Entering the Saudi market can be a daunting prospect for many foreign businesses, but with the right preparation including taking good local advice, pitfalls can be avoided and the journey time can be minimised. In this latest insight, we advise our clients on the 5 AEI ‘P’s for being commercially successful in the Kingdom of Saudi Arabia.
In a recent Financial Times (FT) article, the London paper finished its analysis on the rollout of Saudi Arabia’s Regional Headquarters (RHQ) programme quoting a UAE-based lawyer stating the “rush to Riyadh is on.” The deadline of 1 January 2024 has passed for multinationals and SMEs to establish their RHQ if they want to continue doing business with the state- or state-owned entities in the Kingdom. This has added to the ‘rush’, but interest in the Saudi market across all sectors has seen an exponential rise over the last 18 months and it isn’t specific to the RHQ programme.
According to the organisers of LEAP and Deep Fest, over 215,000 people attended the world’s largest tech conference in Riyadh at the beginning of March this year. The Saudi Gazette reported that 1,800 global entities attended with a total of $13.4 billion investments being signed up to. This was the conclusion of a very busy Q1 conference season. The month before the World Defence Show (WDS) according to their website was expanded by 25% from the previous iteration two years ago. This year WDS included 773 exhibitors, from 76 countries with 61 orders for over SAR25 billion worth of deals. In between these two significant events was sandwiched the Big 5 Construct Saudi event, also reporting on their social media 55,000 attendees, and 1,300 exhibiting companies, from 47 nations, with access to a reported $1.6 Trillion market. Trade delegations for sport, education and a multitude of other sectors have also been in the country.
The word has long been out about the opportunities of the Saudi market. Confidence is booming regarding the Vision2030 strategy. According to the FT the news that Saudi Aramco has boosted its dividend to almost $100 billion, the second-highest annual profit in its history, confirms that the upward trajectory of the Kingdom remains unchanged. One only has to stand at the arrivals hall at Riyadh International Airport to witness the shift in demographic pouring off the international flights. Professionals are entering the Kingdom in their droves either for the first time for business development or returning (potentially with families) to set up businesses or deliver on contracts already won.
AEI pride ourselves in being both advocates and practitioners of Vision 2030, and we assist all cohorts within the international business community coming to the Kingdom, whether they are conducting BD or delivery. In this quick insight we discuss the 5 AEI ‘P’s for being commercially successful in the Kingdom of Saudi Arabia:
1. Planning
Entering the Saudi market or scaling thereafter is a complex process, requiring a comprehensive understanding of statutory responsibilities and the less obvious nuances. There are a few similarities with Gulf Cooperation Council (GCC) jurisdictions, but there are some key differences; assume nothing. AEI consistently advise that businesses should seek tactical counsel from a service provider in the Kingdom on the critical path, milestones and compliance on an investor's journey.
Key areas to consider include the sort of licence required from the Ministry of Investment (MISA) to operate in the Kingdom. A service licence application can often be quite straightforward. A professional licence will almost definitely require a Saudi partner. An industrial or manufacturing licence will require post-licence approvals from various authorities. A trading licence comes with a large capital deposit. Options for structuring a company include becoming an LLC or a Branch depending on the company’s relationship with the parent and its activities. Local content and Saudization are a significant consideration, given that all businesses will have a percentage liability of Saudi nationals they will need to employ. Last but by no means least, Tax is an important feature for planning, with Corporate Income Tax, VAT, and Withholding Tax all factors to be considered when establishing a business model.
2. Presence
Human interaction is a key tenet at the heart of Saudi culture, and this remains a business fundamental in the Kingdom. Expecting to win business and deliver from offshore is not a viable option. Indeed, tendering for public sector business requires a registered entity in the Kingdom, and as previously mentioned, if eligible an RHQ is also a statutory requirement.
Prior to incorporating a foreign business, it remains sound advice to have ‘boots on the ground’ establishing relationships and nurturing those leads. Given the direction of travel for the economy provided by the strategic leadership, it should come as no surprise that a fly-in fly-out model is frowned upon by the Saudi customer base. Furthermore, the risk of Permanent Establishment should not be underestimated, and there are significant repercussions for a foreign business that operates an onshore delivery from an offshore position if they fall foul of the regulation period.
Investing early in finding Saudi talent is also sound advice. Given the level of demand in the Kingdom, the talent pool is already stretched. Human capital development should be a fundamental part of recruitment planning for any business. Retention plans should not be overlooked otherwise Saudization non-compliance can quickly become a challenge.
3. Partnering
The local partner model is a common approach for foreign companies seeking to enter the Saudi market. This approach can be tailored depending on the type of products or services being supplied and the requirements of the market.
Having a local partner is a statutory requirement in some sectors according to the MISA licence required and the activities listed therein being undertaken. Establishing a Law firm or a Real Estate valuation business are only two examples of when a partner is required. Commercial agents and distributors are often most used for the sale of ‘off the shelf’ goods but they usually ask for Kingdom-wide exclusivity. Suppliers may not wish to agree to this, so clarity on this in the first place is important. AEI believe it depends on who puts in the hard work - the distributor or the supplier.
AEI also advocate where possible to remain 100% foreign-owned, avoiding any complications of local partnerships if it is not required. Historically, many foreign businesses have entered into a partnership or an exclusivity agreement, where objectives have been misaligned from the outset. Reversing out of that commercial cul-de-sac is more difficult than driving in.
4. Patience
Strategic patience is a requirement in the Saudi market, as is persistence. A well-planned and executed route-to-market strategy will build in the key milestones to a timeline, assessing the impact of delays and challenges along the way. The regulatory environment is transparent and supported by the various ministries and authorities, with plenty of detail in the public domain. Indeed, the Kingdom has a sophisticated e-government structure where the various stakeholders have an advanced level of interoperability, but understanding how the jigsaw pieces come together is an art.
An example of this would be the Wage Protection System (WPS) file. This is a mandatory payroll function produced by the bank on behalf of the employer, and where employees' salaries are uploaded onto the Mudad portal, one of the platforms belonging to the Ministry of Human Resources and Social Development. It is a lengthy process to establish, and there is a monthly liability to undertake these actions by the business to remain compliant. Patience when setting up and patience with the system as it conducts monthly amendments and updates is a key feature.
5. Payment
In the same way a business needs to be patient with both setting up a business and winning a contract, patience is often also required regarding payment. Delayed payment has been a historical challenge for many businesses in KSA, particularly affecting cash flow for the SME cohort. In recent years, the risk has been reduced significantly and both public and private sector clients in Saudi are often incentivised to make payment inside agreed T&Cs. Nonetheless, it remains sound advice to negotiate and receive an advance payment as a supplier to ensure a healthy cash position. Given the escalating number of projects and programmes in the Kingdom and the expansion of the international supply chain for goods and services, confidence in payments being received on time is improving month on month.
If you have any queries about the Saudi business market, please don't hesitate to contact AEI Saudi.