At first glance, Detroit and Yanbu appear to have little in common. One is an American city facing bankruptcy after years of economic decline, while the other is a fast-growing refinery and manufacturing base in Saudi Arabia. But the Saudis are hoping that Detroit’s most famous export — cars — can help build a brand new industry in the kingdom.
Earlier this month, the Saudi American Business Council held a meeting in Michigan’s biggest city, allowing American firms to get a look at the kind of tie-ups on offer in the fast-growing Saudi market. By the end of the event, Saudi media reported, General Motors, Chrysler and Ford — the Big Three of the US auto industry — are now considering setting up plants in the kingdom. It’s worth pointing out at this stage that there has been no confirmation on this from the manufacturers themselves, although Ford is believed to be interested due to the incentives currently on offer.
Other car makers are already betting on the nascent Saudi auto industry. Japan’s Isuzu Motors is already manufacturing trucks in Dammam, and hopes eventually to produce around 25,000 units a year. Jaguar Land Rover is currently conducting a feasibility study to establish a plant in Yanbu, and the Saudi government is prepared to spend $1bn to develop the city as a hub for car manufacturing.
All this makes sense on paper. From a geographical perspective, Saudi Arabia is a well-positioned base for Western manufacturers wishing to sell vehicles both into the burgeoning middle classes in Asia and Africa, as well as the rest of the Gulf region.
Another major benefit is the presence of low-cost raw materials. As Saudi Arabia attempts to extract even greater value out of its natural resources, its downstream industry is becoming ever more important. Petrochemicals giant SABIC is already working with companies like Volkswagen, Land Rover, and Mitsubishi to provide new materials like lightweight engineering thermoplastics and enhanced fuel additives to their cars.
And as car manufacturers switch to the use of aluminium over steel, the kingdom provides a distinct competitive advantage. Aluminium production is ruinously expensive; some estimates suggest that as much as 40 percent of the cost of producing the metal is spent on the electricity needed to smelt it. With global demand affected by the financial crisis, and as China has sought to source its own aluminium within its borders, most big mining firms have attempted to lessen their focus on the metal. None of this is a problem for Saudi Arabia, which possesses abundant bauxite resources (the main source for aluminium) as well as the cheap electricity needed to fire its smelters.
In fact, one of the main reasons that Ratan Tata, chairman of Tata Motors (which owns Jaguar Land Rover), chose Saudi Arabia for its new plant is so that it can take advantage of the huge Alcoa Ma’aden joint venture smelter in Ras Al Khair.
Add those points to the fact that the Saudi government is likely to help with funding and cheap loans to build up an indigenous manufacturing industry, and the future looks positive. The government is already helping to finance the production of the Ghazal, an SUV being developed by students at King Saud University, a local family firm and a South Korean operator. But Saudi Arabia still lacks the manpower with the relevant expertise to do all this on its own. One solution could be to co-opt overseas manufacturers into training and employment schemes, similar in nature to the offset programmes used in the defence and aerospace industries.
It’s too soon to say whether Saudi Arabia’s grand plans will pay off, but the foundations are there. Other Gulf countries with similar raw materials — the UAE, for example, has a large aluminium production industry and excellent transport connections — may well consider following suit.
Ed Attwood is the Editor of Arabian Business.