I. COMMERCIAL OVERVIEW Overview of Import Market The United States is Saudi Arabia's leading trading partner, joint-venture partner, and investor. Although declining oil prices have caused the public sector to scale back planned expenditures by 19 percent in 1994, this austerity will not jeopardize the relative standing of the U.S., even though Saudi total merchandise imports may drop by less than ten percent. The United States has also been, and will continue to be the leading supplier of services and of defense equipment to the Kingdom. Saudi Arabia accounts for approximately 70 percent of all U.S. exports to the Gulf Cooperation Council (GCC) region of the Middle East. U.S. exports for 1994 are estimated to be $6.8 billion in merchandise, $3 billion in services, and $3 billion in military equipment and supplies. Some growth can be expected in 1995 U.S. merchandise exports, as major projects to provide the Kingdom with aircraft, telecommunications, and powerplants will begin to be reflected in U.S. export figures in the latter half of that year. The Saudi market is very receptive to U.S. goods and services, and should continue to be so for the foreseeable future. U.S. business executives will find that their Saudi counterparts are often educated in the U.S., speak fluent English, and take frequent trips for work and pleasure to the U.S. Nonetheless, it is important to keep in mind that doing business in Saudi Arabia requires cross-cultural sensitivity, strong commitment of executives' time and effort, and familiarity with Saudi banking and other business practices. Over 250 U.S. firms are already resident in the Kingdom, and there are over 200 joint ventures with Saudi partners. Prospects are bright for even greater activity over the coming years, particularly if the government pursues a strategy of privatization of major public-sector firms. Brief Synopsis of Commercial Environment The commercial environment is improving for U.S. firms, albeit in a slightly smaller import market. The Kingdom of Saudi Arabia has taken three steps to bring it even closer to the world trading system: a) It has applied for membership in the General Agreement on Tariffs and Trade (GATT); b) It will begin enforcing the intellectual property rights of other nations on July 13, 1994; c) It has joined the New York Convention on the Arbitration of Commercial Disputes. These steps, coupled with a strong receptivity for U.S. goods and services, make Saudi Arabia an excellent market for U.S. exporters. Statistics bear this out. Even in a modestly declining import market, U.S. firms managed to gain 2 percent import market share in 1993 over 1992, rising to slightly over 24 percent of all imported goods. U.S. exporters will find that the Saudi market is similar to that of other intermediate developing nations as concerns most business practices. However, Saudi law requires a sponsor for merchandise trade in the Kingdom, and generally, the sponsor turns out to be the agent or distributor the U.S. firm has selected to market its goods. Import tariffs are generally 12 percent, with 20 percent for protected infant industries, but these will probably come down as the Kingdom proceeds with GATT accession negotiations. There are no taxes, fees, or controls on remissions of earnings abroad, and the Saudi Riyal is freely convertible with other currencies. Most Saudi standards are compatible with U.S. standards, and do not pose significant market barriers for our goods, although there are frequent problems for selected sectors such as food and electrical products. The Kingdom uses the harmonized system of tariff nomenclature, but in most cases, duty on goods is assessed according to customs inspectors' sense of market price, rather than on invoices. This, too, is likely to change during the Saudi GATT accession negotiations. U.S. firms have done particularly well in winning Saudi major projects in 1994, including the announced purchases of over $6 billion in U.S. aircraft, $4 billion in telecommunications equipment, and $2 billion in powerplants. Host Country Business Attitude Toward the U.S. Saudi Arabia and the United States have been strong strategic and commercial partners for over 50 years, with particular emphasis on cooperation in the oil and defense sectors. Saudi business leaders approve of this partnership and consider its continuation to be in the Kingdom's strong interest. The United States is the leading exporter to Saudi Arabia, providing about one-forth of total imports. U.S. goods and services are respected on the basis of quality and technology, and competitive U.S. foreign exchange and interest rates add to the attractiveness of American exports. There has been a stable exchange rate of 1 US Dollar = Saudi Riyal 3.75 since 1986, adding stability to the trading relationship. Saudi consumers and end-users are very knowledgeable about U.S. goods and services, and many have studied and lived in the U.S. or travel there routinely to develop business. Nevertheless, Saudi Arabia is a highly competitive market and U.S. exporters must be prepared to face strong challenges on the basis of price, service, and financing. U.S. suppliers occasionally are criticized for failing to respond to inquiries, lengthy delivery times, unavailability of spare parts on a timely basis, and a failure to cultivate Saudi customers through frequent contacts and after-sales assistance. The U.S. is geographically disadvantaged vis-a-vis our European competitors, and American companies may need to work harder to overcome these factors. In summary, the Saudis prefer to deal with U.S. firms. U.S. technology is their first choice and the overall quality of U.S. products and services is well recognized. Major Business Opportunities The Saudi private sector is expanding and assuming a larger role in boosting Saudi GDP. Whereas total GDP grew by a mere 1 percent in 1993, the Saudi private sector experienced a 5.1 percent growth. A major indicator of the propensity of the private sector to assume a prominent role in the growth of the Saudi economy is the 18 percent rise in the commercial banks credit extended to the public and private sector in 1993 to finance various economic activities including trade, construction, manufacturing, and agriculture. In addition, many quasi government organizations, i.e. SABIC and SCECOs also benefited from this rise in credit. Since many government projects will be either postponed or cancelled, the Saudi private sector will take the initiative and a number of investments are likely to take place in the following sectors: Petrochemicals: The Saudi Venture Capital Group (SVCG) is actively planning for a $500 million Aromatics plant with the US Chevron with a capacity of 420,000 mt/y of benzene and 270,000 mt/y of cyclohexane. The Arabian Industrial Development Company (NAMA) has recently awarded a contract valued at $150 million for a salt-based chemical and epoxy plant which will produce flaked caustic soda (50,000 mt/y), chlorine (33,000 mt/y), epoxy resins (10,000 mt/y), and calcium hypochlorine (5,000 mt/y). The Arabian Mining and Manufacturing Company (AMAM) plans to build a $270 million plant which will produce 264,000 mt/y of soda ash. The Juffali group has announced a joint venture with Dow Chemical Company (Europe) to manufacture 30,000 mt/y of styrene-butadiene. Jubail Petrochemical Company (KEMYA) plans to raise annual polyethylene production from 400,000 tons to 700,000 tons. The Saudi Methanol Company (AL-RAZI) plans to increase methanol output as well as build an additional unit to produce methyl tertiary butyl ether (MTBE). The Saudi Petrochemical Company is implementing a $900 million plant which will produce 700,000 mt/y MTBE. Al-Jubail Fertilizer Company is planning to establish a $360 million Ethyl Hexanol plant. The Arabian Industrial Fiber Company is implementing a Polyester Fiber plant in Yanbu at a total cost of $350 million. In addition to the opportunities presented in the petrochemical field, the related offset programs with US, UK, and French defense companies will also support the private sector's drive to assume a major role in the Saudi economy. Most of these programs are expected to be financed through commercial borrowing from local and international banks, as well as self financing mechanisms. Offset: Projects under the various offset programs are expected to generate substantial new opportunities through the year 2000 and beyond. The US Peace Shield offset program already has led to five commercial projects: Al-Salam Aircraft Co., the Aircraft Accessories & Components Company, the Advanced Electronics Company Ltd., the International Systems Engineering Company, and the Middle East Propulsion Center. Hughes Aircraft Systems, which replaced the Boeing Company, also has an offset commitment to invest into new ventures in the Kingdom. General Dynamics Corporation also formalized a Memorandum of Agreement which commits it to an Industrial Participation Program in the Kingdom. Although moving slower than its American counterpart, the British Al-Yamama offset program also requires reinvestment by the prime contractor, British Aerospace, in viable Saudi projects. French defense contractor Thomson-CSF has already invested in one offset project, a gold refining project with a total investment of $48 million. Other proposals are still pending and being evaluated by the offset committee. Defense: The Royal Saudi Air Force will build aircraft facilities, valued at $1-2 billion, in different parts of the Kingdom for the 72 McDonnell Douglas F-15's fighter aircraft on order. The Ministry of Defense and Aviation's Strategic Petroleum Reserve Program, estimated at $5-8 billion, will generate procurements for various infrastructural items. Telecommunications: The Saudi PTT expansion (TEP 6) contract for 1.5 million lines, estimated at $4 billion, has been announced, and the US firm AT&T was formally given a letter of intent. Broadcasting: The Ministry of Information plans to purchase and install four high-powered short and medium wave radio broadcasting transmitters for a total project cost of $2-3 billion. Other quasi-governmental organizations are also gearing up for a number of new projects as well as expansion of existing ones. These projects are as follows: Transport: The Saudi Public Transport Company (SAPTCO) plans to buy between 800 and 1000 35-40 passengers city buses valued at $400 million or more depending on quantity and specifications. Power: The Saudi Consolidated Electric Company in the Eastern Region intends to build a 2400 MW generation facility in Gazlan. The Saudi Consolidated Electric Company in the South envisages a 1000 MW generation facility for Asir/Jizan, phase two, another 1000 MW power station in Shuqaiq, and a 100 MW generation facility in Tihama. The Saudi Consolidated Electric Company in the Western region also plans a 1000-2500 MW thermal power plant in Shuaiba. The company is also implementing a $392 million expansion of the Rabigh power plant. The Saudi Consolidated Electric Company in the Central region is still negotiating a $1.2 billion, 2400 MW power station for Riyadh, likely to be awarded to General Electric. Petroleum: A $400 million turnkey contract for a lube oil plant for the local Petromin Lubricating Oil Refining Company on the West coast of Saudi Arabia is being negotiated. Ras Tanura, the Kingdom's oldest refinery, will undergo an upgrade program to lighten its product mix. Cost of the program's first phase is estimated at $1.7 billion. There is another turnkey contract planned to expand refined product facilities in Jizan including pipelines, mooring berths, and storage tanks. The cost of the project is estimated at $150 million. Saudi ARAMCO plans to modify the Berri gas plant to raise its capacity to handle sour gas by installing a High Pressure DGA (HPDGA) unit for a total cost of $200 million. Aircraft: Saudia, the flag carrier of the Kingdom, intends to acquire over 60 aircraft from Boeing and McDonnell-Douglas between 1995 and 2000, with a value of $6 billion. Desalination: The Saline Water Conversion Company is implementing the third phase of a $462 million reverse osmosis/power plant in Al-Khobar on the East Coast of Saudi Arabia. The Royal Commission for Jubail and Yanbu is building a 2.5 million gallons per day desalination plant for a contract valued at $170 million. Roadblocks to Doing Business Saudi Arabia has a different set of trade and investment barriers, mainly regulatory and bureaucratic practices, which restrict the level of trade and investment. Among these are: Commercial Disputes Settlements: Saudi Arabia has signed the New York Convention on the Arbitration of Commercial Disputes. This is an encouraging step, but arbitration has yet to be tested in practice. Business Visas: All visitors to Saudi Arabia must have a Saudi sponsor in order to obtain a business visa to enter Saudi Arabia. The Saudi who agrees to act as a sponsor accepts certain legal obligations including personal liability for the actions of the visitor. Therefore, a Saudi rarely assumes sponsorship unless he has a personal interest in the proposed visit. In practice, this makes it very difficult for an American business person to come to Saudi Arabia to investigate the market or to select a local representative without incurring some type of obligation to his sponsor, i.e. right of first refusal on any business opportunity developed. Although the process of obtaining a visa has been streamlined, American citizens of Arab descent and women continue to have difficulties in procuring business visas, even when they have a sponsor. Delayed Payments: This is the top issue for U.S. firms in the Kingdom. In the current recession, some Saudi Government agencies have delayed payments from 6 to 15 months. Lengthy payment delays, especially from government ministries and agencies, have long been a disincentive to doing business in the Kingdom. This issue stems partly from a traditional Saudi reliance on slow payments in order to manage cash flow, and partly from a bureaucratic reluctance to make final payments. Companies should check with the U.S. Embassy or Consulates for the current arrearage situation. Due to accounting procedures used by the Saudi Government, the Department of Zakat and Income Tax will impose taxes even on payments which have not been received, arguing that the fact of non-payment is essentially immaterial in the tax liability determination process. Given the Saudi government's current and foreseeable fiscal problems, this problem is likely to become more serious during 1995. Product Standards: The Saudi Arabian Standards Organization (SASO) plans to develop more than 1300 standards for implementation in Saudi Arabia and the GCC. The implementation of product standards inconsistent with those in the United States has in the past been one of the most significant barriers to U.S. exports to the Kingdom, blocking U.S. exports estimated at between $100 million to $500 million in previous years. Labeling and expiration date requirements are stringent and cause difficulties for various US frozen foods and fresh meats some canned and prepared foods. Finally, Saudi electric current standards, 127 volts, 60 cycles, have denied entry to many U.S. nonconforming electrical products. Intellectual Property Protection: USTR placed Saudi Arabia on the "priority watchlist" in April 1993, for the lack of copyright protection for U.S. owners of intellectual property. Saudi Arabia has a copyright law; however, the law does not provide protection to foreign works that are published outside the Kingdom. In order to extend copyright protection to foreign works, Saudi Arabia acceded to the Universal Copyright Convention on April 13, 1994. Under the terms of accession, implementation began 13, 1994. Saudi Arabia has not acceded to the Geneva Convention on phonograms. The U.S. Trade Representative will review Saudi enforcement and determine if it is to remain on the special watchlist on an annual basis. Saudi Arabia has a trademark law. Enforcement is spotty, but the law is considered to be a good one. Saudi Arabia's patent law provides a generally complete and adequate legal basis for protection. The term of protection is 15 years and the law provides for compulsory licenses. The law established a patent office, which to date has received over 1,000 patent applications, although it has not yet issued a patent. Arab League Boycott (Secondary and Tertiary Aspects): The laws of Saudi Arabia include the enforcement of the Arab League Boycott, including the Boycott's secondary and tertiary aspects. Saudi Arabia has stated that it has directed the removal of language containing references to the boycott from its commercial documentation, however, those doing business in the Kingdom reported over 1000 requests for boycott information in 1993 to the Commerce Department's Office of Antiboycott Compliance. Several firms that were previously not welcome to do business in the Kingdom have established business relationships in Saudi Arabia. Advice on boycott and antiboycott related matters is available from the U.S. Embassy or from the Office of Antiboycott Compliance in Washinton, D.C. at (202) 482-2381. Protective Tariffs and Non-Tariff Trade Barriers: Saudi tariff protection is generally moderate, but has increased over the years. A number of Saudi "infant industries" now enjoy 20 percent tariff protection as opposed to the general rate of 12 percent. Saudi non-tariff barriers also are increasing. Such barriers include preferences for national and GCC products in government procurements; a 30 percent of contract value "set-aside" for local contractors on major government projects; a requirement that foreign contractors obtain their imported goods and services exclusively through Saudi agents; some services are reserved for government-owned companies, namely, insurance and air transport; and the economic offset requirement mandating reinvestment of a portion of contract value in indigenous industries for certain high value government contracts, particularly in defense. Major Investment Barriers: For the most part, the principal barriers to U.S. investment in the Kingdom are the same barriers to trade detailed above, with the exception of the tariff barriers and preferences which will tend to help American investors as well as their Saudi partners. However, there are two additional barriers to U.S. investment: o Foreign individuals cannot directly own land, although foreign companies may own land in certain circumstances. o Foreign ownership is generally not permitted in the following fields of enterprise: catering; cleaning, maintenance and operations of facilities; power generation; trading; transportation; and businesses that affect national security. Nature of Local and Third Country Competition Europe is Saudi Arabia's largest trading bloc. EU member countries account for approximately 35 percent of Saudi imports compared with 26 percent for the U.S. and 16 percent for Japan. Two of the three Saudi defense offset agreements were signed with the U.K. and France; both of which should have provided the impetus for additional investments and trade between these countries and Saudi Arabia. Both offset projects, however, moved at a slower pace than their US counterpart. Three of the twelve Saudi commercial banks are Saudi-European joint ventures: the Saudi French Bank, the Saudi Dutch Bank, and the Saudi British Bank. The Gulf Cooperation Council (GCC), including Saudi Arabia, is still the British Government's main export target. Up to 1992, there were more than 30 joint Saudi-British industrial projects with a capital of $168.8 million. Saudi-British bilateral trade went up approximately 6 percent from $4.4 billion in 1992 to $4.6 billion in 1993, sales to Saudi Arabia stood at slightly over $1.2 billion in 1993, a 7 percent drop from the previous year. Germany is traditionally the most important source of process technology companies, and Saudi Arabia has benefitted from this German know-how, especially in the Saudi petrochemical, cement and water purification industries. The latest trade figures for Saudi Arabia and Germany reveal a 10.5 percent drop in bilateral trade from $3.7 billion in 1992 to $3.3 billion in 1993. German exports declined by approximately 15 percent during the same period. Germany had the second largest number of European joint industrial projects in Saudi Arabia after Switzerland, numbering 25, and capitalized at $114.4 million. Saudi-French bilateral trade stood at $4.04 billion in 1993, this represented a 5.4 percent drop from the previous year. French exports to Saudi Arabia declined by 17 percent from $1.67 billion in 1992 to $1.39 billion in 1993. France is a major supplier of industrial products ranging from precision instruments to electronics through optics and pharmaceutical products, not to mention consumer and luxury goods. French firms have also obtained projects in high-technology sectors such as power, television, telecommunications, mapping and surveying, and minerals. Up to 1992, there were 13 joint industrial projects capitalized at $63 million. Japan is Saudi Arabia's second largest trading partner after the US, accounting for around 13 percent of the Kingdom's market share in 1993. Bilateral trade between the two countries declined by more than 13 percent from $15 billion in 1992 to $13 billion in 1993. Japanese exports went down by more than 15 percent during the same period, largely due to the appreciation of the yen. Japanese joint venture investments in Saudi Arabia stood at 40 projects, 80 percent in non-industrial ventures. JICA has a number of ongoing cooperation and assistance programs with the Saline Water Conversion Corporation, the Saudi Arabian Standards Organization, the Ministry of Petroleum and Mineral Resources, the General Organization for Technical Education and Vocational Training, and a number of Saudi universities.