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Saudi Arabia
Manufacturing
The government has played an instrumental role in developing
the manufacturing sector by directly establishing industrial plants,
mainly in the basic industries sector, such as petrochemical,
steel, and other large manufacturing enterprises. Also, it has
developed manufacturing through direct loans, mainly by the SIDF
and through industrial subsidies, offset programs, set-asides,
preferential buying programs, and tariffs. In the 1980s, the bulk
of private manufacturing investment was directed to plants that
manufactured goods for the construction industry. With the decline
of construction in the mid-1980s, there has been a shift to other
light manufacturing including food processing, furniture making,
and other consumer goods. This trend accelerated in the early
1990s.
Partly because of private sector reluctance to invest in manufacturing
and partly because of growing oil revenues, the government was
involved early in the 1960s in some basic industries. In the late
1960s, Petromin established a steel- rolling mill in Jiddah using
imported billets, a urea fertilizer plant in Ad Dammam with 49
percent private Saudi capital, and a sulfuric acid plant in the
same location. In the early 1970s, as oil revenues grew, a coordinated
plan emerged to collect and distribute gas that was flared to
two yet-unbuilt industrial sites where it could be used in basic
industries. The two sites selected were Al Jubayl and Yanbu.
In 1975 the Royal Commission for Al Jubayl and Yanbu was created.
The commission was given authority to plan, construct, manage,
and operate the infrastructure needed to support the basic industries
the government intended to build and to satisfy the community
needs of the work force employed in these industries. The commission
was also to promote investment in secondary and supporting industries,
to develop effective city government, and to train Saudis to take
over as many jobs as possible. The commission received an independent
budget to facilitate its work.
By 1990 there were sixteen primary industries, forty-six secondary
enterprises, and approximately 100 support and light industrial
units at Al Jubayl. Yanbu had attracted five primary industrial
plants, twenty-five secondary plants, and seventy-five support
and light units in 1990. Al Jubayl benefited from the massive
petrochemical projects of the Saudi Basic Industries Corporation
(Sabic), but both saw substantial growth during the 1980s. Nonetheless,
both locations suffered from overcapacity; for example, initial
population projections called for 58,000 residents by 1985 in
Al Jubayl, but by 1987 total residents barely reached 40,000.
Revised forecasts estimated that there was substantial room for
growth during the 1990s, and that no major capacity expansion
would be necessary until the year 2000.
With the establishment of Sabic in 1976, the government undertook
a major effort to create a domestic petrochemical industry that
was designed to augment oil export earnings and to use abundantly
available domestic resources, particularly associated gas supplies.
The investments have been guided by a two-phase strategy. The
first phase (1976-87) included a number of large capital-intensive
and export-oriented petrochemical projects that have been completed.
Its aim was to produce bulk products such as ethylene, polyethylene,
melamine, methanol, and downstream products including derivatives
of ethylene. Moreover, during this period, Sabic undertook the
construction of plants to produce fertilizers (urea, sulfuric
acid, and melamine), metals (steel rods and bars), supporting
industrial products (nitrogen), and intermediate petrochemical
products (vinyl chloride monomer, polyvinyl chloride, and MTBE).
Sabic also acquired shares in two Saudi aluminum companies and
expanded overseas by investing in a Bahraini petrochemical complex.
During the first phase, financing by joint-venture partners and
funding from the government's Public Investment Fund (PIF) provided
the bulk of support for these projects. Domestic and regional
private sector participation was also allowed after 30 percent
of the equity capital of Sabic (approximately SR3 billion) was
sold to residents of Saudi Arabia and other GCC countries. In
1987 Sabic split each share into ten shares to mobilize investments
from smaller investors.
In 1992 Sabic owned, either outright or with a minimum 50 percent
stake, fifteen major industrial enterprises. Total output capacity
was 13 million tons of various petrochemicals per year, up from
11.9 million tons per year in 1990 and 9.5 million tons per year
in 1989. Although total sales have continued to rise, weaker international
prices depressed profits during the late 1980s and early 1990s.
During 1991 Sabic registered net profits of US$613 million. About
95 percent of Sabic's sales were exported; total exports approached
US$4 billion per annum. Its success in rapidly increasing exports
and capturing an international market share have made Sabic's
petrochemical exports subject to nondiscriminatory restraint in
both Europe and Japan, its main export markets. Both the EC and
Japan have applied quantitative restrictions to Saudi exports.
Moreover, urea exports from Saudi Arabia were subject to antidumping
duties in the EEC, which no longer permitted preferential treatment
under its General System of Preferences.
Future development plans, part of Sabic's second phase, were
designed to maintain Saudi Arabia's 1992 international market
share and raise domestic petrochemical capacity by 40 percent.
By 1993 Sabic hoped to increase total petrochemical capacity to
20 million tons per year. Projects underway included the Eastern
Petrochemical Company (Sharq), an equal-share joint venture with
Japan's Mitsubishi Gas Company, which was planning a major increase
in its capacity to produce ethylene glycol. The expansion program
aimed to raise production to 660,000 tons per year from the 1991
level of 450,000 tons per year. Sharq also intended to increase
its polyethylene production from 140,000 tons per year to 270,000
tons per year. Ibn Zahr, the Saudi- European Petrochemical Company,
a joint venture in which Sabic had a 70 percent share and Finland's
Neste, Italy's Eco Fuel, and the Arabian Petroleum Investment
Corporation (Apicorp--owned by the Organization of Arab Petroleum
Exporting Countries) each had 10 percent, intended to raise the
output of MTBE from 550,000 tons per year. The company's polypropylene
plant was to be expanded as well. The National Methanol Company
(Ibn Sina) planned to double methanol production from the 640,000
tons annually in 1991 to 1.2 million tons. This plant was also
expected to increase capacity of MTBE to 500,000 tons per year
and possibly to 700,000 tons per year. The National Plastics Company
(Ibn Hayyan), a joint venture with the South Korean Lucky Group
(15 percent), planned to expand output of polyvinyl chloride from
200,000 tons to 300,000 tons per year. The National Industrial
Gases Company was engaged in 1991 in doubling nitrogen production
capacity from 219,000 tons per year to 438,000 tons per year,
whereas oxygen production capacity was to increase from 438,000
tons per year to 876,000 tons per year. The Saudi Arabian Fertilizer
Company completed a 500,000-tons-per-year anhydrous ammonia plant
and a 600,000-tons-per-year granulated urea plant in 1992, and
was expected to undertake further expansion throughout the 1990s.
Because the available gas-based feedstock (ethane and methane)
would be insufficient to meet requirements of the second phase,
Sabic has invested in two flexible feedstock crackers with a total
combined capacity of about 1 million tons. The crackers help reduce
dependence on ethane and methane and allow the use of naphtha,
liquefied petroleum gas, or propane as feedstock.
In Sabic's second-phase financing plans, retained profits and
limited borrowing from the PIF, SIDF, and domestic commercial
banks were expected to provide partial funding. Nonetheless, Sabic
hoped to raise almost 30 percent of the planned US$3.5 billion
to US$4 billion on the international market through syndicated
borrowing. For example, Sharq's expansion plans called for approximately
US$600 million in foreign borrowing, and Ibn Zahr was expected
to raise US$500 million from foreign capital markets.
The private sector's role in industrialization has been largely
restricted to light and medium-sized manufacturing units. However,
some larger merchant families had established larger- scale chemical,
secondary-stage petrochemical, and car or truck assembly plants.
By 1981 Saudi Arabia had approximately 1,200 industrial plants
of all sizes. At the end of the 1980s, this figure had doubled
to about 2,000 units and had risen to 2,100 by 1991. Most private
manufacturing concerns in the 1980s produced construction materials
including cement, insulation materials, pipes, bricks, and wood
products. Judging from data available from the Ministry of Industry
and Electricity, there has been a marked shift from this sort
of production to downstream chemicals, food processing, and metals,
machinery, and equipment manufacturing. The annual number of new
licenses issued to companies in the chemical, rubber, and plastics
sector rose from seven per year in 1987 to fifteen in 1990. Although
this number constituted at most 20 percent of all licenses granted,
the size of the firms was growing, judging from their authorized
capital, which grew from 42 percent of total new investment planned
to 90 percent. Trailing well behind this sector was the food-processing
sector, which saw a rise in number of licenses between 1987 and
1990, but the volume of authorized capital declined, indicating
smaller individual companies and more widespread participation.
Metals and machinery manufacturing followed a pattern similar
to chemical companies, with both the number of units and authorized
capital growing during the four-year period.
The patterns of Saudi private manufacturing investment have conformed
to government investments. Incentives offered to private businesses
included interest-free loans from SIDF of up to 50 percent of
the cost an industrial project, repayable within fifteen years.
Exemptions from tariff duties on imported equipment, raw materials,
spare parts, and other industrial inputs; land leases at significantly
reduced prices; discriminatory buying practices by government
agencies; and significant import protection were some of the other
incentives provided.
Data as of December 1992
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