An Israeli-Saudi ‘Silicon Wadi’ will benefit both countries

A valley at the site of Saudi Arabia's planned future city, NEOM. (Supplied)

Like every crisis, COVID-19 brings great opportunity. Unexploited potential persists for Israeli tech companies to enter new markets in the six Gulf Cooperation Council (GCC) countries, implement state of the art technologies, and encourage the development of local tech initiatives in the region. I forecast a future that entails the creation of a joint high-tech ecosystem among GCC countries, known as the “Silicon Wadi.” Now, more than ever, it is in the best interest of Israel and the GCC to increase business cooperation.

While experts are still trying to predict the ongoing effects of COVID-19, it appears that the high-tech industry in Israel may take a negative hit from a decrease in the inflow of investments from the US, the European Union, and China. International investments play a crucial role for companies, especially those trying to get back on track in our current climate. Considering the less-than-favorable situation of the US market and US pressure to prevent Chinese influence in the region, searching for alternatives in other markets makes sense for Israeli high-tech companies, while the GCC is looking for high-quality investment opportunities.

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The Goods

The Israeli high-tech industry has much to offer several different fields: cybersecurity, agritech, fintech, digital health, water-tech, food-tech IOT, and cloud related technologies.
The year before the COVID-19 crisis undoubtedly set a new threshold for world market growth. Israel recorded a year with the largest number of exits – 138 in total, of which 122 were mergers and acquisitions and the rest were Initial Public Offerings, or IPOs. Total transactions in Israel for 2019 amounted to $21.7 billion.

An even more encouraging figure was the growth of those companies prior to sale, which is indicative of business growth alongside technological growth. It was also a great year for investors in Israeli high-tech companies. Some of them made three times the amount of their initial investments.

A quick glance at the source of money flowing into Israel’s high-tech scene in 2019 shows that 80 percent came from the US. The remaining 20 percent was split between Germany, Canada, and China. Not even a single percent of the funds was invested directly from the GCC countries. Moreover, almost no top-tier Israeli high-tech company is doing any significant business with any of the GCC countries – even though they are the most convenient choices in terms of physical proximity, market size, and growth potential.

Riyadh, the capital of Saudi Arabia. (Supplied)

Riyadh, the capital of Saudi Arabia. (Supplied)

The Market

For the city of Riyadh, 2019 was also a good year. Saudi Arabia’s Vision 2030 economic reform plan is starting to become a reality. The region is changing, and new opportunities, new trends, and hyper development are sweeping Saudi Arabia and Dubai.

The reforms aim to strengthen the Saudi Arabian economy by diversifying the Kingdom’s business portfolio to include industries other than oil and gas. To do so, and to be able to receive the necessary support, the Kingdom must reorganize and revalue many aspects of day-to-day life.

This trend can create mega-scale opportunities in the region. One example is the NEOM vision, a $500 billion plan to build “the city of the future” within Saudi Arabia that will act as a living hub for entrepreneurship and innovation. The city will be built from the ground up with innovative thinking and a combination of breakthrough technologies in the fields of environment and sustainability, energy, water, transportation, culture and more. This city will be sustainable and operated independently, apart from a governmental framework, with its own tax and labour laws and autonomous judicial system.

The Challenge

One potential reason for the lack of investment in Israel by Arab countries and the lack of Israeli high-tech penetration to the GCC is the barrier of the Arab-Israeli conflict. But this may be too simple of an explanation. During the last 20 years, Israel and the GCC countries have been conducting unofficial business together – and not just security-related business, but projects involving irrigation, infrastructure, plastic and water planning. Now, geopolitical changes in the Middle East, mainly through warming of the Gulf States’ relations with Israel, are creating a bridge for new business ties to emerge.

Another explanation for limited GCC investment in Israel is the “capital preservation” concept that characterizes the investments made by the Arab world. Apart from Saudi Arabia’s investments in SoftBank Vision Fund, Saudi Arabia placed third after the UAE ($426 million) and Egypt ($95 million) with respect to total funds raised in the Arab world in 2019. Next in line are Jordan ($41 million), Lebanon ($29 million), Kuwait ($21 million), Bahrain ($6 million), and Oman ($6 million). Investments in venture capital are relatively minor compared to the GDP of the countries in this region.

However, there is a clear trend of growth in investors from the GCC looking for tech investments. One example can be seen in the actions of Saudi Arabia’s Public Investment Fund (PIF), an organization with a very strong record of implementing investment projects in the kingdom. A $40 billion cash injection provided by the Saudi Arabian Monetary Agency in April 2020 will contribute to strengthening the fund’s plan to continue to seize investment opportunities domestically and internationally.

The number of technology users in the Arab world is growing dramatically. The impact of connectivity to the Internet cannot be ignored, especially within emerging markets like the GCC. Almost 70 percent of Internet users are from emerging markets, compared to only 30 percent 10 years ago. Like any technological phenomenon, the Internet, with its scale and speed, presents global opportunities that consumers from the GCC have been quick and enthusiastic to adopt.

The Arab world has the highest on-line video consumption per capita in the world on YouTube and Facebook. This is more than twice the world’s average. Smartphone penetration is also one of the highest in the world, and adoption of social media platforms, including Twitter, Snapchat, Facebook, and Instagram, is sky-high. With 70 percent of the population under the age of 30, the GCC is hyper-social and -digital.

Israeli entrepreneurs tend to ignore the GCC region when considering the potential markets for their companies. The fact is that every market has its unique language and customs, and by bridging the cultural gap with the proper set of tools to hedge the risk, this trade can prove highly lucrative.

A man walks past the Kingdom Centre Tower in Riyadh, Saudi Arabia. (File photo: Reuters)

A man walks past the Kingdom Centre Tower in Riyadh, Saudi Arabia. (File photo: Reuters)

The Future

At this point, it is difficult to predict the long-term economic fallout from the corona pandemic. In previous crises, the amount of venture capital funding has followed the Nasdaq recap index with a slight delay. There may be changes in how we close deals and buy products even within those sectors, but seeking positive cooperation in the region will be beneficial for all.

The vision that I forecast for our region involves the creation of high-tech ecosystems all around the GCC, creating the new “Silicon Wadi.” In 2015, the median age of Saudi Arabia's population was 30 years, while in the UAE it is 34.5. Both are indicative of countries with a young generation as a majority. This will inevitably play a crucial role down the road. For the region to thrive and progress with hope, a healthy economy, and a solid foundation, new opportunities must be created. These prevailing demographic and economic trends have been important drivers in the Vision 2030 strategy to diversify and strengthen the Saudi economy.

The strategy entails an ambitious program of innovation that will see the Kingdom invest $1.6 billion in research and development over the next two years alone. Within that sum is a $75 million allocation to support international partnerships, a mechanism which is projected to have a transformative effect on higher education in the country. Reports indicate that the Saudi Research and Development Office has identified six priority fields for international research collaboration: water, energy, information technology, petrochemicals, life sciences and health, and the environment.

Israel understands that the innovation, creativity, and stable economics of a high-tech private industry flourish in ecosystems that combine many companies, enabling them to interact and meet unofficially. Those ecosystems boost creativity, which is the foundation of this sector. The importance of “Silicon Wadi” was first recognized internationally by Wired magazine, which in 2000 ranked locations by the strength of cluster effects, giving the Israeli high-tech cluster the same rank as Boston, Helsinki, London, and Kista in Sweden, second only to Silicon Valley. Those are the most fertile grounds for creating Israeli entrepreneurs.

Those small ecosystems can be found all around Israel (Herzliya Pituach, Ramat Hachayal, Raanana, Nes Ziona, Yokneam, etc.). Adopting this model to the demographics of the GCC and to MBS’ Vision 2030 can provide the turning point for our region.

It’s the right time to do business in our neighbourhood. Israeli companies should explore the GCC market potential and GCC investors should invest in Israeli technologies. It will not be easy at first, but once we have favourable examples of investment and partnerships with local resellers in the GCC, this cooperation will be considered the usual course of business.

A satellite photograph showing the proposed location of Neom next to the Red Sea. (Supplied)

A satellite photograph showing the proposed location of Neom next to the Red Sea. (Supplied)

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Nave Shachar is the founder and managing partner of Ummah Capital Partners, an investment firm focusing on cooperation between the GCC and Israel.

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Last Update: Wednesday, 12 August 2020 KSA 13:56 - GMT 10:56
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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