Industry to drive future non-oil growth in Saudi Arabia

The industrial sector in Saudi Arabia is widely regarded as a promising area for business growth that can provide additional private sector employment for citizens in the decades ahead. The Kingdom has also recognised that a formula based on the inputs of plentiful crude oil and inexpensive foreign labour alone will not create enough distinctive products to diversify exports and generate sufficient wealth for a growing population. The sector is therefore embarking on an agenda based on Industry 4.0, a more efficient and educated workforce, and investment and skills transfer from the private sector.

Vision 2030

The sharp downturn in oil prices from 2014 to 2016 prompted a policy overhaul in which civil servants and management consultants re-appraised the Kingdom’s economic strengths and weaknesses, and identified a new strategy on which to map future prosperity. The resulting document, Saudi Vision 2030, laid out a blueprint for success based on three pillars: a vibrant society, a thriving economy and an ambitious nation. Crafting a new economic composition is a project that requires the support of citizens and residents, as well as investment from the local private sector and international businesses. However, it is public sector agencies that are leading the charge in enabling progress.

Vision 2030 lays out 96 objectives within 13 programmes, each with its own measurable goals. Plans can be adapted to capture new opportunities as they arise, but accountability in delivery is emphasised. Goals that are important to industry include boosting the private sector’s contribution to GDP from 40% in 2016 to 65% by 2030, while increasing the contribution of foreign direct investment (FDI) to GDP from 3.8% to 5.7%. Since the roadmap was launched in April 2016 there have been multiple changes in the public departments and agencies responsible for implementing the ambitious agenda, many of which have had a direct impact on the industrial sector.

Oversight

The overarching Council of Economic and Development Affairs (CEDA) is chaired by Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud. There are 22 seats on the CEDA board, many of them held by ministers. The Ministry of Economy and Planning (MEP) is responsible for coordinating with other ministries to enact the policies of Vision 2030. In 2017 the MEP assumed oversight of the new National Development Fund, an umbrella body comprising government financing agencies such as the Saudi Industrial Development Fund (SIDF), the Agricultural Development Fund, the Human Resources Development Fund and the Social Development Bank.

In 2016 the ministries responsible for industry, mining and energy were merged, with Khalid Al Falih, the former CEO of national oil giant Saudi Aramco, leading the new Ministry of Energy, Industry and Mineral Resources. However, in late 2019 the portfolios were separated again, and two new ministers were appointed. Khalid Al Falih was replaced at the helm of the Ministry of Energy by Prince Abdulaziz bin Salman Al Saud, an oil industry veteran. Meanwhile, Bandar Alkhorayef, a businessman with 25 years of experience in industry, was appointed head of the Ministry of Industry and Mineral Resources.

This shake-up also meant dividing the functions of the Ministry of Commerce and Investment, which had been responsible for issuing and enforcing commercial licences, trademarks and trade names. The functions of the Saudi Arabian General Investment Authority (SAGIA) were assumed by the new Ministry of Investment in February 2020, headed by Al Falih after a couple months out of office. At the same time, Majid Al Qasabi, the minister of commerce, was named acting minister of media. Ministerial reshuffles have become more common since Vision 2030 was introduced, which is the result of a strict code of accountability that has been implemented for the dozens of goals set for each government department.

Industry Focus

The reshuffle reflected concerns that a ministry combining the interests of industry, mining and energy had too broad a mandate to address the three sectors’ needs effectively. At the end of the process many welcomed the return of Al Falih to a key government role related to investment, where he would be able to draw on dozens of years in industry and a vast network of international contacts. The agency he assumed control of, SAGIA, was formed in 2000. For two decades it spearheaded the Kingdom’s FDI drive by identifying opportunities and partnerships that would bring new products and skills into the country, but also acted as a regulator by issuing licences to investors and setting standards.

Invest Saudi, SAGIA’s promotional arm, highlights business opportunities in the Kingdom. Broad categories identified by Invest Saudi include mining and minerals, chemicals, industry and manufacturing, and transport and logistics. Within each of these the agency identifies subsectors ripe for investment. Under industry and manufacturing it mentions meeting demand for food and building materials by creating food processing businesses, aquaculture farms and companies manufacturing construction inputs. Parts needed for desalination plants, solar panels, vehicles, aircraft and armaments were also highlighted. “When speaking about localising manufacturing capabilities, there are many industries on which the Kingdom can capitalise under Vision 2030,” Abdullah Al Khorayef, CEO of conglomerate Al Khorayef Commercial, told OBG. “Indeed, the military industry and utilities sector are two promising markets in which local content is being developed.”

The government recognises that investors considering opening new factories and warehouses in the Kingdom require different types of locations to meet their needs, from industrial parks with installed sources of power, water and communications, to greenfield sites that can be developed to service the particular requirements of larger firms. The agency responsible for this service is the Saudi Authority for Industrial Cities and Technology Zones (MODON). MODON’s developed industrial land exceeds 198.8m sq metres, and it has attracted SR500bn ($133.3bn) in investment to the Kingdom since it was established in 2001. It operates 35 industrial cities in all corners of the country, with three each in Riyadh, Jeddah and Dammam, and acknowledges that some businesses need to be located within manufacturing clusters or adjacent to shipping facilities.

Realisation Programmes

Government policy outlined in Vision 2030 is broken down into 13 Vision Realisation Programmes (VRPs). Each VRP had short-term goals to be met by 2020, and as of March 2020 the process of measuring progress and planning for the next stage was under way. One VRP, the Privatisation Programme, has a 2020 commitment to raise SR35bn-40bn ($9.3bn-10.7bn) through the sale of government-owned entities, many of which are active in industry. This would generate net government savings of SR30bn-35bn ($8bn-9.3bn) in capital projects and operating costs for those entities, while creating 10,000-12,000 private sector jobs for the public servants who had been working in the public entities that were sold off. “The privatisation of government-owned assets can be a great stepping stone for the local private sector, as well as international bidders,” Abdulaziz Mohammed Al Namlah, managing director of domestic investor Amnest Group, told OBG.

However, the most far-reaching VRP for the industrial sector is the National Industrial Development and Logistics Programme (NIDLP). Launched in January 2019, its mandate is to invest SR1.7trn ($453.2bn) and create 1.6m jobs in industry, non-oil energy, mining and logistics activities. SIDF is the primary financial enabler of the programme, and at the time the NIDLP was unveiled, the government injected funds into SIDF to raise its capital base from SR40bn ($10.7bn) to SR105bn ($28bn) (see analysis).

The NIDLP supports the growth of industry, mining, non-oil energy and logistics to create private sector jobs, boost their contribution to GDP and exports, and promote local content. It provides potential investors with useful context and historical footnotes on the development of Saudi Arabia’s industrial ecosystem, and indicates its aspirations for the next 10 years. The NIDLP covers 11 of Vision 2030’s 96 objectives, and its 2020 commitments are divided into two categories: legal and regulatory changes, including the encouragement of private sector investment in mining; and capacity development initiatives, such as expanding ports and airports, creating specialist centres devoted to Industry 4.0 technologies and supporting industrial compounds like Jubail Automotive Manufacturing City. It is likely that new goals will be published in 2020 or 2021 to reflect recent developments and achievements made in delivery.

Performance

While government reforms are slated to drive economic performance on a number of fronts, many of the country’s industrial activities remain sensitive to fluctuations in global prices for oil, petroleum products and petrochemicals. In 2018 the average price for Brent crude was $71.19 per barrel, a significant improvement on $43.63 and $53.90 per barrel in 2016 and 2017, respectively, according to the US Energy Information Administration. However, prices dipped again the following year, with Brent crude slipping to an average of $64.37. Early 2020 brought further drops, which saw crude trading at around $25 per barrel in mid-March. A combination of factors led to this decline, most notably the global spread of the Covid-19 virus that shuttered factories and dampened demand, first in China then in other major economies. Production increases among leading members of the Organisation for the Petroleum Exporting Countries (OPEC) were also a supply-side factor. In mid-April 2020 the organisation and its oil-producing allies, known as OPEC+, agreed to a production cut of 9.7m barrels per day to help stabilise prices (see Energy chapter).

March 2020 saw the government release preliminary estimates showing overall GDP growth of 0.3% in 2019, compared to 2.4% in 2018. While non-oil GDP grew by 3.3%, oil GDP fell by 3.6%. The manufacturing sector, excluding petroleum refining, contracted by 0.9% at constant 2010 prices and 0.6% at current prices, which saw its value fall slightly to SR222.2bn ($59.2bn) and SR268.8bn ($71.7bn), respectively. The only other non-oil segment to fall in value in 2019 was electricity and water, which contracted by 4%. Manufacturing contributed 9% of overall GDP in 2019, roughly in line with 9.2% in 2018. Mining, for its part, grew by 4.8% at constant prices and by 5.3% at current prices. However, while it is seen as a sector with much promise, its contribution to overall GDP at both constant and current prices was just 0.4% in 2019, with a value of SR10.7bn ($2.9bn) at constant prices and SR13.2bn ($3.5bn) at current prices.

Industrial Trade

A good barometer of industrial health is the value of associated non-oil exports. According to the most recent data available from the General Authority for Statistics (GaStat), total non-oil exports for the month of December 2019 were valued 6.3% lower than in December 2018, at SR19.1bn ($5.1bn), compared to SR20.4bn ($5.4bn). Exports of products from the chemicals and allied industries fell by 19.3% year-on-year (y-o-y) to SR5.5bn ($1.5bn), plastics and rubber articles were down by 21.9% to SR5.4bn ($1.4bn), and base metals fell by 11% to SR1.6bn ($426.6m). While these industries saw significant contraction, exports of machinery, mechanical appliances and electrical equipment grew by 15.2% to SR1.1bn ($293.3m).

China is a critical trade partner for Saudi Arabia: it was the second-most-important destination for non-oil exports in December 2019 after the UAE, purchasing 15% of the total, down slightly from 17.6% in the same month of 2018, when it was the top buyer. The value of non-oil exports to China declined by 20.3% y-o-y in December 2019, from SR3.6bn ($959.8m) to SR2.9bn ($773.1m), while that month’s data showed the Kingdom becoming more reliant on the Chinese economy for imported goods. The share of the Kingdom’s imports that came from China was 18.3% in the final month of 2019 and valued at SR9bn ($2.4bn), up from SR6.5bn ($1.7bn) in December 2018, making China the country’s most significant source of imports. All industrial category imports saw y-o-y increases in December 2019: base metals grew by 19.7%; machinery, mechanical appliances and electrical equipment by 11.7%; plastics and rubber articles by 8%; and products of the chemicals and allied industries by 3.8%.

Employment

Data on the workforce is compiled by GaStat and published in the Labour Force Survey on a quarterly basis. In the third quarter of 2019 the mining and quarrying sector employed 181,588 people, while there were 835,811 people working in manufacturing. Of the 112,653 Saudis in the extraction industries, 107,700 were men and 4953 were women. The manufacturing sector employed 198,029 Saudis, of whom 145,279 were men.

In its “Saudi Labour Market Update” report for the third quarter of 2019, Riyadh-based Jadwa Investment noted there was a fall in net employment in the manufacturing sector that quarter, with 1600 fewer citizens and 7000 fewer expatriates working in manufacturing than in the previous quarter. The number of workers in mining and quarrying grew in terms of both citizens and expatriates, building on the 800 Saudis hired in mining during the second quarter. In its 2018 annual report the country’s largest mining firm, Saudi Arabian Mining Company (Ma’aden), reported that it employed 5772 people at the end of the year, of which 66% were nationals.

The mining sector is one of the main industrial targets of the NIDLP, which estimates the country could hold SR5trn ($1.3trn) worth of minerals (see analysis). According to the NIDLP, Vision 2030 initiatives in mining could lead to 450,000 direct and indirect jobs over the coming decade. To put this in context, Australia’s mining industry, which estimates $282bn in revenue in 2019/20, employed around 250,000 people as of November 2019. The NIDLP’s target for employment in the chemicals industry, meanwhile, is 400,000 jobs. For perspective, the 2018 annual reports of SABIC and Dow Chemical Company showed that the two global petrochemicals firms employed 33,000 and 54,000 people, respectively.

Although the creation of jobs for future generations of Saudis is a central pillar of Vision 2030, transforming industrial employment to create more jobs for citizens may take some time. A key component of the first phase of Saudi Arabia’s industrial development from the 1970s was the use of cheap, often unskilled and primarily male labour. While that remains the case for many sectors of the economy, times are beginning to change. Data for the third quarter of 2019 shows a total labour pool of 12.9m. Of these employees, 3.2m were expatriate domestic workers, including 1m foreign women. Therefore, the labour market in which Saudis were active was 9.7m strong, and of that total 3.1m were citizens.

Among Saudis 54% worked in the private sector and 46% in the public sector, which is in contrast to many GCC neighbours, where the public sector accounts for the majority of citizen employment. Saudis constituted 95% of all civil servants and 20% of private sector employees in the third quarter of 2019, while Saudi women made up 35% of all employed locals.

Labour Force

Expatriate levies were introduced in 2018 to incentivise companies to hire more Saudis, with companies expected to pay up to SR800 ($213) per month for each foreign worker in 2020 – a large bill for some companies, as expatriate males are the largest group in the workforce. In September 2019 the government made an exception for industry in order to stimulate investment, waiving the fees for five years – an exemption that could be worth a total of SR29.8bn ($7.9bn). However, the 706,717 expatriates working in mining and quarrying or manufacturing in the third quarter of 2019 accounted for just 11% of the 6.6m foreign men and women working in Saudi Arabia’s private sector.

More than 1m unemployed Saudi citizens were looking for work in the third quarter of 2019. Of the job hunters, 84% were women; that period there were 857,312 female citizens looking for work, compared to 1.1m in positions. Among female job seekers 730,389 had a high school qualification or above, and 540,100 held a bachelor degree or higher. Of the 168,016 male Saudi jobseekers, 144,261 had completed high school or higher education, and 70,000 held at least a bachelor degree. “Many companies are thinking to establish their factories in Saudi Arabia nowadays. The Chinese workforce is becoming more costly, and there are many Saudis living in secondary cities who are willing to work,” Ahmed Al Sultan, CEO of garment manufacturer Al Aseel, told OBG. “However, more incentives need to be put in place.”

Workforce 4.0

In this context, the real challenge is to create a significant number of positions that match the salaries and expectations of well-educated citizens, while maintaining economically viable businesses. The idea of Industry 4.0, in which manufacturing is transformed by technologies such as robotics, machine learning and artificial intelligence, was the basis of a study of Saudi industry under the NIDLP. The study suggested that the country’s existing plants and factories could become more efficient and profitable if significant investments are made in developments such as 3D printing, automation and advanced analytics. Another conclusion of the report is that an industrial sector transformed by 4.0 technology could complement its investment in such tools with a reshaped workforce. This would entail replacing a large number of low-skilled expatriate factory hands with machines, and employing a smaller number of Saudis in data scientist, big data analyst or automation engineer positions.

While local business leaders can see the societal benefits of this shift, there are mixed views on how it would work in practice. Ali Mousa Al Jabrah, CEO of Astra Mining, has some ideas that he believes could help provide meaningful employment for ambitious young citizens. One is to create a cross between a fabrication laboratory and an industrial incubator on his firm’s premises, with the idea that would-be entrepreneurs receive training and ongoing mentoring as they rent a small space in his factory, possibly with their own equipment or machinery, to launch their small business. “We want to work with the government to help young Saudi entrepreneurs, allowing them to start businesses and become employers themselves without the need to make a large capital commitment at the outset,” Al Jabrah told OBG.

Another idea to solve a problem facing the mining industry is to replace fleets of smaller 3.5-tonne heavy goods lorries driven by expatriate drivers with fewer longer, heavier vehicles capable of hauling 44-60 tonnes driven by Saudis. Research on the introduction of such larger vehicles conducted by the EU found they would be safer than conventional heavy goods vehicles because replacing standard lorries with mega-trucks would reduce the overall number of kilometres travelled and thus lower the risk of accidents. The vehicles would also cause less wear and tear to roads, as multiple axles on larger vehicles allows the cargo weight to be spread more efficiently. The EU study conceded that some investment would be required to increase load-bearing on bridges. “This idea helps create jobs for Saudis because if a company operates many smaller trucks it cannot afford to employ local drivers at higher salaries; but if one mega-truck is carrying the same load as five smaller vehicles then it makes sense,” Al Jabrah added.

According to Mutlaq Al Morished, CEO of petrochemicals manufacturer Tasnee, Industry 4.0 is already reflected in many segment operations. “The chemicals industry is already highly automated and technical, and we have high levels of Saudi employment, with many professional engineers in the industry thanks to the King Abdullah Scholarship Programme,” Al Morished told OBG. “However, if we want our entire economy to diversify in the way Japan, Singapore or South Korea did, we need an education system based on science and not memorisation.”

Subsectors

In 2020 some key parts of Saudi Arabia’s diversification drive with direct implications for industry will fall into place. The Public Investment Fund (PIF), the country’s sovereign wealth fund, will play a much more significant role in capital spending in the Kingdom after it receives the $25.6bn raised in Saudi Aramco’s November 2019 initial public offering, as well as the staggered payments from the fund’s sale of its 70% stake in SABIC to Aramco, valued at SR259bn ($69bn). The understanding is that this will facilitate PIF investments in a range of diversification initiatives and mega-projects, such as the new smart city of NEOM being built in the country’s north-west. This should benefit mining, logistics and advanced manufacturing that are targeted for growth under the NIDLP, but also bring some relief to more traditional segments like construction.

There were signs at the end of 2019 that cement businesses were benefitting from the Housing VRP, which aims to see home ownership among citizens reach 70% by 2030 (see Real Estate & Construction chapter). The Sakani affordable housing programme began in 2017, and its impact is noted by real estate consultancy Knight Frank. In the firm’s third quarter 2019 report, it reported a 122% y-o-y increase in the number of residential transactions in Riyadh, with the value of transactions up by 139%. The report stated that 8000 new residential units were delivered in the capital in the third quarter alone, and that it expected to see a total of 70,000 residential properties built between 2019 and 2021. Cement producers are indeed seeing a boost to their financials due to the initiative. A look at the performance of Yamama Cement showed a 47% rise in sales from the fourth quarter of 2018 to the fourth quarter of 2019, and a 27% quarter-on-quarter increase. The growth was attributed to heightened residential building.

The steel industry is also set to reap the benefits of ongoing construction activity, with SABIC executives at an industry conference in Dubai in December 2019 saying that steel product consumption in Saudi Arabia is expected to increase from 8.4m tonnes in 2019 to 8.5m tonnes in 2020 – although the Covid-19 pandemic may weigh on this projection. Hopes are that by 2030 private investment will bolster demand to a level similar to the 11.7m tonnes recorded in 2012. Both the cement and steel industries have excess capacity in Saudi Arabia, as reined in government project expenditure has dampened demand.

After a year of growth in 2018, 2019 proved to be a tougher year for the Kingdom’s petrochemicals businesses (see analysis). SABIC reported a net profit of SR8.5bn ($2.3bn) in 2019, down considerably from SR31.9bn ($8.5bn) the year before, with a net loss of SR1.5bn ($400m) in the final quarter of 2019. “The petrochemicals industry was negatively impacted in 2019 by additional supply in key products coming on-stream, coupled with a moderation in global growth compared to 2018,” Yousef Al Benyan, vice-chairman and CEO of SABIC, said in a January 2020 press release announcing the financial results.

Mining company Ma’aden also found itself facing lower sales prices for many of its key commodities, thus revenue fell from SR4.9bn ($1.3bn) in 2018 to SR2.3bn ($613.2m) in 2019, and net profit of SR2.2bn ($586.5m) in 2018 turned to a loss of SR1.5bn ($400m) the following year. Meanwhile, food and beverage giant Almarai saw revenue rise by SR793.4m ($211.5m) in 2019 to SR14.4bn ($3.8bn), but net profit dip from SR2bn ($533.2m) to SR1.8bn ($479.9m). Investment firm Al Rajhi Capital noted in the third quarter of 2019 that Almarai faced higher prices for the alfalfa that is used as animal feed, while limited population growth and expatriates leaving the market created downside risk. Saudi Arabia is conducting a census in 2020 to gain more accurate information on its population, but World Bank estimates put population growth at 1.8% for 2018, creating a challenge in regard to market size for the fast-moving consumer goods (FMCG) industry.

Investment

With an FMCG sector reliant on growth in population, consumer confidence and incomes; construction-oriented industries typically powered by government expenditure; and petrochemicals and mining industries subject to fluctuations in global commodity prices, widening the role of private sector investment is paramount. According to the “Investment Highlights Winter 2020” report by Invest Saudi, FDI flows to Saudi Arabia between January and September rose from $1.2bn in 2017 to $3.2bn in 2018 and $3.5bn in 2019.

Around 1130 new investment licences were issued to foreign companies in 2019 – 54% more than in 2018 and triple the number issued in 2017. Of the 2019 licences, 69% were for full ownership of a business and 31% were for joint ventures with local partners. In the manufacturing sector 190 licences were issued in 2019, compared to 133 in 2018, while transport and storage saw 35 licences, up from 29, and construction saw 193, up from 111.

Hosting the G20 Leaders’ Summit in Riyadh, currently scheduled for November 2020, will place the Kingdom in the global spotlight, and provide a platform to showcase reforms and plans to international investors, and encourage them to participate in the country’s transformation journey. While the meeting was still on the agenda as of late March 2020, the spread of Covid-19 has led to the cancellation or delay of numerous high-profile international events. Planners and attendees will therefore be monitoring the situation closely in the months ahead.

Outlook

In its analysis of the industrial landscape, Vision 2030 and the NIDLP also looked at ways that investors could be attracted to develop or expand industrial activity at special economic zones (see analysis). At the same time, localisation strategies have been developed by home-grown industrial giants such as Saudi Aramco, SABIC and Ma’aden to enable the participation of local small and medium-sized enterprises in the supply chain of mega-projects. Greater involvement would also equip these growing businesses with knowledge and technology transfer when in partnership with international industrial firms. Although early 2020 brought concerns over the Covid-19 pandemic, which resulted in slowed economic activity across the globe and an associated drop in oil and other commodity prices, Saudi Arabia is keeping its sights on the decade ahead. The country’s internal transformation vision is designed to create a multifaceted industrial economy that provides attractive jobs for citizens, and capitalises on opportunities that come with its geostrategic position and influence in the region.