Foreign firms maintain local ties in Saudi Arabia

17 October 2008
While directly investing in Saudi Arabia has become easier for foreign companies since a change in investment laws, the benefits of local relationships mean few are prepared to strike out on their own.

Doing business in Saudi Arabia has become easier for foreign firms over the past decade, thanks to a loosening of foreign investment laws, resulting in a marked increase in foreign direct investment (FDI) into the kingdom.

FDI in Saudi Arabia increased to $14.3bn in 2006, from $183m in 2000, when Riyadh passed the Foreign Investment Act.

As the dominant economy in the GCC - Saudi gross domestic product (GDP) reached $374bn in 2007 - and with a young population of 24 million who are hungry for consumer goods, joint ventures offer a lot of potential.

The vast array of real estate projects under way in the kingdom are worth $460bn, while the $27bn King Abdullah Economic City, which comprises six areas - a port, holiday resort, schools, houses, and industry and finance zones - will create huge business opportunities.

Infrastructure plans are also ambitious. The kingdom’s water and electricity authority is considering bids for the Ras al-Zour desalination plant, which is set to be the largest in the world. Riyadh has earmarked $65bn to invest in water and power projects over the next 15 years.

Joint ventures

Over the past decade, economies across the Middle East have taken steps to rationalise business practices and cut red tape.

The Foreign Investment Act 2000 did away with the requirement for local merchant families
to ‘rubber-stamp’ foreign companies coming into the Saudi market, liberalising the market and enabling foreigners to operate wholly owned enterprises.

There is a list of industries that cannot be touched by foreign companies as they are deemed too strategic to give away ownership to non-Saudi citizens.

These include military equipment manufacturing, military catering, legal services and banking.

Even with these no-go areas, commonly known as the ‘negative list’, there are more than enough business sectors available for foreign investment.

The anticipated outcome of the legislative changes aimed at liberalising ownership laws was that foreign companies would break away from their local partners, allowing them to keep 100 per cent of the profits.

However, the nature of doing business in Saudi Arabia - principally, the need to know the right people - means that the joint venture model endures.

“It depends on the industry, but having a Saudi investor who knows the market can be very helpful,” says Mohammed Al-Jadaan, managing partner at local commercial law firm Al-Jadaan.

“A foreign company coming into Saudi Arabia may need guidance on business practices, for example.”

The petrochemicals market is open for foreign investment but many companies still opt for a local partner. “Local expertise is very important,” says Al-Jadaan.

Over the past few years, several major companies have entered into joint ventures to gain local knowledge.

French oil giant Total went into business with Saudi Aramco, signing a memorandum of understanding in June 2006 to build a $6bn oil refinery in the Eastern Province city of Jubail.

The oil giants agreed to form a joint venture company, with each owning 35 per cent, and the remaining 30 per cent offered as shares to Saudi nationals.

Local partners

Saudi conglomerate Zamil Group Holding Company has a large portfolio of joint ventures, including the US’ GE, with which it operates Middle East Air Conditioners.

The Al-Rajhi family has joint venture agreements with companies ranging from cement manufacturers and construction companies to travel businesses.

DHL Exel Supply Chain is another example of a company with a long-established Saudi joint venture partner: the Olayan Group, one of the largest Saudi family businesses, with 50 subsidiaries and huge influence in Saudi business circles.

Dan Wood, business development director for Saudi Arabia at DHL Exel, says the relationship was established 18 years ago.

Exel Saudi Arabia operates out of nine locations in the kingdom, provides 58,000 square metres of storage space and employs almost 600 people.

DHL offers supply-chain handling, in-plant logistics, warehousing and distribution, as well as services such as Arabic labelling for customers including Nestle, Kimberly Clark, Kraft and Motorola.

In 2007, DHL concluded a 10-year, multi-million-pound contract with state energy giant Saudi Aramco. Wood says working with a local partner fast-tracked the contract, cutting its implementation to six months from 12.

As part of the joint venture, DHL Exel Supply Chain manages the kingdom’s oil supply chain, delivering materials for Saudi Aramco through its four material distribution centres in Dammam, Jeddah, Riyadh and Yanbu, and through a fleet of supply vehicles.

“We are a very small part of their business,” says Wood.

He adds that a joint venture would not be easy to break up if a foreign company wanted to go it alone.

“It would be a difficult relationship to end,” he says. “You have a huge customer base and revenue stream to separate, and doing so could harm your growth strategy.”

The benefits of joint ventures are obvious, according to Wood. A joint venture local partner will often be a distributor, which is important in the logistics industry.

“In our case, the Olayan Group already had the distribution rights for Henkel, Xerox and Colgate and was distributing in-house,” he says.

“Being in a joint venture, human resources issues are taken care of, and you can rely on already established sections of a company, such as the real estate department.”

Figures show the UK, France and Japan are among the leading investors into Saudi Arabia.In 2006, $1.6bn worth of foreign direct investment came from the US, $20.5bn from France, $636m from the UK and $3.5bn from Japan.

With foreign companies increasingly entering the market, Al-Jadaan says local joint venture investors have upped their game and are working harder for their money.

Gone are the days when a joint venture involvement was simply in name only, with a profit share for little effort. “Saudi families are expected to add value to the business,” says Al-Jadaan. “Joint ventures are not just a quick and easy way to make money if you have the capital.”

Investment opportunities

Local families are also investing in a more diverse range of business and industry sectors. As Al-Jadaan points out, the Hariri and Bin Laden families have both diversified from construction, into telecoms and power industries and railroads respectively.

He says this is because of the ease with which such a joint venture can be set up, thanks to the Foreign Investment Act.

“It can take as little as two to three months to finalise the legal work, where it used to take nine months to a year,” he says.

“Obviously, it depends on the nature of the business. If it is a small manufacturing operation, then that is relatively easy to set up.”

The World Bank’s Ease of Doing Business Index ranks Saudi Arabia 16th out 161 countries, and 28th in the ‘starting up a business’ category.

By comparison, Bahrain comes in at 18th overall, Qatar at 37th, the UAE at 46th, Kuwait 52nd, and Oman 57th.

Despite Saudi Arabia being one of the more difficult Middle East countries in which to travel, its business policies are clearly more liberal than those of its GCC neighbours.

The Saudi government takes 30 days to reply to an application for foreign investment. Any applications that are rejected are subject to a right of appeal.

However, the legal part is the easy part, says Al-Jadaan. More difficult is getting the right manpower. A limited skilled Saudi workforce makes ex-pat workers essential, but professionals demand high wages to work in the kingdom.

British Offset, an initiative that offers opportunities for international companies to take part in joint ventures in Saudi Arabia, offers advice to firms that are thinking of investing in the kingdom, mainly in the key sectors of aluminium, metal, metrology, energy, logistics and manufacturing.

It played a major role in establishing the United Sugar Company refinery in Jeddah, a joint venture of UK-based Tate & Lyle and the local Savola Group, in 1994.

It was the kingdom’s first sugar refinery but has now expanded to become one of the largest of its kind in the world, and will soon be producing more than 1 million tonnes of high-quality white sugar a year.

This is projected to meet home demand, with the rest earmarked for export to the other Gulf and Arab markets.

British Offset, a joint initiative of the UK government and defence and aerospace company BAE Systems, also assisted in the Saudi Polyolefins Company joint venture of National Petrochemical Industrialisation Company, a Saudi joint stock company, and Netherlands-based Basell, the world’s largest polypropylene manufacturer.

Key fact

100 % - Proportion of profits that can be repatriated

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