Middle East to diversify supply chains in wake of Covid-19

27 October 2020

Firms in the Middle East are considering options to build greater security and resilience in the wake of the impact of the Covid-19 pandemic, according to research.

A report by the Economist Intelligence Unit (EIU) said over-reliance on Asian, and especially Chinese suppliers and clients, was already a major concern before the disruption during the first half of 2020 exacerbated the issue.

As a result, Middle Eastern businesses may look to refocus on local production where possible.

However, options will be limited by constraints on local production skills and capacity, the availability of investment finance, and the need to retain close links with established and emerging suppliers and clients in the key Asian, European and American markets, the report said.

The EIU said Middle Eastern firms have engaged in short term risk mitigation strategies including identifying cost inefficiencies and renegotiating contracts, finding alternative sources for critical materials, increasing inventory levels and enhancing supply chain monitoring.

Longer-term strategies include improving structural cost efficiency, increasing supply chain security and resilience via a more diversified supply chain, greater focus on national and regional production, and digitisation of supply chains.

Signs of recovery from the impact of the Covid-19 pandemic and lockdowns around the world are evident in manufacturing, transport and trade at a global and regional level, according to the research, authored by EIU editorial director Pratibha Thaker.

However, the volume of world trade in goods is expected to shrink by about 18% in 2020, while international trade volumes for goods and services are expected to fall by double digits across the Middle East.

The EIU said regional trade is expected to bounce back in 2021, with the reopening of major economies combined with the large stimulus packages in Asia, Europe, the Americas and the Middle East. But recovery will be dampened by the effects of Covid-19 on domestic demand and global supply chains.

The EIU said Middle Eastern firms had put renewed focus on building supply chain resilience and shortening and diversifying supply lines in the wake of the trade downturn this year.

The Covid-19 pandemic has exacerbated the undermining of globalisation that was already happening before the coronavirus, including increasing nationalist instincts, higher tariffs and increased sanctions, the EIU said. 

However, recovery from lockdown is an opportunity to rebuild trade systems and some Middle Eastern firms are likely to shorten and diversify supply chains, while others will look to new technologies to increase resilience.

Countries including Saudi Arabia, the UAE, Egypt and Turkey have well-developed international logistics infrastructure and are investing heavily to boost regional and international connectivity, according to EIU.

Disruption to food supply chains from the pandemic has led Middle Eastern states to be concerned about food security. Early warning systems have been put in place, sources of food imports identified and investment earmarked for local storage and production facilities.

The EIU concluded that despite the economic problems caused by the pandemic it has created opportunities for growth, innovation and diversification that could benefit the Middle East region.

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