BY CHASE KELLY
Chase Kelly is a SAIS MA student concentrating in International Economics and European and Eurasian Studies.
Crown Prince Mohammed bin Salman of Saudi Arabia has been leading an initiative of the Kingdom of Saudi Arabia to diversify its economy, which is largely based on oil revenues, to create jobs for the next generation. The Vision 2030 Plan developed by the National Industrial Development and Logistics Program (NIDLP) is the grand strategy for executing that diversification. The aim is to replicate the major push in the 1980s towards petrochemicals, which made Saudi Basic Industries (SABIC) the fourth largest firm in the world. The petrochemical industry employs hundreds of thousands of Saudis and contributes significantly to the kingdom’s economy. However, this shift took decades to develop, even with government assistance and plentiful raw materials.[1] The Vision 2030 Plan, on the other hand, aspires to make bold changes to Saudi Arabia in less than ten years.
On July 15, 2017, the Saudi Strategic Management Committee approved the Delivery Plan 2018-2020 for the NIDLP. The program’s mandate is to “transform the Kingdom of Saudi Arabia into a leading industrial powerhouse and global logistics hub” in order to “generate ample job opportunities for Saudis, enhance the trade balance, and maximize local content.” By focusing on four main pillars, namely industry, mining, energy, and logistics, the Kingdom aims to improve trade balances by reshoring certain industries and diversifying employment opportunities for its population, moving away from its current reliance on petrochemicals.[2]
One of the most important of these shifts is the Saudi movement into the auto industry. The Plan calls this initiative both a “game-changer” and a “quick win” for the region.[3] Securing a deal with a major automaker for a car plant is a key target to be achieved by the end of 2020. Prince Mohammed seeks to localize half of the production of currently imported vehicles and create 1.6 million manufacturing and logistics jobs by 2030. However, many questions remain: What does the car market in Saudi Arabia look like? What are the challenges a major auto manufacturer would face by moving into production in the kingdom? Would the decision to move production into Saudi Arabia be a viable one, and which auto makers are considering making the move?
Current market projections estimate that there will be 12.5 million drivers in the kingdom in 2020.[4] Consumer trends show the major reason for purchasing a car in Saudi Arabia is “to serve the basic need of transportation and mobility.”[5] Larger families in the Kingdom may own multiple cars, as well as a secondary SUV or van for group trips.[6] Most consumers maintain a preference for affordable sedans, such a Toyota Camry or a Hyundai Elantra, which represented 75% of the market share in 2014.[7] The majority of the remaining market share (20%) is attributed to 4X4s.[8] Larger families maintain a preference for American cars, whereas smaller families tend to purchase European automobiles.[9] Additionally, a niche exists among the affluent families of the kingdom to purchase higher-end automobiles with frequent changes in adoption of the latest trends.[10] Most notably, consumers maintain a very high particularity for “value buying,” and show low price sensitivity as well as low brand loyalty.[11]
Opportunities
One major incentive for auto production in Saudi Arabia is the significant local and regional demand. Saudi Arabia stands at a central point between three continents—Asia, Africa, and Europe—which gives it a strategic location advantage as a production hub. The kingdom is also the only nation in the top twenty in terms of car demand without a local or regional production hub.[12] Moreover, the UAE, Oman, Qatar, Kuwait, and Bahrain maintain tax free agreements amongst themselves and represent an import potential of one million cars per year.[13] Expanding further, the Middle East and North Africa (MENA) maintains a consumer market of more than four hundred million—and is only growing.[14]
Saudi Arabia’s regional share of demand for cars is greater than fifty percent of the entire Gulf Cooperation Council (GCC) demand, which amounted to 1.3 billion vehicles in 2016.[15] Part of this demand is due to lack of alternative modes of transportation in Saudi Arabia.[16] While Saudi Arabian Public Transportation Company (SAPTCO) operates mass transportation systems in major cities, they are not well maintained and not widely used.[17] Demand has grown three percent annually over the past four years, but car sales are expected to grow by nine percent annually until 2025, as more women gain their licenses following the lift of the driving ban in June 2018.[18] The female population is projected to reach fifteen million in 2020, three million of which (or twenty percent) are projected to begin driving based on both “age and income qualifications” in addition to the 500,000 men reaching driving age in 2020.[19] Additionally, luxury cars in the kingdom account for more than eighteen percent of all imported cars, making it the largest luxury car market in the world.[20] Across all sectors, projections are showing a sustained growth in demand, thus creating a major opportunity for auto manufacturing.
Figure 1. Source: PwC, “Women Driving the Transformation of the KSA Automotive Market,” March 2018.
Figure 2. Source: PwC, “Women Driving the Transformation of the KSA Automotive Market,” March 2018.
Another incentive for auto production in the kingdom is the possibility to capitalize on the anticipated rise in demand for hybrid and electric vehicles (EVs) in the future. The Vision 2030 strategy aims to develop production for both internal combustion engines (ICEs) and electric vehicles, in order to “optimize short-term gains” with ICEs while “making calculated bets” on EV production in the medium-term.[21] Part of the rationale lies in the lack of consensus on the future of EVs or the best technology to incorporate into production. Because the innovations are occurring so rapidly, there is an increased risk that current tech could become obsolete very quickly.
While estimations vary, EVs will account for a significant portion of the car market by 2030 (see Figure 3).[22] Saudi Arabia’s advantage lies not only in the country’s position of high regional demand, but also in the potential capitalization on increased demand for EVs in the near future. Given the significant industry overlap between EVs and ICEs (see Figure 4), this is a calculated risk which could pay off in the future. As many auto production facilities are investing to retrofit their facilities to produce EVs, an ecosystem of regional production in Saudi Arabia could side-step these costs and enable a direct move into EV-centered production. The Vision 2030 outlines hedging the risk based on the prediction that local demand will move from ICEs to EVs in the medium run.
Figure 3. Source: The Kingdom of Saudi Arabia, National Industrial Development & Logistics Program Vision 2030 - Delivery Plan 2018-2020.
Figure 4. Source: The Kingdom of Saudi Arabia, National Industrial Development & Logistics Program Vision 2030 - Delivery Plan 2018-2020.
A third opportunity is the labor-intensive nature of auto production, which has one of the highest employment multipliers.[23] Saudi Arabia wants to reduce dependency on the petrochemical industry while creating jobs for the growing population of younger Saudis—with the median age in the country being twenty-eight.[24] The multiplier effect would create a downstream pull for numerous other sectors, including metals, plastics, and chemicals.[25] Saudi Arabia Basic Industries Corporation (SABIC), for instance, has previously worked with several automobile manufacturers, including Hyundai, Volkswagen, and Mitsubishi.[26] Saudi Arabia also has several spare parts factories because of demand for replacement parts, which include radiators, batteries, filters, lubricants, hydraulic oils, exhaust systems, and converters.[27] This confluence of infrastructure and resources create an amenable environment for auto production in Saudi Arabia.
A fourth incentive for Saudi Arabia to move into auto production is the possible improvement of the country’s balance of payments. In 2017, the OEC reported that automobiles made up the largest share of total imports, at 7.6 percent.[28] South Korea (25%), the United States (22%), and Japan (18%) accounted for the largest shares of the kingdom’s car imports in 2017, which has been consistent with little variability over five years.[29] The introduction of an auto production facility in Saudi Arabia would drastically reduce the $7.35 billion worth of auto imports and therefore result in a more favorable balance sheet, with exports to other members of the GCC amplifying the effect of lower imports.
Challenges
While great potentials will be unlocked by moving auto production into Saudi Arabia, some significant challenges also exist. The most obvious obstacle is the lack of a regional auto-industry ecosystem.[30] While a large amount of infrastructure is dedicated to cars, sales, and maintenance, most of it revolves around imports. The Kingdom would need to forge ahead to develop a local supply chain for the auto production facility. This would include increasing production for the aforementioned supporting industries and mechanisms, while lowering costs for these goods substantially for viable use in production. Without this supply chain development, the production facility would need to import most, if not all, intermediary goods used in production.
Another key challenge to consider is the issue of labor competitiveness, which could signify a comparative disadvantage for the country.[31] An auto manufacturing facility in Saudi Arabia will have difficulty competing with plants in other countries due to higher labor costs and lower productivity in comparison to already operational facilities. The Delivery Plan notes that the aim is to produce more high-end or luxury cars in order to “dilute” this impact of “low cost competitiveness.”[32] A market for this type of car certainly exists, especially amongst the more affluent families of the Kingdom seeking the “lifestyle” associated with the higher-end brands.[33] Another option to avoid this is to focus on model preferences demanded within the region or to utilize Saudi as an “export point” in the region.[34] The biggest drawback with the latter option is that it ignores the high demand for cars within the kingdom. However, the possible “failure to acquire economies of scale” compared to the major competitors in the region remains a big concern.[35]
The current Saudi trade barriers pose a third risk factor. Currently, the car import tariffs for Saudi Arabia are amongst the lowest in the world.[36] This is an understandable policy, given the current import-focused landscape of the country. However, this policy would negatively impact the ability for domestically produced cars to compete in those markets. The five percent tariff for auto imports into the GCC offers little protection for potential domestic production in an already highly competitive market.[37] While Korean, American, and Japanese manufactures own the majority of the market share, Chinese manufactures have been able to attract customers though lower prices and the perception of low maintenance costs.[38] While the lower cost may be a challenge for the Saudi produced cars, two key components could create solutions: innovation and brand preference. Innovation could come in the form of EVs, as noted above. Additionally, the Saudi market maintains very low brand preferences but focuses instead on value buying. If cars were produced in Saudi Arabia, this could change the brand loyalty sphere of the Kingdom to develop a preference for that particular brand. Saudis would likely be more supportive of a brand contributing directly to their local economy, especially in the form of wages and employment.
Saudi Arabia’s extensive standards and regulations create the last challenge, which could have a large impact on market penetration. The Saudi Standards, Metrology, and Quality Organization (SASO) has issued 42 trade-related laws pertaining to the WTO, generated nine different regulatory bodies, and signed 38 bilateral treaties with importing nations. To inhibit counterfeit parts from entering the kingdom, each automobile and spare part imported requires a “Certificate of Conformity,” and SASO banned importation of any spare parts older than five years and any used parts, with the exception of engines.[39] Although envisioned to protect domestic markets, it remains uncertain how these standards would impact production in the country.
Outlook
Saudi Arabia allocated land for the construction of a vehicle assembly plant in April 2019 with capacity to produce between 10,000 and 30,000 cars annually and aiming to reach a steady production volume of 110,000 - 150,000 by 2026. The facility is a joint venture between the Saudi National Automobile Manufacturing Company (SNAM) and the South Korean company SsangYong. The SNAM website notes that the collaboration with SsangYong aims to “establish an efficient supply chain in the kingdom” and “localize product development and engineering.” The product development will roll out in three phases, each increasingly using more local inputs, with the first SsangYong Musso pickup rolling of the assembly line in 2020.[40]
Despite further outreach, Saudi Arabia has not secured a major manufacturer by the goal of 2020. An industry source familiar with ongoing Toyota talks said “nobody would say ‘No, full stop’ ... but they politely conveyed they’re not interested.”[41] Two years ago, Toyota already declined an offer citing “high labor costs, a small domestic market, and lack of local supplies” as the rationality for hesitation. After conducting a feasibility study, a fifty percent government subsidy would be needed to obtain desirable production costs, but Toyota was still uncertain of profitability.[42] Other international auto manufacturers, such as Tata and Nissan, considered establishing plants in the Kingdom.[43] However, to no significant end thus far. Tata Group signed a letter of intent in 2012[44] to explore producing 50,000 of their high-end Land Rovers in the kingdom “at a cost of 4.5 billion riyals ($1.2 billion).” However, the project never moved forward.”[45]
References
[1] Marwa Rashad and Stephen Kalin, “Toyota Snub Dents Saudi Arabia's Manufacturing Drive,” Reuters, June 19, 2019, accessed November 6, 2019, https://www.reuters.com/article/us-saudi-manufacturing-automotive-insigh/toyota-snub-dents-saudi-arabias-manufacturing-drive-idUSKCN1TK08P.
[2] National Industrial Development & Logistics Program, Vision 2030 - Delivery Plan 2018-2020, The Kingdom of Saudi Arabia, 8.
[3] Ibid., 74.
[4] PwC, “Women Driving the Transformation of the KSA Automotive Market,” March 2018, https://www.pwc.com/m1/en/publications/documents/women-driving-the-transformation-of-the-ksa-automotive-market.pdf.
[5] Kokku Randheer, Heba U. Trabulsi, Hala A. Al Ajmi and Hessah K. Al Jasser, “Emerging Industry: A Case of Automobile Manufacturing in Saudi Arabia,” Journal of Marketing Research and Case Studies, 2017: 10.
[6] Ibid.
[7] Ibid., 10-12
[8] Ibid., 12.
[9] Ibid.
[10] Ibid., 10.
[11] Ibid., 12.
[12] National Industrial Development & Logistics Program, 38.
[13] Randheer et al., 2.
[14] Ibid.
[15] National Industrial Development & Logistics Program, Vision 2030 - Delivery Plan 2018-2020, The Kingdom of Saudi Arabia, 38.
[16] Randheer et al., 2.
[17] Ibid., 7.
[18] PwC, “Women Driving the Transformation of the KSA Automotive Market.”
[19] Ibid.
[20] Paul Richardson, “The Owners’ Club: Saudi Arabia’s Thriving Luxury Car Market,” World Finance, October 26, 2015, accessed October 29, 2019, https://www.worldfinance.com/markets/technology/the-owners-club-saudi-arabias-thriving-luxury-car-market.
[21] National Industrial Development & Logistics Program, 120.
[22] National Industrial Development & Logistics Program, 125.
[23] National Industrial Development & Logistics Program, 121.
[24] Randheer et al., 12.
[25] National Industrial Development & Logistics Program, 122.
[26] Randheer et al., 14.
[27] Ibid., 9-10.
[28] Alexander Simoes, “Saudi Arabia,” The Observatory of Economic Complexity, accessed November 14, 2019, https://oec.world/en/profile/country/sau/.
[29] Alexander Simoes, “Where Does Saudi Arabia Import Cars From?,” The Observatory of Economic Complexity, accessed November 14, 2019, https://oec.world/en/visualize/tree_map/hs92/import/sau/show/8703/2017/.
[30] National Industrial Development & Logistics Program, 126.
[31] Ibid.
[32] Ibid., 129.
[33] Paul Richardson, “The Owners’ Club: Saudi Arabia’s Thriving Luxury Car Market.”
[34] Randheer et al., 4.
[35] Ibid.
[36] National Industrial Development & Logistics Program, 126.
[37] Rashad and Kalin, 8.
[38] Randheer et al., 8.
[39] Ibid.
[40] Saudi National Automotive Manufacturing Company, “Who We Are, ” Accessed November 14, 2019, http://snam-sa.com/who-we-are/.
[41] Rashad and Kalin.
[42] Ibid.
[43] Randheer et al., 3.
[44] Ibid., 14.
[45] Rashad and Kalin.
PHOTO CREDIT: Free use image from Canva Pro.