Towards a larger base: Investments are accelerating growth in manufacturing activity

The country’s industrial sector is dominated by heavy industries, in particular refining and petrochemicals, and to a lesser extent metals and fertiliser production. Yet the Kingdom also hosts a large manufacturing industry, which benefits from the availability of raw materials produced by local heavy industry. The authorities are keen to encourage the development of lighter industry to diversify the economy and create jobs for Saudi youth, and most of the segments targeted for development by the industrial cluster programme in manufacturing. At least two of these – the automotive and solar panels production industries – appear on the verge of attracting large-scale foreign investment for new manufacturing plants in the Kingdom.

LIGHTER INDUSTRY: Some of the larger medium and light industrial segments in the Kingdom include the manufacture of food products, operating revenues for which stood at SR57.4bn ($15.3bn) in 2010, according to the Kingdom’s Comprehensive Economic Census, the most recent such figures available at the time of writing, as well as fabricated metal products (SR23.8bn, $6.3bn) and electrical equipment (SR21.2bn, $5.7bn). A prominent example of a local manufacturing success story operating in the last of these areas is Saudi firm Alessa, which produces items such as air conditioning units and refrigerators at its factory in Riyadh. The company sells around 2m units a year, producing about half of that locally. Around 80% of the group’s local output is consumed in Saudi Arabia, with the remainder exported to other countries in the GCC, Levant and North Africa. “There is no significant growth in the region at the moment, but we believe it will come back soon,” said Yousef Abdullah Al Motlaq, CEO of Alessa. “We see North Africa as a very promising export market.”

One major advantage for manufacturers in the Kingdom is the large-scale and growing local availability of raw materials. However, more sophisticated components are harder to source domestically. “We try to maximise our use of locally produced materials, which helps us with our lead time as regards production,” said Al Motlaq. “However, there is a very limited supply in some areas. We source steel, plastics and around 50% of our cables locally, but need to acquire compressors, motors, electronics and so on from abroad.”

SAUDIISATION: Developing a larger manufacturing base is particularly important to the authorities’ goals of raising industry’s share of overall employment to 30% by 2020 in order to boost employment opportunities among Saudi nationals, as the heavy industries that currently dominate the industrial sector, such as petrochemicals, are not heavily labour-intensive in relation to the size of the investments involved in them.

Al Motlaq warned that increasing the proportion of manufacturing employees who are Saudis could be a challenge. “Saudiisation in manufacturing is difficult. It is very difficult to hire Saudi nationals on competitive salaries,” said Al Motlaq. “Saudis also tend to be looking for office work rather than manual work. Hence we are trying to Saudiise in jobs that might be more suitable to them, such as accounting, engineering, technical support, customer services and administrative jobs.” The authorities are hoping that nationals will be recruited for white collar and management positions.

Local industrialists have also argued that much of the Kingdom’s imported manufactured goods could be produced locally. “The Kingdom needs to develop leading sectors with a regional expansion of economic cities and mega projects, which have strategic advantages. It would create jobs and restructure national employment and the market as whole” said Nasser Al Qahtani, CEO of holding company Abdullatif Alissa Group.

However, others point to difficulties involved in replacing imports with domestically produced manufactures. “There are many challenges as regards localising manufacturing in Saudi Arabia,” Al Motlaq told OBG, citing the dumping of products on the Saudi market especially by Chinese companies as a result of export subsidies from the Chinese government to their local manufacturing firms, low margins, and a shortage of education and training initiatives for employees in the sector. “With the exception of the petrochemicals industry, which is an extension of the oil and gas sector and receives large feedstock subsidies, it is very difficult for Saudi conversion and manufacturing industries to continue to compete with foreign firms,” he said. Yet strategies to help local firms compete exist. “We stay competitive by seeking to position ourselves in different niches to Chinese vendors, such as high quality, after-sales support, higher brand positioning and commercial rather than consumer markets, meaning we are not competing directly with them,” Al Motlaq said.

AUTOMOTIVE: Developing the automotive sector is one of the government’s priorities under the industrial cluster programme, which aims to produce 400,000 passenger vehicles annually within the next 10-15 years. The government is hoping vehicle manufacturers will be enticed to establish production facilities in the country due to the local availability of key raw materials, including metals and plastics, as new projects such as Alcoa and Saudi Arabian Mining Company’s aluminium complex and Dow and Saudi Basic Industries Corporation’s Sadara petrochemicals complex come on-line. The Kingdom also represents an increasingly important market in itself – National Commercial Bank in late 2013 forecast new car sales will reach more than 1m a year by 2018 – and is well positioned geographically for exports to other wealthy importers.

Several original equipment manufacturers already have production facilities in Saudi Arabia. These include the Middle East Battery Company, a joint venture between Johnson Controls and local investors, which operates a factory in Dammam with a production capacity of 5.5m AC Delco brand batteries a year. A small amount of vehicle production also takes place in the Kingdom, in the form of an assembly plant for medium-duty trucks opened by Isuzu in 2012. The plant currently produces around 4000 vehicles a year. Isuzu aims to expand output into light and heavy trucks and to bring production capacity up to 25,000 by 2015.

Isuzu may soon be joined by another vehicle manufacturer, this time in the passenger segment and on a larger scale. Jaguar Land Rover (JLR), a unit of India’s Tata Group, in December 2012 signed a memorandum of understanding with the Ministry of Trade and Industry, to investigate the construction of a SR4.5bn ($1.2bn) car factory in Yanbu industrial city. The Saudi government is reportedly willing to pay for the cost of building the facility, which JLR would then lease from it. The proposed plant would have an annual production capacity of 50,000-100,000 vehicles per year, starting with components manufactured in the UK. JLR had previously expressed interest in building a factory to use aluminium output from the smelter being built in Ras Al Khair, which is due to start producing aluminium auto sheet by the end of 2014 and which would be a boon for the firm given its use of the lightweight metal.

SOLAR PANELS: Efforts to attract investment in solar panels, another niche targeted by the industrial clusters initiative, are also bearing fruit. Advantages for local producers include availability of raw materials and cheap electricity, and government plans for major investment in solar-powered electricity. In 2012 the authorities announced plans to build 40 GW of solar generation capacity by 2030, at a cost of $109bn, which would create a huge domestic market for panels.

A Saudi firm, Green Gulf, plans to open a wafer plant with annual production capacity of wafers capable of generating 720 MW of electricity, as well as a photovoltaic module plant with annual capacity equivalent to 200 MW, in the final quarter of 2014. Furthermore, in early February 2014 US firm SunEdison announced it was working with the Public Investment Fund and Saudi Arabian Investment Company on a feasibility study for the establishment of a $6.4bn photovoltaic solar panel manufacturing facility at Waad Al Shammal in the north of the country. The company conducted a preliminary study regarding the potential investment with the National Industrial Clusters Development Programme in 2013. Although the project has yet to be confirmed, in late February SunEdison CEO Ahmad Chatila said he was “very excited about the initiative”, adding that the company would have more to say about the project “as it gets finalised and moves forward”.