The Rise of Saudi Arabia: Framework for Success in the Region

Part 5 of 5

The market in Saudi Arabia is large and can generate significant rewards for companies that successfully capture its value. There are three fundamentals to creating success in the KSA market: finding the right local partner, using a clear sales process, and creating tailored marketing for the region. The KSA market is unique. Businesses seeking to enter the region should acknowledge this through their operations and business strategy.

A Local Partner is Essential

Because the KSA market is so unique, a local partner is essential. Businesses should have criteria and strategies to utilize local partners effectively. Those may include the following:

• Clearly defined roles and responsibilities that rely on the local partner to develop new
  relationships in the region.
• A clear sales process will ensure satisfaction on both ends and facilitate a fast and effective capital or commercial transaction.
• Rights such as exclusivity, rights of first refusal, rights of first notification, franchising rights, licensing rights, distribution rights, or reseller rights.
• Minimum order quantities needed to maintain or achieve certain rights.
• Ability and experience in localization to make sure key marketing messages can be tailored.
• State-level contacts for any compliance or regulatory hurdles in the future.

Customize Business Operations for KSA

Business operations should be customized for KSA. Deciding which operations to customize greatly depends on the business model. J&A recommends companies utilize the typical categories of market entry, sales and marketing, operations and support, and scaling and exiting. Market entry and sales and marketing are tactical while operations, support, scaling, and exiting are categorically strategic.

Market Entry

During market entry, the first month should be spent selecting and clarifying the role of a local partner, who can assist in developing a regional pricing strategy and investing in start-up infrastructure.

• Clarify the role of the local partner and assign KPIs to the relationship.
• Invest in setup infrastructure based on the business model.
• Develop a regional pricing strategy.

Sales and Marketing

The next two to four months will be spent setting the groundwork for sales and marketing operations that are tailored for the region. Operations and support are ongoing and businesses should localize only what is necessary, such as sales, customer service, and office functions.

• Identify customer personas and lead generation; always focus on top-level decision-makers.
• Develop a plan to continue building sales leads.
• Understand the consensus-driven decision-making associated with GCC culture.

Operations and Support

• Localize only the necessary business operations based on an HQ and subsidiary strategy.
• Maintain centralized hubs of product development, service development, innovation, and back-office functions.
• The most common localized operations are sales, account management, and customer service.

Scaling and Exiting

After the first two years, businesses can focus on scaling and exiting. Accurate reporting, leveraging the GCC presence, and showcasing a global business will help increase brand awareness for an exit or continued growth.

• Keep reporting precise and accurate to enable spinoffs and divestitures.
• Leverage GCC presence for cost and revenue synergies as much as possible.
• Capitalize on the relative strengths of the markets in which you operate based on growth or exit strategies.

KSA Pricing and Market Adoption Is Unique

Price elasticity is higher in KSA than in the USA. Because of this, companies entering the market must be prepared to negotiate.

Companies should not overprice their products or services in KSA, but they should give the buyer an opportunity to negotiate for value.

• Companies should understand market critical mass timing. Initial sales are difficult to achieve but adoption rates are faster than in markets like North America and Europe.
• The KSA market is significantly smaller than North America and Europe; companies should have an expansion strategy into other GCC and MENA markets after initial sales are created in KSA.

We hope you’ve enjoyed this series on the rise of Saudi Arabia. We reviewed the kingdom’s history, unique competitive advantages, anticipated economic changes through its Vision 2030 program, and a framework for utilizing this information to generate success in the region as a foreign company. KSA faces competition in the global top 20 economies, but there is no doubt the country will continue to expand and become an increasingly powerful player, both in MENA and across the globe.

Source: IAGS | The World Bank | IMF GCC Banking | IMF GCC Markets | IMF Trade and Foreign Investment | Saudi Arabia Vision 2030 | UAE Ministry of Finance | McKinsey and Company

The Rise of Saudi Arabia: Manufacturing and Healthcare

Part 4 of 4

Manufacturing and healthcare are expected to account for 24% of Saudi Arabia’s GDP compound annual growth rate into 2030. This part of the series will provide an analysis of these two industries and their expected changes as part of the country’s evolution.

KSA’s GDP is as Large as All Other GCC Countries Combined

Saudi Arabia has the largest GDP in the Gulf Cooperation Council (GCC) and the Middle East and North Africa (MENA) region. The chart below compares the kingdom’s GDP to its GCC counterparts.

Advanced manufacturing is a major focus for KSA’s into 2030. The region’s strong position in industrials and large-scale manufacturing can become compounded as its trade position and openness increases to levels similar to the UAE and Bahrain. Manufacturing is expected to be the greatest driver of the economy into 2030.

Healthcare is another major driver of government spending. Projects in healthcare equipment, medical devices, pharmaceuticals, and services are on the rise and generally sponsored, in whole or in part, by the government.

KSA Manufacturing is on the Rise

Saudi Arabia manufactures a range of goods. Some private companies are using the country to produce locally already, including international firms such as Isuzu, which opened a truck assembly plant in the kingdom in 2012. Continued competitiveness requires a skilled and more productive workforce, stronger legal and investment protection, and the removal of a range of obstacles that hinder business, including high-import duties, lengthy customs and visa procedures, and gaps in local supply chains.

• Saudi Arabia has made value-added manufacturing services a priority since 1995.
• This growth has slowed in recent years as the country tries to balance supply and demand with its capabilities.
• KSA can be a manufacturing hub in the MENA region if it builds the infrastructure, competes on price, and develops the necessary capabilities to meet consumer demand.

KSA Health Expenditures are Focused on Programs and Wages

Healthcare was one of the greatest beneficiaries of public spending during the oil boom, and there was a large-scale buildup of healthcare infrastructure including 81 new hospitals. The kingdom will need to continue spending heavily on healthcare to care for its aging population.

KSA needs more healthcare workers. Just one in three healthcare professionals is a Saudi national, and there are not enough healthcare graduates to replace professionals who retire or leave their jobs. To reverse this trend, several initiatives are being implemented to improve the perception of the healthcare professions and to provide educational capacity at colleges, universities, and appropriately equipped teaching hospitals.

The final part of this five-part series will combine this into a cohesive, actionable framework that gives businesses from outside KSA steps for achieving success inside the country.

Source: IAGS | The World Bank | IMF GCC Banking | IMF GCC Markets | IMF Trade and Foreign Investment | Saudi Arabia Vision 2030 | UAE Ministry of Finance | McKinsey and Company

The Rise of Saudi Arabia: Trade and Finance

Part 3 of 3

Finance and trade are expected to make up 13% of the kingdom’s GDP compound annual growth rate into 2030. This part of the series will provide analysis on these two industries and their expected changes as part of the country’s evolution.

KSA’s GDP is as Large as All Other GCC Countries Combined

Saudi Arabia has the largest GDP in the Gulf Cooperation Council (GCC) and the Middle East and Northern Africa (MENA) region. The chart below compares KSA’s GDP to its GCC counterparts.

• Saudi Arabia’s GDP is almost as large as all other GCC countries combined.
• All GCC GDPs follow similar cycles of highs and lows.
• GDPs in 2020 are expected to contract globally due to the COVID-19 pandemic, but J&A expects the kingdom’s GDP to continually climb as government spending increases in 2021 and beyond.

International Trade: KSA Makes up Nearly 30% of GCC Imports and Exports

Saudi Arabia alone accounts for almost 20% and 25% of MENA’s imports and exports, respectively. There are 19 countries in MENA. Exports out of the KSA consist mostly of raw materials, transportation, and machinery. Due to the kingdom’s size, it can increase its regional exports apart from fuel. KSA has the ability to import more tourism, hospitality, and leisure services and technology once these industries are more developed.

Investments in finance and trading infrastructure are expected to grow KSA’s GDP by $150 billion through 2030. This growth will be challenging, as fundamental legal frameworks need to be established for effective small and medium (SME) lending and capital markets. KSA’s investment in trading infrastructure will become a more powerful driver as the manufacturing capacity of the country also begins to increase and the state grows as a distribution hub in the region.

Small and Medium Business Lending Lags Behind Comparable Economies

Small and medium lending and trade finance are essential elements to grow any economy. It is estimated that nearly 40% of (or 100 million) global jobs are a result of small and medium businesses. GCC countries’ average lending to SMEs is far behind other MENA countries. KSA and the UAE lend less than 5% of total funds to SMEs, whereas non-GCC countries place 15% of total lending into SME businesses.

J&A completed a deep dive of KSA imports and exports in its Global Trade newsletter. The entire series can be located here. In the kingdom, 60% of exports are fuel; imports and raw materials make up approximately 80% of the state’s imports. KSA holds the second most oil reserves in the world next to Venezuela.

Small and medium business lending is key to development of GDP growth. Globally, SMEs account for 23% of GDP.

• KSA is behind its regional counterparts in SME lending and financing.
• To successfully implement more advanced SME lending, KSA will need to privatize several industries and implement a legal framework that can apply to international business owners as well as domestic ones.

SME lending is an essential activity to enable economic growth in the private sector. There is significant room for growth in lending to small and medium-sized business, as well as in better provision of financial services to households, including mortgages and investment products in GCC countries. Households play an important role in growing the KSA economy through savings.

• Monthly incomes are adjusted for income tax, reserve assets plus government stock market equity, and interest payments.
• Monthly incomes have steadily increased since 2005, and are expected to continue increasing into 2030.
• Saudi Arabia is less dependent on international workers compared to its GCC counterparts such as the UAE. This allows the kingdom to invest in its citizens on a larger scale.

The next part of our series will take a deeper look at manufacturing and healthcare within the context of KSA’s 2030 vision growth.

Source: IAGS | The World Bank | IMF GCC Banking | IMF GCC Markets | IMF Trade and Foreign Investment | Saudi Arabia Vision 2030 | UAE Ministry of Finance | McKinsey and Company

The Rise of Saudi Arabia: Travel, Tourism, and Hospitality

Part 2 of 2

There are eight sectors that are expected to account for the majority of KSA’s economic growth into 2030. The travel, tourism, and hospitality industries are expected to account for 11% of total GDP growth in that time period. This part of the series will take a closer look at these sectors and their expected changes over time. The sectors’ growth will slow due to the COVID-19 pandemic, but they will likely remain a key growth area well into 2030. Even during the pandemic, domestic tourism is on the rise while international tourism has slowed.

Saudi Arabia is home to Makkah, the holiest Islamic religious site, in addition to several natural tourist locations such as beaches, mountains, and valleys. The kingdom is taking active steps to make tourism and hospitality more accessible. This includes the privatization of certain tourism services and the preservation of important cultural and historic sites.

Rising International Tourism in the Kingdom

• International tourists have more than doubled in KSA since 2005; this is largely due to the easing of restrictions for tourist visas to enter the country.
• About 10 to 13 million Muslims visit the holy sites of Makkah and Medina every year, including more than two million during the annual Hajj pilgrimage period.
• The kingdom possesses a wealth of archaeological sites such as UNESCO world heritage site Mada’in Saleh and areas of natural beauty like coasts and mountains; therefore, J&A sees an opportunity for thriving profit-driven tourism.

Domestic Tourism Is a Large Opportunity for Growth

• Domestic tourism presents a significant opportunity for economic growth, as locals prefer to vacation and travel outside the region.
• The Ministry of Tourism launched the Saudi Summer campaign to encourage domestic tourism during the COVID-19 pandemic.
• The Saudi Summer led to a $1.6 billion consumer spend, 26% more than the same period in 2019.
• As tourism sites become more developed, J&A expects domestic tourism spending to increase and compete with locations such as Dubai, UAE.

In the next part of our series we will review steps the KSA government is taking to grow business lending and trade.

Source: IAGS | The World Bank | IMF GCC Banking | IMF GCC Markets | IMF Trade and Foreign Investment | Saudi Arabia Vision 2030 | UAE Ministry of Finance