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Wed 26 Sep 2018 11:03 AM

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The Middle East's role in China's Digital Silk Road

There has been much talk about China's Belt and Road initiative (BRI). But beyond this physical infrastructure the Asian giant has big plans to extend its digital footprint, including here in the Middle East

The Middle East's role in China's Digital Silk Road
One of the most important aspects of the $1trn Belt and Road Initiative strategy, however, has nothing to do with highways, ports or energy. It’s digital – and the Middle East plays an important role in this plan.

Over the past few years, the world has been abuzz with talk of China’s enormously ambitious $1trn Belt and Road Initiative (BRI) - also known as the New Silk Road - that seeks to expand its transportation and energy infrastructure around the world to improve connectivity with the rest of the globe, and perhaps extend both its soft and hard power capabilities.

One of the most important aspects of the strategy, however, has nothing to do with highways, ports or energy. It’s digital – and the Middle East plays an important role in this plan.

While the New Silk Road refers to a tangible, physical infrastructure network on land and sea across the Eurasian landmass, the Digital Silk Road deals with a largely unseen and in some ways much more abstract infrastructure.

“We should pursue innovation-driven development and intensify cooperation in frontier areas such as digital economy, artificial intelligence, nanotechnology and quantum computing, and advance the development of big data, cloud computing and smart cities so as to turn them into the digital Silk Road of the 21st century,” Chinese president Xi Jinping said in a 2017 speech.

“We should spur the full integration of science and technology into industries and finance, improve the environment for innovation and pool resources…we should create space and build workshops for young people of various countries to cultivate entrepreneurship in this age of the internet.”

Don’t dismiss the technology angle of the UAE-Chinese relationship. The small numbers belie how strategic it may be in the future

The importance of the MENA region in China’s digital strategy was starkly highlighted at the World Internet Conference in Wuzhen in December 2017, when a number of countries – including Saudi Arabia, Egypt and the UAE – agreed to cooperate with China on the project by expanding broadband access as well as encouraging cooperation in e-commerce and other related transnational standards.

While the Digital Silk Road is a common talking point in Chinese media coverage of the wider Belt and Road Initiative, it remains relatively unknown in the rest of the world – even though it has the potential to dramatically alter the Middle East’s digital landscape.

Chinese companies make their mark

At the forefront of the Chinese digital push into the region are its various telecom companies, who hope to gain access to Middle Eastern markets while at the same time help advance China’s overarching strategic goals.

“Don’t dismiss the technology angle of the UAE-Chinese relationship. The small numbers belie how strategic it may be in the near future,” says Sam Blatteis, the CEO of MENA Catalysts, a Middle Eastern government affairs firm for technology multinationals.

“The five giants of the Chinese internet age – Tencent, Alibaba, Baidu, Xiaomi and Didi – are extraordinary creatures,” he continues. “Their sheer scale and access to capital means the smallest movements from anyone of them into a country here can move markets.”

The movement of these companies in the region, however, is by no means insignificant.

In 2017, for example, Alibaba announced a $600m plan to create a “Tech Town” – five times the size of the Pentagon near Washington – that will eventually house 3,000 firms working in robotics, artificial intelligence and mobile apps near Jebel Ali in Dubai.

Not to be outdone, the other major Chinese firms followed suit, albeit at different speeds.

“China has built up ties through projects that create interdependencies between itself and the UAE government. China’s answer to Samsung, Xianomi, has rolled out a number of 1,500 sqft stores in Dubai, each the size of three basketball courts, while Beijing granted UAE-based e-commerce giant Noon, the Middle East’s competitor to Amazon, approval to expand into China’s booming e-commerce market,” Blatteis explains.

“Many American tech companies’ MENA offices may have grown comfortable with their regional reputation and still think that Chinese tech platforms are of lower quality.

But US companies shouldn’t dismiss them. As the old Arabic proverb says, ‘the rain begins with a single drop.’”

China’s e-commerce model spreads

Speaking at the recent Gateway Gulf conference in Bahrain, Winston Wenyan Ma, the managing partner and chief investment officer of China Silkroad Investment Capital says he believes that the most immediate effect of the digital Silk Road will be the spread of Chinese e-commerce networks and models.

“The keywords we kept hearing in recent years are connectivity and flow in relation to their trade services, and now the latest is data,” he says. “And at the first level, it will be e-commerce.”

As an example, Wenyan Ma points to the shopping extravaganza that takes place in China every year on November 11, during the country’s popular “Single’s Day” holiday. “Vendors and consumers from more than 200 countries participate in this Chinese version of Black Friday,” he says. “When you have more cyber infrastructure extensions, you’ll have an e-commerce network across all regions.”

Chinese tech giants are no strangers to surmounting the logistical challenges of developing countries

He says the Chinese mobile economy is expanding fast as consumers move away from PCs, landline phones and credit cards, and into a smartphone age, including shopping. “In the emerging markets – and also the GCC – markets are experiencing the same thing.”

A better fit for the region?

Speaking to Arabian Business, Blatteis notes that in many ways Chinese companies are perhaps better suited for the conditions of the region than their American or European counterparts, even if their presence in the region is less well established.

“Several Chinese tech companies that we’ve seen are comfortable entering markets where there is government-led growth, rather than private-sector led growth. State-dominated economies in the region have historically been inefficient and underbuilt, offering the change for Chinese companies’ fast growth,” he explains.

“Chinese tech giants are also no strangers to surmounting the logistical challenges of developing countries, where they may have a leg up on Western rivals.”

Additionally, Blatteis notes that the relative cost-effectiveness of many Chinese tech products – such as those of Xiaomi, which opened stores in Dubai and Cairo last year – may help these companies tap into a large and potentially lucrative segments of buyers around the region.

“$88 phones may have a comparative advantage in the UAE, where a large share of the labour force are low-paid workers from India and Pakistan, and in Egypt, whose population has a yearly income of approximately $12,000 per capita.”

Security concerns – or not?

Around the world, the expansion of China’s digital footprint in the region has been accompanied by concerns over whether the connections could be used to expand Chinese intelligence efforts or lead to compromises over the privacy of data. In a July report, the US-based Council on Foreign Relations expressed concerns that Chinese tech companies may insert “backdoor mechanisms that could increase [Beijing’s] intelligence and propaganda operations in Belt and Road Initiative partner countries.”

Some experts, however, have dismissed these concerns – and say they may be welcome in the region, especially when viewed in comparison to US companies. “I think that many MENA governments and Chinese tech titans might be in the same place on this,” Blatteis remarks. “Chinese tech companies have said they see their positions on security and public safety as differentiators with the governments, compared to their American counterparts.”

Wenyan Ma, for his part, said earlier this year that he believes that any concerns related to Chinese tech – which he says he believes are a natural effect of a worldwide ‘inflection point’ in which connectivity is at an all-time high and trust at an all-time low – need to be addressed by Chinese companies themselves as they enter the Middle East market.

“It’s really important to make sure that when Chinese companies enter into this market, it should not be viewed as pure market expansion,” he says. “These internet giants and telecom companies must ensure proper data protection and economic data sharing. Chinese internet giants need to work together to figure out the new paradigm.”

The missing enterprise factor

According to Blatteis, the success and expansion of Chinese companies in the Middle East are held back at present because “as much of the world heralds the success of Chinese tech, it’s largely been a consumer-business narrative”.

“In the enterprise-application market, China has long had nothing comparable to Oracle, SAP or SalesForce.com. In fact, the Chinese enterprise market looks like the consumer market ten years ago. Chinese customers – in this case, companies – are reluctant to pay for software. The rise of Alibaba’s cloud business in the Gulf, data centres and joint ventures with entities in the region may be transformational in the region’s booming cloud economy.

“The Chinese can come in at lower costs, and don’t have the same restrictions on individual privacy rights necessarily, despite the EU’s General Data Protection regulation.”

What’s clear, then, is that the Belt and Road bridgeheads penetrating the region are digital as well as physical.

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