Saudi
Petrochemical Industry: The Heart of Investment
Mohamed A. Ramady, Ph.D.
In the era of market openness and fierce globalized
competition, both multinationals and nations are
once again reassessing their core competitive
advantage. What is it they are good at and which
makes them stand out from the crowd? For the Gulf
nations, embarking on massive investment and
infrastructure projects, this is an important
question to ask, the alternative being lumbered with
�white elephant�, uncompetitive and uneconomic
projects down the road.
Different nations pride themselves on doing things
in particular ways that makes them good at what they
do. For example, Germans are renowned for their
precision engineering, that produce world-class cars
and consumer durable goods. Despite high labor cost
and a seeming rigid wage market, Germany ran a
record trade surplus in 2006, and was the biggest
exporter of any country in the world, even ahead of
the vaunted Chinese. Why? Because consumers believe
in German product excellence. The same goes for
another world exporter � Japan, which excels in
electronics and almost daily consumer product
developments, even if some are mind boggling robotic
household maids. Again, Japan has run trade
surpluses of nearly $100 billion in 2006, and has
entered into �tough� export markets, such as China
and India.
Other countries have decided to capitalize on the
perception of what they do best, or are most famous
for. The smaller Scandinavian countries seem to have
found a niche in the fast growing mobile and
telecommunication markets, while the French have put
in a bit of passion for food and beverages. As for
the Italians � who does not recognize the upmarket
designer clothes and accessories? The Tunisians and
the Turks have access to cheap leather products and
their work force is just as good as the Italians,
and so where did they go wrong�? They �went wrong�
in not having a complete product supply chain-from
market research, design, public relations, to
procurement, manufacturing and marketing. Where are
the renowned Tunisian or Turkish design houses? To
someone from planet Mars, the handbags and leather
jackets from all these three countries might look,
feel and smell the same, but for the so-called
sophisticated consumer, the key is the brand name.
Some countries have decided to opt for services,
whether it is in tourism, banking, legal, insurance
or media. This might be lucrative in the short run,
until some other country decides to compete in these
sectors, but it leaves the economy lopsided and
prone to rapid changes in technology and an
�education gap�. The buzz word is to create
knowledge-based economies, which would be more
creative and at the knife-edge of research and
development in services as well as in new industries
such as biotechnology, robotics, environmental
protection and pharmaceuticals. Britain seems to
have fallen into this category of �new economy�,
driven by its financial services and allied support
industry, as well as world class pharmaceutical and
chemical research. Other countries such as
Singapore, decided to opt for both a knowledge-based
service economy as well as advanced industrial
production. To be in this type of economy, one
requires a tradition of excellence in science and
quality education. There are those in Britain that
argue that being in this type of service and
�creativity� economy is somewhat dangerous, as there
is a limit to ingenious financial asset-stripping
and private equity fund deals.
In the Gulf, some countries have decided to be
everything, while others have decided to specialize
in what they can do best. Dubai constantly reinvests
itself as the hub of the knowledge-based economy of
the Arab world, and a �creative� economy is a matter
of faith. Bahrain has decided to opt for the
financial services and ancillary support economy,
while Kuwait has opted to maximize its investments
overseas, given the limited market and
non-hydrocarbon resource base of that country. Qatar
has opted to become the world�s premier gas
production and distribution center and build up
allied industries, while at the same time developing
knowledge-based education system that can service
the whole Gulf. As for Oman, it has opted for
balanced socio-economic growth, where social
equality and a pace of development that is
commensurate with the country�s human and natural
resources are finely balanced. Which other country
in the Gulf would have bounced back in a socially
cohesive manner following the disastrous Tropical
cyclone Gonu, as Oman did. It might not be too long
before Oman becomes a calm retreat for highly
stressed out Gulf families, opting out of the ever
increasing push for more economic growth.
For Saudi Arabia, the choices are more open. The
domestic market is the largest in the Gulf, and
there are a diversified number of local industries
that cater to this market, while at the same time
upgrading their operations to meet international
competition. The key comparative advantage lies in
the Saudi petrochemical industry. The upstream oil
and gas sector will remain the country�s main source
of revenue, based on low cost energy and feedstock.
The major economic cities in planning or under
construction, as well as the overwhelming number of
mega projects are either petrochemical, or are
energy related. These are estimated to be around
$300 billion for oil and petrochemicals over the
next 20 years, with an additional $80 billion � $100
billion for the mega cities. Specialization in the
petrochemical sector can provide the building block
for other industries, and expand the value-chain
with diversification in domestic industries in
specialty chemicals and to building up a support
base for consumer-related by products.
Some countries will always be ahead of the Kingdom
in the �creative service� economy, but concentration
on optimizing on Saudi Arabia�s petrochemicals
industries will ensure that there is always
potential for export of these products to an
increasing consumer base around the world. That is
why the multinationals have decided to establish
joint venture in the Kingdom and not elsewhere.
They
have done their sums and it made sense. Domestic
investors are advised to do the same.
[Dr. Mohamed A. Ramady is visiting associate
professor, finance and economics at
King Fahd
University of Petroleum and Minerals, Dhahran.]
Source:
Arab News
