Historic bonds between the Middle East and Asia are being revitalized in a torrent of trade and investment in energy, infrastructure, and manufacturing
The dusty, 1960s-era building in Delhi's business district is worlds away from the sleek, glass-and-steel towers of Dubai. The elevators, which stop only at even-numbered floors, are packed with sweaty bodies. Shoeshine men ply their trade on the open-air landings. A sign warns: "Spitting in the building premises is strictly prohibited."
Yet you can find a small taste of Dubai tucked away in a modest office on the eighth floor. The cramped quarters are the local arm of Evolvence Capital, a Dubai-based private equity empire that has tentacles reaching deep into the Indian hinterland. From the simple office in Delhi, Evolvence funds businesses such as the top construction company in tropical Chennai, a high-tech pharmaceutical plant in the rocky countryside near Hyderabad, and a private cancer-treatment center run by U.S.-trained doctors in Bangalore.
Evolvence is the brainchild of Khaled Al-Muhairy, a 36-year-old native of Abu Dhabi. Eight years ago, Al-Muhairy left his post as a fund manager at the Abu Dhabi Investment Authority and set up his own asset management firm, Evolvence. In 2003, Al-Muhairy started scouting for stakes in India, figuring that the country's economy was at last ready to take off. Although he was sufficiently wary of the Indian environment to avoid raw vegetables and tap water, he liked what he found. Today he has private equity funds worth some $400 million focused on India. "You can see in the eyes of the people that they want to succeed," Al-Muhairy says over a lunch of grilled meats and salads in the garden of a Lebanese restaurant in Dubai.
TRADE FLOWS BOTH WAYS
The Arab world and Asia have a legacy of trade ties dating back to caravans that transported textiles and spices across the desert on the so-called Silk Road and to Gulf traders that sailed the blue waters of the Indian Ocean in chunky ships known as dhows. Today a new Silk Road leads from the busy ports of Shanghai, Hong Kong, and Singapore to the Persian Gulf—and from sparkling airport lounges in Dubai and Riyadh back to Asia's bustling cities. The merchants on this new route are Arab investors looking for smart places to park their petrodollars and Asians seeking to lock up energy supplies and find markets for the goods churned out by their factories.
Trade between the two regions has been expanding at a 30% annual clip. Since 2006, Asia has been the largest trading partner of the Gulf Cooperation Council, a group of six wealthy Arab countries, according to data compiled by Standard Chartered Bank. As of last year, Asia accounted for 55% of the GCC's total trade of $758 billion, the bank says. The mainstay of Gulf exports to Asia is oil, but some energy-intensive manufactured goods such as aluminum are also joining the mix. In return, China and Japan send to the Gulf products ranging from cars to computers while India and other Asian countries supply much of the food consumed in the Middle East. And while the scale of investment lags the trading ties, investors from the Gulf are buying stakes in everything from Asian banks and department stores to hotels and office buildings. Standard Chartered estimates that the Gulf countries invested $60 billion in Asia from 2002 to 2006.
It's easy to find evidence of the growing links. Delhi newspapers advertise homes built by Emaar Properties, a Dubai developer. Smaller companies from Algeria, Egypt, Morocco, and elsewhere have factories in China to make shoes, toys, and the like. And so many Middle Eastern traders visit the wholesale markets in the southern Chinese town of Yiwu that road signs are posted in Arabic as well as Chinese and English. "Power is moving from West to East," Al-Muhairy says. "It is a huge opportunity."
The Asians are getting a foothold in the Middle East, too. China has plowed billions of dollars into North Africa's oil sector, especially in Sudan and Algeria. Along with the energy investment comes work for Chinese companies building roads, pipelines, and other infrastructure. Goods from Chinese appliance manufacturer Haier and electronics maker TCL are available across the Middle East. Indian engineering outfits Larsen & Toubro, Voltas, and others help out on real estate and industrial projects in the Arab world. And Malaysian developer MMC is working on a vast new city in Saudi Arabia. "We are seeing serious investment flows from Asia to the Middle East," says Rachid Mohamed Rachid, Egypt's trade & industry minister.
Why the change? For several years booming Asia has looked more promising than the U.S. or Europe. And the backlash against Middle Easterners in the U.S. following the September 11 attacks has encouraged the region's businessmen to look for other places to put their money. Many Arabs who might once have gone to the U.S. or Europe for education, medical care, or vacation are instead choosing Asia—and taking their business interests with them. "All the traditional and fundamental links [with the West] are being replicated and taken over by Asia," says Rachid.
FORTUNES BUILT ON GOLD AND PEARLS
The global credit crunch will doubtless affect the trend. Stock markets across both regions have plummeted, slashing the value of investments. With oil prices down, Arab countries will have less money to invest; governments may use their cash to prop up domestic economies and possibly bail out banks and developers. But the West is suffering, too, so there's little reason to believe the economic integration of the Middle East and Asia won't continue.
While talk of the original Silk Road suggests distant history, ties between the two regions remained vibrant until the mid-20th century. Many Gulf Arabs sent their children to learn English in the subcontinent's schools, which they considered superior to those available in at home. Kuwaiti captains traded pearls from their domestic waters to Indian merchants for rice, teak, and steel. And many of them also stashed contraband gold—subject to high duties in India—in the cargo. "Gold smuggling formed the basis of the fortunes of many Kuwaiti families," says Nadira Sultan, a member of a Kuwaiti merchant clan with a long history on the subcontinent.
Those links led to thriving communities of Gulf Arabs in India. Sultan family lore tells of an ancestor who was ruined after his ship foundered on a reef off Mumbai. Sultan's father later built his career in India, where Sultan spent her childhood in the 1950s. She recalls sleepless nights in the Indian resort of Khandala, "not daring to breathe because of the tiger growling outside our bedroom window," and being enchanted by snake charmers and dancing monkeys on Mumbai's streets.
A few years later, though, the subcontinent began to lose its charm for many Arabs. India started throwing gold smugglers in jail just as the Gulf's oil industry took off, creating good jobs closer to home. Nadira's brother, Nader, for instance, eventually became CEO of state-owned Kuwait Petroleum. The oil boom led to closer ties with the U.S. and Europe, and most Arabs forgot about India, China, and the rest of Asia, preferring to invest in the West.
Nadira Sultan's cousin Tarek is among the latter-day trade sheikhs working the new Silk Road. He is CEO of Agility, a Kuwaiti logistics and warehousing outfit with $6.2 billion in annual revenues. Agility has made a bundle supplying the U.S. military in Iraq. Now it's plowing nearly $2 billion into millions of feet of warehouse space and other trade infrastructure in Asia, building up a network of 70 offices and 20,000 employees in China and India. Agility even deployed a dozen trucks and 100 workers to handle dirty laundry for athletes at this summer's Beijing Olympics. "Everybody knows about China and the U.S.," says the 44-year-old Sultan. "We are making investments in the trade that takes place within Asia."
On the ground in the Gulf, connections with Asia are visible everywhere. Asian laborers are the muscle that builds skyscrapers, airports, and petrochemical plants. Asians also provide much of the brains and managerial talent at businesses ranging from investment banks to retailers, and people whose parents or grandparents originally came from the Indian subcontinent form the backbone of the middle class in Dubai and Abu Dhabi. The souks along the Creek, the salt inlet that was Dubai's original harbor, are dotted with hole-in-the-wall Hindu temples, and it's rare to spot anyone in Arab dress among the crowds piling into abras, the rough wooden water taxis that shuttle across the luminous green water.
So far, investment flows haven't kept up with trade ties, but that's likely to change. To date, only about 11% of foreign direct investment from the Gulf has gone to Asia. But by 2020 that could nearly double, to 20%, while the share of Middle Eastern money flowing West will fall to about half the total, from three-quarters today, consultancy McKinsey estimates. Even with lower prices for crude, the Gulf countries will have lots of financial firepower. If oil averages $50 per barrel, McKinsey figures, the Gulf will earn $4.7 trillion through 2020.
Middle Eastern sovereign wealth funds are already pouring money into Asia. The largest—the Abu Dhabi Investment Authority—aims to have 8% to 12% of its estimated $500 billion-plus fund invested in emerging market stocks, with Asia a key destination. Other big investors include Dubai Financial Group and Dubai International Capital, controlled by the emirate's ruler. But a lot of recent investments in Asia have taken a whack. Dubai International Capital, for instance, bought 3% of India's ICICI bank for more than $700 million in July 2007. Since then, ICICI's shares have fallen 53%.
For Asian and Middle Eastern investors, negotiating the written and unwritten rules of each others' business environments isn't easy. While India may be "the backyard" of the Gulf region, says Georges Makhoul, Middle East president for Morgan Stanley (MS), China and other countries farther east are more challenging for Arabs to understand and penetrate. A recent Chinese delegation to Kuwait tried to pitch investors on projects in the mainland that might cost anywhere from $10 million to $100 million, but the Kuwaitis considered those too small. Instead, they expressed interest in a $400 million industrial development zone and a $300 million tower with offices and a hotel. "Arabs don't like to invest in small projects—only huge ones," says Lin Shunjie, a Chinese trade official. "If they invest in real estate in Shanghai, they want to invest in the tallest building."
MEGAPROJECTS ACROSS ASIA
A handful of sophisticated investors is helping to break down those cultural barriers. A key Gulf emissary has been Mohamed Ali Alabbar, chairman of developer Emaar Properties and a top advisor to Dubai's ruler Mohammed bin Rashid al Maktoum. Alabbar has an undergraduate degree from Seattle University in the U.S, but he got his first taste of razzle-dazzle entrepreneurship working as a banker and investor in Singapore in the late 1980s and early '90s. "Interacting with the Chinese was such a gift for me," he says over lunch at his sunny Dubai home, looking out over a swimming pool to his private six-hole golf course. Now he's working on some $5 billion worth of hotels, golf course communities, and shopping malls in India, Indonesia, Pakistan, and China—though some of those projects will likely be delayed due to the credit crisis.
In both regions giant, state-controlled companies are leading the way. With more than half of Saudi crude flowing to Asia, Saudi Aramco, the national oil company, is trying to lock up markets in the region. In China, Aramco is a partner in a $5 billion refinery and petrochemical complex in Fujian Province, while China's Sinopec is displaying the green, blue, and white Aramco logo on 31 of its gas stations. Sinopec, meanwhile, is one of a handful of foreign oil companies looking for gas in the restrictive Kingdom.
Riyadh has set up a vast initiative called Jazan Economic City to attract Asian capital. Today, Jazan is a remote, 40-square-mile strip of desert scrub and mangrove flats on the Red Sea, not far from the Yemeni border. One of the project's anchors is supposed to be a $4.5 billion aluminum smelter and power plant owned by local partners and China Aluminum (ACH), or Chalco. And the Saudis are looking for a partner on a refinery in Jazan. Asian businesses are being told that Jazan has at least three attractions: subsidized energy, a foothold in the Gulf, and proximity to booming markets in East Africa. The Saudis hope Jazan will soak up high unemployment in one of the Kingdom's poorest areas. But in the early stages, at least, thousands of workers are likely to be imported from China, India, and elsewhere in Asia because locals lack the necessary skills.
While oil-exporting nations want to lock up markets for their crude, Egypt and other Arab states are pushing Asian countries for investment that creates jobs. China's exports to Egypt have more than quadrupled since 2003, to $4.7 billion in 2007—roughly 18 times the value of Egyptian exports to China. The Egyptians want China to compensate by manufacturing in Egypt. "We are trying to make Egypt a hub for China to export from," says Ahmed El Sewedy, chief executive of Cairo-based El Sewedy Cables and head of the Egyptian-China Chamber of Commerce.
Drive about an hour northeast of Cairo, and you'll see evidence that the Egyptian arm-twisting may be working. In a secluded stretch of desert near the mouth of the Suez Canal, TEDA—one of China's biggest development agencies, based in the northern port city of Tianjin—is carving out a manufacturing zone. The aim is to attract some 50 Chinese-owned factories that would employ 10,000 Egyptians and 1,000 Chinese. Seven companies are already operating in the area, including a Chinese/Egyptian venture that assembles oil drilling rigs and another that makes disposable garments for hospitals and restaurants. Liu Aimin, general manager of Egypt-TEDA Investment, the company that's developing the zone, ticks off Egypt's attractions for Chinese companies: cheap labor, trade agreements that ease entry of goods into the U.S., Europe, and Arab countries, and a location "at the crossroads of Asia, Africa, and Europe, facing 1 billion customers."
Like most Chinese in the region, the TEDA people seem hunkered down in the middle of nowhere, worrying about security. Indian businessmen in the Middle East, by contrast, seem much more willing to mix with the locals. In nearby Ismailiya, a pony-tailed Indian textile designer named Siddharth Sinha and his father, Man Mohan Sinha, have set up a factory to make women's jeans. The Velocity Apparelz plant boasts spacious meeting rooms full of edgy art where buyers from companies such as Levi Strauss, Zara, and Gap (GPS) come to see new designs. The 2,700 workers, many of them young women in headscarves, use lasers to burn wear marks onto the fabric and phalanxes of embroidery machines to stitch flowers along the seams. The plant—one of three the Sinhas operate in Egypt—is likely to turn out more than $40 million in jeans this year, and the Sinhas have acquired land for a fourth factory near Cairo. "India is a very difficult place to operate," says the younger Sinha. "So we said: 'Why not do something completely different?'"
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Turkey Looks to Central Asia
Russia's war with Georgia last summer may have created an opening for Turkey to boost its ties with Central Asia. A Turkish delegation to the region in October sought to dramatically increase trade over the next two years, the online publication Eurasia Daily Monitor reported on Oct. 22. While energy will be a keystone of that effort, Turkish companies also do construction work in the region and have significant investments in Central Asian companies. Turkey shares linguistic, religious, and cultural traditions with the region, and it may use that common heritage to counter Russian and Chinese influences in Central Asia.
To read the Eurasia Monitor article, go to http://bx.businessweek.com/investing-in-turkey