy resources, China has become a familiar and welcome partner. This warm reception contrasts sharply with the obstacles and suspicion Chinese companies increasingly face in the West.

Economic diversification

For Gulf leaders focused on economic diversification, China presents a model of a country that in less than a decade developed a flourishing digital economy – on its own terms. For Gulf leaders, China’s example of “cyber sovereignty” is especially appealing, as Gulf countries harbor similar sentiments over internet security and government control.

China and the Gulf also share similar concerns that are addressed by emerging technology, from water preservation to renewables and smart city solutions.

While the last few years have seen a rise in Chinese investment activity in the greater Middle East, in particular in the Israeli technology ecosystem, the last 24 months have brought the first wave of Chinese tech companies to the Gulf itself.

Huawei, for example, invested $30 million in a Bahrain headquarters and is developing telecommunications, cloud and smart city projects in Saudi Arabia. Alibaba, the content powerhouse, formed a joint venture in Dubai to offer regional cloud services. Didi, China’s rival to Uber, recently took an equity position in regional taxi and ride-sharing app Careem.

The Belt and Road Initiative provides a policy framework to encourage Chinese bureaucrats, businesses and financial institutions to build on this first wave of trade and investment in areas beyond logistics, infrastructure and natural resources.

To facilitate this, Gulf leaders should engage with China’s tech titans on a strategic level, identifying and funding projects that will bring Chinese knowhow and resources to the region.

With enormous financial capabilities and a clear vision of developing the area into a technology and services hub, the Gulf countries are well-positioned to partner with China’s most innovative companies to achieve these most ambitious goals.

Dorian Barak is a veteran fund manager and private equity investor focused on emerging markets. He is CEO of Indigo Global, which advises strategic investors and funds on technology investments and acquisitions.

Sam Chester is an investment professional with a decade of experience in China and the Middle East. He is a Vice President at Indigo Global.