Saudi’s automotive ambitions grow

Saudi Arabia is set on establishing itself as the new automotive hub for the Middle East. The kingdom is currently the largest importer of vehicles and auto parts in the region, accounting for about 770,000 auto sales a year.

New car sales are increasing steadily, up 6.7 per cent in 2014, with the market forecast to reach one million units by 2020.

This will make the kingdom the world’s 16th largest automobile market and easily justify local assembly operations.

The Saudi government intends to meet the growing demand for cars and commercial vehicles not just through imports but also by attracting original equipment manufacturers to open plants in the kingdom. Plans to develop a domestic automotive industry are at the centre of an ambitious industrial diversification strategy.

Development of an automotive sector has been identified as one of five priority industries in the National Industrial Clusters Development Programme.

But the kingdom wants to go much further than mere assembly operations. On top of developing production of cars, trucks and buses, the government envisages the manufacture of motor components and sub-assemblies across the country.

In June this year, the first Volvo truck rolled out of the Arabian Vehicles & Trucks Industry plant in the new King Abdullah Economic City. The plant is a joint venture between Zahid Tractor & Heavy Machinery Company and Volvo Truck Corporation. The new factory is producing Renault and Volvo vehicles from the same assembly line.

As vehicle sales have continued to expand in Saudi Arabia, other international car and truck manufacturers are considering establishing production lines in the kingdom.

Japan’s Isuzu has already begun vehicle assembly in the country and Jaguar Land Rover, owned by the India’s Tata Group, has been looking at the feasibility of setting up a manufacturing plant.

Isuzu’s production plant, located in Dammam’s Second Industrial City, started operations at the end of 2012 – initially assembling 600 of the company’s F-Series trucks a year with imported components. The production volume is due to increase rapidly. According to Isuzu’s president Susumo Hosoi, the company plans to produce 25,000 light and heavy-duty trucks by 2017 with 40 per cent of output sold to countries in and around the Gulf.

The Isuzu venture is not the first truck assembly operation in Saudi Arabia. There are three truck assembly plants in Jeddah’s industrial zone that have been operating since the 1980s. This assembly business stems from the long-standing relationship between Germany’s Daimler and E.A Juffali & Brothers – the kingdom’s exclusive Mercedes-Benz dealer.

The two groups have worked together for more than 40 years and operate a truck assembly facility in Jeddah under the National Automobile Industry Company joint venture. The venture produces some 8,000 heavy-duty commercial trucks a year for a domestic market growing in line with Saudi infrastructure developments and expanding construction activity.

Another indication of a growing domestic automotive industry came earlier this year. In May, Saudi National Automobile Manufacturing Company and Saudi Arabian Public Investment Fund entered into a partnership with South Korea’s Daewoo International to build a vehicle manufacturing plant. SNAM holds 50 per cent of the $1bn venture with the PIF holding 35 per cent and Daewoo 15 per cent.

According to Daewoo International manager Park Kyung-Ho, the plant is expected to be located in Sudair Industrial City about 130 kilometres north of Riyadh. It will meet local demand and also export vehicles to the rest of the Gulf region. Daewoo says it is aiming to reach an annual production capacity of 150,000 vehicles by 2018.

Other producers – including Ford, GM and Chrysler – have also expressed interest in local manufacturing operations and have reportedly been in discussions with the Ministry of Commerce and Industry.

The Saudi government, in line with its commitments to the World Trade Organisation, allows foreign operators 100 per cent ownership of companies, factories, production equipment, property and projects. As well as a range of fiscal incentives and a maximum of 20 per cent tax on corporate profits, the government can also provide low-cost loans from the Saudi Industrial Development Fund and PIF.

In addition to its own growing domestic market, Saudi Arabia offers tariff-free access to other countries of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates – which import 1.2 million vehicles a year.

Observers believe that the size and wealth of the regional market ought to make it attractive to the motor industry. Around four million cars are bought in the Middle East and North Africa annually. This represents a larger market than Germany, with some three million vehicles a year sold.

Within the region, Saudi Arabia leads demand with annual sales now approaching one million.

Over the next 20 years, the Saudi government is looking to create an industry that will encompass the production of cars, trucks and buses. The aim is that by 2025 around 600,000 fully assembled vehicles will be produced each year in the kingdom.

NICDP vice president of automotive development Didier Vigouroux believes that as the volume of locally-made cars increases, the market will eventually become attractive for smaller Saudi companies. This could include the manufacturing of tier-two and tier-three elements such as sub-systems, components and standard parts.

The Saudi government is particularly keen to attract companies that can utilise materials produced in the kingdom – such as plastics, carbon fibre and synthetic rubber – and turn them into parts and assemblies for vehicle production. In addition, the increasing use of aluminium for bodywork by global manufacturers could make Saudi Arabia a very attractive proposition for assembly.

Saudi Arabia Mining Company (Maaden) and the United States’ Alcoa operate a major integrated aluminium complex including a bauxite mine, aluminium refinery, smelter and rolling mill at Ras al-Khair. The new smelter at the integrated aluminium refinery is producing automotive-grade sheets and creating new opportunities in automotive casting and stamping.

Saudi Arabia Basic Industries Corporation is also cooperating with Italy’s Montefibre to provide the technology needed to develop a carbon-fibre plant in the kingdom. The material is in growing use by automakers to create lighter more fuel-efficient products. Another SABIC venture with Exxon could see synthetic rubber produced in the kingdom for tyres and automotive seals and hoses.

The scale of Saudi ambitions is reflected in a prototype automobile designated Ghazal One. This is based on the Mercedes’ G-Class sports utility vehicle and has been designed by a joint venture of King Saud University, Al Muwakkaba for Industrial Development & Overseas Commerce and South Korea’s Digm Automotive Technology.

Saudi Aramco researchers have also unveiled a vehicle design with the potential of capturing and storing up to 70 per cent of carbon dioxide emissions.

Such vehicles could provide a competitive alternative to electric models.

The building blocks for a successful automotive manufacturing industry are steadily being put in place. In time, it could lead to production of not just foreign models but also Saudi designed vehicles.