Saudi Arabia’s Ambition to become the Silicon Valley of the Middle East

Saudi Arabia's Silicon Valley ambition

Saudi Arabia is investing billions of dollars and hoping to attract billions more to become the digital center of the Middle East, investing in data centers, metaverse, and fiber optic cables.

Global players Microsoft, Google, Oracle, Meta, and Apple have been attracted by its strong financial resources, high internet usage rates, and future plans, and are all pouring into the country.

According to Saudi Arabia’s “Vision 2030” economic plan, Riyadh focuses on achieving economic diversification and moving away from dependence on hydrocarbons, with measures including investment in information and communication technology (ICT) infrastructure and services.

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Fahad Alhajeri, CEO of Center3, a subsidiary of Saudi Telecom Company (STC), told the media in October 2022 that its goal is to become “the main digital hub connecting Asia, Europe, and Africa, and to lead the largest share of internet exchange and data flow in the region.”

However, to achieve this goal, Saudi Arabia needs more data centers and infrastructure to handle large amounts of data traffic, including fiber optic cables directly linking Asia, Europe, and other places to the Arabian Peninsula.

Riyadh also faces several other challenges, including the tech war between Washington and Beijing, questions about Saudi Arabia’s human rights and digital privacy practices, and the economic feasibility of its strategy.

01 Can Saudi Arabia build a Silicon Valley in the Arabian Peninsula?

Saudi Arabia is already a digital giant in the Middle East. According to Goldstein Research, it has over 55% of the largest telecom market and 51% of the IT industry in the region. The internet penetration rate is 98%.

However, consumer spending on IT only accounts for 0.7% of GDP, compared to 1.3% in developed markets, indicating room for growth.

That growth is coming. By 2030, Saudi Arabia’s cloud services are expected to reach $10 billion. Google has formed a joint venture with state-owned oil giant Saudi Aramco. In February 2003, Oracle announced a $1.5 billion investment in opening a cloud center. Microsoft will invest $2.5 billion to build a new cloud data center. Chinese tech giant Huawei will invest $400 million in the cloud field. Meta, the parent company of Facebook, will open the region’s first metaverse academy in Riyadh in May to train people on how to build new digital environments. Apple will set up its first distribution center in the Middle East near Riyadh.

James Shires, a senior researcher at the Chatham Institute and author of “Middle East Cybersecurity Politics,” said, “Large technology companies realize that the future is non-Western, so they need to engage with these regions, especially countries like Saudi Arabia that will become important markets for them.”

The Saudi government is supporting a major plan to digitize Saudi Arabia, which is necessary to make projects like the multi-billion-dollar city of Neom in northern Saudi Arabia a smart city.

Neom conceptual image

In 2022, Riyadh allocated $6.4 billion for future technology and entrepreneurship, including $1 billion to Neom Tech & Digital for the development of XVRS, the world’s first integrated cognitive virtual world and reality.

In addition, the Ministry of Communications and Information Technology plans to attract $18 billion for building a large data center network. MIS, based in Saudi Arabia, has set up a $320 million fund for the development of six data centers. National-supported STC is investing $400 million to build “the region’s largest cloud data center.” Saudi Aramco will invest $1 billion in a venture capital fund focused on new technologies.

However, according to a report by Al Rajhi Capital, in order to achieve its ambition to become a data center, Saudi Arabia needs to increase its data capacity from the current 60 megawatts to 1,300 megawatts by the end of this decade.

Paul Brodsky, senior analyst at Washington telecommunications research firm TeleGeography, said: “But what drives the development of the center is content, what people see on their computers and smartphones. People in the Gulf region are no exception.

“In most cases, the content people consume comes from local content caching. Therefore, someone in Saudi Arabia is likely to watch cricket matches on a streaming service located domestically. The cache itself comes from European or Asian centers.

“To become a center, you need to store data locally and push it closer to end users. You need a large number of people who need content.”

02 Fiber optic cables are key

The key to this growth is fiber optic cables, which carry 95% of global internet traffic. The Middle East is connected to Europe through lines that cross the Mediterranean, and to the Gulf through Egypt and the Red Sea.

So far, Saudi Arabia has lagged behind Egypt in becoming the region’s main cable TV operator.

But as the development of the necessary cable plans for Saudi Arabia to become an IT hub, this is about to change. Brodsky said: “Whenever you see a large data center enter, you need to connect them, either to existing submarine cables to meet growing demand, or you need more cables.”

STC plans to build a 1,100-kilometer Saudi TV cable that will run along the Red Sea coast from Jeddah to Al Haql near Neom.

According to reports, the company also supports the Trans-Europe Asia System (TEAS), the first ground cable to cross Saudi Arabia, from Ha’il Hanna in the Persian Gulf to Amman, Jordan, and then to Israel. The second cable is planned to run along the Red Sea coast and then extend north to Eilat and Israel. In addition, the Google-funded Blue-Raman cable will land near Neom.

In order to ensure sufficient technical workers to achieve Saudi Arabia’s “digital dream,” talent from the region has been recruited.

Mohamad Najem is the executive director of the Beirut-based non-governmental organization SMEX, which is dedicated to promoting digital rights in the Middle East and North Africa.

He said: “All the talent from Egypt, Jordan, and Tunisia has gone to Saudi Arabia.” “They have hired everyone they can, and spent a lot of money on English speakers.”

However, it is not enough to invest a large amount of money to create such a large ecosystem to become a digital center.

Rachel Ziemba, a senior adjunct researcher at the Washington New American Security Center, said: “Saudi Arabia is ambitious. But as we have seen around the world, it is difficult to rebuild an ecosystem like Silicon Valley. This is partly due to obtaining the right academic, business, and governance support.”

Saudi Arabia must also decide in which areas it can innovate and compete globally, and in which areas it cannot.

Ziemba said: “To transform from a large consumer of IT products, software, and data clouds to truly manufacturing these products themselves, where do they stand in the technology industry’s supply chain?”

03 Caught up in the US-China trade war

Riyadh’s desire for its digital ecosystem comes at a difficult time.

In the past three years, Washington has increased its economic power against China and explicitly stated that it does not want other countries to use Chinese technology. Therefore, Chinese telecom giant Huawei lost contracts to launch 5G networks in the UK and India. In turn, Beijing has also enacted legislation to prevent US technology companies from participating in Chinese telecom companies.

“One problem that any jurisdiction developing IT currently faces is: should they use Chinese or American software, hardware, networks and components?” said Ziemba.

“If they use Chinese technology, at what point will they face the risk of being restricted by the United States and pressured around Huawei components and networks? For many years, many Gulf countries have had questions about how to deal with the competition between China and the United States in technology, and this is still a factor.”

In 2019, Huawei opened its first offline flagship store in Saudi Arabia.

Saudi Arabia has established joint ventures and partnerships with global technology companies including Huawei. It also owns the Global Tech Hub, a joint venture between Russia and Saudi Arabia.

“Saudi Arabia is operating in a ‘work with anyone’ manner,” Ziemba said, “but in the long run, it may be difficult to work with all mainstream manufacturers to adopt technology. We especially see that the United States wants to use export controls as a more meaningful economic and diplomatic tool.”

Ziemba also believes that the risk of different and dispersed technology ecosystems is much greater.

“But regardless of any concerns the United States may have about Saudi Arabia, technology may be an area where they hope to cooperate rather than view development as a threat.”

04 Digital Security

Another area of concern for foreign companies operating in Saudi Arabia is human rights, digital privacy and surveillance.

Saudi Arabia’s Personal Data Protection Law (PDPL) will take full effect in March 2023, but it has been criticized by digital rights organizations such as SMEX, which says the legislation may still allow for violations of privacy and data protection rights.

SMEX stated in its report: “The problem is not with the text of the law itself, but with its applicability and implementation in Saudi Arabia, as it is an authoritarian country.”

The US government and private sector have also expressed concerns.

In July 2022, the US International Trade Administration, which is part of the Department of Commerce, said: “The US industry has noted significant differences in some of the laws and regulations that have created ambiguity. Perhaps the most significant factor…is Saudi Arabia’s strict data localization requirement, which is inconsistent with the best practices of global privacy and data protection, and may increase the cost of doing business in Saudi Arabia…”

Any US tech giant wishing to work with Saudi Arabia needs to navigate these concerns and face pressure from non-governmental organizations and other groups on human rights and digital privacy.

Shires said that while tech companies want to do business in Saudi Arabia, maintaining their ethical commitments and internal corporate values may not be easy. “There are issues of cybersecurity for people who hold dissenting views. If we broadly say that Saudi Arabia is a responsible digital leader in the region, it doesn’t always show that responsibility.”

For example, SMEX said it had asked Google for its human rights due diligence report in the Gulf region in 2021. The tech giant said it had conducted the study but had not yet released the report. It did not explain the delay.

Najem said: “We are still working to exert pressure because we are not sure they are doing anything. The problem with all projects involving cooperation with large companies in the Gulf region is: who controls the data and what is their human rights due diligence? If you are a US tech company and you are doing business in an authoritarian country, you need to do due diligence.”

These concerns may give pause for thought–but ultimately, whether Saudi Arabia becomes the digital center of the region will depend on its economic viability.

“The government can do what they want, but ultimately it’s about the market,” Brodsky said. “Saudi Arabia has the potential to become a major ICT center.”

This article was originally published in Middle East Eye.

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