Toyota snub dents Saudi Arabia's manufacturing drive
* Saudi GDP breakdown: https://tmsnrt.rs/2WDjAZb
* Economy by sector in 2018: https://tmsnrt.rs/2IUeZbs
* Saudi Arabia 2018 GDPby economic sectortmsnrt.rs
* Toyota reluctant to build large plant in Saudi Arabia
By Marwa Rashad and Stephen Kalin
RIYADH, June 19 (Reuters) - Saudi Arabia began courting
Toyota two years ago to build a large car plant as part
of Crown Prince Mohammed bin Salman's grand plan to wean the
kingdom off oil revenues and create jobs for young Saudis.
But the Japanese carmaker has rebuffed Riyadh's overtures
following talks that dragged on without tangible results because
high labour costs, a small domestic market and a lack of local
supplies gave Toyota pause for thought, four sources said.
Securing a deal with a major automaker by 2020 for a car
plant is a key target in the Gulf state's national industrial
strategy, part of a broader agenda to diversify the economy of
the world's largest oil exporter.
Failure to do so would be a setback for Prince Mohammed,
coming after the listing of oil giant Saudi Aramco was shelved
and the killing of journalist Jamal Khashoggi tarnished the
"Nobody would say 'No, full stop' ... but they politely
conveyed they're not interested," said an industry source
familiar with the Toyota talks.
Toyota said it could not comment on the current internal
discussions and communication with the Saudi government.
Saudi Arabia's ministry of energy, industry and mineral
resources and the government media office did not respond to
requests for comment.
As part of measures designed to create 1.6 million
manufacturing and logistics jobs by 2030, Prince Mohammed wants
to localise half the production of imported vehicles and weapons
- which are expected to account for up to $100 billion in
spending by Saudi government entities and consumers by 2030.
Under the deal Toyota signed in March 2017, the Japanese
company agreed to conduct a feasibility study for an industrial
project to make vehicles and car parts in the kingdom.
Two sources familiar with the matter said Toyota concluded
after the study and negotiations that Saudi Arabia would need to
provide huge subsidies for the project to be viable.
"They found that production costs will be similar to other
countries only if there is a 50% government incentive. But even
then, they aren't sure it will be profitable," said one source
with knowledge of the negotiations.
When it comes to establishing manufacturing, Riyadh hopes to
replicate its 1980s push into petrochemicals - the cornerstone
of an industrial drive that turned Saudi Basic Industries
(SABIC) into the world's fourth biggest petrochemicals firm.
Hundreds of thousands of Saudis work in petrochemicals, one
of the biggest contributors to the economy outside oil. But it
took decades to build up the industry, even with huge government
funding and cheap raw materials.
Saudi Arabian Military Industries, owned by the kingdom's
sovereign wealth fund, is spearheading the drive to localise
military spending. It aims to generate $10 billion in revenue
over the next five years and hopes to generate 30% of revenues
from export markets by 2030.
For cars, the National Industrial Development and Logistics
Program (NIDLP) wants half the roughly 400,000 vehicles bought
each year in Saudi Arabia to be made there by 2030, one source
But Toyota, which has a 30 percent market share, only
proposed a small plant producing up to 10,000 vehicles using
imported goods and the Saudis wanted a bigger factory, the
industry source and the source familiar with the talks said.
A strategy document posted on NIDLP's website acknowledged
that Saudi Arabia had a major competitive disadvantage and state
incentives would be needed to create "substantial commercial
justifications" to attract carmakers.
It did not provide specifics about the disadvantages, nor
the size and kind of state incentives required.
At NIDLP's launch in January, the state approved 45 billion
riyals ($12 billion) of incentives to develop an auto sector,
including duty rebates, human resources subsidies and tax
holidays, but it wasn't enough, the industry source said.
NIDLP did not respond to requests for comment.
Asked if it would consider the project if the economic
conditions changed, Toyota said: "We do not comment on
assumptions about the current and future situations."
The NIDLP is aiming to create 27,000 jobs in the automotive
sector by 2030 by attracting so-called original equipment
One obstacle, though, is the absence of a local supply chain
for car parts, three automotive industry executives said.
Riyadh would need to build integrated economic districts
producing components such as windows, batteries and wheels to
lower costs, a senior executive at a Western auto firm said.
"If I have to open a manufacturing process in Saudi and then
import every single component from abroad, I do not have any
economical plus," he said. "The problem is not really setting up
a plant, but having the entire value chain."
The local market is also relatively small. Demand for cars
in Saudi Arabia has fallen by some 50% over three years to about
450,000 cars in 2018, as a drop in oil prices and departure of
expatriates hit consumption, said Subhash Joshi, director of
mobility practice at research firm Frost & Sullivan.
"Saudi Arabia and (Gulf) countries have been persistently
disappointing in terms of sales in recent years, so it's not as
if OEMs would be entering a booming market," said Justin Cox,
director of global production at LMC Automotive.
Cox said countries such as Egypt and Turkey had more
advantages for carmakers.
Toyota has a 1.2 billion euro plant with an annual capacity
of 150,000 vehicles in Turkey, which is in a customs union with
Europe. A plant Nissan set up in Egypt in 2005 with a $200
million investment will produce 28,000 cars this year.
Cars imported into the GCC customs union which includes
Saudi Arabia only attract a 5% tariff, offering little
protection against cheap imports for countries trying to get
domestic car production off the ground.
Turkey and Egypt also provide experienced, cheap manpower
while Riyadh has been reducing the number of foreign labourers
to create jobs for Saudis, who prefer higher-paying public jobs.
Some 10 million foreigners have been doing the strenuous,
lower-paid jobs largely shunned by the 20 million nationals.
Khalid al-Salem, who oversees the development of industrial
cities, said the authorities were working on incentives to lure
Saudis to industrial jobs instead of retail, where entry
requirements are easier and pay is higher. He did not elaborate.
It's not the first time Saudi Arabia has attempted to lure
In 2012, Jaguar Land Rover signed a deal to explore
producing 50,000 Land Rovers a year in the kingdom at a cost of
4.5 billion riyals ($1.2 billion), but it never moved forward.
The industry source said the British luxury brand, owned by
India's Tata Motors, got a better offer from a
"We continually review our global manufacturing footprint.
At this time, our focus remains on our manufacturing presence in
the UK, China, Brazil and mainland Europe," Jaguar Land Rover
said in an emailed response when asked about the Saudi project.
Two of the sources said Riyadh has also approached Nissan
Motor Co in recent years.
They said the Japanese firm considered contract
manufacturing through a 75% Saudi-owned venture - without the
Nissan brand - but the arrest of former chairman Carlos Ghosn
last year meant it was off the table for now.
Nissan declined to comment.
MINING AND PHARMACEUTICALS
While Saudi Arabia is struggling to lure carmakers, it does
have a truck assembly industry. But analysts say assembling
vehicles imported in kit form requires less investment and
doesn't create as many jobs as building cars from scratch.
Economists say, however, that Saudi Arabia does have the
potential to build competitive industries and create jobs in the
mining and pharmaceutical sectors.
The state is looking to triple mining's contribution to
gross domestic product by 2030 by focusing on untapped reserves
of bauxite, phosphate, gold, copper and uranium.
Saudi authorities estimate the country holds 500 million
tonnes of phosphate ore, about 7% of global proven reserves and
a new mining law to boost foreign investment is being drafted.
Monica Malik, chief economist at Abu Dhabi Commercial Bank,
said investment in mining infrastructure would likely have the
most direct impact on developing new manufacturing industries.
Pharmaceuticals is another strategic sector for NIDLP. About
25 local manufacturing plants produce 30% of prescription drugs
consumed now and the government wants to double the sector's
contribution to non-oil gross domestic product to 1.97% by 2020.
Suhasini Molkuvan, programme manager at Frost & Sullivan,
said the target was almost close to reality though a lack of
investment in research and development and intellectual property
left local firms dependent on multinationals.
"Diversity is easier said than done," said a senior Riyadh
banker. "It might be achievable in 15 to 20 years if they
continue to make the push."
($1 = 3.7504 riyals)
(Additional reporting by Sylvia Westall, Tuqa Khalid and Saeed
Azhar in Dubai, Costas Pitas in London, Naomi Tajitsu in Tokyo
and Norihiko Shirouzu in Beijing; editing by Ghaida Ghantous and
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