Eyes on the East: exploring the growing trade between Saudi Arabia and Eastern markets
1xA decade ago, the world was struggling to contain the challenges of a major financial crisis. Few countries were left unaffected by what the IMF deemed the worst global recession since the 1930s[1].
Today, confidence is returning.
World real GDP is expected to increase by 3.2% in 2018 and 3.1% in 2019[2]. In a survey conducted by Emirates Investment Bank, 65% of high net-worth individuals based in the Gulf Cooperation Council (GCC) thought the global economic situation was either improving or stable[3]. The World Bank has described 2017 as “much stronger than expected[4]”, while the International Monetary Fund (IMF) believes that “the world economy continues to show broad-based momentum[5]”.
However, there remain some threatening signs in the global trade environment, with a protectionist U.S. president and the potential reaction he incites causing concern among many. The World Trade Organization (WTO) is one such body. It argues that “increased use of restrictive trade policy measures and the uncertainty they bring to businesses and consumers could produce cycles of retaliation that would weigh heavily on global trade and output.[6]”
Yet there are still strategic routes to success available to economies willing to diversify and focus their energies eastward. Much of the GCC has already developed deep and ever-increasing links with the Far East. “Largely under the radar, these growing ties between the Gulf and Asia have the potential to reshape geopolitical patters and relationships,” says The Washington Post[7].
The World Economic Forum expects China, the East’s major power, to overtake the United States as the world’s dominant economic power by 2030[8]. It states that “China’s policy of enhancing its capabilities and building economic links with many countries has seen it “become viewed as a vital overseas partner and investor”.
Saudi Arabia too has already long since established strong trade links with China. The world’s most populous country is the biggest importer of goods to the Saudi Arabian economy, and the second biggest market for Saudi Arabia’s exports. And another Far East economy, Singapore, is fourth[9]. In 2014, The Economist recognized that Saudi Arabia had “the greatest potential to change the investment dynamics of the (GCC) region, largely thanks to its mega-projects pipeline requiring major external project finance and further steps towards liberalisation”, and that “Chinese investment into Saudi Arabia is growing at a fast clip[10]”.
Indeed, through its ambitious Belt and Road Initiative, which aims to connect 70 countries across Asia, Africa, Europe and Oceania through new railroads and shipping lines[11], China is already showing its determination to forge new trade routes fit for the 21st Century.
So, what could a burgeoning trade relationship between Saudi Arabia, the wider – and rapidly developing – economies of the Middle East, North Africa and Turkey (MENAT) region and Eastern powers including China, Japan, Korea and the ASEAN bloc, notably Singapore and Malaysia, mean for the future flow of investment between the Middle East and the Far East?
A more prosperous Middle East
Vincent Lo, Chairman of the Hong Kong Trade Development Council (HKTDC), believes China’s Belt and Road Initiative could have unprecedented benefits for the markets involved. He said: “The initiative offers immense development opportunities for both developed and emerging economies around the world.[12]”
The ‘belt’, according to the UK’s The Guardian newspaper, is “a series of overland corridors connecting China with Europe, via Central Asia and the Middle East[13]”.
In June 2018, more than 3,000 government officials and business leaders from 51 countries gathered at the Hong Kong Convention and Exhibition Centre for the third annual Belt and Road Summit. The Belt and Road plans aim to “promote economic cooperation and connectivity’ through a massive infrastructure development project.[14]” They are viewed as a serious signal of China’s intent to strengthen its economic ties with countries both near and far.
This appears to be good news for nations across the MENAT region, and particularly the economically powerful GCC bloc. China’s first Arab policy paper revealed in January 2016, that trade between the Middle East and Beijing increased by 600% in the decade up to 2014[15], reaching US$ 230 billion in that same year[16]. It also outlined some of the key areas that could further benefit the Middle East in the medium- and long-term.
“We support the entry of more non-oil products from Arab states into the Chinese market. We will continue to improve the trade structure and push for sustained and steady development of two-way trade. We will strengthen exchanges and consultations between Chinese and Arab trade authorities, complete China-GCC FTA negotiations, and sign a free trade agreement at an early date.[17]”
The increased trade links between China and the Middle East are one of three reasons, alongside growth opportunities across MENA and China’s ‘Going Global’ economy policy, that lead BMI Research to indicate that Chinese investment in the infrastructure markets of the MENA countries will continue to gather pace in the coming years[18].
The Middle East Institute also recognises these changes. It affirms that China is already the largest trading partner with the region and growing its trade relations with the Arab states is “a top priority for China”, its goal being to double its trade with the region to US$ 600 billion by 2020.[19]“
The relationship between the Middle East and China is a relationship borne of mutual respect, convenience and economic realities. “As China looks west, Arab countries turn east,” is the verdict of The Economist, which reports that China’s oil imports from the Middle East will double from three million barrels a day in 2015 to 6 million barrels a day in 2035[20].
Beyond China
The GCC’s trade links with the Far East extend beyond China, however.
Japan imports 76% of its oil from Saudi Arabia, the UAE and Kuwait, while bilateral trade between Japan and the UAE was worth US$ 51 billion in 2014[21].
In addition to its practical legislative changes and insightful strategic policies, Saudi Arabia’s determination to spread its message led to the country’s involvement in several high-profile international trade and diplomatic initiatives during spring 2017.
In 2017, Indonesia also announced plans to increase its trading links with the Middle East. Its ambition is to increase non-oil and gas exports to the GCC by 5.6% (US$ 3.49 billion), with a series of government programs launched and quarterly targets announced[22].
Similarly, the GCC-Singapore Free Trade Agreement (GSFTA) came into effect almost five years ago, in September 2013[23]. And there are also significant links between the GCC and South Korea. According to a report from the Middle East Institute, exports from Korea to the GCC reached US$ 17.8 billion in 2013, with cars, steel, machinery and electronics among the most popular Korean imports into the GCC[24].
An indication of the ever-growing links between the Middle and Far East is summed up in a report from French think tank Institutes Francais des Relations Internationales, (IFRI) which found that Gulf States’ exports to Japan, South Korea, China and India were more than three times larger than to the United States and the European Union, and the figure is set to grow over the remainder of this decade.[25]
This East-to-East trade growth can be seen very visually as shown below[26]:
Saudi Arabia: pioneering trade links
For Saudi Arabia, increasing the links with China and other Far Eastern economies is an economic imperative. As Crown Prince Mohammed bin Salman continues to drive forward with the ambitious and far-reaching reforms of Vision 2030, which puts economic diversification at its central pillar, there is increasing optimism and belief in the possibilities afforded by expanding east.
“Saudi Arabia is right at the crossroads of important international trade routes between three continents: Asia, Europe and Africa. We will therefore maximize the benefits from our exceptional and strategic geographic position, agree new strategic partnerships to grow our economy, and help Saudi companies to increase exports of their products.”[27]
Vision 2030 outlines a clear ambition for Saudi Arabia: to be “the heart of the Arab and Islamic worlds, the investment powerhouse, and the hub connecting three continents”. Saudi Arabia wants to increase foreign direct investment from US$ 8 billion in 2017 to US$ 18.6 billion by 2020[28]. By 2030, it aims to increase foreign direct investment from 3.8% of GDP to 5.7%[29].
“Opening Saudi Arabia further for business will boost productivity and smooth our journey to become one of the largest economies in the world… We will create an environment attractive to both local and foreign investors, and earn their confidence in the resilience and potential of our national economy.”[30]
Across Saudi Arabia, there is physical evidence of the commitment the government is giving to its Vision 2030 ambitions. From a new airport in Al-Qunfudah through to the US$ 7.2 billion expansion of Jeddah’s King Abdulaziz International Airport (KAIA), a growing capacity for air freight and a 21% increase in annual throughput at King Abdullah Port[31], Saudi Arabia is making a determined move to become a global logistics hub.
“To take full advantage of these investments, we plan to work with the private sector and enter into a new series of international partnerships to complete, improve and link our infrastructure internally and across borders. … Air, maritime, and other transport operators will be encouraged to make the most of their capacity: achieving durable links between existing trade hubs, as well as opening new trade routes. This will reinforce our position as a distinctive logistical gateway to the three continents.[32]”
A focal point for foreign direct investment
Saudi Arabia is also, increasingly, becoming a major destination for foreign direct investment. As a leading member of the GCC, Saudi Arabia offers the benefit of providing duty-free access to each of the other five members of the organization.
Companies doing business in Saudi Arabia also enjoy several financial benefits, including a complete absence of income tax, sales tax, and property tax. Overseas investors enjoy just 20% corporate tax on total profits and 5% withholding tax, with any losses being able to be “carried forward indefinitely to offset future taxes”[33][34].
In 2017, His Excellency Eng. Ibrahim Al-Omar was appointed as the Governor of the Saudi Arabian General Investment Authority (SAGIA). One of his priorities is to continue to develop Saudi Arabia’s attractiveness on the international stage. He said[35]:
“Whenever SAGIA meets with foreign investors unfamiliar with Saudi Arabia, they often leave surprised and impressed with what they see and hear when we discuss the on-going transformational changes under Vision 2030. Judging from their reactions, they perhaps came to Saudi Arabia with one perception, and left with another.
While we are a country with a population of nearly 32 million, more than half of whom are under the age of 25, this population is growing at a rate of around 2.5% annually. This strong consumer-led market is driven by relatively high amounts of purchasing power compared to our regional peers.
Saudi Arabia also provides a base for investors to reach an even larger market of approximately 1.5 billion consumers in some of the world’s fastest growing markets, which are just a short five-hour flight from Riyadh.”
Saudi Arabia already benefits from a deep and extensive relationship with China, based first on foreign policy but with increasingly deep economic ties[36]. In 2017, for example, Saudi Arabia’s King Salman led a trade mission to China that resulted in more than US$ 65 billion worth of economic and trade deals signed.[37]
Analysis by The Economist revealed that bilateral trade flows between Saudi Arabia and China were worth more than the trade flowing between Saudi Arabia and the United States[38], traditionally its strongest Western ally both economically and politically. Indeed, Bahrain, Egypt, Iran and Saudi Arabia all import more from China than any other country, with Saudi Arabia joining Iran and Oman in exporting more goods to China than any other country[39].
There are concrete links with other major Eastern powers, too. The Saudi Japan Vision 2030 is a formal agreement to strengthen bilateral economic cooperation between the two countries. In Spring 2017, Saudi Arabia’s King Salman visited Japanese Prime Minister Shinzo Abe in Tokyo to mark the agreement.
The Saudi-Japan relationship is borne of a combination of Saudi Arabia’s Vision 2030 and Japan’s Growth Strategy, which was unveiled in 2013 and three years later defined three requirements to achieve its ambitions – the first of which was “strategic expansion into ‘promising markets’[40]”.
Other investments are also being made with Eastern partners. In early 2017, Saudi Aramco committed US$ 7 billion to buy a stake in a major refining and petrochemical project of Malaysian firm Petronas. The venture, known as PRefChem, is likely to be used as a platform to other investments in Southeast Asia[41].
The combination of regulatory reforms and diplomatic efforts appears to be bearing significant fruit elsewhere, too. In February 2017, PepsiCo indicated its confidence in Saudi Arabia’s future by unveiling plans to open a significant manufacturing plant in Jeddah. It will initially supply the entire Gulf region, before expanding further in future years. Sanjeev Chadha, CEO of PepsiCo in Asia, the Middle East and North Africa, said: “The plant is going to be one of the largest in the PepsiCo system globally.”[42]
Global electronics giant Sony is also aiming to grow its presence across the Middle East and Africa. It aims to increase business by 20 percent in 2017 through a combination of new product launches and a refreshed business strategy[43].
Historical leaders in East-to-East trade
Since 1955, when Abdul Latif Jameel secured an agreement with Japanese automotive manufacturer Toyota to become its official distributer in Saudi Arabia, Abdul Latif Jameel has been at the forefront of East-to-East trade links.
The vision of founder, the late Abdul Latif Jameel, has passed down through generations of Abdul Latif Jameel staff. By adding value and encouraging development in the communities where they operate, Abdul Latif Jameel has forged longstanding international links with a network of partners.
The business’ roots in eastern markets were humble, with an initial order of just four Toyota BJ all-terrain vehicles more than 60 years ago. Today, Abdul Latif Jameel’s position as a leading distributor and retailer of some of the world’s leading passenger vehicle brands has helped make them a significant contribution to the economic development of Saudi Arabia.
For the last 17 years, we have also been involved in a joint venture with DENSO, another Japanese firm, providing air conditioning and refrigeration equipment for human and food transportation. As well as manufacturing and assembling air conditioning for the Toyota Hilux pickup, the joint venture also distributes DENSO parts across North Africa, as well as manufacturing vehicle air conditioning equipment in Turkey.
Elsewhere in the east, their Singapore hub enables DJ Parts – one of our three automotive aftermarket parts brands – to conduct its research and development. P2 and FBK, two parts brands, operate out of factories in Malaysia and China, where the organization also has its own distribution points.
Pioneering East-to-East relations, Abdul Latif Jameel also has significant relationships with China’s enormous economy.
In 2018, Abdul Latif Jameel Motors in China celebrates its 20th anniversary of retailing Toyota and Lexus vehicles working with Toyota’s Chinese partners FAW (FTMS) and GAC (GTMC). Mohammed Abdul Latif Jameel, Chairman and Chief Executive Officer of Abdul Latif Jameel, said: “Our commitment to adding value, industry experience, and deep roots in the country has seen us recognized as an automotive partner of choice.”
Strategic guidance and support for global investment partners
The growth of Saudi Arabia and the development of external trade links has always been a major focus for Abdul Latif Jameel. In 2016, this vision entered another chapter with the formation of Abdul Latif Jameel Investments.
By committing considerable resources to this venture, which is designed to facilitate foreign direct investment into Saudi Arabia, Abdul Latif Jameel is demonstrating its determination to accelerate and help deliver the economic diversification outlined in Vision 2030. It also affirms our position as one of the most trusted investment partners in the region.
Under the leadership of Senior Managing Director Omar Al-Madhi – recognised by the World Economic Forum as a ‘young global leader’ and a former chief executive officer of Volkswagen Group Saudi Arabia and prior to that a member of SAGIA’s executive team – Abdul Latif Jameel Investments provides insights and guidance to a wide range of investment partners looking to tap into the very real development and growth opportunities in Saudi Arabia and the wider MENAT region.
Abdul Latif Jameel Investments combines a deep knowledge of MENAT markets, including links with governments, financial institutions and brand partners, with assets that are ready to be deployed.
It builds on Abdul Latif Jameel’s history of exploring new markets and expanding its international reach into territories rich with potential, and provides investors the opportunity to leverage strategic partnerships and gain access into the significant and developing consumer markets of Saudi Arabia and the MENAT region.
Mr Al-Madhi said: “Abdul Latif Jameel Investments is committed to advancing foreign direct investment in Saudi Arabia’s infrastructure of life. By carefully selecting and advocating the key industries that contribute to Saudi Arabia and the wider MENAT region economically, socially and developmentally, Abdul Latif Jameel Investments will help to drive progress for the next 50 years. Our focus on sunrise sectors, where opportunities have sustainable scalability, makes us the preferred partner for any significant entity wishing to do business in this part of the world. And by bringing together our operational, strategic and financial expertise developed in other markets, particularly in the East, we are ideally positioned to support the ambitions of, Japanese, Chinese and ASEAN organizations.”
To learn more about the opportunities available in Saudi Arabia to proactive organizations from China, Japan and ASEAN countries, visit the investments section of our the Abdul Latif Jameel website.
[1] Press Release: Statement by the IMF Mission to the Russian Federation, International Monetary Fund, 1 June 2009
[2] Strong trade growth in 2018 rests on policy choices, World Trade Organization, 12 April 2018
[3] 2018 GCC Wealth Insight Report, Emirates Investment Bank, accessed May 2018
[4] Global Economy to Edge Up to 3.1 Percent in 2018 but Future Potential Growth a Concern, The World Bank, 9 January 2018
[5] Global Economy: Good News for Now but Trade Tensions a Threat, International Monetary Fund, 17 April 2018
[6] Strong trade growth in 2018 rests on policy choices, World Trade Organization, 12 April 2018
[7] The Gulf states are turning to Asia in a big way. Here’s why it matters. The Washington Post, 21 April 2017
[8] Why China could lead the next phase of globalization, World Economic Forum, 22 November 2016
[9] Saudi Arabia: Trade Statistics, Global Edge, accessed May 2018
[10] GCC Trade and Investment Flow, The Economist Intelligence Unit, 2014
[11] Inside ‘Belt and Road,’ China’s mega-project that is linking 70 countries across Asia, Europe and Africa, Business Insider, 31 January 2018
[12] Belt and Road: From Vision to Action, The 2nd Belt and Road Summit, 11 September 2017
[13] The $900bn question: What is the Belt and Road initiative? The Guardian, 12 May 2017
[14] The Middle East is the Hub for China’s Modern Silk Road, Middle East Institute, 15 August 2017
[15] Is China pivoting towards the Middle East? World Economic Forum, 4 April 2017
[16] The great well of China, The Economist, 18 June 2015
[17] Full text of China’s Arab Policy Paper, Xinhuanet, 13 January 2016
[18] China Set To Expand MENA Market Share, BMI Research, 11 January 2017
[19] The Middle East is the Hub for China’s Modern Silk Road, Middle East Institute, 15 August 2017
[20] The great well of China, The Economist, 18 June 2015
[21] Japan-GCC: A renewable partnership, Gulf News, 29 February 2016
[22] Indonesia Targets 5.6% Export Increase to GCC, Ministry of Foreign Affairs Republic of Indonesia, 1 June 2017
[23] Gulf Cooperation Council-Singapore Free Trade Agreement comes into force on Sept 1, The Straits Times, 1 September 2013
[24] Korea and the GCC: Reaching a Sustainable Economic Partnership, Middle East Institute, 6 June 2014
[25] The GCC States of the Persian Gulf and Asia Energy Relations, IFRI, September 2012.
[26] Global Marine Trends 2030, Lloyd’s Register Marine & University of Strathclyde
[27] Vision 2030, Kingdom of Saudi Arabia.
[28] Saudi Arabia: An Attractive and Fast-Growing Destination for Foreign Direct Investment, Opening Doors, Summer 2017
[29] Vision 2030, Kingdom of Saudi Arabia.
[30] Vision 2030, Kingdom of Saudi Arabia.
[31] Saudi Arabia: At the heart of global trade routes, Opening Doors, Spring 2018
[32] Vision 2030, Kingdom of Saudi Arabia.
[33] Saudi Arabia: An Attractive and Fast-Growing Destination for Foreign Direct Investment, Opening Doors, Summer 2017
[34] Positive Laws and Regulations, Saudi Arabian General Investment Authority, accessed May 2017.
[35] A vision to become an investment powerhouse, Opening Doors, Winter 2017/18
[36] The Middle East is the Hub for China’s Modern Silk Road, Middle East Institute, 15 August 2017
[37] The Middle East is the Hub for China’s Modern Silk Road, Middle East Institute, 15 August 2017
[38] Is China pivoting towards the Middle East? World Economic Forum, 4 April 2017
[39] The great well of China, The Economist, 18 June 2015
[40] Saudi Japan Vision 2030, accessed May 2018
[41] Saudi Aramco to buy $7 billion stake in Petronas’ RAPID refinery project, Reuters, 28 February 2017
[42] Pepsi building ‘one of its largest plants’ in Saudi Arabia – reports, FoodBev Media, 22 February 2017
[43] Sony aims to grow business by 20pc in region, TradeArabia, 6 April 2017
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