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
