Why are Chinese companies flocking to the Middle East (again)?

The discussion around Chinese companies expanding to the Middle East has resurfaced over the past two years, but unlike the first wave in 2015, today’s entrants face more pressing needs: securing funding, accessing resources, and exploring new markets.

Saudi Vision 2030, the ambitious plan to transform Saudi Arabia’s economy, is already underway. Similarly, the UAE has its own vision for the future. Entrepreneurs familiar with the region often liken it to “Shenzhen 20 years ago,” but with even greater opportunities. The UAE, as international as ever, has a strong appetite for industries beyond oil, driven by its push for a diversified economy.

Despite its wealth, the Middle East remains a complex and often misunderstood region. Last year, waves of investment institutions flocked to Saudi Arabia, but many returned empty-handed. Entrepreneurs, too, ventured in, only to stumble into pitfalls due to a lack of regional knowledge. Even the most basic steps—such as registering a company—can take anywhere from three months to half a year.

So, what must Chinese companies get right when entering the Middle East? Which industries are most welcomed? Which regions are most suitable for expansion? And where do the opportunities and advantages lie?

To unpack these intricacies, 36Kr spoke with Yan Linhui, the China representative for Khalifa Economic Zones Abu Dhabi (KEZAD Group) and a partner at Fosun Capital. Yan’s role includes helping Chinese companies establish themselves in KEZAD and guiding them through the process of securing relevant subsidies.

KEZAD, owned by ADQ, stands as a significant economic player. ADQ is the 18th largest sovereign wealth fund globally, the seventh largest in the Gulf region, and the third largest in Abu Dhabi.

The following interview has been edited and consolidated for brevity and clarity.

36Kr: When companies expand into the Middle East, what issues concern them most? What pitfalls do they need to avoid?

Yan Linhui (YL): Companies generally care about several types of issues: the business environment, market size and profitability, tax rates, labor costs, and land prices. They also wonder if they can secure investment from sovereign wealth funds or royal families once they reach the Middle East.

As for pitfalls, many Chinese companies are unfamiliar with local laws and culture and lack effective communication with genuinely experienced local partners.

For example, Saudi businesses work from Sunday to Thursday. Local employees typically work from 8:00 a.m. to 4:00 p.m, while government offices close even earlier, around 3:00 p.m. In the UAE, the workweek is four and a half days, with Friday afternoons reserved for religious prayers. Saudi Arabia’s work pace is also slower compared to the UAE.

Saudi Arabia requires foreign companies to pay 20% corporate income tax, while locally owned portions are subject to a 2.5% “Zakat” tax in lieu of corporate tax. Foreign companies must also meet the “Saudization” rate—a legal requirement for a certain percentage of Saudi nationals to be employed. Local employees are aware of this requirement, so their work mentality can reflect the law. Employers cannot arbitrarily fire them or criticize poor performance too harshly, as this could lead to legal action.

Additionally, opening a trading company in Saudi Arabia requires a paid-up capital of around RMB 60 million (USD 8.4 million) for wholly foreign-owned businesses. However, joint ventures with local partners require much less capital, so many foreign investors prefer joint ventures. Some companies have also encountered cases where contract documents in Arabic were subtly altered to favor local partners.

In contrast, company registration in the UAE is much simpler. Requirements vary across free zones but generally involve around AED 150,000 (USD 40,840). Almost all industries allow for 100% foreign ownership, except for a few specific ones. Tax policies are uniform, and many industries benefit from free trade zone incentives. For example, Jereh Group, a Chinese oil and gas company, recently secured a USD 920 million order in Abu Dhabi. The UAE is highly international—simply setting up a local subsidiary enables companies to win contracts.

In Saudi Arabia, however, government projects often require production to occur within locally registered joint ventures, as the government has stringent localization demands.

When it comes to the workforce, the UAE is more international, especially in cities like Dubai and Abu Dhabi, which have higher proportions of internationally educated and skilled professionals. In contrast, Saudi Arabia has a larger native population and workforce.

To avoid these pitfalls:

1. Carefully review legal documents with the help of professionals and ensure Arabic contracts are translated into English.
2. Exercise caution when collaborating with local companies, and ensure accuracy and retention of transaction documents.
3. Understand local mindsets—regarding Saudization, for instance, hiring local women, who are eager to work in administrative roles, can help reduce costs.

In the UAE, the business environment is excellent, with local hiring quotas set at just 2%, allowing for more foreign workers. Companies can also use human resources firms to handle recruitment.

When negotiating with local businesses in the Middle East, patience is crucial. Avoid rushing the process—take your time to understand their psychology. Arabs are highly skilled negotiators.

36Kr: Which types of Chinese businesses are favored in the UAE and Saudi Arabia?

YL: The UAE aims for economic diversification but does not enforce localization requirements, whereas Saudi Arabia also seeks economic diversification but insists on localization. Chinese companies with strong financials, significant strength, or global rankings (such as Fortune 500 firms) find it easier to land in the Middle East.

In terms of industries:

1. New energy is highly favored, including solar energy, energy storage, and hydrogen energy. The UAE aims to become the world’s hydrogen energy hub by 2031.
2. The digital economy is a priority. The UAE currently leads the Middle East in digital infrastructure.
3. Advanced manufacturing industries relying on energy and ports are welcomed. Historically, the Middle East relied on imports, but with affordable energy and automation, local manufacturing now has a competitive edge. Ports like the Port of Jebel Ali and Port of Khalifa also facilitate easy import and export of goods.
4. Modern agriculture is highly welcomed, with multiple companies already established in economic zones.

Energy costs and tax benefits are highly favorable for Chinese businesses. In KEZAD’s free zone, for example, industries can enjoy zero taxes. The UAE has no personal income tax and a value-added tax (VAT) rate of 5%, but KEZAD’s industrial sector is VAT-exempt, along with customs duties. Although businesses with over AED 375,000 (USD 102,100) in revenue must pay 9% corporate income tax, many industries are tax-exempt, such as manufacturing in KEZAD.

Labor-intensive industries may encounter efficiency issues, but high-tech and automated enterprises have a distinct advantage.

36Kr: Saudi Arabia has grown rapidly in recent years. How does its infrastructure compare to the UAE’s in attracting investment?

YL: I’m not sure about other areas, but KEZAD provides fully developed infrastructure. Land is leveled, electricity and water are connected to the doorstep, and roads are built to the entrance. Rainwater and sewage systems are also completed underground before land is handed over to Chinese businesses, with no extra costs.

36Kr: Can you give a specific example? Would the cost of building a factory in the Middle East be higher than in China?

YL: I think the costs are actually lower. Take for example a modern agriculture company I helped introduce into KEZAD: land is very cheap after subsidies, electricity costs are half of those in China, and since operations require significant cooling, the savings are substantial. Taxes are minimal, and once the business grows to a certain scale, costs become very manageable. Labor needs are limited, but product prices in the Middle East are 3–4 times higher.

36Kr: The Middle East has always been unstable, with events like the Israeli-Palestinian conflict and the Red Sea crisis. In your opinion, does geopolitical risk affect the Gulf markets, and how can Chinese businesses mitigate such risks?

YL: This is a geopolitical issue, so I’ll keep my response brief. Looking at the UAE’s diplomatic behavior in recent years—such as hosting the presidents of China, the US, and Russia—it’s clear that the UAE does not take sides. The nation values freedom and openness, aiming to become the “Singapore of the Middle East,” with a fundamentally neutral stance.

Interestingly, many wealthy Russians have moved to the UAE in recent years, bypassing Singapore.

36Kr: How have Saudi Arabia and the UAE’s attitudes toward Chinese businesses changed in recent years?

YL: They are undoubtedly more welcoming toward China.

First, as the world’s largest energy consumer, China is an ideal customer.

Second, Saudi Arabia made significant purchases at the recent China International Aviation and Aerospace Exhibition, including Chinese weapons.

Third, the region’s massive demand for infrastructure aligns with the strengths of Chinese companies, which are capable, cost-effective, and often willing to provide financing—making collaboration particularly appealing.

These factors collectively foster stable relationships, creating favorable conditions for Chinese businesses to expand into the Middle East.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Leslie Zhang for 36Kr.