Saudi Arabia: To Go Or Not To Go
Yes, therein lies the question, as Hamlet asked. The Crown Prince is making his tour to the US with the hope to encourage US companies to do business in SA. From what we read, he is hoping to assure people that Saudi Arabia is a safe place to do business. Most people don’t know how to how to start. What should people know to establish a relationship and find out if it is right for them? We turn to our partner, Larry Fallin, who manages the Middle East office of Berkeley Research Group, to investigate this opportunity.
Here are Larry’s Insights:
Prepare Business Models, Not Plans
I talk to people often about how to get companies started. Actually, the process is the same, whether you are a Saudi here or an expat coming from outside to start a company.
First: Throw away your business plan – whatever you think that plan is -- and develop a business model instead. This is not just another version of a business plan. It’s important to distinguish the difference. You have to have a model about how you will deal here.
For Saudi Arabia, there are three things you have to address. If you do these three, you will probably be fine.
- What is the value proposition for the product or service you are plan to sell into the market or develop here to sell elsewhere?
- What is the revenue model, including the pricing and distribution strategies tied to the revenue model?
- What is the cost model to show you can make money?
Once you have those, the next step is to start the process of identifying customers. The big push here in the Vision 2030 is: Build it Here. For example, let’s use a medical device product which you think will do well in the region. Here, the diversification push here is all about what they can also export? They are trying to change their export profile from just oil to more products. They will approach you and say: yes, that is a good product for Saudi Arabia but can we manufacture it here? That is a big push. One area they are especially pushing is the military industry. If you have products in the defense industry, you will be welcome. I just attended the Armed Forces Exhibition and there were aisles of things the Defense Department needs that they want to manufacture in SA and you could walk by the booths and read the specs and learn how many of each they need.
Second: there is a process to go through about which I caution people to do not try and work around Many people tell me “I am doing business in SA and know a Prince here who will help me.” I warn them: The prince probably does not know anything about the processes and can’t really help at all.
One way to do business here is by working with a partner. Joint ventures are popular. If you want to explore this, do a solid due diligence about the prospective partner first. You could get a partner who is very active with your business and its development but could equally likely have one that will just sit back and take a percentage off the top and not help at all.
Due diligence is not too difficult to do. You do need either feet on the ground or engage with a local law firm. Most of the major firms you know all have affiliate offices here and their local office lawyers can do the work here.
To do business in KSA, you have to have several licenses. You must get a commercial registration, become a member of the Chamber of Commerce, and get a VAT certificate. The VAT certificate says you will collect and pay taxes. If you don’t have this certificate, you cannot invoice directly. You don’t have to have a Saudi company to do business but you do need a way to file invoices.
There are several more things you must secure. You need a ZAKAT certificate, which shows you paid your income tax. If you are just starting, you won’t have any taxes but you still have to have the certificate. You need a Saudization that shows your company has a classification about what kind of company and reports how many Saudi employees you have working in it. Those are all important. Any project you bid on – whether for private businesses or government ones – you have to submit all these certificates as part of your bid package. That is where a bid partner or joint venture partner can help accelerate your process. They will have all the certifications and can submit for you.
You also need a company profile. Company profiles are odd here. They list the projects you have done. If you have done joint venture work with any companies here, all of those project must be in the profile.
There is a process to go through here with the Saudi Arabian General Investment Authority (SAGIA). It has a thorough website (
https://www.sagia.gov.sa/en/Pages/default.aspx) that outlines all the steps you must go through to get all the licenses and processes. You must have incorporation documents, financial documents that must be stamped by the Saudi Arabian Embassy (in Washington, DC for US companies). Make sure you have your corporate stamp handy because all documents must be hand stamped. We are still stamp happy here and must have a seal on everything. I just completed a filing that had 500 pages and they had me stamp every single page.
To get started, you also need to have an established bank account. You can’t get a bank account until you are a Saudi company. Depending on the industry and type of business you have, you will need to deposit an amount between 550K SAR and 50mil SAR in the bank. That is totally a decision made by SAGIA. The good news is that can be in-and-out money. You don’t have to maintain that amount of money in your account but you have to have it in at the time you are getting your certifications.
If you do any business with any sector of the government, including semi-government organizations, commissions and authorities, they have different procurement processes.
For instance, you are likely to have to place a 1% bid bond, drawn on a local bank. That is the bid bond you have to submit with your bid. They don’t release that until they actually reward the contract, which can be up to six months. If you have a local bank account with a reasonable balance, you then just have to buy the bond. If you don’t have a bank account, then you need to deposit that amount in the bank as collateral. Small companies may struggle with this when cash becomes a real issue.
Let’s say you then win the bid. The day you sign, they will ask for a ~5% performance bond, which you will have to pay. That money is tied up until after you complete the contract. If you don’t perform well, you forfeit the bond. That is a risk mitigation issue. If you have a good history and strong banking relationships and have insurance, you won’t have much trouble with this process.
I encourage people who want to do business here to come and visit, for more than a day. Talk to people about your product or service is and find out more about how real the market is. I just helped an Aluminum company which is looking at building a plastic bag plant here. They are going through this process and will make a board decision soon about whether to proceed.
A part of the challenge is going through the process. If you engage with people to get access to funding, loans and help, it will be easier. If you are helping a small-to-medium enterprise get off the ground, there are lots of funds and help for that.
Hiring Talent
The push for Saudization changes the way to hire people, too. For some time, people came here and build their factories and bring in hired low-cost employees from Pakistan or Bangladesh. That is evaporating. You now need to have 40-50 % Saudis as employees. If you are in the financial services industry, you are expected to have 80% or more Saudi employees.
That is an issue, since the talent capable to do the work is insufficient right now. I have worked for the last three years with the Ministry of Labor and Social Development. Unemployment here is running a 12.8%. For males it is running about 5% and for females it is about 39%. For unemployed males, education distribution run high school or less. For unemployed females, it runs bachelor’s degree or higher. So, you have a highly educated female population with no job experience. There is a big push to increase the labor force participation with females, which runs about 28-34%.
Most people don’t realize that 90% of the female unemployed population have never held a job of any kind, not even as a barista or retail clerk. They never have worked. They’ve gone to school: that’s it. Thus, the experience level is very low while the education level is high. What we have in the market is a challenge: you can hire an Indian engineer with 10 years of experience for about 2500-3000 riyals a month. Saudi females with no experience who graduate from school expect a salary of 4500 riyals or more a month.
There is a huge wage expectation because of the Kafala System (Kafeel), which some might see as akin to slavery. This system monitors migrant laborers, working primarily in the construction and domestic sectors,
When an employer brings in a group of employees from say, Indonesia, that group will be paid something like 1000 – 1500 riyals a month as retail clerks and they have no mobility. They cannot change jobs. They can only work for the sponsor who pays them in the job they were hired to do.. In the labor market, they have no bargaining power to get better wages or new jobs. On the other hand, the Saudis have all the bargaining power. They can command higher salaries because the companies must hire them to meet the regulatory hiring requirements.
I am just now publishing a paper that argues abolishing the Kafala System will elevate everyone’s wages and create more jobs.Let’s use an example. A medical device company wants to build a factory here. It plans to hire 100 people. There will have to be about 30% Saudis (the rules change often so it is just about) and then maybe it can get visas under the Kafala system to hire the rest of your workforce. There is no guarantee you will get the visas, so it is a big risk. A big push now with a new rule coming some time in June will require that all retail operations must hire only Saudi employees. There is no guarantee that the Ministry of Labor will issue a company the visas it needs for the workforce it needs.
For example, I worked with a tire manufacturing company that wants to build a factory here. The company has a Chinese partner. The financial plan for the business was built on a plan to bring 800 Chinese workers at a very low wage to work in the new factory. The government changed the rules and said the company had to have 50% Saudi employees. The wage element doubled as a result, which made the project unfeasible.
It’s important to be careful. When you go through the SAGIA process, people will keep saying everything is fine. That’s nonsense. SAGIA does not control the rules: the Ministry of Labor does. One thing people need to do when setting up an organization is to meet early on with the Ministry of Labor to determine what kind of visas you will be able to get based on specialized skills you will need. The visas are very specific and the approvals change. Sometimes they approve visas for accountants and other time they are not. Sometimes you can get visas for engineers. Other times you cannot. You cannot get visas for secretaries.That is why it is important to come and spend time going to all the offices to find out how your business can work here.
You can also set up a branch office here, which is another process. It can be a sale and distribution office, which has different requirements. If you are services-oriented, you can fit here. The culture is oriented to “body-shops” and they like to see a lot of people hired. For example, I don’t have a lot of employees here but I do augment my staff with local Saudis I hired. When I go to meetings, I take about 3 Saudis with me so we look heavy and my team works to train the Saudis on new work.
Several businesses work out of the UAE and Dubai or and then service within Saudi Arabia. Most of the consulting companies – McKenzie, BCG, PwC, etc – have consultants fly home on Thursday nights and come back on Sunday nights. They spend the weekend with their families in the UAE, Dubai or Bahrain.
All in all, KSA is a high risk-high reward place. If you are successful with the right business model, you make a lot of money. If you are not successful, you can lose a lot of money. I tell people to expect it will take about 6 months before they get their first contract, unless they have a product that is the best thing since sliced bread. It just takes that amount of time to understand where all the players are and how to work with all the moving parts.
If you want to be a qualified vendor, the process to get approved involves submitting a vendor profile that lists and explains all the services you can provide. Then, when requests for sources come up from organizations, you will receive an RFP. The most stringent companies to submit responses to are Aramco, SABIC and Advanced Electronics. Vendor qualifications are the same as for Intel, Boeing or Northrup Grumman. They are very comprehensive. If you are qualifying for services to a bank, it is less stringent.
If you want to supply a product, you can partner with a well-known company in your field. For example, if you have refrigerators and freezer, you might align with Shaker, which a already the representative for Dyon Vacuums, Samsung appliances, etc. and ask them if they would retail your product for you. If they offer two options: 1) yes, we will have you sell it to us for OEM prices and mark it up and service it, or 2) we are happy to do this as long as you place with us one of your sales/business development and technical support people as part of our team. In that case, you will do all of your sales under their umbrella. The cost of the second is higher but you also have more quality assurance.
There are a lot of one-person companies here. When you connect with one, you will end up doing all the work. You may get access to the market by making introductions but you will need to do all the rest.
The anti-corruption campaign has reduced the influence of a lot of people. There are still people who can get you access to the right people but they cannot influence the decision-maker anymore.
It’s absolutely safe to do business here. The challenges are not with safety. They are more in topics like getting paid. For example, small businesses can struggle because collections can take four or five months before you get paid. You will absolutely get paid but you may wait 100 days before you see the money. Cash flow will be a real consideration. Private companies and the government are both very slow to pay. It is one of the big hurdles anyone coming here will face. If you have a 50mil riyal project, you can 10mil in receivables in any given time. They pay no carrying costs on this, so you will never collect late fees. You will have to build that into your cost model.
Emerging Business Opportunities
The best opportunities are those than can be supported by 5G.
- Health care – They plan to spend close to 100bil in the next 4-5 years. If you have a medical device or procedure change solution, that is a real opportunity. They are shifting from a fee-based to an outcomes- based model. They are reorganizing and creating three, possibly four new entities for oversight. One will be the Ministry of Health which will be a regulatory and quality body. They are spinning out all their hospitals which will be held by a new holding company, which will be overseen by a new Saudi Health organization.
- IoT – Industrial internet technologies that create an “always connected-always on environment” is a highlighted area. They are camera-crazy, so anything using sensor management would be good.
- Future City - You may want to review the information Neom City at
www.Neom.com. It is about a $500billion project for any future thinkers intrigued by this vison of a new city. Think of this project as a Google campus on steroids. It is complete with driverless cars, women who can wear bikinis at the beach and all of the latest technology. This is a project the Crown Prince is looking to find investors to support.
- Blockchain – It is starting here. They are doing small blockchain pilot projects within the Saudi Monetary Agency.
- Logistics-part of Vision 2030 is to become a global logistics hub
- Consumer Technology Goods – Saudis have the most number of cellular phones per capita than any other country. They are also the biggest users of YouTube. This is a wireless community and there is a big push for broadband to come.
- Entertainment – They plan to spend 80 billion in entertainment. That includes sports. I am sure the people here trying to figure out the implications of the change in the alcohol restrictions are waiting to see what opportunities will come through. Entertainment services and products will be attractive.
- Cultural Change Derivative Businesses – Females have just gotten right to drive. There will be derivative business opportunities tied to such changes in users.
There are stimulus dollars for all of these sectors. In all cases, note they are trying to be more services-oriented within their businesses, so any advances that help to do this will be well-received.
Governance Culture
The status of corporate governance here is changing, largely because of the anti-corruption campaign going on now. They have two stock exchanges here: the large one is the TADAWUL and the other is their version of the early NASDQ, for small start-up companies. I say early NASDQ, since it has changed over time.
The exchanges are hammering hard about governance. There are two issues of governance here. One relates for larger companies like Aramco or SABIC. Because they are spinouts with huge amounts of government money in them, their boards are often dominated by ministers or deputy ministers who have no capability to serve as a director. Zero. Yet, because they are ministers of something, they get assigned to one of these companies. That is changing. Boards are adding more active board members who understand their fiduciary responsibilities. It also means that companies that set up joint ventures here can expect to have an investor partner to ask for a board role. The shift to outside directors is happening in banks here. A lot of the banks here have several directors who are not Saudis. There is a small impetus on Corporate Sustainability Responsibility just beginning
It is close to what happened in China early on. Many private sector companies here started as family enterprises and they dominate the corporate structure – both the board and senior management. They focus on looking out for their family interest rather than looking out for their partners or investors. Some of these companies went public and kept brothers and uncles on the board who had no qualifications to serve on a board of a local dog pound let alone a major corporation trading on the stock exchange. In many cases, these are completely passive boards. If directors show up to two meetings a year, you might be lucky.
The boards here tend to be at best tactical and more concerned about why you spent money on something and do not address strategic questions such as where should the company be four years from today.
Education and Training
A lot of people are going outside Saudi Arabia for education and then coming back. A lot of females go elsewhere – especially the U.K, U.S. and Australia – to get masters and doctoral degrees. Some also go to China or Korea. They typically get their undergraduate degrees here but then go outside for advanced degrees. In this way, these people do bring in a global perspective, however, companies here are not yet using those people effectively yet.
Saudi Arabia has the largest women’s college in the world at Princess Nourah bint Abdulrahman University. They have a good business school there as well as a medical school with a hospital that is not open yet as they are waiting to get certified because they need more staff. They recently added an engineering college as well. The school has capacity for 40,000 Saudi students and it is a big sprawling campus that is a work of art. People I speak with who graduate from there are well-educated.
There is a private university in Jeddah – Effat University – which is a small school similar to Smith or Mount Holyoke type school. Instruction is mostly in English and it produces good graduates as well.
Also, King Fahad , University of Petroleum and Minerals is one of the best schools on the planet, let alone in Saudi Arabia.
The problem is in most of the mens’ schools, in my opinion. The education is at best – early turn of the century. A lot of it is rote, just memorize, tests are fill in the blanks, there is little emphasis on thinking or collaboration. If you ask a student what a formula they wrote means, they cannot answer the question.
You also need to investigate. I interviewed a male candidate who recently got his doctoral degree from Reading University in the UK. I set up the interview in the KSA. He could not speak English. I had a Saudi ask him for me: How did he get his Ph.D. if he can’t speak English. How did he write his doctoral dissertation and defend it? He said he hired a Pakistani there do this for him. I discussed that with a colleague here who said this is not uncommon.
Of late, the Ministry of Education is not certifying some degrees from some schools. Also, they are denying scholarships for some schools.
Employee Solutions
Saudi Arabia has a population with 50% of the people younger than 30, who are highly educated but lacking in experience. What do companies coming into Saudi Arabia do since they must add the right percentage of these people with others?
To be honest, most of them cheat. For instance, all security officers must be Saudis. Hotels often hire for one post will hire six Saudis to stand at the gate and let people in and out. Hospitality companies are now hiring female Saudis for the reception desk roles and go through a training program.
One flaw in thinking I hear from company managers is their worry about retention. When they hire a Saudi, they wonder if they hire a person and train them, will the person use that experience and then leave to go somewhere else for a better wage or package. I argue that is not a bad because it helps the overall economy. You can always hire someone else. They say yes, but that will cost money. Yes, but what you are saying is you don’t want to pay well and keep good people.
If you are starting a company here from your headquarters in San Jose, California, for example, you would be smart to take the first group of Saudis you hire and send them to work in San Jose for the first six months. They will learn your work culture and the role. If they learn your company culture there instead of remotely, you will get a far better result. These people are intelligent. They just lack experience.
When I hire, I look for athletes, not position players. That has worked out for all the companies with which I work. That allows the company to develop the performers in the ways they need them as opposed to struggling to find a person who already has the skill and experience. The likelihood of the latter is just too low. What they find is they are much more valuable, once they understand the culture and have had the in-company training. You don’t need to send everyone. Just one cadre can come back and train all the rest. They will be able to create the infectious enthusiasm for everyone else you hire. It is a cost you will need to spend but the probability for success this way is much higher.
When you advertise for people, you will likely get responses from people who want to exit the government sector and move to the private sector.
Note, when you hire Saudi employees and then need to fire them, the firing process is painful. You must provide certain benefits, including health care. Even though it is free here, you pay. You will need to provide a housing allowance, transportation allowance, and sometimes an education allowance. If you have expats in the same compound for your business, you will have to offer pretty much the same package to the Saudis. It is an overhead to keep in mind.
If you plan to move people here, study what other companies in your industry are offering their expats. People’s expectations for expatriate packages to come here are unreal. The compensation packages are all over the place here and go up and down depending on demand. Schools are expensive. You can spend $12K a year for American education here. They also have an expat levy fee. This is a payment you must make for every expat you hire, every month. It is a punitive payment designed to make expats unattractive. The levy is invoiced to the employee and there is nothing that says the employer has to pay it. If you have 3 children and a wife with you, you will likely have to pay 1500-2000 riyals a month to have them with you. That is a surprise fee. You get here and all of a sudden you find out you need to pay this and it will be deducted from your paycheck. Of course, you will be upset and argue that the employer should pay it. Alternatively, you will send your family home and then won’t be far behind.
Right now, expat families here are losing more than 100K family dependents a month.
School fees are going up because there are fewer students with the same amount of overhead.
They are trying to substitute Saudi’s for expats. The government is trying to create new jobs.
They are creating what I call stranded workers in five years. Automation and technology will replace about 50% of the roles for people today and these people will have no place to go. As costs double for expats from 1500 riyals a month for a Pakistani versus 3000 riyals a month for a Saudi, which is the de-facto minimum wage for Saudis, owners will adopt technologies.
Timing: Is This the Right Time to Come?
If you have something compelling, I would encourage you to come now. The shocks on the system are yet to come. If you have a dynamic business model you can be very successful here. What success means is relative, of course. If you are a small business with 5 mil in revenue with min cost and overhead. If you are Lockheed Martin and expect to get 500 mil., it is different.
Again, it really comes down to your business model. If your model makes sense, you will be ok.
The Heart of Strategy
Entering a new market is a strategic decision we should weigh carefully. We hope this guidance helps.
Interview with Larry Fallin
Larry Fallin has more than 35 years of senior operational management and consulting expertise with organizations across the United States, Europe, and the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), public and private, ranging in size from Global 100 to startup enterprises. He is a specialist in creating strategies, transformations, turnarounds, and organizational value through innovation programs. His selected achievements include:
- Working with the Job Creation Commission of Saudi Arabia defining new paths for employment creation
- Advising the Minster of Housing on broad reaching policy issues from an evidence based perspective
- Larry was Managing Director for establishing the Analytical Function for KSA’s National Labor Observatory
- Project Director for multi-national team that conducted a Detailed Feasibility study to establish a Car Manufacturing Industry in KSA, project estimates tremendous job gains for Saudis and requests government support to create industry.
- Established a green-field strategic technology organization to support the construction, operations and maintenance of 3 International Airports within the Kingdom of Saudi Arabia acted as Chief Technology Officer
- Created Program Management Office (PMO) to oversee the technical and project schedule and budget activities for over 50 technology projects
- As Vice President IT & Operations for provider of Network operation Centers (NOCs) and e-solutions, he developed a technology roadmap for products for application monitoring services.
Larry holds an MS degree in Mathematical Statistic and an BBA in Econometrics. For direct contact, write to: lfallin@thinkbrg.com
