Is Saudi Arabia’s Auto Industry a Non-Starter?
Saudi Arabia’s slow and arduous march toward economic diversification is beginning to pay off, but the road to achieving sustained success in the nonoil private sector remains a challenge.
And the reliance on energy-related projects — petrochemicals, power generation and natural gas exploration — continue to define the Kingdom’s economic future.
It’s only natural that since Saudi Arabia is the world’s biggest oil producer, the government would spin off its energy expertise into other fields. But Saudi government officials also recognize that energy alone will not lead to sustained economic growth.
The recently passed mortgage law is expected to encourage banks to expand its loan practices in a $ 16 billion market. This will broaden business opportunities for lenders and property developers while providing middle-class Saudis the means to buy a home.
This will go a long way toward boosting the nonoil private sector, which in 2010 accounted for nearly half of Saudi Arabia’s total economic output. In contrast, the nonoil private sector in 1974 provided only about one-quarter of the Kingdom’s total economic output.
New banking laws that open the door to more foreign investment, entry in 2005 to the World Trade Organization, telecommunications and the fledgling tourism industry have provided possibilities for further economic growth not imagined just a decade ago. Add the six planned economic cities that is said to provide about 1 million jobs, and Saudi Arabia is on a solid economic footing.
Yet Saudi Arabia’s future has been, and always will be, tied to oil and energy, whether it’s petrochemicals or natural gas. That’s why it’s puzzling that Saudis have not embraced the vision of the government to manufacture auto parts by 2013 or 2014 and build cars by 2021.
King Saud University engineering students developed a prototype sport utility vehicle, the Ghazel, which is an economical SUV on par with the Kia Sorento. The Ghazel could be the answer to lessening the Kingdom’s dependence on oil exports, but many obstacles remain.
Economic analysts and automotive experts believe that manufacturing auto parts by 2014 is too optimistic given that there is no labor pool in place.
To complicate the implementation of auto parts manufacturing is the Nitaqat initiative, which requires a specific percentage of Saudis to be employed at the assembly plant as laborers. A more realistic goal is perhaps 2018 or 2019. The test for a true domestic car is whether the private sector can successfully launch the auto parts manufacturing plants and employ Saudis to produce the parts and manage the facility. If auto parts production occurs within a year or two of the original launch date and with a Saudi labor pool, then it’s conceivable that automobile assembly can become a reality.
I recently spoke to a fellow who works in the automotive cluster in the government’s national industrial clusters development program. The program focuses on solar energy, plastics, minerals processing, home appliances and automobile manufacturing to diversify Saudi Arabia’s economy. He said a Saudi automotive industry would create more than 100,000 jobs, but he acknowledged that car manufacturing is by far the biggest challenge.
But it’s not as if there is no foundation for building cars in the Kingdom. Isuzu Motors Ltd. is building trucks out of a Dammam assembly plant and is expected to deliver about 25,000 vehicles annually to Asian countries.
As for building a passenger car assembly plant, officials with the National Industrial Clusters Development Program officials are still in negotiations. However, King Saud University has already reached an agreement with Digm Automotive Technology of South Korea to develop a vehicle that would carry a price tag under $10,000.
That doesn’t necessarily mean that Saudis and expats will line up at the showroom to buy Ghazels that are competitive with Japanese imports. Rather, Saudi auto manufacturers should adopt the practices of Japanese automaker Honda in the 1960s and South Korea’s Hyundai in the 1980s by efficiently producing economical bare-bones cars to build an institution of automaking, and then evolve into manufacturing mid-range and later luxury cars.
Even if Saudi Arabia establishes an auto industry, sustaining it remains daunting. For one, the Asian market is flooded with Japanese and South Korean cars and trucks.
A better strategy is to sell the car domestically and to find a niche market in Africa where exporting new cars is a relatively open market.
The new industry also must overcome the immense skepticism among the many Saudis who view automaking as a pipe dream. If delays plague the opening of an auto parts manufacturing plant, we can expect the 2021 target for auto production also to be affected.
Significant delays will only shake confidence among investors, and ultimately potential buyers of a Saudi-made car.