The Middle East market has started to show on the radar of investors in recent years with spiralling wealth and booming IPO activities. And there are definitely some underlying chances to explore, like the mother-infant-child industry and logistic infrastructure, but not all trials would turn to profits. Startups should find their own edges and more importantly, understand this special market truly.
The Middle East, situated at the crossroads of Europe, Asia, and Africa, has given birth to many great civilizations throughout history. Given its rich natural reserves, it has been an important hub of world energy production and a gas station for the global economy for years, making it of paramount strategic importance.
For entrepreneurs and investors in the business world, the Middle East is also a land full of opportunities and possibilities. The six Gulf countries have a total population of 600 million, and the age structure is considerably young. Meanwhile, according to the data given by the IMF, the GDP per capita of the six Gulf countries ranges from USD 23,000 to USD 84,000. Of which, Qatar has the highest per capita wealth in the Arab world – an average of USD 183,100 per individual, according to the Credit Suisse Bank’s Global Wealth Report 2022, with United Arab Emirates (UAE) in third place with USD 122,800.
Such high spending power and willingness to spend makes the Middle East market fantastically wealthy and attractive. Combined with its well-established internet infrastructure and relatively high local Internet penetration rate (80%) — contrary to some stereotypes — the e-commerce industry here has ushered in rapid growth in recent decades.
While the uncertainty brought by the pandemic barely made a dent in their huge wealth and Middle Eastern consumers remain the most positive, their spending patterns have drastically shifted.
Young, rich, but cautious and generous at the same time. The average Middle Eastern consumer is now more price-conscious and is increasingly looking for ways to save. Value is now the top influencer for any purchase, which has heightened the region's new brands and brand switching. As consumers re-evaluate their approach to personal consumption and adopt new habits, preferences, and attitudes for the future, companies must also ensure that their products meet expectations to maintain brand loyalty.
Venture Capital is Chasing the Middle Eastern World Feverishly
In its 2022 report, the IMF damped down its global economic growth outlook. However, the Gulf countries are the exceptions. The energy crisis and the impact of the geopolitical conflict between Russia and Ukraine made this region significantly important to the world economy. The World Bank estimates that the GDP of the GCC (Gulf Cooperation Council) is expected to grow at a rate of 6.9% in 2022, largely due to the growth in local oil production.
But that failed to satisfy the countries in the region, and their ambition for digital transformation is visible. While enjoying the huge wealth brought by oil and gas, a key proposition for policymakers in Middle Eastern countries in recent years has been moving away from traditional energy industries and transforming into a diversified economy.
With a growing economy coupled with national policy support, a new crop of cash-rich investors and the emergence of the newest unicorns, the MENA area is seeing a boom in startups. The rise of sovereign wealth funds as major investors and the growing popularity of smartphones has further accelerated this momentum.
According to the Sovereign Wealth Fund Institute, the region's 10 largest sovereign wealth funds manage nearly USD 4 trillion combined. The influx of foreign institutional investors and visible interest from venture capitalists and startup founders in advanced sectors like fintech, digital transformation and renewable energy technology show a level of sophistication that's being noticed now more than ever.
During October and November 2022, startups in the MENA region achieved 69 deals and 39 deals, respectively, raising USD 646 million and USD 439 million, up 331% and 55% from the same period last year. According to regional think tank and tech investment firm Wamda, startups in the region attracted a record USD 3.94 billion in funding in 2022, most of which happened in the UAE, Saudi Arabia and Egypt.
But as mentioned before, people there are rich but not blind. Not all companies can succeed, and exploring and winning all the way in the Middle East market can be a tricky task.
The Mother-infant-child Industry: Less Attention, while Huge Potentials
Because of the unique nature of the Middle East market, products that have been proven in other markets may not work in the Middle East — nail salon for example. However, the mother-infant-child industry seems to be one of the right directions to explore.
The World Population Prospects 2022 issued by the United Nations tells one reason behind it. Over the next 30 years, the global fertility rate is expected to decline across all regions. However, three regions can still maintain a generation replacement fertility above 2.1: sub-Saharan Africa, Oceania outside Australia and New Zealand, and North Africa and Western Asia, which is mainly the MENA area we are referring to.
hibobi, among them all, has seized this chance well and performed outstandingly in the Middle East's maternity and babycare industry. And localization, a problem that every company needs to answer, is the first step into the Middle East for hibobi. Its Founder and Chief Executive Officer, Feilong Huang, mentioned to EqualOcean that "Successful companies share one commonality: they all have teams in the market that are constantly researching the needs locally, constantly looking at the changes in the market."
With localized consumers' needs, hibobi has registered around 10 million users in the Middle East and has managed to gain competitiveness in the market.
For most, the mother-infant-child industry in the Middle East is relatively unknown and rarely discussed. But successive successful performances like hibobi have opened up additional possibilities for Chinese companies going global.
Opportunities and Challenges Co-exist, and Localization is a Key
The Middle East is China's main crude oil supplier and trade partner and is an important strategic pivot point and cooperation area for developing the Belt and Road initiative. Following the Belt and Road Initiative proposal, cooperation between China and major partner countries in the Middle East has extended and strengthened in recent years.
According to the Report on Chinese Investors' Confidence in the Middle East 2022, jointly authored by PwC China and the Shanghai Institute of International Studies (SIIS), 75% of respondents cited the potential of the Middle East market as their main reason for investing, while 36% and 21% of them cited strong customer purchasing potential and meeting local needs as important considerations for investors.
Among them, more than half of the companies surveyed have established regional headquarters in the Middle East, with 82% of them based in the UAE. More than 6,000 Chinese companies are currently operating in the UAE, covering a wide range of sectors such as energy, infrastructure, communications, and finance. 82% of respondents plan or continue investing in the Middle East.
But the road won't be easy. As mentioned before, localization will be an issue for most companies. Whether it's a religious issue or a normal regulatory issue like local protection, failure to deal with it properly can easily lead to a significant loss of local users or forced suspension of business. "When companies first arrive in the Middle East, they need to understand and study the local market environment as soon as possible, clarify the customer portrait, customer needs, business pain points and the scale of the investment budget, master the skills suitable for localized marketing, and create a perfect financial, tax and legal system, etc." Frank Dai, President of Huawei Cloud Middle East, said.
Advanced and edgy technology and solutions in various industries give Chinese companies great advantages, but they must tailor them to local needs to ensure they can be truly used in the MENA region.
Bottom Line
This is the Middle East market now, with both challenges and opportunities ahead. But that won't change the fact that money and entrepreneurs are now pouring into this niche market. EqualOcean has exclusively learned that two of GGV's partners, Fu Jixun and Li Hongwei, have already made their trips to the Middle East, and Zhou Wei, the Founding Partner of CCV denoted in February that he would be there in March. So, it seems feasible for new brands to avoid the roller-coaster world of developed markets and try emerging ones.
We believe that the experiences of Chinese enterprises going global are all learnable and reusable from each other. Those experienced in the Middle East should take the initiative to support and guide newcomers. With this goodwill in mind, we have established a chat room aiming to provide an opportunity for startups in MENA region to communicate with each other and better serve Chinese brands going abroad. And EqualOcean is also holding a forum on "Going to the Middle East" during the 2023 EqualOcean Globalization Summit in early June, and organizing a business tour to the Middle East in late October this year.
If you have insights into the Middle East market to share or are interested in this promising market, you are welcome to scan the QR code to contact us.