Sometimes starting late has its own advantages, says Professor Lobo

Professor Miguel Lobo, Director of the INSEAD Middle East campus

TRENDS speaks to Professor Miguel Lobo, Director of the INSEAD Middle East campus, who says that, if GCC companies can’t compete globally, global firms will enter their markets.

Today, there is a new generation of digital natives – people who have grown up with the Internet. How important is it for Middle East companies to develop products and services, keeping these digital natives in mind?

It is difficult to give a simple answer to this question, because it would be very different for different industries and, sometimes, even within the same industry, depending on which company you are talking about. There are companies that have made great efforts and headway, but I do feel that a lot of companies in the Gulf are still behind. The good thing is that, sometimes, starting late has its own advantages, as those companies can learn lessons from others and approach it in a more cost-effective manner. However, it is getting to the point now where the risks of being too late are becoming high.

You have a generation that expects to have access to services and purchases quickly and through digital means. This generation is very large and already an important segment of consumers. It may appear to some businesses that the impact is small, because this generation is still relatively young and, therefore, has lower purchasing power. However, losing customers in this demographic can be dangerous for some companies, especially industries where habits and brand preferences are long-lasting. There is a risk of losing a whole generation of customers for next 20 to 30 years.

How important is it for GCC companies to enhance their ability to compete globally?

They will have to do this, whether they think in those terms or not. If they are not able to compete well by global standards, there will be other global companies that will come into their markets. Less competitive companies end up trying to secure their businesses through other forms of protection, from the government or some other regulatory means. That is a dangerous position to be in.

It means you are dependent on this regulatory protection to keep your market share and, as government officials change, the policy changes. Whether you are a family-owned business or a public one with shareholders, you don’t want the value of your business to be overly dependent on the whims someone who is not a part of your organization. Remaining globally competitive is the only insurance against this.

What could be the apparent benefits for corporates out of this?

There can be benefits for organizations from working outside of their borders – sometimes outside of their comfort zone – beyond access to new markets. By having to find ways to be competitive in a global environment, they experiment and develop efficiencies that improve their performance in their home markets.

How you look at the economic diversification drive that UAE and Saudi Arabia are pursuing?

It’s somewhat different from country to country. Dubai, of course, is extremely diversified. Its economy has several different sectors (logistics, finance, tourism and retail, hub for regional corporate headquarters, etc.) and, for the most part they, all are very solid. Abu Dhabi is probably still more dependent on the energy sector than is ideal, but has made significant progress over the past ten years and there is an integrated strategy that continues to be pushed forward, so I am optimistic.

Regarding the Saudi economy, my belief is that it has strengths in depth that many outsiders don’t appreciate: when seen from the outside, it’s easy to miss that there is a lot more to it than oil and gas. However, the Saudi economy sometimes has seemed to operate on two tracks. There is an economy that is diversified and has a lot of strengths, but does not have the level of productivity of a developed country. And then, there is the energy sector, which operates in a global environment and to high standards.

The challenge for Saudi Arabia is to make sure that the local economy continues to raise its productivity to bring it closer to the standards on which its energy sector has been operating.

Startups are the lifeline of any economy, but they are not contributing to the fullest in the GCC region. What could be the reason behind this and how can this problem be solved?

It is not easy to develop a startup ecosystem and, in any case, economic growth cannot and should not rely on that. If it was easy to build a new Silicon Valley, everybody would have done it.

You need to get a lot of things right at the same time and some of these things depend on each other to get started. The talent pool on the business and technical sides, the legal framework, venture capital, access to markets – all need to be right at the same time. So, while it is a difficult problem from a policy point of view, there are a lot of things that the region should continue to make progress on – a lot of it has to do with regulatory costs and the challenges faced in setting up a new business, and the costs and personal risk for individual entrepreneurs.

Another important dimension to continue making progress on is talent – this is one dimension where the UAE has a competitive advantage as an economy that is open for global talent to come in (though more should be done to ensure that the best talent stays here in the long term, rather than being transitory). But as I said, it is not easy. There are dozens of countries in the world trying to have the next Silicon Valley – if it was easy, we would by now have a hundred Silicon Valleys.

How do you view the technology disruption that is sweeping across industries?

The disruption from robotics is the same as the disruption that’s coming from artificial intelligence (AI). The transformation of manufacturing due to robotics has been happening for some 30 years and it will continue at an incremental pace. In some industries, it is still mostly to come and, in others, it is almost complete.

When you look at auto manufacturing or the handling of cargo in ports, they have seen a dramatic drop in employment relative to output in the past 30 years. But, outside of manufacturing, there are some things that cannot be automated in the foreseeable future – for instance, who coaches a children’s sports class? There are many services where you are paying for human interaction and those services are not going to see any meaningful disruption.

Regarding AI, it is not clear when the disruption will happen, but it is certain to happen in all industries. Over the past 20 years, the costs of data storage have decreased by a factor of 100,000. Cell phones of the current generation have more computing power than the world’s fastest super computer had just 20 years ago. This trend is continuing and, in the coming 30 to 40 years, we will have absolutely astonishing things happening in all industries because of this.

Will it make many jobs obsolete?

This matter is subject to much debate. Some people say things will happen very quickly in next ten years, but I don’t believe that. This is a 30- to 40-year process. But it is definitely coming. Younger business leaders, and even those who are now in their 40s, will still have to deal with this in their lifetime.

What role could state-owned funds play in a nation’s development?

Government funding has played an important role in the development of technology – we would not have had the Internet, semiconductors and micro-electronics, etc., without it. But investing with an eye towards both development and financial return is a very different game from development grants.

Governments often don’t have as much information as private investors do. Further, entrepreneurs are sometimes concerned that there might be strings attached with the funding beyond financial return, that it might create a political dependency. This has always been and will always be a concern everywhere in the world. Nevertheless, state-owned funds have played and will continue to play an important role in the coming years.