Saudi automotive cluster boosts plastics projects

27 May 2011 13:09  [Source: ICB]

Saudi Arabia's plans to attract car manufacturers to the country hinge on the development of supplier networks and the production of key materials such as plastics

Saudi Arabia aims to produce slightly more than 500,000 vehicles per year over the next 10-15 years

Rex Features

Saudi Arabia has ambitious plans to create its own automotive industry, but for these plans to succeed, the country will need to develop local production of key automotive plastics.

The Saudi government has highlighted automotive as one of the industrial clusters it intends to develop as part of plans to diversify the economy and create new jobs. The automotive cluster will focus on the whole automotive chain, from the OEMs (original equipment manufacturers), which assemble the vehicles, down to the Tiers 1, 2 and 3 suppliers, says Didier Vigouroux, vice president of the automotive cluster within the Saudi ­National Industrial Clusters Development Program (NICDP).

The NICDP is tasked with the development of five export-oriented industrial clusters: ­automotive, plastics packaging, minerals & metals, solar and home appliances.

The automotive cluster team is in talks with most of the world's approximately 12 major automotive OEMs. One, Japan-based Isuzu, has already agreed to invest in the country, says Vigouroux. Isuzu revealed plans in February to build a truck assembly plant in the country. It plans to start up the plant with an initial capacity of 600 units/year by the end of 2012, and expand capacity to 25,000/year within five years.

At the same time as seeking investments in vehicle assembly plants, Saudi Arabia needs to develop a network of local automotive suppliers that will be able to supply parts and components to these plants. "We're addressing the problem from both ends," says Vigouroux. "You can call it a chicken and egg story. An OEM cannot survive profitably without its suppliers and the suppliers cannot pre-exist the OEMs."

Saudi Arabia intends to create a manufacturing industry for relatively small and compact parts that can be exported until local OEM assembly activity is developed. Suitable parts include headrests, glove boxes and ­armrests, which are materially dense enough and compact enough to be exported to Europe, the nearest OEM region, explains Vigouroux, who is a French national. There is also scope to develop the production of ­replacement products, such as tires, for the region, he adds.

At this stage, it does not make sense to develop Tier 1 manufacturers, which generally supply complex and bulky modules that would be difficult to export to Europe, he explains. The production of smaller-size parts that can be exported to Europe, on the other hand, will help facilitate the establishment of OEM assembly activity.

This will require the local availability of key materials, such as automotive-grade plastics and metals, at the right price.

New projects are already being planned in Saudi Arabia for the most important ­automotive plastics, such as acrylonitrile-butadiene-styrene (ABS), nylon, ethylene-propylene-diene monomer (EPDM), polymethyl methacrylate (PMMA) and automotive polypropylene (PP) copolymer grades. None of these is currently produced in the country.

The automotive cluster team is conducting an inventory of plastics and other products produced in Saudi Arabia that could be used in the automotive sector. "As of today, we ­almost don't have any of the automotive grades of polymers that we will need for this industry," Vigouroux says. "But there are significant plans in place to cover most of them within the next five years." For example, PMMA will be produced by Saudi major SABIC, which plans to start up a 50,000-60,000 tonne/year plant in Al-Jubail in 2014.

Arabian Chevron Phillips Petrochemical (ACP), a subsidiary of US-based Chevron, and Saudi Industrial Investment Group (SIIG) plan to build Saudi Arabia's first polyamide 6,6 plant in Al-Jubail. The project, which includes polymer conversion facilities, is expected to start up in 2013.

Also in Al-Jubail, SABIC and ExxonMobil are developing an elastomers and carbon black project, which will supply products for tires. The project is expected to produce more than 400,000 tonnes/year of rubber, thermoplastic specialty polymers and carbon black products, including EPDM/thermoplastic elastomers (TPE), butyl rubber and styrene butadiene rubber (SBR). The auto cluster team is linking up the ­material candidates for each automotive part with the upcoming chemicals projects in the country. "We are analyzing the projects so we can ensure there will be local availability of a particular material by a particular time frame," says Vigouroux. "Together with our colleagues in the plastic packaging cluster, we are in active discussions with the petrochemicals companies about specific projects."

Timing of the chemical projects will dictate when a particular parts project can be ­implemented, he explains. The plan is to produce the most important and highest volume automotive polymers locally and import some of the more specialty polymers from other regions, such as Europe.

"Every product will have its own business case. Some will lend themselves to localization relatively quickly - depending on factors such as the volumes required and the investment costs - and others will take a long time," Vigouroux adds.

He acknowledges that some specialty grades will never be produced locally. "That's inevitable because we'll never have in Saudi Arabia an automotive cluster that represents millions of vehicles. We are aiming over the next 10-15 years to reach a critical size, which ensures industrial sustainability, of slightly over half a million cars and trucks per year."

Saudi Arabia is not creating an auto ­industry from scratch. Three relatively low volume truck assembly operations already exist in the country, operated by Mercedes, Volvo and MAN, and there are small and medium-sized enterprises (SMEs) producing replacement after-market parts, such as bumpers, batteries, filters and brake pads. Most of the SMEs would not meet the ­standards required of OEM suppliers today, but could be developed into OEM suppliers, Vigouroux notes.

Students at the King Saud University (KSU) in Riyadh have already designed a prototype car, known as Ghazal-1. The project started as a learning exercise for students to restyle the interior and exterior of a Mercedes-Benz G class-based sport utility vehicle, and attracted substantial media interest. Saudi investors subsequently expressed an interest in producing a redeveloped model commercially in the country. The NICDP automotive team is collaborating with KSU and the consortium of investors to assess the feasibility of the project. "The KSU initiative could be a very interesting complement to the main objective, which is to attract global OEMs," Vigouroux observes.

Developing Saudi Arabia's automotive ­industry will be a lengthy process. It usually takes at least 15 to 20 years for a supplier network to mature, Vigouroux says.

"Getting foreign direct investment into your country from the automotive industry is extremely difficult."

The country is developing new incentives to attract foreign investments. The current incentives, which were developed to attract petrochemical investments, are not going to work for the automotive sector, says Vigouroux. "We are in the process of finalizing a completely new set of incentives that, if ­approved by the authorities, will be better tailored to the automotive industry and the other new industries being targeted."

Investments in vehicle assembly plants in Saudi Arabia will be aimed at the regional market. Saudi Arabia alone has about 700,000 new car registrations per year and that is growing by about 8-10%/year, according to the NICDP. In the Greater Arab Free Trade Area (GAFTA) region, new car registrations are estimated at slightly less than 2m/year, says Vigouroux.

"This is getting close to the size of a typical average European market such as Spain or Italy, so it's not that small anymore."

Europe-based OEMs, which have a ­relatively small share of the Middle Eastern market, might have more to gain from building a production platform in Saudi Arabia than the Asian and North American OEMs which are already very popular in the region, suggests Vigouroux. US car makers, such as GM Motors and Ford and to a lesser extent Chrysler, have lost considerable market share over the last 10 years against the Japanese and Koreans but they still have some pretty decent ­positions, he adds.

Job creation is the fundamental driver behind Saudi Arabia's cluster development plans. In the mature automotive markets, such as North America, Europe and Japan, the employment ratio between the supply network and the OEM is about six to one. "In other words, one job in the assembly plant of an OEM eventually creates, at the mature level, about six jobs within the supplier network," says Vigouroux.

Free trade rules within GAFTA, which covers 18 member states, should encourage investors to maximize the local content of their vehicles, he continues. Under GAFTA rules, when an end product contains 40% GAFTA content, it can be imported duty free. "As soon as you can reach that 40% GAFTA content, you are in a larger free trade zone of some 400m people," he says.

Increasing the local content of vehicles will lead to the creation of more jobs. Approximately 60% of the country's population is under 30 and the unemployment rate for them is estimated at 27%.

"Building up a strong export-oriented ­automotive sector for the Kingdom is one way to address the demographic challenge," says Vigouroux.

Follow the ICIS Chemicals and the Economy Blog, by Paul Hodges

By: Anna Jagger
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