Saudi Arabia

German Companies, Desert Dreams

saudi 19 october riyadh drivers source
The German-Saudi business relationship has been strained by the Arab power's increasingly aggressive stance against Iran.
  • Why it matters

    Why it matters

    Saudi Arabia could be a huge market for German companies, especially pharma firms that are struggling with falling prices, but trade with the Arab kingdom is not easy.

  • Facts

    Facts

    • German exports to Saudi Arabia are worth around €10 billion a year.
    • Machines, medical equipment, automobiles and other vehicles are the most common exports.
    • Saudi Arabia is building what will be the largest chemicals complex in the world, which could provide opportunity for German businesses.
  • Audio

    Audio

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Despite the controversies surrounding the Arab kingdom, German companies like Saudi Arabia.

The world’s biggest oil producer is a client that pays its bills on time. It has a huge untapped market, not just for controversial, headline-grabbing arms deals, but also for German carmakers and electronics firms.

A glance at the streets of Riyadh shows what awaits those carmakers who dare to brave any potential bad PR.

While Beijing is bursting with foreign, and above all, German cars, the situation in Riyadh is very different. The German carmaker share is less than 2 percent in a country with 31 million residents. There is plenty of potential, especially for Germany’s luxury brands.

Germany’s exports to Saudi Arabia, mostly machines, medical equipment, cars and other vehicles worth around €10 billion, seem low in comparison with other countries. The volume of exports from France is 10 times bigger – but German companies maintain a presence anyway, not wanting to miss out on business.

Siemens, for example, has around 2000 employees in Saudi Arabia. But Saudi Arabia has hardly any presence in Germany.

Germany covers its oil needs from Russia, Norway and North African sources. Still, there are many areas where German and Saudi interests cross over.

In September, Cologne-based specialty chemicals maker Lanxess said it had found the right partner for its troubled rubber business.

After four months of unfruitful negotiations with potential buyers from Russia and Britain, Lanxess settled on a deal with Saudi Arabian oil producer Aramco, which will run the synthetic rubber operations in partnership with Lanxess.

The joint venture between the Saudis and Lanxess is a prime example of the radical change taking place in the global chemicals industry. Oil concerns from the Gulf and especially Saudi Arabia are increasingly looking to process raw materials en masse.

European chemical companies are getting out of mass chemicals, where profit margins have plunged, by selling plants and looking for allies.

The Saudis are ideal partners for Lanxess. Saudi Aramco is the world’s biggest oil producer and can provide its German partner with cheap access to petroleum, from which rubber is made, to produce car tires, for example.

The German company and the Saudis will remain equal partners in the rubber joint venture for five years – a business generating €3.1 billion. After that, all options are open.

Eventually, the Saudis will take over rubber production completely from Lanxess, according to industry expectations.

The strategy of Saudi managers is clear: They want to expand the economic basis of their country, and chemicals production is ideally suited to that purpose. In practise, that means not just exporting oil to chemical companies. The Saudis themselves want to earn from processing it, for example, to plastics.

Lanxess is not just benefiting Saudi Aramco with this venture.

“The agreement is also promoting economic growth and diversification for the Kingdom of Saudi Arabia,” said Abdulrahman Al-Wuhaib. He is responsible at Saudi Aramco for the downstream business, i.e. for the refinement of crude oil for products with higher profit margins. The Saudis are even more reliant on such products, since the oil price fell so sharply.

The country is building what will be the largest chemicals complex in the world. The complex, called Sadara, is a $20 billion joint venture between Aramco and its partner, Dow Chemical.

Three, 26 ultra-modern, high-scale plants are to produce 3 million tons of basic chemicals and plastics annually for packaging, household cleaners and cosmetics, among other things.

The project presents huge opportunities for German businesses. The Munich-based Linde Group, for example, will supply industrial gases.

Huge urban construction projects, some of them announced years ago, have remained nothing more than desert daydreams.

But not all Saudi-German business endeavors are so straightforward.

Rainer Seele, who heads a body to promote trade between Germany and the Middle East and is chief executive of Austrian oil group OMV, fears the standoff with Iran will damage business. Both countries have “to focus on stabilizing the region and de-escalating the conflict as quickly as possible,” he told Handelsblatt.

For many German companies, business is a problem in Saudi Arabia.

For years, the Saudis have made no progress in changing their energy supplies, or move toward renewables, where German machinery and electronics companies are active.

While it is “undisputed that renewable energies in Saudi Arabia will make a substantial contribution to energy supplies in future, up to now there is no new concept to make that happen,” according to Germany Trade & Invest, a government backed business development corporation.

At the beginning of 2013, Saudi Arabia presented a gigantic program for how to introduce and use renewable energy. German solar and wind companies thought their time had come. But little has happened and observers say the plan is “no longer up-to-date,” even if it has not yet been withdrawn.

The Saudis are also working on a $70 billion program to construct 16 nuclear power stations. However, many fundamental questions concerning the program have to be addressed.

Nuclear power and renewable energies are two reasons why Saudi Arabia’s economic development is stagnating.

Huge urban construction projects, some announced years ago, have remained nothing more than desert daydreams.

A big obstacle to improving business relations is the “inadequate transparency of decision-making processes,” said Jürgen Hogrefe, a consultant who advises German companies with business ambitions in the region. The inconsistent legal system gives many a mid-sized company-owner headaches.

Some laws change overnight, many decisions are not transparent. Big companies with direct links to the government clearly have an advantage, complained another entrepreneur.

Yes, the government in Riyadh has announced enormous investments in transport infrastructure, the energy sector and urban construction. But even when the projects begin, there are problems.

Companies complain, for example, that the quota of Saudi workers demanded by the government is difficult to fulfill, as many applicants lack the qualifications needed.

On the other hand, the few qualified Saudis are in great demand. Companies go to great lengths to employ them, which in turn drives up costs.

 

Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. Bert-Friedrich Fröndhoff leads a team of reporters which covers the chemicals, healthcare and services industries at Handelsblatt. To contact the authors: stratmann@handelsblatt.com and roendhoff@handelsblatt.com

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