UK firms have been urged to ignore stereotypes and grasp long-term business opportunities in Saudi Arabia
British officials like to talk of a strategic relationship between the “two kingdoms” – the UK and Saudi Arabia – building on close bilateral ties between London and Riyadh going back decades.
This is not just “camel corps” bluster frequently heard from the cosy confines of the Foreign Office. The links between the two countries do indeed run deep. Saudi Arabia is the UK’s largest trading partner in the Middle East, and Britain is the Saudi kingdom’s second largest foreign investor after the US, visible exports totalling £3.1 billion ($4.88 billion) in 2010, a rise of 16 per cent on the previous year. Saudi-UK joint ventures number over 200 and counting.
But the UK’s committed band of Saudi friends are frustrated with the overall response of corporate Britain to the scale of the Saudi opportunity.
Though British firms are doing well in the kingdom, noted influential former UK ambassador to Riyadh Sir Sherard Cowper-Coles at the Opportunity Arabia conference in London in late September, British firms should be doing far more to win orders and friends in the kingdom.
At the annual event staged by the Middle East Association to raise the profile of Saudi business in the UK, Sir Sherard – now a director of international business development at BAE Systems – didn’t mince his words.
Presenting the kingdom as a rock of stability in a turbulent region, politically influential both regionally and internationally, with the largest economy in the MENA region, Sir Sherard bemoaned the failure to market these advantages properly.
“Saudi Arabia is a country of huge potential but it always seems to undersell itself, particularly to UK exporters and investors,” said Sir Sherard. “It seems there’s a group of devotees who do understand the kingdom and care for it and who go back again and again – but there are too many who don’t understand it.”
A blunt speaker frequently critical of the allied effort in Afghanistan since retiring from the Foreign Office, Sir Sherard says both sides need to do more to build on historic ties.
Baroness Liz Symons, a former trade minister in Tony Blair’s government, urged UK firms to get their feet on the ground. “If you want to do business in Saudi Arabia you have to go there, get there early and stay there,” she told the conference.
Sir Sherard, a fluent Arabic speaker who headed the British embassy in Riyadh between 2003 and 2006, views Saudi Arabia as an unvarnished opportunity for British business. “Saudi Arabia remains the serious country in the Middle East and in my view the most stable – a country with a serious economy, equivalent to over a quarter of Arab GDP, with an excellent economic outlook and enormous prospects through the decades ahead,” he said.
However, Saudi Arabia suffers from a series of prejudices. Prime among these are an impression that it is an absolute monarchy ruled by gerontocrats prone to blocking reform. Sir Sherard was keen to puncture these myths.
“There are images of Saudi Arabia instead of information, stereotypes instead of statistics, prejudice instead of plain facts,” he said.
The kingdom is making progress, said Sir Sherard. When he left Saudi Arabia, the kingdom ranked 38 in the World Bank’s ease of doing business ranking – in the four following years it leapt from 38th to 11th.
Despite growing volumes of business between the UK and Saudi Arabia, Sir Sherard argued these are not growing at the rate they might. “Investor appetite is high but not as high as it should be. Yes, UK exports last year were still up 16 per cent at £3.6 billion so they are doing well, but in my view not doing well enough,” he said.
His message to UK firms is to get out there and stay there. He pointed to BAE’s extensive presence in Saudi Arabia going back four decades (see page 46), and its willingness to invest in upskilling Saudis and then employ them; 58 per cent of BAE Systems’ 6,0000 employees in the kingdom are Saudi nationals. “We’re proud of our plans to transfer skills from Lancashire or Surrey out to the Kingdom,” said Sir Sherard.
Other Saudi-British businesses were also keen to boost the Saudi economy’s strengths. Thamer Jan, general manager of commercial banking at Saudi British Bank, argued that Saudi Arabia had weathered the economic storm of the last few years much better than other emerging markets, with growth in the range of four to five per cent per year.
Reform challenges are significant, noted Jan, with unemployment the major issue. “This is a key challenge for us, as we have a relatively young population with 35 per cent of population under 15,” he said.
The government is making the effort to improve things. “The economy remains dependent on government spending. However strides are being made to encourage the private sector to play a more active role,” said Jan.
Another major challenge is the shortage in housing supply in Saudi Arabia. “There is significant demand in housing, with a need for up to one million new homes by 2015. The proposed mortgage law should assist people owning their own home, but is still a work in progress,” said Jan.
Much of the uplift for the housing sector is coming from a munificent King Abdullah bin Abdulaziz, who in February and March 2011 announced a $130 billion financial package to spread the wealth wider. This is already having a major impact on the Saudi economy.
“Part of that package was a complete review of wages of government employees and it has had a strong impact on the economy both at private sector and public sector levels,” said Jan. “Spending will take time to filter though but we’ve seen evidence that it has positively impacted the economy and we expect 2011 to be a strong year.”
The Saudi financial sector, meanwhile, looks in robust fettle. “No Saudi banks have had to resort to government support, unlike some neighbouring economies,” said Jan.
According to Jan, there is an increased amount of cross-border business – payments, cash banking, treasury and trade finance. And with that there’s been strong infrastructure growth that has driven credit growth to 10 per cent in 2011, up from five per cent in 2010.
Excess liquidity is, however, one obstacle facing Saudi banks, he said. “The challenges for banks are primarily that we are at the moment running ample liquidity and that has driven some larger banks to misprice risk or price risk cheaply,” warned Jan.
The generally robust economic backdrop in Saudi Arabia is underpinned by a sustained move towards industrialisation, part of a strategic attempt to deliver more value-added to the resource-rich kingdom.
According to Leslie McCune, managing director of Chemical Management Resources, this is manifesting itself in the petrochemicals sector. “There’s a strong drive towards industrialisation that is much more pronounced than in previous years,” he told the conference, noting the words of the chief executive of state oil company Saudi Aramco, Khalid al Falih: ‘nations do not raise living standards by exporting commodities.’
McCune said there was now a growing resistance to exporting commodities to countries and then re-importing them. Why export plastic pellets to China to make into pipes to put into Jeddah’s municipal water system, he asked.
The wealth of opportunity on offer in Saudi Arabia in petrochemicals and other sectors will keep the kingdom on the UK and other countries’ radar screens.
But the clearest message from the conference was that having an on-the-ground presence is the key ingredient to making a success of a tough market – with more than one delegate grumbling about the cumbersome process of obtaining business visas.
For those with the patience and perseverance, the kingdom nonetheless offers substantial rewards, said Sir Sherard.
“If I have one message on my return to Saudi Arabia it is to vote with your feet, get out there and have a strategic vision, because in the end the rewards are enormous with enterprising young Saudis waiting connect with western investors,” he concluded.
Saudi-UK trade ties (2010)
Value of UK exports to Saudi Arabia (visible goods) $4.6 billion
Estimated value of UK services exports to Saudi Arabia $3 billion
Value of Saudi exports to UK $1.5 billion
Number of UK-Saudi joint ventures 200
Total value of investment made by UK-Saudi joint ventures $17.5 billion
by James Gavin
November 2011
@ The Gulf Business News and Analysis