© Wika, Okea | iStickphoto

28.11.2017

CHALLENGES TO PRODUCTION IN SAUDI ARABIA - USING LOCAL OPPORTUNITIES

It is not only state-owned companies who are urging suppliers to consider local production. However, maintaining a branch office or even a production facility in Saudi Arabia poses a particular challenge.

By Dr. Alexander Koldau

© Coperion, urfinguss | iStockphotoIn Saudi Arabia, local presence is the key to success. "Serving the Saudi market from Dubai is only possible to a limited extent," confirmed Tino Reppe, who has headed the sales, service and production site of Wika Alexander Wiegand SE & Co. KG from Klingenberg in the Jebel Ali Free Zone for the past ten years. Saudi representatives require the extensive support of local employees. This solution is only possible to a limited extent in the long term, but it can serve as a means to penetrate the market.

Saudi Arabian customers not only appreciate the local presence of their suppliers, they also increasingly require local assembly or production in the country. Wika has thus decided to establish its own service and production branch in Saudi Arabia and to move one assembly line from Dubai to Saudi Arabia at the end of 2017/beginning of 2018.

Market opportunities for services

When it comes to new machinery business, Saudi Arabia is usually too small to justify local assembly or production. However, there are market opportunities that can be used by local companies, especially when it comes to services. A number of VDMA members have reported accessing considerable market capacities, even when it comes to servicing the machines of other manufacturers. Coperion GmbH from Stuttgart, which has a branch primarily aimed at the service business, sometimes has to leave market opportunities unexploited, as it cannot increase the corresponding capacities rapidly enough. During its more than ten years of local presence, Zeppelin Systems GmbH from Friedrichshafen has not only developed its local production and service capacities, but has also discovered a hitherto unexploited service branch in the form of non-destructive testing (NDT). This market gap was identified when the company suffered a shortage of service providers for its own silo production business.

Economic boom cycles

Zeppelin CEO Heinz Wallmeyer cited a further benefit in that these services are also required in other sectors, which have thus far not formed part of Zeppelin's target market. This would hedge against any severe economic fluctuations, which the company regards as a challenge. They are the result of the oil price and state-controlled economic policy decisions and programs.

Zeppelin has had some unpleasant experiences in this regard. In the past, there were sometimes over 60 employees on site for production purposes, with only service business available for months on end in some cases. These fluctuations could be absorbed because most of the product staff had been engaged from the company's Indian factory for a specific project and could return to India at the end of the project. However, such solutions are becoming more difficult to implement, as it is Saudi Arabian government policy to restrict the number of migrant workers. To date the country has been mostly dependent on migrant labor and will need to integrate its local population into the value creation process. There are now regulations governing the percentage of local employees.

Saudi employees can be integrated

Companies have had mixed experiences with Saudi employees. Coperion is very satisfied with its female Saudi employees. The young women are well qualified and highly motivated. However, not all companies have the option of employing women. Saudi Arabian labor laws specify particular structural requirements for the employment of women. For example, no sanitary facilities were provided for women in the past - until recently it was inconceivable that women be in employment. In addition, the employment of women depends on the consent of their father or husband. This means that most female employees leave the company when they marry, or at the latest when they are expecting their first child. This may, however, change in the near future, provided that the reforms specified in "Vision 2030" are implemented.

Local company representatives report that young employees in particular are well qualified and ever easier to integrate into companies. However, it remains a challenge for companies to find well-trained, motivated Saudi employees and to retain them. Frank Hildebrandt, Managing Director of the local subsidiary of Stahl CraneSystems GmbH from Künzelsau, regards human resources management as one of the greatest challenges for companies in the Middle East. The company’s subsidiaries in Dubai and Damman have employees from 14 nations in Europe, the Middle East and Asia, the cultural characteristics of which must be taken into account. He admitted that the takeover and integration of a Saudi company has clearly extended his range of experience in the management of intercultural teams, despite his 15 years of management experience in the Middle East.

Dealing with the authorities

Yet another local challenge is dealing with the authorities. The support provided by the Saudi Arabian General Investment Authority (Sagia) has fluctuated a great deal in recent years. According to the companies, however, support is currently very positive; this fact was reiterated by Jochen Hundt, a legal consultant specializing in the establishment of branches in Saudi Arabia. "However, starting a branch in Saudi Arabia is in no way comparable to an establishment in one of the free zones of the United Arab Emirates," he said. Even established companies must regularly renew various licenses.

The times of low oil prices and empty state coffers have resulted in the creation of new levies - such as the fee of 100 Saudi riyals (20 euros) per month for each family member of a migrant worker, which is set to increase over the next few years, thus emphasizing the wish of the government to reduce the number of foreign workers. Some specification changes can have considerable consequences. Zeppelin, for example, will have to give up the site it has occupied for the past ten years, as it has not been licensed for industrial operations and the authorities are putting pressure on the company to relocate to an approved industrial site. It is therefore recommended to adhere to specifications from the beginning and not to trust that the authorities will continue to turn a blind eye in order to attract investors.

Circumventing problems through partnership

Leser GmbH & Co. KG from Hamburg has managed to circumvent the main problems of doing business in Saudi Arabia. To serve the Saudi market, which for this company is mainly in the oil-rich region around Damman and Jubail, Leser established a sales office in neighboring Bahrain in 2008. In order to make full use of the benefits of having a local supplier with local production facilities, the company supported its Saudi partner, thus allowing him to establish a licensed assembly plant in 2010. This means that the partner is responsible for human resource management and collaboration with the authorities.

Major Saudi Arabian customers welcome assembly in Saudi Arabia, and sales in the country have multiplied. "It took our lawyers some time to secure the exclusivity of collaboration and the rights to the use of our brand within this set-up," explained Krishnapura Nandagopal, CEO of Leser Middle East. However, collaboration with the Saudi partner, who had previously only been active as a dealer, has not always been easy and Leser still needs to provide a lot of support to establish and assure its own assembly-related quality standards. As collaboration with the local partner repeatedly resulted in problems, Zeppelin has reduced the involvement of its Saudi partner.

Subsidiary preferred

Establishment of a 100 percent subsidiary is now possible and is preferred by most companies. However, local partners will once again become more important for sales support as the economic reforms take effect and pressure of local value creation increases.

Despite the volatile environment, the companies are standing behind their investments in Saudi Arabia. Despite the changing environment and the volatile economy, they are expecting good business opportunities, at least in the medium to long term. The service business for the large number of machine installations mostly justifies a local presence. The companies are glad to have tapped into the market by establishing their own subsidiaries. In some cases, a local presence is of advantage when tendering for projects, with the companies being aware of a discrepancy between over-inflated promises and their implementation.

Further Information

VDMA Foreign Trade   |   VDMAimpulse 06-2017: "Gulf States on the verge of change"   |   VDMAimpulse 06-2017: "Saudi Arabia: 'Vision 2030' for the economy"   |   VDMAimpulse 05-2016: "Low oil price forces Arab countries to reform"

© VDMA
Contact
Dr. Alexander Koldau, VDMA Foreign Trade.