One sector Saudi Arabia is pushing hard to develop is its domestic automotive industry. The national strategic plan, part of the Ninth Development Plan ( 2010-14), included automotive development as one of the central pillars of Saudi industrial strategy. In fact, the automotive industry is seen as part of a larger industrial project whereby the Kingdom creates whole supply chains rather than just producing the raw materials, shipping them overseas for manufacturing and then buying the finished products.
With automobiles, the aim is to start by supplying the raw materials, like plastics and aluminium, and then move on to manufacturing vehicles within the Kingdom. Cars and trucks will then be bought by Saudis, with some being exported as the Kingdom’s automotive manufacturing capacity grows.
The Kingdom is the largest importer of cars and car parts in the region, with new car sales rising steadily – up 6.7% in 2014 at roughly 770,000. While the government has yet to release official sales statistics for 2015, the US Department of Commerce puts the number at 900,000. This comes to roughly SR75bn ($20bn) a year, according to the General Authority for Statistics, with the sector calculated to grow by around 4-5% per annum for the next decade.
The number of new cars on the road in the Kingdom is expected to hit 1m per year by 2020, indicating there is strong domestic demand to be tapped if production can be localised. Another 4m cars are sold across MENA every year, indicating strong auxiliary markets nearby for any automobile manufacturers setting up shop in the Kingdom.
Building The Industry
Even so, questions remain over the scalability of the industry and the financial investment needed to set up a full supply chain. “For the automotive sector to succeed, you cannot just build a single factory to manufacture cars. You need to build an entire industry. Developing the supply chain is key, as is creating the proper infrastructure, logistics and incentives to help grow the industry,” Fahd Al Dohish, CEO of Saudi National Automobile Manufacturing Company (SNAM), told OBG.
SNAM has a licence manufacturing agreement with an original equipment manufacturer (OEM). According to Al Dohish, this approach will more closely engage the partner OEM in the development of SNAM’s manufacturing facility in order to ensure that the vehicles produced under SNAM’s trademark are produced at their quality standards. Additionally, this approach will likely aid the marketing of the company’s brand beside a trusted OEM. A number of automotive parts joint ventures with local Tier-1 suppliers have also been established by SNAM in collaboration with global Tier-1 suppliers and local manufacturers to supply vehicle components. Ultimately, SNAM will not only manufacture motor vehicles to meet domestic demand, but also initiate an industry for spare parts in the Kingdom with capacity to export to foreign markets. The company’s 15-year development plan is designed to take the Saudi automotive sector from initiation to maturity, where the industry will be internationally recognised for not only production of national vehicles, but also local manufacturing of foreign brands.
One partnership that has already moved ahead is Arabian Vehicles & Trucks Industry (AVI), a joint venture between Zahid Tractor & Heavy Machinery Company and Volvo Truck Corporation, which is located in the industrial valley of King Abdullah Economic City. Designed by a joint Volvo-Renault project team – and one of the first production hubs in the world to produce both Volvo and Renault trucks on the same line – the joint venture manufactured its first Volvo truck in June 2015. “The new AVI facility represents a significant breakthrough in the diversification of Saudi Arabia’s industrial capabilities,” Wafaa Zawawi, chairman of the board of managers of AVI, said when the facility went into operation.
Germany’s Daimler and local company EA Juffali & Brothers also operate a joint-venture truck assembly facility in Jeddah. The company, the National Automobile Industry Company, produces 8000 heavy-duty commercial trucks each year for the local market.
Japan’s Isuzu began assembling trucks in 2012 in its $133m manufacturing plant in Dammam’s Second Industrial City. The target was 600 vehicles in the first year, starting with the medium-duty Forward truck line, rising to 25,000 by 2017, with upwards of 10,000 of those heading to neighbouring GCC markets. However, as an in-country assembly plant, most of the actual components of the trucks are currently manufactured elsewhere and then shipped to the Kingdom, although the company does plan to start manufacturing some parts in the Kingdom in the near future.
For Saudi Arabia to fully benefit from its automotive industry, it is important for the country to be involved in as much of the overall supply chain as possible. “The push to develop the automotive industry is good, it is an important driver to increase domestic rubber consumption, among other things. If a car is imported from somewhere like Japan, for instance, probably the rubber parts also come from Japan,” Philippe Ducom, chairman, CEO and president of ExxonMobil Saudi Arabia, told OBG. Others in the industry agree. “Cars are shifting towards lighter metals, such as aluminium, carbon fibre and plastics, all of which we can source from companies like Saudi Basic Industries Corporation and Ma’aden,” Al Dohish told OBG. Al Dohish added that since 15% of cars sold each year are sold to the government, the state can lend a strong hand to the industry by prioritising the buying of domestically manufactured vehicles.
If the Kingdom can bring in foreign joint ventures and establish a few signature projects, there is a real opportunity to build clusters of automotive parts suppliers around the larger facilities. This fits with the National Industrial Clusters Development Programme and could eventually lead to the establishment of Saudi small and medium-sized enterprises focused on the development and manufacturing of specific elements of automobiles, such as subsystems, bodywork and electronics, as well as dealing with repairs and maintenance.
According to a 2013 report by the US-Saudi Arabian Business Council, Saudi Arabia’s automobile accessories, repair and after-sales service equipment market is already worth more than $2.5bn. The Kingdom accounted for 183 of the 300 auto assembly and parts manufacturing plants in the Gulf region in 2013.
However, there are still questions remaining. “We are looking at automotive products – seatbelts, etc. Automotive could be a huge success, the issue is that the local market might be too small to meet the supply on its own,” Ayman Al Hazmi, general manager of Wahaj (Saudi Specialised Products Company), an affiliate of Sipchem, told OBG. If the Kingdom is going to grow a sustainable automotive sector, it will also need to supply markets elsewhere in the Middle East.