Saudi Arabia's Business Climate
Foreign direct investment in Saudi Arabia reached an estimated $15 billion in 1997, with $7 billion coming from the U.S. Other countries with FDI in the kingdom are: Japan, Britain, Switzerland, France and Germany.
The total volume of foreign investment in Saudi Arabia reached US$ 22.5 billion in 1995, and the greatest number of investments came from the United States, Japan, France, Britain, South Korea, Taiwan, the Arabian Gulf countries, Syria and Lebanon. Most of the investments were made in petrochemicals, airport services, electrical and electronic manufacturing, and the food and beverage industries.
Saudis have traditionally resisted privatization, referring to it as “private sector participation.” But the collapse of oil prices forced the Saudis to take privatization seriously. The government created in 1998 two joint stock companies -- Saudi Telecommunications Company and the Saudi Electric Company -- to help attract local and international investors to buy, finance or manage these utilities. Both these companies are expected to be privatized.
The government has also contracted private corporations to operate most of the kingdom’s seaports. Furthermore, there has been speculation that the government is considering privatizing water, roads and Saudi Arabian airlines.
Both the sixth and seventh Saudi Five Year Development plans have emphasized job creation as a national priority through a strategy of "Saudiization." Part of this strategy calls for reducing the number of foreign workers.
The need to create jobs has become increasingly important as the population, growing at yearly 3.4 rate, puts hundreds of thousands of new workers into the labor force each year. (Unemployment figures are unavailable.)
A large majority of the labor force is comprised of non-
Saudis. At the beginning of 1996, there were 6.25 million expatriates from 190 different nations in the Kingdom. These workers are concentrated in the construction trades, and as cashiers, accountants, purchase managers and warehouse officers. Currently, 4.7 million workers of the 7.2 million labor force are non-Saudi nationals.
Partly because of this ratio and partly because of reduced oil prices, the government doubled the cost of work permits for foreigners to $533. The increase may raise several hundred million dollars and create jobs for Saudis. Moreover, the government also made it more expensive for foreigners to enter and leave the country, raising visa prices to $133.
Saudi Arabia's rapid development during the past two decades has been the main justification in allocating such a large number of jobs to non-Saudis. Huge infrastructure projects required extensive labor, but local work ethics made imported workers more desirable.
Traditionally, the Saudi private sector has been unwilling to pay Saudis the salaries they demand, preferring instead to hire expatriate labor. Even now, salary levels provide little or no incentive for Saudis to work in positions typically held by expatriates, a trend that is expected to continue.
The Saudi private sector employment constitutes only 16 percent of the total work force. The rate of Saudi employment in the industrial sector stands at 4 percent and in the services sector at 12 percent. In contrast, their share in the public sector stands at 79.2 percent.
To increase Saudi presence in the private sector, the Saudi authorities are considering establishing a minimum Saudi wage, limiting the work day to eight hours and creating social insurance and pension plans similar to those available in the public sector.
The al-Saud ruling family's push for “Saudiization” is motivated by a desire to eliminate possible threats from the Saudi middle class, a reality which has preoccupied the royal family in recent years. In the past, the Saudi middle class received public sector jobs and benefits and in return backed the al-Saud ruling family’s monopoly over the Kingdom's economy, finances and politics. But over the last two years, budgetary constraints have left government ministries and agencies unable to provide the same level of jobs and benefits. It is estimated that 20 to 30 percent of Saudi Arabia’s university graduates are unemployed.
A significant development regarding the stock exchange occurred in late 1999 with the government opening the market to foreign investors. Non-Saudis are now allowed to invest through funds run by Saudi banks. Many foreign investors had previously demanded to enter the Saudi Stock Exchange, which has 73 listed companies and a total market capitalization of SR 195 ($52) billion.
The 13-year-old market is the region’s largest in absolute terms. But it amounts only to 33 percent of GDP, a relatively small ratio. The market is also highly concentrated. SAIBIC comprises 18 percent of the market capitalization and five other companies make up 50 percent.
The Saudi securities market is not highly developed. Under the Banking Control Law, trading in shares is conducted through a department in the Saudi Arabian Monetary Agency (SAMA). Joint stock companies are the vehicle permitting ownership by a large number of public shareholders, and the formation of such companies has been encouraged by the government through its privatization policy.
The kingdom is working to upgrade and expand its telecommunications infrastructure. The Saudi Telecommunications Company hopes to have a total of 7.5 million phone lines operational by 2005: 6.5 million fixed lines and one million mobile.
Western Region Electricity Corporation started in late 1999 the first stage of an infrastructure project in which 144 new electricity sub-stations are being installed for new residents in Jeddah. In addition, 29 stations are being installed to ease the volume on existing stations.
The country is also investing in roads. The government budgeted $1.22 billion for road projects that will span more than 2,000 kilometers. A series of road projects that will connect Saudi Arabia to Oman, Qatar and the United Arab Emirates have been opened for private-sector involvement.
The Saudi Arabian Railways Organization (SARGO) is also expanding. It intends to spend $4.5 billion between 2000-2005 to construct links between the Red Sea city of Jeddah and Dammam on the Persian Gulf. Other scheduled projects include links to military installations and connecting mining sites and seaports.
The kingdom is also increasing its potable water output with the addition of new water desalination facilities. Currently, the kingdom can produce 726 million cubic meters of potable water, 70 percent of the country’s drinking supply. That output will rise to 800 million following the completion of several projects. In 1998, the Shuaiba facility began providing 25 million gallons per day to Mecca and Ta'if. The estimated $1.07 billion second phase is to produce 60 million gallons a day for Jeddah.
The country also plans to spend $4 billion on projects that will provide water to all regions by 2008. The most important projects now are a second station at Shuaiba, a station at Yanbu and one at the Al-Khobar plant.
Best Non-Agricultural Prospects
Goods & Services
1 Telecommunications Equipment
2 Electrical Power Systems
3 Water Desalination Equipment
4 Computer Software
5 Auto Parts & Service Equipment
6 Computers and Peripherals
7 Medical Equipment
8 Education & Training Services
9 Oil & Gas Equipment & Services
10 Pollution Control Equipment
12 Security & Safety Equipment
13 Mining Equipment
Franchising has become a popular and growing approach for local firms to establish additional consumer-oriented business in Saudi Arabia. This has become a popular sector for Saudis who want their own business and appreciate western business practices. This sector’s growth is expected to occur at a 9-10 percent yearly rate for the next two years.
Boutique retail outlets have recently begun to emerge. Branded apparel boutiques are also appearing especially for French and Italian designers.
Opportunities exist in the business service, apparel, laundry and dry cleaning services, telecommunications, automotive parts and servicing, mail and package service, printing and graphic design, courier services, hotels and motels and convenience stores. Non-food franchises comprise 55 to 65 percent of the market, estimated at $274 million in 1997. Success is often associated with franchiser and location.
Fierce competition exists between foreign, local and businesses from developing countries in car rental agencies, laundry and dry cleaning and auto maintenance.
Success in the Saudi market is often attributed to finding the appropriate franchiser and location. Usually, fast food franchises are situated near shopping centers or areas of high traffic flow. Non-food franchises account for 55 percent to 65 percent of the franchise market.
The large expatriate work force in Saudi Arabia patronizes franchises as a way of obtaining the same quality and level of services received at home. Franchising has expanded in the Saudi market at a phenomenal rate, more than 10 percent annually, outpacing other industry sectors.
Franchisers should realize however, that the culture and religious background of the Saudi people might make it necessary to modify some franchise concepts before they can be successfully introduced and operated in Saudi Arabia. These mores include the separation of the sexes and a general prohibition on photos or advertising that would be considered only mildly suggestive in the West.
The importance of advertising has grown with recent lifting of a ban on television commercials. Now companies use the full range of advertising mediums to gain market share and increase retail sales. Some televised commercials are broadcast on Saudi’s two channels for limited times each day.
Bright colors (red, blue, green, black) are popular, while soft colors (pink, cream) are not. All commercials are screened to ensure compliance with moral and religious standards. The female form is usually not permitted in the media.
Saudi Arabia is the largest advertising market in the region, accounting for 40 percent of all advertising expenditures in the GCC alone. The Saudis, with their relatively high per-capita income and market-oriented economy, have become the prime target of producers of consumer goods and thus, the prime targets of the best international advertising firms.
Print media assumes the bulk of advertising expenditures in the Kingdom, with newspapers accounting for 61 percent of the pie, magazines 23 percent and television just 16 percent. Television was not legalized until 1963 and faced stiff opposition from conservative Islamic forces who termed the medium a "device of the devil."
© 2000 Mena Report (www.menareport.com)