Saudi Arabia is driving an economic transformation that provides important opportunities for local companies and multinational corporations (MNCs) in oilfield services and equipment. There are two opposing forces at work within the broader economic changes.
The government is encouraging foreign direct investment and making it easier for foreign companies to do business in Saudi Arabia without local partners. At the same time, the government is also increasing local content requirements, potentially giving the local private sector a significant role. Saudi Vision 2030, the official economic programme, seeks increased local content, local jobs, and a greater role for the private sector.
In response, local and foreign companies must review their strategies and how they approach partnership. This is because local company-MNC partnerships are the most significant force in the Saudi oilfield services and equipment sector. MNCs were critical to developing the sector and previously had to partner with local firms. These local enterprises were the agents, distributors, or passive joint venture partners of MNCs. Many are large, family-owned conglomerates with interests in multiple sectors. Local firms must now see what they can exploit from their current operations and which capabilities they have to build.
Recent changes pull in two different directions, toward greater openness and toward greater localisation. Foreign companies can operate solo in Saudi Arabia under certain conditions. As of late 2015, foreign enterprises can have complete ownership of wholesale and retail operations in return for investment, research and development, logistics and after-sales support, and employment commitments. Some large, well-established foreign firms are already taking advantage of this and have licences for trading activities in Saudi Arabia through 100%-owned subsidiaries.
However, the drop in the oil price three years ago has intensified the government’s policy of economic diversification, particularly through localisation. The most important local production and employment initiative for the oil-field services and equipment industry is Saudi Aramco’s In-Kingdom Total Value Add programme (IKTVA). The company procures the lion’s share of Saudi oil-field services and equipment. Saudi Aramco increasingly requires that MNCs provide a plan to increase local production. IKTVA, along with other localisation policies, is well established and more are on the way.
This changed environment provides an opening for local companies and MNCs. They can proactively redraw their vision and strategy for the oil-field services and equipment sector. This means examining what kinds of investments are available, assessed in terms of localisation potential and economic attractiveness, and their coherence with their existing investment portfolio. Local firms should ask what they can exploit from their existing operations.
Partnerships will change. Some local firms could operate independently in niches that MNCs find uninteresting. Some MNCs will maintain an agent/distributor relationship with a local partner where it is not feasible technologically or commercially to localise a specific product. Other MNCs could go for complete ownership of their Saudi operations because they have high-value processes that they can localise, and the skills to undertake localisation without a partner.
In this new environment, the main issue for local firms is to develop the capabilities to support efficient and profitable localisation, whether with an MNC or alone. They must strengthen, or acquire, capabilities in eight key areas: financial, technological, operational, marketing, supply chain, shared services, manpower development, and policy advocacy.
Financial capabilities matter, because traditionally the MNC covered most investment through its offshore production. However, local firms should now be able to fund either their part of localised manufacturing or their own operations.
Similarly, MNCs were the main technology providers, which is why changing partnerships are an opportunity for local companies to develop their technological capabilities. Local companies should be able to select which technology to invest in, particularly if they choose to operate alone.
In the past, operational capabilities were mostly the concern of MNCs, which used to lead core technical operations. However, local companies should now review joint venture operational plans and practices based on their familiarity with the Saudi environment and experience of non-core operations in other sectors.
[Without further ado then, let’s proceed to the list and find out which are the top 5 companies…]
