There are three major marketing regions in Saudi Arabia: The Western Region, with the commercial center of Jeddah; the Central Region, where the capital city Riyadh is located; and the Eastern Province, where the oil and gas industry is most heavily concentrated. Each has a distinct business community and cultural flavor.
Exporters may find it advantageous to appoint different agents or distributors for each region having significant market potential. Multiple agencies and distributorships may also be appointed to handle diverse product lines or services.
While there is no requirement that distributorships be granted on an exclusive basis, it is clearly the policy of the Saudi Ministry of Trade and Industry that all arrangements be exclusive with respect to either product line or geographic region.
Steps to Establishing an Office
A second method might be to establish a technical and scientific service office, which also requires a license from the Ministry of Trade and Industry. Foreign companies represented in Saudi Arabia may apply for permission to open a technical and scientific service office. Technical and scientific service offices are not allowed to engage directly or indirectly in commercial activities, but they may provide technical and advisory support to their Saudi agent/distributor as well as conduct market surveys and product research.
A third method is to establish a branch office. The establishment of branch offices is open to wholly foreign-owned entities. Under the new Foreign Investment Act, the requirements and procedures for establishing a foreign branch office have been eased. The move has sparked a number of foreign companies to set up branch offices in Saudi Arabia. Companies that are contracted to do work for the Saudi Government must obtain a temporary commercial registration. Under certain circumstances, a foreign company may apply for a permanent registration if it wishes to engage in permanent business in Saudi Arabia.
A fourth method is to establish a representative (or liaison) office. This is normally granted only for companies that have multiple contracts with the Government and require a local office to oversee contract implementation. Representative offices are not allowed to engage in direct or indirect commercial activity in the Kingdom. Establishment requires a license from the Ministry of Trade and Industry.
A fifth method is for a foreign company to establish a joint venture with a Saudi firm. Usually, the Saudi business community refers to limited liability partnerships as joint ventures. These partnerships must be also registered with the Ministry of Trade and Industry and the partners' liabilities are limited to the extent of their investment in the partnership.
Finally, foreign companies can get a license from the Saudi Arabian General Investment Authority (SAGIA) to set up an industrial or a non-industrial project in Saudi Arabia. SAGIA will license projects under the new Foreign Investment Act, which allows for 100 percent foreign ownership. In addition, foreign investors can open a sales/administration/marketing office to complement their industrial or non-industrial project. SAGIA has a broad mandate on all matters relating to foreign investments in industry, services, agriculture, and contracting.
Creating a Joint Venture
If the foreign investor chooses to set up a business on his own, the amount invested should not be less than $533,000 for agricultural projects, $1 million for industrial projects, and $533,000 for other projects. The Investors Service Center (ISC) at SAGIA oversees all matters related to a foreign investor licensing and registration process. The ISC is intended as a one-stop shop that will assist foreign investors and minimize lengthy procedures. Another very significant change that accompanied the new Foreign Investment Act is the reduction in the corporate tax rate for foreign companies with profits in excess of $26,000 a year. It lowers the maximum rate from 45 to 30 percent and allows companies to carry forward corporate losses for an unspecified number of years.
Licensing will be also an appropriate method of doing business in Saudi Arabia under some circumstances, but the tax implications should be considered. Royalties, license fees, and certain management fees are deemed to be 100 percent profit, and the full amount will be taxed at the normal corporate tax rate for non-Saudi companies.
Depending on the nature of the foreign investment, the Saudi Arabian Standards Organization (SASO) may be involved. SASO is the Saudi authority for establishing product standards for imports and locally manufactured goods, and will examine products or processes to be used to ensure they meet existing or planned Saudi standards.
The Saudi Industrial Development Fund (SIDF) may be engaged to provide up to 50 percent financing for approved industrial projects, and payback period could be up to 15 years. Market intelligence also is available through the SIDF for prospective investors.
Other Saudi Arabian Government entities that may be involved in the process include: Ministry of Foreign Affairs (visas), the Ministry of Interior (residence permits and industrial safety and security approvals), the Royal Commission for Jubail and Yanbu (if the project is placed at the Saudi industrial cities of Jubail or Yanbu), the General Organization for Social Insurance (social insurance and disability payments for Saudi employees), and the General Organization for Technical Education and Vocational Training (training programs for Saudis).
Use of Agents/Distributors; Finding a Partner and Attorney
Under the 1969 Labor and Workman Regulations, 75 percent of a firm's work force and 51 percent of its payroll must be Saudi, unless an exemption has been obtained from the Ministry of Labor and Social Affairs. In 1996, the Saudi Government implemented a regulation requiring each company employing over 20 workers to include a minimum of five percent Saudi nationals. This number increases by five percent per annum, and has now reached 30 percent of a firm's workforce.
Franchising and Direct Marketing
Success in franchising in the Saudi market is often attributed to finding the appropriate franchiser and location. The Commercial Agency Law applies to any franchise agreement, and the Ministry of Trade and Industry is the government entity that licenses and approves such agreements. Under the new Foreign Investment Regulations, a foreign franchise owner may apply for a license to establish a company with a 49 percent foreign ownership for the distribution of its franchised product(s) that are locally produced.
Direct marketing is not widely used in Saudi Arabia. Until recently, limitations in the Saudi postal system are also a constraint: no home delivery or postal insurance is available yet; however, as part of the privatization of the Telecommunications and Information Technology Ministry, mail and parcel home deliveries will be forthcoming.
The advent of the Internet in the Saudi market is expected to have a profound effect on Saudi shopping behavior, providing increased possibilities and accessibility for Saudi consumers.
Product Pricing and Licensing
Products are usually imported on a CIF basis, and mark-ups depend almost entirely on what the vendor feels that the market will bear relative to the competition.
Sales Service/Customer Support
Selling to the Government
Foreign contractors operating solely for the Government, if not already registered to do business in Saudi Arabia, are required to obtain temporary registration from the Ministry of Trade and Industry within 30 days of contract signing. Foreign companies also may be allowed to establish a branch office through the new Foreign Investment Regulations. These offices were usually approved only for foreign defense contractors and high-tech companies, while for others, a liaison office may be established to supervise work in Saudi Arabia and to facilitate coordination between the Government and home offices.
Foreign contractors involved in government projects are required to establish a training program for Saudi nationals. Some government contracts will also require a minimum amount of subcontracting with Saudi companies. In addition, the SAG may favor Saudi-foreign joint venture companies as opposed to foreign firms and will also support companies that use Saudi manufactured goods and services.