Wednesday, January 26, 2011

How to proceed in creating successful JVs in Saudi Arabia

ARE you considering setting up a joint venture (JV) in Saudi Arabia? You’re not alone. The accession of the Kingdom to the World Trade Organization and the establishment of a clear investment framework have led numerous companies to consider gaining a foothold in this, the largest, yet still developing, economy in the Arabian Gulf region.

ROTR- The Center of a Sharia State

The young, well educated Saudi population, a national budget focused on growth and a recession-proof GDP (gross domestic product) are very attractive to those firms searching for profitable markets where they can capitalize on their investments in R&D.

Abdullah Al-Rushaid, chairman and CEO, Al-Rushaid Group of Companies told Arab News how companies should proceed in creating successful JVs in the Kingdom.

Founded in 1978, Al-Rushaid Group has been a partner in 52 JVs, mostly with US co

mpanies. The group offers a diverse range of manufacturing and service related operations to facilitate the demands of the continuously expanding Saudi economy.

As someone who has never had a failed JV, Al-Rushaid believes that every successful

agreement begins with the partners knowing each other enough to understand the strengths and weaknesses that their respective companies will bring to the relationship.

“Before you go into a joint venture or partnership, start with an agency,” he advised. “Get the products or services known to the market. Then you can convert this relationship into a joint venture. Starting with a joint venture from day one isn’t very healthy. There is nothing worse than for a foreign company to enter into partnership with someone who doesn’t understand that company’s business.”

He added that the likelihood of disagreements is high when the partner doesn’t understand the business or the business model.

“In a joint venture, from the start the Saudi partner must contribute - whether by being on the board and helping develop the business direction or by using his local assets to gain market share.”

In most Saudi JVs the foreign partner is what Al-Rushaid calls “the technical partner” and the Saudi partner is the one with the local knowledge to make the venture a success. He discourages wealthy Saudi individuals from attempting to set up holding companies in which they are passive investors, as he believes such arrangements are rarely successful.

“A shareholder has to look after his interests. Technical partners are looking for an active partner not a passive investor,” he explained. “If I were someone who was an elderly man or someone who doesn’t want to bother with being involved with business every day, then I would put my money into the stock market.”

Al-Rushaid has always represented those firms that have products or services that from the start of the JV are right for businesses and industries in the Kingdom’s Eastern Province. He has found that market research is essential.

Just because a brand sells well in Dubai, it doesn’t mean it will be a success in Saudi Arabia, he said. He added that this is particularly important with specialized technologies, where the needs of companies vary based on their working conditions. As an example, he pointed out that each oil field is different and a pump or drill bit that’s ideal for one field won’t be acceptable in another.

“The oil, gas and petrochemical industries require the continuous upgrading of technology, new equipment and enhanced design. If there is a project to build an ethylene plant in Jubail today, the demand will be to build the plant with new technology — not what was used even a few years ago,” said Al-Rushaid. “You have to make sure that whichever company you are going into a joint venture with, that they are constantly upgrading their equipment and doing research so that theirs is the latest technology in the market. Once you represent the right company with the right product, you can sell it easily. If you represent the wrong company with the wrong product, definitely there’s no market for you.”

Once the decision to move forward with the JV is made, Al-Rushaid still insists on a few essentials. He requests that his technical partner match Al-Rushaid’s JV investment “dollar for dollar.” He has found that simply bringing great technology to the relationship is not enough. The matching investment creates commitment from the technical partner and ensures that there will be continuing interest in R&D as well as the transfer of knowledge to keep the JV competitive.

He isn’t a fan of relationships where products are created under license, having seen too many instances where after many years and much investment from the Saudi side, the licensor walks away from the arrangement. That doesn’t happen where the partner has made a significant investment. Al-Rushaid will only enter into JV agreements created as per Saudi law. This includes the provision that arbitration to settle disputes must take place in the Kingdom. “You don’t want to see a Saudi employee take you to a British court,” he remarked. “That’s exactly what can happen if arbitration isn’t required to be in the Kingdom.”

So how to best proceed to create a successful venture? According to Al-Rushaid, set up an agency first. Then make a joint investment servicing those products.

“If choosing between investing in products or services, services come first,” he asserted. “People need to be confident that the equipment they’ve purchased can be kept running. There is a very strong requirement for service and maintenance of existing equipment. In the industrial world they look at not only what is cheaper to buy, but also at what is cheaper to operate. The market is always interested in better products and better served products. There are many products here that have no service behind them. Customers might make a mistake and buy those products one time but they won’t buy them again. So for success, make services your first joint investment.”