Wednesday, 17 July, 2019, 2:28 AM
Rifat's wife Minni arrested
Home Business

Toyota snub dents Saudi Arabia’s manufacturing drive

Published : Thursday, 20 June, 2019 at 12:00 AM  Count : 22

RIYADH, June 19: 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 labor 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 kingdom's image.
"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 localize 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 50per cent 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 localize military spending. It aims to generate $10 billion in revenue over the next five years and hopes to generate 30per cent 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 said.
But Toyota, which has a 30 per cent 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 manufacturers (OEMs).
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.
The local market is also relatively small. Demand for cars in Saudi Arabia has fallen by some 50per cent 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.
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 5per cent tariff, offering little protection against cheap imports for countries trying to get domestic car production off the ground.  (abridged)    -Reuters






« PreviousNext »



Latest News
Most Read News
Editor : Iqbal Sobhan Chowdhury
Published by the Editor on behalf of the Observer Ltd. from Globe Printers, 24/A, New Eskaton Road, Ramna, Dhaka.
Editorial, News and Commercial Offices : Aziz Bhaban (2nd floor), 93, Motijheel C/A, Dhaka-1000. Phone :9586651-58. Online: 9513959, Advertisement: 9513663
E-mail: info@dailyobserverbd.com, online@dailyobserverbd.com, news@dailyobserverbd.com, advertisement@dailyobserverbd.com,   [ABOUT US]     [CONTACT US]   [AD RATE]   Developed & Maintenance by i2soft