Local manufacturing gains strength in Saudi Arabia TEY_post_-Vikas-HANDA

Our strategy is to bring the latest technology to the Middle East and manufacture world-class products locally.

Vikas HANDA Managing Director GULFTEK

Local manufacturing gains strength in Saudi Arabia

September 28, 2023

Vikas Handa, managing director of GulfTek (Gulf Technical Factory), talks to The Energy Year about the company’s strategy for gaining market share for its drilling and production equipment business. GulfTek is one of Saudi Arabia’s largest manufacturers of engineering equipment, including rigs, rig equipment, valves, downhole and pressure control equipment, instrumentation fittings and flowmeters.

What is the portfolio of products manufactured at GulfTek?
Our main focus is to serve the production and drilling industry. We understand the impact of downtime in a production environment and the potential consequences it has on our customers. Hence, we have geared up our manufacturing and service capabilities here locally in Saudi Arabia to ensure our customers don’t suffer any losses from the non-availability of equipment.
Our manufacturing and service shops run round the clock to ensure our customer requirements are met. GulfTek has the highest number of American Petroleum Institute (API) manufacturing licences in the Middle East and Europe region, in addition to having DNV and ASME U & R certifications.
We have invested in a world-class manufacturing facility in Saudi Arabia to ensure our customers do not depend on foreign supplies. In fact, we are now exporting drilling equipment manufactured by us from Saudi Arabia.
We manufacture highly engineered equipment which can be largely grouped into four categories: drilling rig structures and masts, downhole tools and OCTG equipment, valves and pressure control equipment, and instrumentation fittings and flowmeters.
Our strategy is to bring the latest technology to the Middle East and manufacture world-class products locally.
We have successfully localised the manufacturing of flowmeters, instrumentation fittings, API valves and more and are in the process of expanding our instrumentation product offering. Our forging mill will be in the production phase next year.
What differentiates Gulftek is our engineering know-how and R&D capabilities. We have a world-class engineering team which continues to improve our products and services.

Tell us about your key clients and how you plan to grow your market share.
In line with Crown Prince Mohammed bin Salman’s Vision 2030, Saudi industry prefers to buy equipment made in-country because of the IKTVA [In-Kingdom Total Value Add] programme. Our major focus is EPC companies. We have long-term contracts to provide our products and services.
We will continue to enhance our local manufacturing and engineering capabilities to strengthen our position as a leading manufacturer of engineered equipment in Saudi Arabia.
We are gaining market share very quickly by replacing imports with locally manufactured equipment. In addition to flowmeters and instrumentation, we have localised the manufacturing of API Spec 6A gate valves and drilling rig components. Normally, international manufacturers used to supply these. However, because of our investments in local manufacturing, this market is taking off for us.

How is GulfTek’s capacity being expanded?
We continue to invest. We just added a new 23,000-square-metre facility. This means we have a total of around 45,000 square metres of production area in Saudi Arabia, which is massive.
The Ministry of Energy and Saudi Aramco will be inaugurating our instrumentation manufacturing plant in September, which is a turning point in manufacturing instrumentation products in the kingdom.
Following this, our current facility will be transformed into a machine shop, and we will move our fabrication capabilities to the new facility, which is already operational.
Our five-year investment plan anticipates an investment of USD 30 million in addition to the USD 20 million we have invested already.

What is the company’s market share for its leading products?
Our overall market share is less than 10%, giving us huge upside potential.


What would you identify as GulfTek’s main competitive advantage?
The latest machine tools are only 10% of the equation. 90% is technology, processes and people, which are non-tangible investments.
We have a massive engineering design and R&D centre, with industry-leading engineers. This is what sets us apart. We want to be a leading engineering equipment manufacturer in the Middle East in terms of technology, market share and customer service.

What are Saudi Arabia’s main advantages as a manufacturing and export market?
If the market is to tank again and oil prices reach USD 25 per barrel, how many countries will still be able to produce and supply oil at that price? Very few, but Saudi Arabia will be among them given it is blessed with one of the largest, accessible and shallowest oil and gas reserves globally. This is an essential reason to set up manufacturing here.
In addition, due to its geographical location, it’s easier to export products by road from Saudi Arabia.

What are the main challenges for the local manufacturing sector as it tries to compete internationally?
We want to expand as a regional manufacturer. Exporting is the key component of that. However, our prices are not competitive when we are competing against India, China and UAE-based manufacturers, and having manufactured myself in these markets, I can tell you the cost differential can range from 15-50%.
A key variable is that raw materials are not available locally, so importing them increases the cost of manufacturing in-country. They increase even more when considering the Customs and duties on these raw materials. This is being worked on, but there’s a lot that still needs to be done.
There are some finished products that can be imported, which require a 5% Customs duty. We can produce those items in-country. However, ironically, importing the raw material to manufacture those products has a 15% Customs duty.
For us to export from Saudi Arabia, a raw material supply chain has to develop here. There is a lot of effort being made by the Saudi government to resolve these issues. The labour market and industrial reforms are underway, which should reduce the cost of skilled labour and the availability of labour and materials. A few years down the line, I see these raw materials being available. That will give us the best competitive edge to export.

How are shortcomings in the local steel industry affecting the competitiveness of local manufacturers?
Steel imports are the biggest issue in upstream manufacturing. Some of the raw materials – which are imported from Europe, China, India and the USA – have a lead time nearing one year.
However, the industry requires the final products within 12 hours of receiving a purchasing order. So, we run an inventory worth millions of dollars in permanent debt because we’re committed to delivering on time to our customers.
The Saudi steel mills are still not able to produce the alloys required by the upstream sector. Massive forging mills are not yet convinced about investing here. First, they want to see a captive market. Saudi Aramco’s upcoming steel forging manufacturing joint venture is expected to be commissioned by 2024 or 2025. A strong local steel industry will save lots of foreign currency and will be a game-changer.
Therefore, we at GulfTek have decided to set up our own forging mill in Saudi Arabia to solve this long standing issue.

How can financing improve the substitution of imports in Saudi Arabia?
The market is there. Companies need to build the capacity, which requires them to invest capital. At a later stage, once the company is running, they can apply for financing through the Saudi Industrial Development Fund [SIDF], but this takes so long that it might actually hamper growth. However, in the end it is positive to receive financing from institutions that have a greater understanding of the agenda of a company trying to manufacture in Saudi Arabia than private investors.
We are the perfect example of localisation and import substitution: we are the first company to manufacture flowmeters, instrumentation fittings, API valves and drilling rig equipment, in addition to other API-licensed products. All these products used to be imported, but now we are manufacturing them in-country. The sooner we get the capital, the sooner we grow the capacity, the sooner we replace the imports and add to the local market.
There are still some funding-related hurdles for companies that are not 100% Saudi owned. I think this strategy needs to change. If they don’t bring in foreign technology partners, how are they going to manufacture products which they have never manufactured here before? Saudi Arabia needs to finance the companies that have a proven track record in this market. For instance, in our category, we have the best IKTVA score.

How is Saudi Aramco’s strategy to increase its production capacity by 1 million bopd impacting the appetite for investment in the manufacturing sector?
We are quite upbeat about this. We established the company here in 2017, after Vision 2030 and the IKTVA initiative were announced. We believed in the vision, and we understood that Saudi Arabia must localise the manufacturing of its energy supply chain and that this was being taken very seriously.
I think Saudi Aramco is supportive and becoming more and more focused on facilitating companies to set up and register by helping them get local manufacturing approvals. IKTVA alone is a massive differentiator, as it showcases the market size and available opportunities to the business community.
The government has transformed all its organisations to be very customer focused. In 2022, the Ministry of Human Resources and Social Development launched the Qiwa platform to simplify the hiring processes.

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