AI companies should be wary of Gulf spending spree

Mint

6 hours ago

A handful of Middle Eastern countries have emerged as some of the world's biggest spenders on artificial intelligence. The companies benefiting from the windfall should be wary—as should their investors.
Gulf countries including Saudi Arabia, the United Arab Emirates and Qatar are in splash-out mode, spending billions of dollars on data-center projects with Microsoft and OpenAI, as well as chip purchases from Nvidia, Advanced Micro Devices and others to fuel their AI ambitions.
Their aim is to seed domestic AI industries rather than ceding the technology entirely to foreign tech companies. Many see it as a point of national pride to develop Arabic-language AI models locally. AI investments also fit into longstanding economic diversification efforts.
Nvidia's stock rose 15% in one week last month after it reached deals to sell millions of chips to the U.A.E. and Saudi Arabia. AMD also got a share boost after it reached a deal worth up to $10 billion in Saudi Arabia.
The deals have been welcome news when U.S. export controls have effectively shut out Nvidia and AMD from the market for advanced AI chips in China. That was a body blow especially for Nvidia, which had been a leading player in a market it estimates will grow to $50 billion annually in the coming years.
Tech companies hope spending in the Middle East will keep going up as countries place more bets on AI. But there are reasons to wonder whether it will become a sustainable source of revenue in the long run.
Many big investments in the region that generated a flurry of initial excitement have been scaled back or scrapped over the years, falling victim to poor management or political squabbles. Among the largest is Neom, a futuristic desert city in Saudi Arabia launched in 2017 but plagued by cost overruns and delays. A board presentation last year found it would cost $370 billion to build the city's first phase in the next 10 years.
Even if Middle Eastern countries do move forward with the projects they have announced, it is unclear where the end demand for their AI services will come from. That differentiates them from commercial buyers and makes it less certain that they will keep plowing money into larger and more advanced AI facilities down the road.
Tech companies' growth in the region could also easily be scuttled by U.S. export controls. U.S. officials have long worried that China will leverage its close political and military ties to the Gulf countries to get around AI restrictions on China.
In the waning days of the Biden administration, the U.S. addressed those concerns by proposing country-specific quotas for AI chip shipments to the Middle East and other countries. The Trump administration scrapped them after Emirati officials courted the president with $1.4 trillion of investments over the next decade, paving the way for Nvidia and AMD's deals.
It isn't hard to imagine similar restrictions coming back if Middle Eastern data centers do become a way for China to sidestep direct curbs on its AI development, or if a later U.S. administration takes a more cautious view of that risk.
Israel's conflict with Iran makes it harder to ignore the region's political risks. Should the conflict spread or become a wider regional war, closed airspace and military threats to U.S. interests in the region could slow or postpone investments in AI infrastructure. U.S. companies may be reluctant to send staff to the region.
A prolonged conflict would also reorient the political and financial priorities of regional governments, which could quickly turn off U.S. companies' regional revenue spigot. More broadly, the conflict is a reminder of the constant geopolitical risks present in the region.
The Middle East has recently been a gold mine for U.S. tech. In the long run, though, it may not be the mother lode recent announcements suggest.
Write to Asa Fitch at [e-mail]