Page 106 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

90 Dubai & Co.

In April 2006, President Hu Jintao of China was accorded an
uncommon level of hospitality by Saudi Arabia. He was invited to
address the country’s Shura Council and was escorted around the
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country by members of the royal family. China could conceivably
become one of Saudi Arabia’s most important customers as Chinese
prosperity rises and automobiles become more common. As BMWs
increasingly share the roads with Beijing’s famous bicycles, Saudi
petroleum will find a highly lucrative market.

RISKS AND DRAWBACKS:
THE ROSE HAS THORNS

Despite the overall attractiveness of the GCC countries as places to
do business, doing so certainly has its risks and drawbacks. These
risks and drawbacks—economic, political, and social—must be
understood carefully by multinational firms as they craft their
regional strategies.

Overdependence on Oil
In Chapter 2, I argued that the GCC economies are not all about
oil—in fact, multinationals can grow their businesses in a much
broader range of sectors. While this is certainly true from the per-
spective of business opportunities, the underlying driver of wealth
creation in the region overwhelmingly remains oil and gas. All gov-
ernments of GCC states derive the bulk of their income from hydro-
carbons alone—due largely to the fact that taxes, service fees, and
duty revenues on other goods are often negligible. Despite the Gulf-
wide initiative to rapidly diversify economies, only the UAE and
Bahrain have less than 60 percent of their total exports coming from
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the nonoil sector. Even in these two nations, oil revenues account
for three-quarters of government revenue. The hard reality of the
matter is that a collapse in oil prices would severely curtail the
wealth generation of the GCC, reducing the ability of the public and
private sectors to invest and spend in the local economies. Firms
must understand that betting on the GCC’s sustained prosperity is
largely a bet on oil prices not collapsing in the years ahead.
Fundamental indicators, however, suggest that oil prices are
likely to remain above $40 per barrel in the medium and long term.