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 In Its Annual Report for the Fiscal Year 1434/1435H (2013G), the Saudi Industrial Development Fund Reviewed the Prospects of the Automotive Industry in the Kingdom and its Implications for the Domestic Economy

​Introduction:
The Saudi government has launched many initiatives in order to diversify the country’s economic base and the sources of national income. Among these initiatives are the current plans for auto-manufacturing in the Kingdom, given particular emphasis in the 9th Development Plan (2010G – 2014G). The project is regarded as one of the pillars of the National Industrial Cluster Development Program, an important division of the National Industrial Strategy for industry. The government’s initiative aims to upgrade the local industrial sector’s composition and structure while increasing the productivity of the Saudi economy, thereby reducing the adverse effects of oil price fluctuations. Among the key economic factors behind the localization of the automotive industry is the fact that it will reduce expenditure on the import of foreign cars, transfer useful technology and create lucrative job opportunities.
 
The Kingdom provides a large consumption market for all types of vehicles. According to the Central Department of Statistics and Information, in 2012G, the Kingdom’s imported about 981,000 new vehicles, at a total cost of SR 77 billion, about 13% of the Kingdom’s total imports. Such prohibitively high import costs put tremendous pressure on Saudi Arabia’s balance of payments and restrict economic growth. Hence, the localization of this industry is a strategic option to help diversify income sources; meet part of local demand; lessen the financial burden of imports; transfer technology; upgrade the local industry structure; provide job opportunities, and augments the value added of domestic products.
 
It is important to bear in mind that the Kingdom is not a beginner in the automobile industry and the manufacture of components. It can point to extensive experience in the automotive assembly industry including buses, fire-engines, ambulance and hydraulic garbage trucks. In addition, the Kingdom also has experience in the manufacture of truck bodies, car parts and components such as gear boxes, oil filters, radiators, exhaust pipes, tires, batteries, laminated windshields, etc. According to the Ministry of Commerce and Industry, more than 251 car assembly and components factories are currently operating in the Kingdom, representing a total finance of SR 7 billion besides providing job opportunities for nearly 27,000 workers.
 
Rationale behind the Establishment of an Automotive Industry in the Kingdom:
The principle arguments for localization of an auto industry may be summarized as follows:

• Technology Transfer:
The auto industry is regarded as one of the world’s major industries. It encourages technological innovation and knowledge transfer, whether directly or indirectly. The direct method functions either through the global branches of the big international auto- manufacturing companies or through the purchase of production rights. On the other hand, the indirect method fosters the mutual exchange of knowledge and experience among workers in the auto industry. Moreover, the auto industry is renowned for its progressive and ongoing Research and Development Policies. Thus, it would have a significant positive impact on related industrial and scientific sectors within the Kingdom.
 
• Industrial Integration:
The auto industry relies to a great extent, on the input provided by numerous small and medium scale industries. Also, it requires the services of a large number of those institutions that help to strengthen links with input producers as well as offering assistance in the marketing and maintenance of its products. Furthermore, the auto industry is known for its ability to create industrial clusters. Various official  studies strongly suggest that the success of one auto-industry related project contributes to an increase in investment in its support industries. Thus, a group of factories located in the same zone would facilitate integration, leading, in turn, to a significant drop in manufacturing costs and an attendant increase in overall productivity. The latter can be achieved through a number of effective strategies including rapid transfer of expertise and experience among workers and the growth of a favorable socio-economic infra-structure in the area.
 

• Creation of Job Opportunities:
In contrast to many other industries, the auto industry is characterized by generation of high rates of direct and indirect investment and job opportunities. As mentioned above, the   creation of one job opportunity on the auto industry’s production line, generates a minimum of 5 job opportunities in the manufacturing of car components and parts. Moreover, the auto industry relies heavily on highly proficient human capital, remunerated with above-average wages in contrast with other industries. 

Increasing Value Added:

The auto industry is distinguished by its high Economic Multiplier; its successful integration with other industries such as energy, petrochemicals, steel & aluminum, etc., as well as its ability to attract trained skilful personnel who stimulate growth in the value added of these industries, factors which reflect positively on the overall economy.

• Contribution to the Development of a Diversified Industrial Structure:
The industrial sector in the Kingdom is characterized by the dominance of the chemical industries which account for about 54% of total industrial investments. Hence, the need for diversification of the structure of Saudi industry is imperative. Such diversification could be attained by developing inter-linked industries, such as the auto industry. The latter is well-known for interdependence on, and inter-linkage with, a wide range of complementary small and medium scale industries.

 
Nevertheless, the contribution of the majority of the Kingdom’s private sector’s industries (with the exception of the petrochemical sector and some engineering industries) to the Saudi economy overall is small,  mainly due to the poor productivity levels of these industries because of their dependence on low and/or medium level technologies. As productivity levels are commensurate with wages levels, it is not surprising that the private sector finds it difficult to attract Saudi workers. However, the auto manufacturing industry can provide a timely solution with its advanced technology and interdependence with numerous complementary small and medium scale industries. In short, the auto industry can accomplish the objectives of diversifying and expanding the Kingdom’s industrial base at the same time.
 
Overview of World Automotive Industry:
Globally, the automotive (and car components) industry is regarded as one of the world’s major industries. According to the World Trade Report 2013G issued by the World Trade Organization (WTO), auto industry products account for about 7% of global exports. Moreover, throughout its history, the auto industry has invariably been among the world’s fastest growing industries and among the highest in maintaining its share of world trade. Besides, the auto industry has made an impressive recovery from the drop in productivity recorded in 2009 brought about by the impact of the global recession. The industry produced about 84.1 million vehicles in 2012G, with a projected growth rate of 3% in 2013G. In addition, currently, the auto industry employs about 9 million workers worldwide, accounting for about 5% of total employment in the global manufacturing sector. According to the “Organization Internationale des Constructeurs d’ Automobiles” (OICA), world demand for motor vehicles increased annually by 2.8% during the period 2005G – 2012G while world production of vehicles increased by an annual growth rate of 3% during the same period.

World Demand and Production of Motor Vehicles by Geographical Region in 2012G


 Source: “Organization Internationale des Constructeurs d’ Automobiles” (OICA)

 

Outlook for the Automotive Industry in the Kingdom:

Local and Regional Demand:

Information provided by the Central Department of Statistics and Information, reveals that the Kingdom imported, on average, about 679,000 motor vehicles per annum in the period 2005G–2012G, with an annual growth rate of 9.5%. It is worthy of note that, in 2012G, the Kingdom’s  total imports of vehicles reached the impressive figure of 981,000 vehicles, valued at SR 77 billion. Accordingly, the Kingdom has the largest automotive industry market in the Middle East. The high demand for vehicles is expected to continue bearing in mind the rising population growth rates in the Kingdom (3.7% annually), above the world average, in addition to the high purchasing power and the high proportion of the young population (15 – 24 years): 21%.
 
As for regional demand, automotive sales in the Middle East region have continued to increase at an average annual growth rate of 5.7%. As is the case in the Kingdom, the countries of the region are characterized by a high population growth rate overall of 2.3%. Within the Middle East region, the Kingdom is regarded as a major re-exporting center for vehicles and repair parts, due to its unique geographical location. The latter is a major advantage for the Kingdom. With an annual growth rate of 13% for the period 2005-2012G, the value of re-exported vehicles and repair parts amounted to SR 6 billion in 2012G. These figures present a strong argument for localization of an automotive industry in the Kingdom.
 
The Kingdom’s Imports: Quantity & Value of Vehicles
During the Period 2005G – 2012G


Source: Central Department of Statistics & Information
 
Basic Resources:
The Kingdom can boost substantial quantities of natural raw and basic materials which would greatly abet the establishment of a range of industries that could lend support to auto-manufacturing, for example, an abundance of mineral resources; energy resources available at reasonable costs, and huge potential for industries providing input to the auto industry. Moreover, the Saudi Basic Industries Company (SABIC), a primary pioneer in the field, currently produces a variety of plastic products and raw materials used in auto manufacturing. Furthermore, in addition to its existing steel and plastic plants, SABIC is planning to produce additional materials such as synthetic rubber used in tire manufacturing and rubber hoses, which are essential for auto manufacturing. In addition, the joint venture between the Saudi Arabian Mining Company “Ma’aden”, and “ALCOA”, considered as one of the largest aluminum projects worldwide, will undoubtedly help to realize the Kingdom’s ambitions to establish an auto industry. This can be explained by the fact that aluminum is a major input resource with enormous potential for innovation in auto manufacturing, which increasingly makes use of light-weight solid metal parts.
 
Supporting Industries:
The Kingdom has an advanced industrial sector and infra-structure in contrast to its neighboring countries, which would constitute a distinct advantage for the country in the establishment of an auto manufacturing industry. According to the Industrial Directory of the Ministry of Commerce and Industry, about 251 factories engaged in manufacturing car components and parts are currently operating in the Kingdom. These products include gear boxes, axles, shock absorbers, tie rods, radiators, laminated wind shields, batteries, constant velocity axles, brake pads, etc. In addition, there are several support factories such as those producing car paints, car seats, bumpers and accessories. In this respect, the number of SIDF financed  car components and parts factories by the end of 2012G was about 65, with a total loan value of about SR 1.5 billion.
 
 
Government Support & Financial Resources:
The non-availability of long-term financial resources poses a formidable obstacle for the establishment of such a capital-intensive industry as the auto industry in any country. However, the Saudi economy is privileged to be the beneficiary of substantial revenues which would undoubtedly help to overcome this obstacle. Furthermore, local private and public financial institutions in the Kingdom have a good reputation for financial stability and solvency.
 
Additional government support towards the establishment of an auto manufacturing industry in the Kingdom will be required and are crucial to its success. Government support should not be limited to the finance; rather, it should include the provision of an adequate infra-structure (Auto Zone); seek to attract international partners; set up research and development centers, and upgrade the qualifications of personnel. Massive government spending on projects calculated to improve the infra-structure in recent years and the ensuing increase in demand for transportation equipment and supply of related spare parts are important factors to consider in attracting investments to auto manufacturing in the Kingdom.
 
Challenges Facing Auto Manufacturing in the Kingdom:
Despite the many opportunities and incentives for auto manufacturing in the Kingdom, the industry faces a number of challenges, among them are the following:
 
Limited Market Size:
The local market volume is obviously limited when set against the scale of global export markets; hence, economies of scale might not be attained. As a capital-intensive industry, the auto industry has to reach mass production levels in order to generate profitable returns for investors. However, the limited scale of the local market doesn’t allow for mass production; nor can sizeable profitable returns on investment be expected. Nevertheless, a possible solution to this challenge could be described as gradual entry into the auto industry, either by targeting a particular market segment or focusing on particular types of vehicles such as cargo and public transport vehicles, or by integrating with international auto manufacturers to produce selected components (as is the case in a number of other countries). On the other hand, among alternative potential solutions might be the possibility of negotiating with neighboring governments such as those of GCC, Arab and Middle East countries to target specific regions.
 
International Competition:
The economic benefits of the auto industry have made it a focal point of interest in those countries seeking to localize it by attracting international companies by offering various incentives. However, because of stiff international competition, WTO regulations and quality control restrictions newly-established motor vehicle companies may not be able to make satisfactory profits which would enable them to develop and succeed. Hence, providing more incentives than those provided by other countries constitutes a major success factor for advancement of the auto manufacturing industry in the Kingdom. Providing such incentives requires continuous reviewing of investment laws and regulations, particularly foreign investment regulations, related to the industry and its support industries, with particular emphasis on those related to taxes and exemptions.
 
Advanced Technology:
In spite of rapidly increasing use of modern, sophisticated technology throughout the Kingdom, the current technological levels of local industries are not on a par with those required for the auto industry in highly-industrialized countries. This situation clearly calls for the establishment of scientific research centers specializing in the auto industry and its support industries. To this end, the authorities should encourage the establishment of local research centers to enter into partnerships with relevant international technology/science centers and institutions.
 
Infra-structure:
The relative high degree of industrial development in the infra-structure in the Kingdom, in contrast with that of other countries in the region is certainly preferential factor. However, there is still a long way to go before it can match the levels of international standards. For example, the local transportation network needs to be improved, particularly the trains services, not to mention services provided by the Kingdom’s ports, electricity suppliers, telecommunication companies, etc., to create a favorable environment while reducing costs for an auto industry. Any delay in establishing support projects, or their abandonment, such as the planned aluminum and petrochemical industries and/or improvements to the infra-structure, will adversely affect the success of auto manufacturing in the Kingdom.
 
Human Capital:
The prospects of success for the auto industry in the Kingdom depends on the continuity and effectiveness of the recent educational initiatives adopted in the Kingdom, particularly those related to the scientific, engineering and vocational areas. It also requires the establishment of specialized training centers in collaboration with international motor car manufacturing companies.
 
Support Industries:
The majority of companies currently operating in the industrial sector of the Kingdom have the potential to support the proposed auto industry; however, improvements are essential in terms of adequate resources, modern technology, and quality demands to enable them to compete with their international competitors in the auto industry, who may offer lower prices and better quality. Obviously, large industrial projects engaged in manufacturing motor vehicles cannot be expected to enter into business relationships with low quality local industries.
 
Conclusion:
Prospects for the success of auto manufacturing in the Kingdom are favorable. However, there are formidable challenges. Nevertheless, the success of the petrochemical industry in the Kingdom is a striking example of what can be achieved. Initially, the petrochemical industry took many risks and faced great challenges, but, with determination and effective management, the Royal Commission for Jubail and Yanbu has gradually created an industry in the Kingdom on an equal footing with industrially advanced countries also competing in the petrochemicals sector. Therefore, the setting up of a unit specializing in the localization of an auto manufacturing in the Kingdom is of paramount importance. This unit should consist of both public and private sectors. It should commence operations by establishing the necessary infra-structure required for the auto industry and develop realistic plans with measurable, applicable objectives. Moreover, the success of the petrochemical industry in the Kingdom, underlines Saudi Arabia’s potential as a choice location for a viable auto-manufacturing industry.
 
 

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