Saudi Arabia is adding rail lines, expanding shipping ports, investing in workforce education, and offering other incentives to attract vehicle makers and suppliers.
“We’re committed to support this (automotive) cluster, and we’re working very hard creating the right elements for its success. Now this can only happen with collaboration between government and companies. And this is what Saudi Arabia is good at as we have seen from the oil industry, the petrochemicals industry, the metals industry, and the minerals industry,” said Azzam Shalabi, President of Saudi Arabia’s National Industrial Clusters Development Program.
Shalabi was one of several speakers at the “Saudi Arabia: New Auto Market Hub” conference on June 26 in Birmingham, MI. The event was organized by the U.S.-Saudi Arabian Business Council (US-SABC).
Over the next 10-15 years, Saudi’s government wants in-country passenger vehicle assembly to reach 400,000 units yearly. The vast majority of that production output would occur in the Yanbu Industrial City via an auto zone that would feature vehicle manufacturing plants, Tier 1 supplier factories, as well as shared facilities and services.
Construction of a greenfield production facility that includes stamping, body, paint, and assembly operations would cost an automaker or a supplier approximately $1 billion, according to John Lucci, Managing Partner of the North America Automotive Practice of Oliver Wyman in Troy, MI. (Oliver Wyman served as an advisory consultant for the development of Saudi Arabia’s auto zone concept.)
“To get a return on investment, you’d need to see a volume of 200,000-plus annually. But with a fragmented market, like it would be in Saudi Arabia initially, the concept is to go with shared services (i.e., stamping, paint shop) within the manufacturing environment as a way to lower initial capital investment costs to the OE,” Lucci told SAE Magazines.
Jack Ferzly, Saudi Arabia’s Automotive Cluster Director, noted in an interview with SAE Magazines that the country will capitalize on its “strategic location.” As members of the Gulf Cooperation Council (GCC), Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates are in a single customs zone. The GCC signed a free-trade agreement with Singapore and the European Free Trade Association (which includes Switzerland, Norway, and Iceland) and is negotiating with China, South Korea, and other countries.
Ferzly also said Saudi Arabia’s vast resources are being leveraged: “We have a portfolio of tools in our hands from raw materials to cheap energy to competitive labor that will enable us to do this (auto cluster)."
The country's manufacturing picture is gaining momentum beyond commercial-vehicle assembly, which started in 1977 with NAI, a joint venture between Juffali and Mercedes-Benz. The current passenger-vehicle assembly examples are Isuzu and Jaguar Land Rover, which signed a letter of intent in 2012 to build a vehicle manufacturing plant.
Isuzu’s plant in Dammam 2nd Industrial City will produce 600 medium-duty trucks this year, with parts supplied from Isuzu’s operations in Asia, according to Tucker McDonald, Research Analyst for US-SABC. “Moving forward, Isuzu will extend its model offerings to include heavy- and light-duty trucks, and (the vehicle maker) estimates a combined production of 25,000 vehicles a year by 2017, with parts supplied from manufacturing facilities in Saudi Arabia,” McDonald explained to SAE Magazines.
Suppliers are adding to the production landscape with various mega-projects.
KEMYA Al-Jubail Petrochemical Co., a joint venture of ExxonMobil and SABIC, is investing $3.4 billion in the Middle East’s first synthetic elastomers project.
Simon Holmes, Senior Business Advisor for Saudi Elastomers Downstream Industry with ExxonMobil Chemical, said KEMYA’s start of production is expected in the second half of 2015. The complex will have three plants producing the three largest synthetic rubber types (butadiene, EPDM, and butyl rubber), plus a unit for carbon black.
Asia, Europe, and Middle East markets are expected to be the primary recipients of KEMYA’s synthetic rubber, which will be used for automotive applications (including tires, weather seals, and hoses) as well as nonautomotive applications, according to Holmes.
The Saudi Arabian Mining Co. (Ma’aden) and Alcoa are constructing the world’s largest integrated aluminum complex with a bauxite (aluminum ore) mine, refinery, smelter, and rolling mill. The smelter became operational in 2012. The rolling mill will produce can sheet by the end of 2013 and aluminum auto sheet by the end of 2014. The mine and the refinery are also slated to go online in 2014, noted J. Michael Murphy, Vice President-Commercial/Global Automotive for Alcoa Global Rolled Products.
By 2025, the global demand for aluminum sheet is predicted to grow five times current levels, according to Murphy, who added that the projected increase ties to the U.S. government’s 54.5 mpg corporate average fuel economy (CAFE) mandate that is prompting automakers to lighten vehicles as a way to improve fuel economy.
The $10.8 billion Ma’aden-Alcoa project means aluminum will be mined from Al Ba’itha near Quiba in the north. It will be further processed on the east coast’s Bas Al Khair industrial zone for markets in the Middle East and Europe.
In January 2013, the Middle East Battery Co., in which Johnson Controls is a joint venture partner, announced a $40 million investment to install new technology and increase ACDelco automotive battery production at its Dammam facility. The upgrades will take production capacity from 3.5 million to 5.5 million units yearly.
Johnson Controls’ Vice President & General Manager of Global Aftermarket Power Solutions, Allen Martin, said Tier 1 suppliers and automakers look for economies of scale. “So the idea of the (auto) cluster really reduces that risk and makes it more of a manageable return on investment,” he told SAE Magazines.
The cluster concept would also help address workforce training. “We’re still going to have processes and things that the companies are going to have to bring, but it gives (companies) a much greater chance of solving that (training) need,” said Martin.
Although General Motors does not manufacture vehicles in Saudi Arabia, John Stadwick, President and Managing Director of GM’s Middle East Operations, said infrastructure upgrades are important. “It will help us move our product (because) we have to import and transport it across the entire kingdom,” Stadwick told SAE Magazines.
The Saudi government’s approach to vehicle manufacturing is similar to China's, said Stadwick, who previously lived and worked in Shanghai. “China has a very young population. Saudi Arabia has a very young population. Both countries are investing heavily in education. Both countries are investing in infrastructure. This (auto cluster) is just the next logical step to take and put manufacturing in—just as China has done.”