A local partner for developing Saudi manufacturing

Saudi Arabia

Mohammed Abduldayem, president and CEO of Earth Reservoir for Oil & Gas (EROG), talks to The Energy Year about the attractiveness of Saudi Arabia as a destination for establishing manufacturing facilities and the company’s key projects in localisation. EROG partners with international companies to introduce oil and gas products and services in Saudi Arabia.

Why is Saudi Arabia an attractive destination to set up manufacturing facilities?
The cost of setting up these facilities in Saudi Arabia is extremely attractive. It is mind blowing for foreign investors to discover that it’s 23% cheaper to build a factory here than to build it in the UK. Renting land in an industrial zone here can be as cheap as SAR 3 [USD 0.80] per square metre per year. That’s almost free.
If a company can prove to the Saudi Authority for Industrial Cities and Technology Zones (MODON) that its project will contribute to the GDP of the country and it will be environmentally sustainable, it can get that rent price. This is not possible anywhere else on this planet.
A company’s operating expenses can be reduced by as much as 75% in Saudi Arabia. Imagine the effect of that on a company’s gross margins and net profit. Even calculating the local taxes, it is still hugely attractive as an investment.
On top of all that, if companies build a plant and hire the employees in conjunction with the Ministry of Human Resources, the Ministry of Industry will waive the expat levy expense for the first two years.
With the support from our government, the sky’s the limit. We will be a billion-dollar company in the next few years, and we will continue to look into future partnerships for local manufacturing in Saudi Arabia.

What are EROG’s main projects for developing local manufacturing capabilities?
We are looking to transfer most of our agent-type relationships with existing partners into local manufacturing projects when economically viable. Three manufacturing facilities are being built as we speak.
We plan to commission a speciality chemicals manufacturing plant with our US partner Colonial Chemicals in Dammam in Q2 2023. We are honoured that a Michelin subsidiary company has chosen to work with EROG. This will be the first facility of its kind in Saudi Arabia because of its high manufacturing capacity and its chemical data reporting products.
Along with Maxwell Oil Tools, a manufacturer of composite centralisers and other drilling tools, we are developing one of the first non-metallic manufacturing facilities in Saudi Arabia. CDI Energy Products’ facility is going to be ready in Q4 2023. It aims to deliver critical service high-performance polymer components for the Middle East.

Is public financing an attractive option when launching a manufacturing facility?
The fear of the unknown is already mitigated by the different governmental entities that collaborate with investors. The greatest risk is the capital investment risk. However, if a foreign company complies with the requirements to localise the manufacturing of a value-added product and given they have a Saudi local partner, the Saudi Industrial Development Fund will lend 50% of their capital investment at no cost.
The local entity is already covering 50% of that risk. You would never be able to finance a project anywhere else with such minimal costs of financing.

What kind of localisation opportunities have you identified in the services sector?
We are creating JVs for services that are either not fully supplied locally or will be required in the near future. An example is the JV created with our US partner Diversified Well Logging, the first robotic logging company in the world.
We also recently agreed to create a JV with the Spanish company Erhardt. Saudi Arabia has never had a local JV specialised in freight forwarding projects. Traditionally this service was provided by multinational companies from the UK, France, or the US. We’re transferring the know-how from Erhardt by bringing them into the country and creating a new entity here.

What is the role of public institutions in enabling a new wave of investments in Saudi Arabia?
Only the western region has projects, such as NEOM, the Red Sea and The Line. On the energy side, Saudi Aramco has planned capacity increments on all fronts. This is a golden era for investors in Saudi Arabia, be they local or foreign. I see the development of new industries and the establishment of local manufacturing as the segments where investors can make a difference.
The structure of government support has changed. Any government entity will either support you or guide you on how to get the required support. That was not the case in the past.
The Ministry of Investment is very proactive in showing local and foreign investors how their investments will unfold and the government’s future demand and support. They provide all this information on a clear market roadmap.
Companies receive prompt support from the Ministry of Industries in obtaining the required licences. The IKTVA [in-kingdom total value add] team in Aramco furnishes potential investors with a massive amount of data on the market they are targeting after they sign a nondisclosure agreement.

What are the details of your partnership with South Korean turbo technologies developer Turbowin?
Through our partnership with Turbowin, we will build an electrical compressor and blower facility. Anyone would be inclined to think that Turbowin’s first location for building their second manufacturing plant would be Europe, as Europe is moving away from being dependent on fossil fuels. But instead, it is Saudi Arabia. This is another great example of our government’s support.
While the partnership with Turbowin was in process, the Ministry of Investment invited EROG to participate in an official visit to South Korea. We signed our agreement with Turbowin in Q4 2022 with the presence of Crown Prince Mohammed bin Salman, the minister of investment and the minister of economy. This visit had an extremely positive impact on our Korean partner’s motivation to come and invest in Saudi Arabia.

What is the company’s philosophy with respect to adding value as an agent of international companies?
To launch EROG, we took advantage of our background working at Saudi Aramco and international oilfield service companies and identified the market gaps where suppliers or active members of a given niche market were missing.
Initially we started working as agents for international companies in Saudi Arabia. We now represent 29 companies from around the world. We have weekly or bi-weekly meetings with our partners where we follow up on their market-entry progress and their qualification with key customers.
EROG’s involvement in partners’ operations is minimal. Each one of them has an entire operations team to run the businesses. We provide high-level interventions if needed, as well as the HR and logistical support that an international company cannot build overnight in Saudi Arabia.
We add value to all of our partners. The proof of this is that, of these 29 companies, more than half transferred from existing agents in Saudi Arabia into EROG because of the service we provide. Our company is approved by the US Foreign Corrupt Practices Act and is registered with the American and UK embassies.

How selective are you when choosing new partners?
We normally partner with companies that believe in the market’s growth potential and those which believe that physically operating here will grant them more market share than trying to do business 10,000 miles away.
We are extremely selective when choosing partners. Even though we still have the capacity to represent more companies, we have turned down more than 50 prospective partners. These are all good companies, but we are not the right partners for them.
We turned them down either because we don’t have the right local expertise for their business or because the partner did not have the appetite to invest in developing local expertise in Saudi Arabia as part of their business costs.
One of the testaments to our added value for our partners is that a global player with the magnitude of Innovex, which has been with us from the beginning, is still working with us after all these years.

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