1. Atlantische Initiative
CONFIDENTIAL
Berlin, 10 May 2007
Beyond Oil – Opportunities on New Silk
Road
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This material was used by McKinsey & Company, Inc., during an oral presentation; it is not a complete record of the discussion.

2. 6 questions we hope to answer today
• What specific countries in the Middle East are we focusing on?
• Why do we believe that changes in the region are important on a
global level?
• Why should the changes matter to the international business and
government community?
• How big is the opportunity?
• What are others doing? What can we learn from them?
• What are the potential barriers that exist?
1

3. Overview
Beyond oil – major changes in Gulf economics of
global significance
Re-awakening of historically significant 'Silk Road'
Huge potential for deepening and broadening the
relationship
Key challenges – A few obstacles that need to be
overcome
2

4. Beyond oil – major changes in Gulf economies Focus
are of global importance of discussion
The GCC by far is the wealthiest of the 3 areas that make up the Arab world
Population, 2006 Nominal GDP, 2006 GDP per capita, 2006
m $b $000
GCC 36 702 19.2
Levant** 29 68 2.4
North Africa*** 194 392 2.0
'Arab World'**** 329 1240 3.7
Total
* Arab world as defined by the Arab league includes 22 states
** Includes Jordan, Lebanon, Syria. Does not include Palestine
*** Includes Algeria, Egypt, Libya, Morocco, Sudan and Tunisia
**** Includes GCC, Levant, Yemen and Iraq
Source: Global Insight World Market Monitor
3

5. Changes occurring in GCC are different than during previous oil booms
Unique ingredients for radical change
• Means – An increased oil price Early evidence that results are different
(structural) will cause an additional
• Reduction of external debt – Saudi
USD 2 trillion to flow to region over
Arabia cut external debt from 97% of
next decade
GDP in 2002 to less than 30% in 2007
• Necessity/urgency – Growing young
• Controlled government spending –
populations and spiralling unemploy-
Revenues increase by 300% and
ment with no remaining room in public
government spending only by 74%
sector. Also, a falling per capita
(education/healthcare)
oil/gas production
• Non-oil GDP growth – GDP growth in
• Leadership – New ambitious leaders
non-oil sectors is now beginning to
have taken power in several Gulf
exceed the oil sector
states with explicit goal of
diversification from oil • FDI – Increased from $2b in 2001 to
$20b in 2005
• Reformed institutions – Investment
laws, capital markets and trade
Source: Global Insights, United Nations Conference on Trade and Development (UNCTAD)
4

6. Old Dubai – Sheikh Zayed Road (1990)
5

7. New Dubai – Sheikh Zayed Road (2005)
15 Years
later
6

8. Economic growth rates in GCC match or exceed those
of other 'BRIC*' countries
Nominal growth
Real growth (2004–06), % (2004–06), %
6.6
GCC 20.8
10.6
China 16.6
26.0
Brazil 2.6
28.6
Russia 6.6
14.1
8.9
India
* Brazil, Russia, India, China
Source: Global Insight World Market Monitor
7

9. Saudi Arabia is by far the largest economy in the GCC
The Gulf Cooperation Council states Basic demographics
Nominal GDP
Real (2004–06)
Population, 2006 per capita,
GDP growth rate
m 2006, $
Kuwait
Jordan
• Saudi Arabia 24.5 14,161 11.5%
• UAE 4.2 37,357 16.6%
Bahrain
Qatar
• Kuwait 16.6%
2.8 34,711
UAE
Saudi
• Oman 9.0%
2.5 13,867
Arabia
Oman 15.8%
• Qatar 0.8 62,293
15.5%
• Bahrain 0.7 20,860
Source: Global Insight World Market Monitor
8

10. Foreign investors have significantly increased their interest in the region
over recent years
FOREIGN DIRECT INVESTMENT INFLOWS
$m
CAGR*, 2001 - 06
2001 2006 %
United Arab
1,200 9,260 50
Emirates
Saudi Arabia 504 16,510 101
54
Qatar 296 2,580
Bahrain 3,560 114
80
178
Oman 5 837
13
Kuwait -112 98
* Compound Annual Growth Rate
Source: EIU WorldData
9

11. Overview
Beyond oil – major changes in Gulf economics of
global significance
Re-awakening of historically significant 'Silk Road'
Huge potential for deepening and broadening the
relationship
Key challenges – A few obstacles that need to be
overcome
10

12. Re-awakening of historically significant trading route
Middle East – China Middle East – China
Oil flows, QBTU Trade flows, $b
2.7 59
CAGR= CAGR=
25% 25%
0.7
6
1999 2005 1995 2005
Middle East – Asia
Capital flows, $b
15
CAGR=
21%
7
2001 2005
Source: BP Statistical Yearbook; IEA; Global Insights; McKinsey analysis
11

13. The rise of direct airline links another indication of
increased activity
U.S. GCC China
Number of direct flights per week
GCC to U.S. GCC to China
7
2000 11
48
2006 20
12

14. Growth in trade flows primarily driven by rise of oil imports
MIDDLE EAST – TRADE WITH MAJOR REGIONS
$b, CAGR
CAGR (1995 - 05)
%
703
China 25.4
59
13.2
Asia*
240
362
6.8
62 Japan
16
104
250
6
237 EU 8.5
49
69
32
130
105
105 10.5
US
63
38
1995 2000 2004
The rise in trade between the Middle East and
Asia has outstripped the increase between
the Middle East and the US
* Asia: Asia excluding China, Japan
Source: Global Insight using IMF's Direction of Trade Statistics database
13

15. OIL DEMAND FROM CHINA WILL GROW FASTER THAN THE REST OF
WORLD
Primary demand for petroleum products
QBTU CAGR 2003-2010
%
2.1
207.3
6.0
29.0
167.8 3.5
8.1
4.5
19.5
19.1
145.1
China 6.0
12.7 12.9
India 1.1
4.7 41.0
9.5
Middle East 36.6
34.0
Europe
1.4
45.3
39.6
35.9
U.S.
1.5
64.3
53.5
48.1
RoW
2003 2010 E 2020 E
Source: McKinsey Global Institute; Energy demand model
14

16. Asia and the Middle East today are the major net providers of capital to the
rest of the world
Share of net
Net capital outflows capital
$b %, 2006
1,426
Other 15
220 Petro-
dollars***
1,047 Middle 20
280 Asia and the Middle
East**
162 East are the major
net providers of
132 capital to the world
450 Asia* 32
• More than 50% of
total net capital to
378
the world
436
97
Western 28
54 398 Europe
308
174
86 ROW 5
78
67
24
2000 2005 2006e
Note: Only includes countries in any given year with a current account surplus/capital account deficit
* Asia and petrodollars estimated based off of current literature; W.E. and ROW extrapolated over 5-yr CAGR
** Includes Algeria, Iran, Kuwait, Saudi Arabia, Syria and Yemen
*** Includes Indonesia, Nigeria, Norway, Russia, Venezuela
Source: Economist; Wall Street Journal; McKinsey Global Institute Capital Flows Database; McKinsey analysis
15

17. For Japan, the Middle East (Gulf) is a strategically
important trading partner
Share of Japanese oil imports by country
Volume (Ml), m Share, %
1. KSA 73 29
2. UAE 61 25
3. Iran 32 13
For both Japan and the Gulf, the
trading relationship is important 4. Qatar 24 9
5. Kuwait 18 7
• Japan is the 2nd largest trade
partner for Saudi Arabia after 6
6. Oman 3
the U.S.
7. Neutral
5 2
• UAE/Saudi are the 3rd and 4th territories
largest import countries for 3
8. Other ME 1
Japan (mostly oil)
9. Indonesia 8 3
Japan receives
6
10. Sudan 3
89% of oil from
region compared to 2
11. Nigeria 1
19% for U.S.
12. RoW 11 4
Source: JETRO, China Statistical Year Book
16

18. Recent transactions/deals
Emirates-based
China's Sinopec Etisalat paid USD 2.6 Egypt's Orascom
invests as much as billion for a 26% stake picked up 19% of Hong
USD 100 billion in in Pakistan Kong's Hutchison Tele-
Iran to secure Telecommunications com for USD 1.3 billion
supply of energy
Damac Holding is Majid Al Futtaim Group
building a USD 2.7 ties up with Japan’s top
billion residential, office finance houses to launch
Emaar – MGF
and leisure complex in premium credit cards
Land plans to
Tianjin, China
invest USD 4
billion in India
Emmar and
Saudi Prince Bandar bin
Limitless
Mohammed plans to
announced
buy a majority stake of
USD 40 billion real
Bangladesh's Rupali
estate projects in
Bank
Pakistan
* FTA = Free Trade Agreement
Source: Internet research
17

19. No longer merely portfolio, cross border
investments are becoming more long term ILLUSTRATIVE
Countries Sample Deal
• quot;Deal of the centuryquot; – USD 100 billion energy deal.
China Iran
China will pay Iran USD 30 billion over next 25 years for
oil and LNG. China will also provide USD 70 billion for a
• Both Middle East
51% stake in Iran's Yadavaran oil field which has
and Asian
estimated reserves of 3 billion barrels
countries
investing with
• The UAE's Emirates Telecommunications Corporation
UAE Pakistan
more strategic
(Etisalat) acquired 26% management stake in Pakistan
focus
Telecommunication Corporation for USD 2.6 billion
• Recent flurry of
• Egypt's Orascom picked up a USD 1.3 billion worth
Hong big non-oil deals
Egypt Kong 19% stake in Hong Kong's Hutchison Telecom in additional to
giant petro-
projects
• Indian joint-venture Emaar-MGF Land has planned to • Energy, Real
UAE India
invest USD 4 billion in projects ranging from townships, Estate & Telecom
hotels, hospitals and golf courses. The company attracting the
expects USD 8 billion in revenue from the projects most deal
interest
• Damac Holding is building a USD2.7 billion residential,
UAE China
office, and leisure complex in Tianjin
18

20. Overview
Beyond oil – major changes in Gulf economics of
global significance
Re-awakening of historically significant 'Silk Road'
Huge potential for deepening and broadening the
relationship
Key challenges – A few obstacles that need to be
overcome
19

21. Huge potential
1. Energy
• China demand for energy will account for 50% of
total increase during the next 15 years
• Japan relies on the Gulf for 89% of it's oil needs
• $155b in power sector expenditures in MENASA
region required over next 10 years
2. Infrastructure
• Saudi Arabia has $650b in infrastructure spending
plans over next 10 years
• China has $1 trillion infrastructure needs over next 5
years
• Significant SOE privatization/IPOs
3. Capital flows/
• Shift in Gulf investor portfolio from West to Asia
FDI
~250b
• More direct investment by both Gulf
and Japan
4. People
• Between 2003-2006 there were 2589 Japanese
living in the GCC (half of them in Dubai) and only
168 GCC nationals living in Japan
• Gulf provides significant jobs in construction for
China and Asia
Source: ANRE, Ministry of foreign affairs Japan, Saudi Chamber of Commerce and Industry, Abraaj Capital
20

22. Significant infrastructure expenditure is required in GCC
GOVERNMENT SPENDING
Projected required
expenditure through
2016*
Examples of investments
$b
• Roads, airports, railway, shipping
Transportation 188
• Power plants
Power & Utilities 155
• Desalination plants
Water 133
• Hospitals, clinics
Healthcare 49
• Schools, universities, research
Education 18
centers
• Feedstock, olefins, aromatics
Petrochemicals 87
* MENASA region, conservative estimates
Source: Abraaj Capital report
21

23. China has equally impressive infrastructure requirements
GOVERNMENT SPENDING
Projected expenditure
through 2010
$b Example of Investments
Road (22,000 km extension of
national truck highway system)
Transportation 512
Airports (50+ new airports)
Electrical power generation
(increase capacity by 350 GW by
Energy 381
2010, 160 GW already under
construction or green-lighted)
Water supply (develop 600 billion
Water 65
tons of new water supply per year)
Beijing Olympics 2008
International (stadiums and other facilities)
80
events
Expo 2010 (venues, city infrastructure)
Source: McKinsey Analysis
22

24. Total cross-border capital flows between the Middle East and Asia will grow to
$300b by 2020, with cross-border investments climbing to $1.6 trillion
Cross-border capital flows* between
the Middle East and Asia
$b
300
CAGR
22.2%
110
40
15
7
China today
2001 2005 2010e 2015e 2020e accounts for
~50% of all capital
inflows and
Cross-border financial holdings* outflows for Asia
1,600
between the Middle East and Asia (including Japan)
$b
CAGR
24.5%
540
180
60
25
2001 2005 2010e 2015e 2020e
* Cross-border holdings and flows include debt and equity securities, cross-border lending, and foreign direct investment
Source: McKinsey Global Institute Capital Flows Database; McKinsey Global Institute Cross Border Holdings Database; McKinsey Analysis
23

25. What are others doing?
quot;Opening a corporate
headquarters in the United Arab
Emirates city of Dubai and moving
its chairman and chief executive,
David J. Lesar, there.quot; - NYT
quot;Goldman Sachs, Dubai,
Qatar movequot; – Reuters
quot;the U.S. buyout firm that manages
quot;Morgan Stanley Licensed To
more than $44 billion worldwide …
Establish First Middle East
plans to raise as much as $1
Office At Dubai International
billion for a fund targeting the
Financial Centrequot; – Mondo
Middle Eastquot; – Bloomberg
Visione
24

26. Overview
Beyond oil – major changes in Gulf economics of
global significance
Re-awakening of historically significant 'Silk Road'
Huge potential for deepening and broadening the
relationship
Key challenges – A few obstacles that need to be
overcome
25

27. Interviews with CEOs indicate excitement but some lingering barriers
Gulf – “Going East” China – “CHIME – a buzzword”
• “We want to go global by going East, not West. The • “East-East transactions are reducing the traditional
West is aging and losing momentum,”. “You’ve got deal flow to the West. The acronym CHIME for China,
aging populations and an aging economy; the East is India and the Middle East, is now a buzzword in Hong
where the true glamour is. The East is where your Kong.”
$100 of investment, works the hardest.” – Victor Chu, Head of Far Eastern Investment Bank
– Major investor, Dubai
• “We see major investment opportunities certainly in oil
related markets but also in construction and
• “We believe the linkages between our region and infrastructure“
China are so important. The real change in last 5-10
– Chinese insurance company
years is this: we went regional. Trading in each
• “China has signed a variety of economic and trade
other’s countries has given us confidence.”
– Major investor, Abu Dhabi agreements with all 6 GCC member states, e.g., an
Economic and Trade Agreement, Agreement of
Investment Protection and Applicable Double Taxation
• “Financing is easier in West but growth is slow. In the Agreement“
Middle East and Far East, you have to use cash but – Middle East expert, Ministry of Commerce, China
the potential for growth is so much higher in China or
• “China has made progress in Arab language education
India. Instead of NY, Paris and London it’s now
– there were only a handful of universities with Arab
Shanghai, Mumbai and Cairo.”
programs in 1990, now more than 20 universities offer
– Major investor, Kuwait
Arab language programs”
– Middle East expert, Ministry of Foreign Affairs, China
• “We are big believers in the flow of money East. • “We would like the Gulf’s ‘long term’ approach – it is
We have seen huge demand in Chinese IPOs”
similar to ours – we both have opportunities to invest and
– Major global investment bank
help with each other’s economies. We have identified 7
projects in the Gulf that we would like to pursue”
– Chinese Logistics Company
Source: Interviews; press articles
26

28. Key challenges that you see
Bureaucratic/system barriers
• No approval and license / government systems as a manufacturing base
Insufficient legal/
(ease of filing applications, process transparency)
regulatory
•
infrastructure No legal system / regulations protect important business properties
(example: patent protection, etc.)
• I think a local partner is necessary, but we don’t have clear selection
Process standards
complication
• There might be a difference in the business decision speed of Japanese
companies and Middle Eastern clients and partners; this could be damaging
to business
• We see a problem with social instability and low levels of safety
Lack of
confidence in
System stability
Cultural/network gaps
• Institutional understanding of Islamic culture is low, and there would be a
Lack of cultural
lack of personnel who could do internal management. It would be difficult for
skills representatives dispatched to the Middle East to adapt
• It takes time to get used to the local management style
• We have low research capacity in the local market, and we would not be
Lack of network able to market to local clients
skills • Practically, there little information in Japan on Middle East business and
managerial conducts. As such, I feel less confident doing business there
Source: Japanese company survey
27

29. Ways to strengthen the road ahead – public-private sector initiatives
Examples
Description
• Key driver to smoothen trade & capital • FTA between Japan and GCC expected
flows soon
Free Trade
Agreements • Bahrain considering FTAs with other Asian
countries like India
• SEZ usually served as quot;windowquot; and role • China investing in Dubai industrial & real
model to attract foreign investment estate SEZs
Special Economic
Zones • Gulf countries showing strong interest
in India's planned 150 SEZs
• Secondments • Eisenhower Fellowship program
Human capital
• People exchanges • U.S.-Japan young political leaders
exchange
exchange program
• Laying groundwork • Improving commercial services in embassies
for better business dialogue • Japan-Arab Dialogue Forum
Diplomatic platforms
• Shanghai Co-operation Organization
• Protect quot;lower endquot; of downside • Overseas Private Investment Corporation
in the U.S.
• Operating on market principles
• Export development banks
Government • Nurturing three to four high-profile
investment agencies • Government agencies like SAGIA, ADIA,
quot;cornerstone investmentsquot;
KIA, Temasek, GIC and so on are helping
to make quot;cornerstonequot; investments
• Exchanges in sports, arts • Doha Games
• Education programs • Language programs
Cultural linkages
• Student exchange
Source: McKinsey Analysis, publication research
28