Led by Crown Prince Mohammed bin Salman, Saudi Arabia is fast moving on the path of diversification thereby reducing the country’s reliance on hydrocarbons. In the past few months, many initiatives have been taken to ensure a wholesome development of the country, while building a global reputation.
However, it needs a greater effort to ensure things stay on track and do not derail in-between. As oil has been the biggest contributor to the state exchequer so far but experts have recommended that Saudi oil-field services and equipment sector must review their strategies and approaches to partnerships in order to continue to thrive.
This finding has been revealed in a recent study by global management consulting firm Strategy& (formerly Booz & Company), part of the PwC network. It said that multinational corporations (MNCs), and their local partners should revamp their plans to ensure a continuous streak of revenues.
Building on partnerships
Partnerships between MNCs and local companies dominate the oil-field services and equipment sector in Saudi Arabia. MNCs initially acted alone until changes in local regulatory requirements required the participation of local companies.
To meet these requirements, many MNCs that entered the market in the 1970s did so in partnership with strong, family-led industrial conglomerates, with the local firms acting as the agents and distributors for goods manufactured overseas.
“Partnerships still remain an important option for smaller foreign companies that have less international experience or for new entrants to the Saudi market. For such companies, the establishment of an agency or distributorship allows them to understand market dynamics and mitigate risks,” said Georges Chehade, partner with Strategy& Middle East and a member of the energy, chemicals and utilities practice.
Saudi opening up
Recent moves to increase transparency and encourage foreign investment via the revision of key pieces of legislation are making it easier for MNCs to do business in Saudi Arabia without local partners.
Saudi Arabia’s has stated its desire to reform and liberalize its economy. This is evidenced, in part, by the creation of the Saudi Arabian General Investment Authority (SAGIA) and, in 2005, their accession to the World Trade Organization.
In other developments, the recent increased focus of Saudi Arabia’s policy to obtain goods and services domestically in order to create jobs provides a new incentive for MNCs to seek local partners and foster localization.
Aramco’s IKTVA’s objectives
The key localization initiative for the oilfield services sector is Saudi Aramco’s In-Kingdom Total Value Add (IKTVA) program, launched in December 2015. IKTVA’s three key objectives are to:
Double the percentage of locally produced energy-related goods and services from 35 percent in 2015 to 70 percent by 2021. Export 30 percent of output from the local energy goods and services industry. And create half-a-million direct and indirect jobs for Saudi nationals
Although the IKTVA program is still developing, it is already having an impact. Saudi Aramco reports that locally produced energy-related manufacturing accounted for 43 percent of the total in 2016, up from 37 percent in 2015.
Dr. Yahya Anouti, principal at Strategy& Middle East and a member of the energy, chemical and utilities practice, stated, “The changing environment offers important opportunities to those local companies that proactively align their strategy and capabilities to meet the new requirements of localization. Local companies that succeed in developing their capabilities will emerge as partners of choice for MNCs or as independent local suppliers.”