Saudi corporations and their local partners to re-visit partnerships
A recent study by global management consulting firm Strategy& has highlighted that multinational corporations (MNCs), and their local partners, operating in the Saudi oil-field services and equipment sector must review their strategies and approaches to partnerships in order to continue to thrive.
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.
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 liberalise 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 Organisation.
“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.
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 localisation.
The key localization initiative for the oilfield services sector is Saudi Aramco’s In-Kingdom Total Value Add (IKTVA) programme, launched in December 2015. IKTVA’s objectives are to: double the percentage of locally produced energy-related goods and services from 35 per cent in 2015 to 70 per cent by 2021; export 30 per cent 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 programme is still developing, it is already having an impact. Saudi Aramco reports that locally produced energy-related manufacturing accounted for 43 per cent of the total in 2016, up from 37 per cent in 2015. In addition, the IKTVA score was a key component in the process to select suppliers for contracts that could total over SAR 60 billion ($16 billion). Meeting IKTVA targets to remain competitive is forcing MNCs to rethink their supply chain operations so that they switch to local suppliers and develop the local supply chain wherever economically justified.
The changed environment provides an opening for local companies that proactively develop and adapt their capabilities to support MNC localisation to be positioned to retain their existing partnerships and attract new MNC partnerships.
“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,” said Dr. Yahya Anouti, Principal at Strategy& Middle East and a member of the energy, chemical and utilities practice.
To achieve future success MNCs will need to significantly improve how they interact with local partners, specifically in areas such as finance, technology, operations, shared services, localization, public affairs advocacy, marketing and the supply chain.
“Although the investment landscape in Saudi Arabia may seem of concern for local companies, the current changes herald the start of the next phase of development of the oil-field services and equipment sector. In this new era for partnerships, success will come to MNCs that can leverage local partnerships to drive increased localization, and to those local companies that can offer the capabilities to support this process,” said David Branson, executive advisor at Strategy& Middle East and a member of the energy, chemical and utilities practice.