US companies in Saudi Arabia face a fight for survival
Riyadh, Saudi Arabia — Boom times in Saudi Arabia have come to an end. As the Saudis confront the problem of how to live within their reduced income , some American companies are asking if there is any longer much of a future for them in the kingdom.
Doing business in Saudi Arabia, even in the best of times, is tough. The difficulty of operating within a starkly alien culture is sometimes more exhausting than the heat, dust, and occasional long hours.
According to Western economists, there is still money to be made in Saudi Arabia's maturing economy. But the size of the business deals and the margin of profit will be smaller than in the soaring 1970s. What concerns American trade officials here is that US firms may not be willing to fight for survival in the ever-growing jungle of Saudi laws and customs.
The days of big construction when entrepreneurs received massive sums on starting up giant building projects has passed with the oil glut. The number of construction projects began to decrease in mid-1982, with a further decline of 21 percent on new contract awards in the first four months of 1983.
On the projects that are being let, contractors are faced with fierce competition and new government regulations designed to protect Saudi nationals. There is evidence that Saudi Arabia achieved its 15 percent decline in public spending in fiscal 1982-83 by reducing the number of new projects, canceling ongoing projects, tightening government contract conditions, and delaying payment on work already performed.
The contractors most severely hit are those building the industrial cities of Jubail and Yanbu. Considered dream projects even by Saudi Arabia's economic planners, the industrial cities were designed to take advantage of Saudi Arabia's cheap energy costs and byproducts of oil production.
Some of the planned projects are considered expendable or can be delayed indefinitely.
According to an employee of the Royal Commission for Jubail and Yanbu, which is managing the projects for the government, the commission has been ordered to make a total evaluation of the entire enterprise and to cease letting contracts for anything nonessential. In addition, projects less than 50 percent complete are to be stopped.
A recent meeting of American businessmen in Al-Khobar organized by the US consulate was dominated by complaints about the failure of the royal commission, particularly, to pay its outstanding debts.
Not all sectors of the construction industry are being plagued by the problems facing contractors in Jubail and Yanbu. Basic infrastructure construction, such as provision of electrical power in rural areas and social projects like schools and hospitals, are going ahead as scheduled with little or no delay in payments due to contractors.
Since much of the political power of King Fahd rests in the merchant and entrepreneurial class that has developed in Saudi Arabia during the last 10 years, new government regulations to protect its own are cascading out of the various ministries.
The most significant for foreign business interests are the requirement that 30 percent of all government contracts must go to Saudi subcontractors and that all government projects are to be put out to public tender to give local companies previously restricted because of prequalification procedures an equal chance at contracts. In addition the Saudis are more strongly enforcing a longstanding requirement that contractors use Saudi products if their cost does not exceed by more than 10 percent the cost of the same product purchased abroad. The government is also insisting that Saudi nationals be given jobs.
What money remains to be made in Saudi Arabia by American companies lies in maintenance, services, and consumer goods. But in these areas, Americans face tough competition from the Europeans and Asians. According to officials with the American Embassy, the United States has traditionally held 20 percent of Saudi Arabia's import market. That slice appears to be declining although the most recent figures available from the Saudis are from 1981.
Not only are American businessmen faced with Saudi law, they are also bothered by the regulations of their own government. Primary and secondary boycott laws aimed at neutralizing the Saudis' boycott of companies doing business with Israel and the foreign corrupt practices act, which tries to impose Western ethics on Arab society, add to the problems of US businessmen in Saudi Arabia.
But American business is being hurt as much by political factors as anything else. US foreign policy in the Middle East since the Israeli invasion of Lebanon has frustrated and annoyed Saudi Arabia. The unwillingness or inability of the US to rein in the Israelis is beginning to inflict economic blows on US business.
As an addendum to a longstanding determination to keep itself free from total dependence on any one country, Saudi Arabia now appears to be making its displeasure with US policy known by publicly seeking business with other countries more in tune with the kingdom's own policies. These would be nations of Western Europe and Japan.