In February 2021, Saudi Arabia announced that all foreign firms seeking state contracts must have their Middle East headquarters in the kingdom by 2024. Can Saudi’s forced attraction be feasible and sustainable? Is there a way to lift the entire Gulf market to be more competitive internationally?
It is important to note that the UAE has built its economy and reputation over the last 50 years, ranking 16 with a score of 80.9/100 on the World Bank’s 2020 Ease of Doing Business Index, while Saudi Arabia ranked 62 with a score of 71.6/100. Another comparison is the IMD World Competitiveness ranking 2020, in which UAE fell from rank 5 to 9 (but still in the top 10), and Saudi Arabia went from rank 26 to 24.
According to one source, 24 international companies announced plans to move their regional head offices to Riyadh, including PepsiCo, French oilfield services company Schlumberger and Canadian fast-food chain Tim Horton’s. Some of these are:
|Firm||What they are saying|
|DELOITTE||Deloitte has been operating in Saudi Arabia since 1950 and we are honoured to be a strategic partner for the city on its journey to achieve its ambition under Vision 2030|
|PwC||The company would support the kingdom’s transformation from PwC’s regional consulting headquarters in Riyadh|
|BOEING||We have over 2,200 people employed by various Boeing entities and joint ventures in the kingdom. Boeing Saudi Arabia is a Saudi Arabian company with Saudi leadership and majority Saudi employee base. We are committed to the success of Vision 2030.|
|CHEVRON||Saudi Arabian Chevron (SAC) has plans for a new headquarters in Khafji City in eastern Saudi Arabia, the U.S. energy company said, adding that it “looks forward to continuing its mutually beneficial partnership with the kingdom.|
|BECHTEL||The U.S. construction firm Bechtel said it had established Riyadh as its regional headquarters to cover the six nations of the Gulf Cooperation Council (GCC), namely Saudi Arabia, the United Arab Emirates, Oman, Qatar, Bahrain and Kuwait.|
|CSG||The U.S. technology firm said it was shifting its regional office to Riyadh from Dubai but would not shut its Dubai office.|
|ROBERT BOSCH||German auto supplier Robert Bosch said it had signed a memorandum of understanding to explore potential business in Saudi Arabia. The company has an office in the kingdom and a presence elsewhere in the region, including the United Arab Emirates.|
|OYO||Indian hotel startup Oyo said it would set up its regional headquarters in the Riyadh special economic zone, the King Abdullah Financial District, with several executives relocating there.|
|FRANKLIN TEMPLETON||Investment firm Franklin Templeton said it would monitor regulations to evaluate its approach and remained committed to doing business in the Middle East. Its website says it has offices in the UAE and Turkey.|
|Google told Reuters its cloud computing unit will deploy and operate a Google Cloud region in Saudi Arabia. The technology division of state oil firm Saudi Aramco will establish a local reseller for the services, Google said, adding that the focus will be on serving businesses in the country.|
|STANDARD CHARTERED||London-listed bank Standard Chartered said it had operated in Saudi Arabia since 2010 via its capital markets operations and was granted a full banking licence in 2019. The bank said its Middle East chief executive was based in Riyadh, which “enables us to further unlock exciting opportunities in the kingdom.|
|FORD||The company had established an office in Riyadh a decade ago and had two long-standing distributor partners. We will continue to follow the announcements published by the Saudi government to better understand the new regulations before commenting further.|
|GREENBRIER||U.S. rail firm Greenbrier is setting up a Riyadh headquarters to target Saudi market.|
Source: https://www.usnews.com/news/top-news/articles/2021-03-29/factbox-saudi-arabia-seeks-to-draw-in-foreign-companies Copyright 2021 Thomson Reuters.
The Crown Prince Mohammed bin Salman’s Vision 2030 about implementing its liberalizing economic and social reforms for the local population of 34 million, 70% of which are younger than 30, has attracted new investments in recent years. The King Abdullah Financial District (KAFD) is getting ready to receive the projected 500 international companies to be based in Riyadh, as a direct competition to Dubai, offering zero percent corporate tax for 50 years, a 10-year waiver from the state’s ‘Saudization’ policy to reserve jobs for Saudis and ‘preferential’ treatment in government contracts.
A recent whitepaper on Saudi Arabia by Economic Intelligence Unit reports, “The Ministry of Investment issued 466 foreign investor licenses in the fourth quarter of 2020, the highest number of such licenses recorded in a quarter since 2005, and the stock of total foreign investment (including foreign direct investment, foreign portfolio investment and other investment) surpassed the SR2trn (around US$500bn) mark for the first time ever. Inward flows of FDI were US$1.4bn Q4 2020, despite the knock to global investor sentiment caused by the Covid-19 pandemic.”
The UAE/Dubai continues to rise to the Saudi/Riyadh challenge. In the first half of 2020, FDI worth AED 12bn into 190 projects and capital of Dh739 million for startups, flowed into Dubai. Dubai, with its clear first-mover advantage as a regional business hub has launched new policies recently that continue to attract and hold its business leadership position in the region. Some of these include, 100 percent onshore ownership of foreign companies, easing of visa restrictions, including different variations of residency permits, incentives for small and medium enterprises and a new insolvency law to help UAE residents clear bad debts.
- What are the hidden opportunities and challenges for the UAE, when Saudi Arabia opens its doors to international tourism and regional headquarters of major international companies?
- How does the Saudi strategy affect the UAE and the region?
- Will the Saudi call unify or divide the GCC?
Led by its Accomplished Business People committee, the Capital Club Dubai held a roundtable discussion in May 2021, under Chatham House Rule, to discuss the pros and cons of the Saudi government’s 2024 proposition and gave some recommendations from the private sector.
- The whole region could benefit from this proposition, with higher levels of services, products and policies emerging. It has the potential to change from being competition to collaboration and the entire GCC can thrive in the long-term. On a competitive dynamic between Dubai and Riyadh, this could raise the bar and create a virtuous circle.
- With two-thirds of Saudi Arabia’s population being locals (not expats) it is looking to find alternative sustainable economic models for its large population, attract better talent and create new jobs.
- If MNCs decide not to go, it could unlock opportunities for the next level of companies to create different types of businesses.
- There could be possibilities of a common GCC currency and easing of trade through the region, similar to the European Union.
- This could create a boost for tourism in the entire region.
- Young Saudi locals will begin to be trained for the job market. With the focus on tourism, and via the travel and hospitality sector, the young people will learn customer service and then move into business. The aim is to amp their skills and change their work ethic. The real value is in the cultural change for future generations.
- The MNCs for the larger MENA market are headquartered in the UAE because they feel this is a safer market for IP and their capital, and they perceive reputational risks in moving to Saudi Arabia. Dubai is where people want to be, and Riyadh has a lot of catching up to do, so until there is a tipping point, Saudi Arabia will lose the battle in the short term.
- To be successful, Saudi Arabia needs to first create the right ecosystem. It is premature to use the ‘stick’ approach because the risks are high and rewards come with lots of strings attached. More details are required before any serious decisions to move can be made. The Saudi market is not mature enough and cannot be sped up artificially. The general sense is that the rules will be watered down and if they push too hard, they will lose talent and innovation.
- For many large international firms, Saudi Arabia is a relatively smaller market in terms of global turnovers, so it is more trouble than its worth.
- Due to Covid 19, there is a real slow down in global talent mobility and people do not want to ‘get stuck’.
- Looking back at the example of the push for mandatory health insurance in Saudi Arabia (initiated in 1996-97) took many tweaks and trials before it was properly rolled out over 15-20 years. Similarly, this proposition will take time through different variations and extended timelines.
- There is a very complex administrative system and no real tax free zones in Saudi Arabia.
- From the family perspective for expats, life in Saudi Arabia would be very challenging. Furthermore, there aren’t enough good international schools and universities. Adjusting to life and established good educational institutions take a long time and cannot be rushed.
- Also, the government of Saudi Arabia need to be mindful to prepare the locals to absorb the changes. Dramatic reforms need to be kept in pace with societal acceptance.
- There is a real challenge of dealing with all different laws in the country and expats will find it difficult to trust the court system.
Recommendations for UAE/Dubai
- Review all the indices that show the UAE’s competitive advantage – communicate and develop these and others further.
- The UAE needs to be fully committed to sustainability and renewable energy; explore other untapped markets; strategise on developing new business advantages; and raise the level of talent in the country.
- The Saudi proposition can be considered as catalyst in the UAE to shift mindsets strategically and decrease internal competition and be more equipped to deal with wider regional competitive challenges.
- The UAE should deliberate on which sectors it wants to specialise in and become a global leader. Any good business disrupts itself and the same applies to a country.
- Build an entrepreneur friendly ecosystem, finding a balance between acceptable risk and protecting creditors’ rights.
- Address the IP issue thoroughly, not only in trademarks but also in patents. This is where real value is created and can be Dubai’s crown jewel.
There are many questions emerging due to the Saudi 2024 proposition. Will the HQ move be evaluated by headcount or function? What is the full scenario regarding repatriation of profits? Will this level the playing field and result in income tax and/or corporate tax being introduced in the UAE?
Dubai is expected to continue to be the place that people want to live because it has the right overall environment – legal and regulatory environment as well as the living standards that the senior executives and ambitious people want for themselves and for their families. Saudi Arabia has got a lot of catching up to do. However, it is worth noting that very few multi-nationals are in Dubai for the UAE market. They are here for the bigger MENA region, for the big population centers, like Saudi, Egypt, etc.
Tourism is a strong focal point of the agenda and has captured the imagination in Saudi Arabia, but to sustain an economy it has to develop in many areas including manufacturing, technology, agriculture, etc. and reveal a much wider diversification strategy.
It’s early days still, but there was a consensus that this proposition is going to take much longer than 2024 to implement and maybe the competition will be good for the region and for business.