Saudi’s move to liberalize the oil field sector calls for Corporations and their local partners to re-visit partnerships

Sunday 05 November 2017
Georges Chehade, partner with Strategy& Middle East
Dubai - MENA Herald:

A recent study by global management consulting firm Strategy& (formerly Booz & Company), part of the PwC network, has highlighted that multinational corporations (MNCs), and their local partners, operating in the Saudi oil-field services and equipment sector must review their strategies and approaches to partnerships in order to continue to thrive.

Partnerships between MNCs and local companies dominate the oil-field services and equipment sector in Saudi Arabia. MNCs initially acted alone until changes in local regulatory requirements required the participation of local companies. To meet these requirements, many MNCs that entered the market in the 1970s did so in partnership with strong, family-led industrial conglomerates, with the local firms acting as the agents and distributors for goods manufactured overseas.

Recent moves to increase transparency and encourage foreign investment via the revision of key pieces of legislation are making it easier for MNCs to do business in Saudi Arabia without local partners. Saudi Arabia’s has stated its desire to reform and liberalize its economy. This is evidenced, in part, by the creation of the Saudi Arabian General Investment Authority (SAGIA) and, in 2005, their accession to the World Trade Organization.

Commenting on the role of partnerships, Georges Chehade, partner with Strategy& Middle East and a member of the energy, chemicals and utilities practice said, “Partnerships still remain an important option for smaller foreign companies that have less international experience or for new entrants to the Saudi market. For such companies, the establishment of an agency or distributorship allows them to understand market dynamics and mitigate risks.”

In other developments, the recent increased focus of Saudi Arabia’s policy to obtain goods and services domestically in order to create jobs provides a new incentive for MNCs to seek local partners and foster localization.

The key localization initiative for the oilfield services sector is Saudi Aramco’s In-Kingdom Total Value Add (IKTVA) program, launched in December 2015. IKTVA’s objectives are to:

• Double the percentage of locally produced energy-related goods and services from 35 percent in 2015 to 70 percent by 2021

• Export 30 percent of output from the local energy goods and services industry

• Create half-a-million direct and indirect jobs for Saudi nationals

Although the IKTVA program is still developing, it is already having an impact. Saudi Aramco reports that locally produced energy-related manufacturing accounted for 43 percent of the total in 2016, up from 37 percent in 2015. In addition, the IKTVA score was a key component in the process to select suppliers for contracts that could total over SAR 60 billion (US$16 billion). Meeting IKTVA targets to remain competitive is forcing MNCs to rethink their supply chain operations so that they switch to local suppliers and develop the local supply chain wherever economically justified.

The changed environment provides an opening for local companies that proactively develop and adapt their capabilities to support MNC localization to be positioned to retain their existing partnerships and attract new MNC partnerships.

Dr. Yahya Anouti, principal at Strategy& Middle East and a member of the energy, chemical and utilities practice added, “The changing environment offers important opportunities to those local companies that proactively align their strategy and capabilities to meet the new requirements of localization. Local companies that succeed in developing their capabilities will emerge as partners of choice for MNCs or as independent local suppliers.”

To achieve future success MNCs will need to significantly improve how they interact with local partners, specifically in areas such as finance, technology, operations, shared services, localization, public affairs advocacy, marketing and the supply chain.

David Branson, executive advisor at Strategy& Middle East and a member of the energy, chemical and utilities practice commented, “Although the investment landscape in Saudi Arabia may seem of concern for local companies, the current changes herald the start of the next phase of development of the oil-field services and equipment sector. In this new era for partnerships, success will come to MNCs that can leverage local partnerships to drive increased localization, and to those local companies that can offer the capabilities to support this process.”

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