Marketing U.S. Products and Services
Author - U.S. Department of Commerce
Distribution and Sales Channels 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, and there are few truly "national" companies dominant in more than one region.
Many companies import goods solely for their own use or for direct sale to end-users, making the number and geographical pattern of retail outlets a factor of potential significance. U.S. 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.
In considering the socio-cultural differences between Saudi Arabia and the United States, in particular, the relative segregation of men and women, it should be not be overlooked that the number of Saudi businesses owned and managed by women is significant, and growing rapidly. In its sixth development plan, the Government aims to increase the number of female students from 126,000 to 177,000.
According to official statistics, Saudi women own and run over 15,000 companies, about 4.3 percent of registered Saudi businesses. In addition, women account for about ten percent of the Saudi workforce. The Saudi Government projects that more Saudi women will enter the labor market, and their number increased to 240,000 based on a recent report published by the Jeddah Chamber of Commerce.
While there is no requirement that distributorships be granted on an exclusive basis, it is clearly the policy of the Saudi Ministry of Commerce that all arrangements be exclusive with respect to either product line or geographic region.
Many Saudi companies handle numerous product lines making it difficult to promote all products effectively. Saudi agents typically expect the foreign supplier to assume many of the market development costs, such as hiring of dedicated sales staff.
Foreign suppliers often detail a sales person to the Saudi distributor to provide marketing, training, and technical support. Absent such an arrangement, U.S. firms should expect to make at least four visits per year to support their Saudi distributor.
Use of Agents/Distributors; Finding a Partner The Saudi Government is currently reviewing a new agency law and related regulations with the aim of improving and further promoting commercial exchanges as the Kingdom prepares to join the World Trade Organization (WTO).
U.S. exporters are not required to appoint a local Saudi agent or distributor to sell to Saudi companies, but commercial regulations restrict importing and direct commercial marketing within the Kingdom to Saudi nationals and wholly Saudi-owned companies. Agent/distributor relations are governed by the Commercial Agency Regulations of the Kingdom of Saudi Arabia, administered by the Ministry of Commerce.
Obtaining a business visa for Saudi Arabia requires sponsorship by a Saudi national, and Saudi nationals receive strong preference in sales to Government agencies and parastatal corporations. Consequently, U.S. firms may find it advantageous to establish local representation, especially for product lines requiring strong sales and service efforts.
Foreign contractors wishing to bid for Government contracts must appoint a local service agent, and consultants must be represented by a Saudi consulting agency. The compensation payable to a local service agent is limited to five percent of the total contract price as per the Service Agency Regulations. However, that percentage is not adhered to at all times.
Terminating an agent/distributor agreement can be difficult even though Saudi policy has changed to permit registration of a new agreement over the objections of the existing distributor. Time is better spent in making the proper initial selection than in attempting to end an unsatisfactory relationship at a later date. The U.S. Commercial Service, through its U.S. District Offices, Export Assistance Centers, and overseas posts, offers a variety of services to assist U.S. firms in selecting a reputable and qualified representative. A complete "Guide to Agency/Distributor Regulations in Saudi Arabia" is available through the National Trade Data Bank in CD-ROM format (Tel: (202) 482-1986 for details).
Franchising Franchising is a popular and growing approach for local firms to establish additional consumer-oriented business in Saudi Arabia. Although the franchise market is small relative to that in the United States, it is rapidly expanding in several business sectors.
Franchising opportunities exist in the following business categories: apparel, laundry and dry cleaning services, automotive parts and servicing, mail and package services, printing, and convenience stores.
Success in the Saudi market is often attributed to finding the appropriate franchisor and location. Non-food franchises account for 55 percent to 65 percent of the franchise market.
Franchising remains a growing sector in Saudi Arabia. This is in part due to a desire among Saudis to own their own business, and an appreciation for Western methods of conducting business. Competition is particularly fierce between U.S. franchisors and local and third country competitors in the following sectors: car rental agencies, laundry and dry cleaning services, and auto maintenance. Moreover, some local fast food outlets are already making inroads, being more successful and more accommodating to Saudi taste buds.
Direct Marketing Direct marketing is not widely used in Saudi Arabia. Personal relations between vendors and customers play a more important role than in the West; furthermore, many forms of direct marketing practiced in the United States are unacceptable due to Islamic precepts regarding gender segregation and privacy in the home. 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 Post, Telecommunication, and Telegraph Ministry, it is highly likely that mail and parcel home deliveries could begin by the end of 1998.
Direct marketing has been conducted on a very limited basis using unsolicited mail campaigns and fax, catalog sales (with local pick-up or delivery arranged), and commercials on satellite television providing consumers in many nations (including Saudi Arabia) with a local telephone number to arrange delivery.
The advent of the Internet in the Saudi market will eventually have a profound effect on Saudi shopping behavior, providing increased possibilities and accessibility for Saudi consumers.
Joint Venture/Licensing The Saudi Government is currently reviewing the foreign investment code to encourage more Saudi-foreign joint ventures in Saudi Arabia. Foreign investment is generally welcomed in Saudi Arabia if it promotes economic development, transfers foreign expertise to the Kingdom, involves Saudis in ownership and management, and creates jobs for Saudis.
Foreign investment is regulated under the Foreign Capital Investment Law administered by the Ministry of Industry and Electricity (MIE), which must approve all investments. Investments involving mineral extraction are handled by the Ministry of Petroleum and Mineral Resources. The Ministry has already granted a mining concession to an American-Saudi joint venture, a positive step toward privatization and more openness to foreign investments.
Foreign investment is normally limited to joint ventures in which the Saudi partner holds at least 25 percent up to a majority share. There are no restrictions in the use of currency accounts or on the entry or repatriation of capital, profits, dividends, or salaries, provided tax requirements have been satisfied and clearance provided by the Department of Zakat and Income Tax. Foreign ownership is not permitted in a few sensitive areas or in well-developed sectors where it is believed sufficient local investment and expertise already exist.
A variety of incentives may be available to foreign investors upon approval of the Ministry of Industry and Electricity. These include tax holidays for five years (ten years for industrial and agricultural projects), duty free importation of capital equipment, spare parts and raw materials for the duration of the project, and access to low cost financing, industrial land, and utilities.
Local products receive price preferences of 10-20 percent in Government tenders. Most incentives are only available to joint ventures with at least 25 percent Saudi ownership.
Licensing is an appropriate method of doing business in the Kingdom 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.
The process for establishing a joint venture is as follows:
First, the Ministry of Industry and Electricity (MIE) and its constituent parts must review and process all applications for industrial projects. Within the MIE, the Industrial Licensing Department (ILD) and Foreign Capital Investment Bureau (FCIB) are responsible for evaluating and licensing industrial projects. Non-industrial projects are handled unilaterally by the FCIB.
The MIE's Industrial Protection and Encouragement Department (IPED) studies the project's potential impact on domestic industry and determines any tariff protection that may apply. The MIE's Industrial Cities Department (ICD) evaluates requests for sites in Saudi Arabia's industrial cities.
In addition, an application must be made to the Foreign Capital Investment Committee (FCIC) for a foreign investment license. The FCIC is an inter-ministerial committee that receives recommendations forwarded by the MIE/FCIB, and after study makes its recommendation for final approval to the MIE. Following the issuance of the investment license, an application for commercial registration is made to the Ministry of Commerce (MOC).
In this process, the MOC will approve the joint venture's Articles of Association, register the company under the MOC's Companies Regulations, and assign a commercial registration number.
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 joint venture projects. Market intelligence also is available through the SIDF for prospective investors.
Other Saudi Arabian Government entities that may be involved in the process include the Ministry of Foreign Affairs (visas), the Ministry of Interior (residence permits and industrial safety and security approvals), the Ministry of Labor and Social Affairs (work permits for foreigners), the Royal Commission for Jubail and Yanbu (if the project is sited at the Saudi industrial cities of Jubail or Yanbu), the Government 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).
Foreign investors may structure their enterprise as a limited liability company (the most commonly used approach), as a joint-stock company, or as a joint venture. By law, limited liability companies must not have less than two nor more than fifty shareholders and must be capitalized with at least SR. 500,000 ($133,333). Limited liability companies are forbidden to deal in insurance or financial enterprise. Joint stock companies are a variety of the limited liability company that can be held either privately or publicly. They resemble U.S. corporations in structure and function.
Joint ventures are unincorporated associations in which each party to the venture holds title to his mutually agreed contribution. They resemble general partnerships. The Ministry of Commerce approves formation of all joint ventures. Applications must include the venture's objectives, rights and liabilities, as well as the manner in which profits are to be divided. A detailed "Guide to Establishing Joint Ventures in Saudi Arabia" is available in CD-ROM format on the National Trade Data Bank. A few major U.S. accounting firms with Saudi offices also publish very useful guides to the tax and legal aspects of doing business in Saudi Arabia.
Steps to Establishing an Office The procedures to follow in establishing an office in Saudi Arabia differ according to the type of business undertaken. The most common and direct method of establishing an office is simply to appoint an agent/distributor, who can set up the office under their own commercial registry and obtain residency visas for any necessary expatriate personnel. The agent/distributor agreement should be registered with the Ministry of Commerce as previously described.
A second method might be to establish a technical and scientific services office, which requires a license from the Ministry of Commerce. This approach preserves the independence and identity of the foreign company's local office as a separate entity from the Saudi agent/distributor.
Technical and scientific service offices are not allowed to engage directly or indirectly in commercial activities, but they may provide technical support to the Saudi distributor as well as conduct market surveys and product research.
A third method is to establish a branch office, which is normally permitted only for foreign defense contractors. The establishment of branch offices is open to wholly foreign-owned entities, and requires approval of the Ministry of Industry and Electricity's Foreign Capital Investment Committee (FCIC).
An essential element in the FCIC's approval process is that the branch office contributes to the Kingdom's economic development. FCIC approval also requires the foreign company submit a certified copy of its charter and bylaws, accompanied by an Arabic translation, as well as the company name, address, date of establishment, type of business and amount of capital. The company's board of directors must also provide a resolution authorizing the establishment of a Saudi branch office.
Following FCIC approval, the branch office must establish and register with the Commercial Register of the Ministry of Commerce. The registration process requires representation by a Saudi attorney.
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 representative office license from the Ministry of Commerce.
Finally, foreign companies may establish an office by entering into a joint venture with a Saudi firm, as described in the previous section.
Costs associated with setting up an office in Saudi Arabia can vary considerably. As a general guide, the following are current costs of housing and office rental, as well as costs for employee salaries, taxes, and transportation. Most of these costs have remained relatively unchanged from the previous year. Typical rent per year for a one-bedroom furnished apartment is $13,200, and $16,134 for a two-bedroom apartment.
A one-bedroom furnished villa in a Western-standard residential compound will rent per year for $22,000 to $23,650; two bedrooms, $27,866 to $29,333; three bedrooms, $33,733 to $36,666; four bedrooms, $42,533 to $54,266. Residential compounds in Saudi Arabia often include a swimming pool, tennis courts, a club house, and eating facilities.
Typical management, maintenance, and use charges are usually included in the rental price, and security deposits are in the range of $2,970. Rental terms are for one year payable in advance. Office rental costs are variable, and are governed largely by the city and business location.
Typical rental costs in a modern commercial center are approximately $220 per square meter, inclusive of maintenance and utility charges. A 12-month rental is the minimum and advance payment is required.
Saudi law requires that Saudi nationals make up 75 percent of a company's work force and 51 percent of its payroll in all businesses. However, due to a shortage of qualified Saudis, in practice much of the work force is made up of non-Saudi Arabs, Europeans, Americans and Asians. In 1996, the Saudi Government implemented a regulation requiring each company employing over 20 workers to include a minimum of five percent Saudi nationals. Companies not complying with the five percent rule (which will increase in annual increments of five percent) will not be given visas for expatriate workers.
An employee's nationality and level of experience, as well as the nature and location of the business will create variations in pay, but a typical manager's yearly salary (base) is approximately $30,000 to 40,000. Mid-level office workers are paid approximately $20,000 to 30,000 per year. A clerical worker's base yearly salary is in the range of $8,000 to 10,000. A support worker (driver, caretaker) earns in the range of $6,000 to 7,000 yearly. Local Saudi employee taxes are 15 percent of base or combined with benefits. From base salary and housing, companies withhold five percent and pay 10 percent.
It is customary to provide non-Saudi workers with furnished accommodations or a housing allowance as well as round-trip air fare to their country of origin on a yearly basis.
Regarding transportation, four-door sedans rent monthly for approximately $960, and yearly for about $11,500. A new GMC Suburban can be purchased for approximately $30,373. It is important to note that, by law, females in Saudi Arabia, regardless of nationality, are forbidden to drive motor vehicles.
Additional monies, along the lines mentioned above, should be included in an office budget to provide sufficient cars and drivers for transportation of female family members and staff.
Business travelers coming to Saudi Arabia to explore business opportunities are eligible for a visitor's visa, which currently is a single-entry visa for up to three months' duration. However, there is hope that the Saudi Government will very soon agree to two-year, multiple-entry visas for U.S. citizens.
Currently, the visitor's visa application requires the U.S. company's representative to submit to Saudi visa authorities a letter of invitation issued by a Saudi company that has agreed to serve as his sponsor. The letter, which must be in Arabic, must be on the Saudi company's letterhead, in the original, and must bear an authenticating stamp from the Saudi company's local chamber of commerce. The U.S. company's representative must apply for the visa prior to departing the United States at either the Saudi Embassy in Washington, D.C., or at one of the Saudi Consulates in Houston, Los Angeles or New York City. These requirements are very strictly enforced by Saudi visa authorities. The Saudi Government announced in late May a new and simplified procedure for the issuance of entry visas to foreign businessmen, but full details have not been published.
Selling Factors/Techniques Expatriate managers have had a strong influence in introducing advanced selling techniques into a market that relied heavily on word-of-mouth and established buying patterns until a few years ago. Advertising and public relations firms are multiplying in Saudi Arabia, and the Saudis themselves have become a discerning, sophisticated clientele.
Although details of a transaction can be handled by facsimile, now in widespread use, no serious commitment is likely to be made without a face-to-face introduction. Business cards are usually printed in English on one side and Arabic on the other.
Saudis are gracious hosts and will try to put a visitor at ease, even during arduous business dealings. A large portion of upper and middle class Saudis were educated in the United States or in Europe.
The positive aspect of the Saudis' familiarity with the United States is that most importers are very receptive to American products because of the U.S. reputation for state-of-the-art technology, durability, and stable prices. Of course, this goodwill can be used only as an introduction, since a product must be competitively priced and readily available to make a sale.
Financing may also be offered as part of a sales proposal, usually after a solid relationship has been established. Financing is increasingly becoming an important facet of business dealings with Saudi Government agencies. Likewise, the Government has begun to experiment with Build-Operate-Transfer (BOT) financing schemes.
Higher oil revenues during 1997 helped the Government to close out most arrearages to private sector contractors. The Embassy estimates that remaining arrearages still total up to $3 billion.
Foreigners need to find a Saudi partner before they are allowed to engage in trade within the Kingdom, but direct sales can be made to Saudi private clients without having to use a local agency. Saudi Ministries will purchase only from local agents or distributors, and contracts for major projects are usually awarded to joint ventures linking foreign and Saudi partners.
An irrevocable letter of credit (L/C) is the instrument normally used for Saudi imports; open account, cash in advance and documentary collection are also acceptable if both parties agree. Maximum or minimum credit terms are not required.
Export Credit Insurance for political and commercial risk is available from the Foreign Credit Insurance Association (F.C.I.A) of the U.S. Export-Import Bank in Washington, D.C. (Tel: 202-566-8990, or 212-306-5084).
The Government maintains a free trade approach to exchange transactions: no exchange restrictions apply; exchange for payments abroad is obtained freely; and there are no taxes or subsidies on foreign currency transactions.
With the advent of the Internet, industry sources expect that such access will boost regional and international business. For that matter, the Ministry of Commerce is forming a team to establish regulations regarding electronic commerce, which is expected to expand as soon as the service is established in Saudi Arabia. According to some estimates, there are already 30,000 subscribers in Saudi Arabia who are browsing the world wide web through the Bahrain Telecommunication Company (BATELCO).
Since 1981, the Saudi Arabian Monetary Agency (SAMA) pegs the riyal to the dollar, to facilitate long term planning and minimize exchange risk for the private sector. The rate has remained stable at $1 = SR 3.7450 since 1987.
Advertising and Trade Promotion Advertising, once a relatively secondary aspect of sales, has come into its own, especially with the recent lifting of a ban on televised commercials. Most companies' advertising budgets now cover the complete array of media, such as TV, newspapers, trade magazines and billboards, in addition to trade promotion events. Saudis receive preferential rates.
Bright colors such as red, blue, green and black dominate ads. Pink, cream and other soft colors are not as popular. With some modest exceptions, the female human form is not culturally or religiously acceptable in the media. Landscapes and other non-human images are commonly featured. Ads, packages, literature, etc. are frequently in English and Arabic.
Advertising is critical in gaining retail sales and market share. Both television, magazines, and point of sale advertising are common. Some televised commercials are broadcast on the two Saudi channels (Secam color system) during limited periods of the day. One TV channel is in Arabic; the second is in English, with broadcasting covering the entire Kingdom.
Cost of a time slot varies considerably, depending on timing, and is usually less costly for Saudis than foreign firms. Contents are thoroughly screened to conform with strict moral and religious standards.
A new approach to presenting products is advertising through international TV channels such as CNN and MBC (Middle East Broadcasting Corporation in London). In 1997, two new satellite channels broadcasting from Beirut, Lebanon, went on the air, the Lebanese Broadcasting Company (LBC) and Future Television.
Many analysts rate the two channels as the most popular pan-Arab stations, and most major Saudi companies place commercials on these two channels as well as on the MBC channel. In addition, an encrypted TV network provides approximately 30 channels for an average subscription of $1000 per year.
The network, Orbit Communications, is owned by a local Saudi company, and it has a viewer's base of around 170,000 clients. Other Arabic satellite channels which have been launched, such as Arab Radio and Television, are also attracting numerous advertisers. These TV channels have succeeded in introducing several new products to the market.
There are no signs that the cable television network will be launched in the foreseeable future. The first of its kind in the Kingdom, SARA Cable is an offshoot of a large, Riyadh-based, media and production company, ARA International.
Print advertising is also important. In recent years, several magazines have appeared on the local market. Popular magazines are: Al-Wasat, Al-Majallah, Al-Yamamah, and Sayidati. Advertising rates for publications vary greatly; however their level is well below the U.S. norm, in keeping with the reduced readership.
Newspaper advertising is carried out in both the local English and Arabic press, but its effectiveness is somewhat limited by the relatively low readership rates. The three local dailies published in English have circulation in the 20,000 to 50,000 copies range: Arab News (London); Saudi Gazette (Jeddah); Riyadh Daily (Riyadh). The leading Arabic newspapers, with nationwide distribution, have circulation in the 70,000 to 100,000 range: Al-Hayat, Al-Shark Al-Awsat, Okaz. Other relevant newspapers have lower circulation, and some have only regional distribution: Al Bilad, Al Jazira, Al Madina, Al Nadwa, Al Riyadh, Al Youm, Um Al Qura, Al-Riyadiya (sports only). A newcomer, the Al Iqtisadiah economic daily, has rapidly earned a loyal readership of executives and Government officials.
Numerous trade promotion events take place from September through June, with most of them held in the modern exhibit centers in the Kingdom's three major cities: Riyadh Exhibition Co., Ltd. PO Box 56101 Riyadh 11554, Saudi Arabia Tel: (01) 454-1448, Fax: (01) 454-4846 Tlx: 406359 EXHB SJ Contact: Bechara Nacouzi, Sales Manager
Al-Harithy Co. for Exhibitions, Ltd. PO Box 40740 Jeddah 21511, Saudi Arabia Tel: (02) 654-6384, Fax: (02) 654-6853 Tlx: 602784 EXPO SJ Contact: Saeed Haider, General Manager
Dhahran International Exhibition PO Box 7519 Dammam 31472, Saudi Arabia Tel: (03) 857-9111, Fax: (03) 857-2285 Contact: Najeeb Abdul Rahman Al-Zamil, General Manager
Each exhibit center organizes five to ten events a year, and even though the programs have varied over time, the recurrent themes cover most industries of interest for U.S. exporters: agriculture, automotive, computers, medical and lab equipment, construction, production technology, electrical and A/C-heating, and communications. Smaller exhibit facilities are also located in regional centers, and often operate in cooperation with or under the sponsorship of the local chamber of commerce.
Most chambers have a proactive approach to promotion and trade, organize shows and presentations for individual companies or groups, and have been eager to attract American and other Western suppliers.
The main Chambers are:
Council of Saudi Chambers of Commerce and Industry PO Box 16683 Riyadh 11474, Saudi Arabia Tel: (01) 405-3200, Fax: (01) 402-4747
Riyadh Chamber of Commerce and Industry PO Box 596 Riyadh 11421, Saudi Arabia Tel: (01) 404-0044, Fax: (01) 402-1103
Jeddah Chamber of Commerce and Industry PO Box 1264 Jeddah 21431, Saudi Arabia Tel: (02) 651-5111, Fax: (02) 651-7373
Dammam Chamber of Commerce and Industry PO Box 719 Dammam 31421, Saudi Arabia Tel: (03) 857-1111, Fax: (03) 857-0607
Makkah Chamber of Commerce and Industry PO Box 1086 Makkah, Saudi Arabia Tel: (02) 534-3838, Fax: (02) 534-2904
Medina Chamber of Commerce and Industry PO Box 443 Medina, Saudi Arabia Tel: (04) 822-5380, Fax: (04) 826-8965
Taif Chamber of Commerce and Industry PO Box 1005 Taif, Saudi Arabia Tel: (02) 736-6800, Fax: (02) 738-0040
NOTE: Add country code 966 if dialing from the United States, and drop the zero before the first digit of the telephone or fax numbers above.
Product Pricing A rate of exchange of the dollar to the riyal has been set at 3.7450 since 1987, a competitive dollar value compared to the Japanese and European currencies, and reasonable interest rates have greatly facilitated market penetration. Thanks to this, Saudi importers expect U.S. producers to practice a more stable pricing policy than their foreign competitors.
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. There is no standard formula to come up with the mark-up rates for all product lines at different levels of the relatively short distribution chain. Pricing is very important to the average Saudi. Therefore, where there are competitive products, Saudi buyers frequently will compare prices before making a buying decision.
Stability of prices has been a policy of the Saudi Government for years, and after rising to five percent in 1995 as a result of the utility and gas rates hikes, inflation was negative 0.4 percent for the 12-month period ending December 1997.
For the U.S. supplier, some give-and-take is expected in preliminary negotiations. The asking price is usually lowered a bit, to entice the client and to bow to the old-fashioned Saudi penchant for bargaining and personal exchange.
Financing has become a leading consideration in purchasing, especially for investment goods and repeat orders. As leveraged transactions become the norm, Saudis have come to understand that an attractive financial package can be even more interesting than an up-front low price. The support and services provided by the U.S. Eximbank attract the Saudis' keen interest, and are being considered for several major projects.
Sales Service/Customer Support Saudi Arabia is a relatively open market, which makes it highly competitive. Brand loyalty and established preferences are less developed than in other countries. Consequently, above average sales service and customer support are indispensable to win and maintain new clients.
As the Saudi market matures, this will become more and more the norm, and the recent economic slowdown is adding to the competitive pressure; the sell-and-forget techniques still common in the 1980s are definitely out.
Saudis view a foreign firm's physical presence in the Kingdom as a tangible sign of long-term commitment. Prompt delivery of goods from available stock and the presence of qualified support technicians have become more important, and they influence repeat business much more now than ten or even five years ago. Government agencies usually require equipment suppliers to commit to providing maintenance and spare parts for an average period of three years.
Selling to the Government Government spending accounts for approximately 24 percent of GDP, a sign that Saudi Government efforts to broaden economic activity beyond oil are making progress. Still, some of the companies that are considered part of the non-oil private sector, are majority-owned by the Saudi Government.
U.S. firms considering sales to the Government should request a briefing from the Embassy concerning the latest situation on payments and how U.S. firms can protect themselves.
As a practical matter, U.S. companies seeking sales of goods and services to the Saudi Government should appoint a reputable agent or distributor with experience in the field.
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 Commerce within 30 days of contract signing and to select a Saudi national as an officially registered agent (weapons sales are exempt from this agency requirement). Compensation for agents is limited to a maximum of 5 percent of contract value; however, the rate may vary depending on the agreement. Foreign companies also may be allowed to establish a branch office by obtaining a foreign capital investment license from the Ministry of Industry and Electricity.
Branch offices are usually approved only for foreign defense contractors. For others, a liaison office may be established to supervise work in the Kingdom and to facilitate coordination between the Government and home offices.
This requires approval of the Ministry of Commerce. Liaison offices are prohibited from conducting commercial business in Saudi Arabia.
Foreign contractors involved in public works projects are required to subcontract at least 30 percent of the contract value to 100 percent Saudi-owned companies. This requirement also applies to limited liability partnerships with less than 51 percent Saudi ownership.
The subcontractor must be qualified to perform the work and may not further subcontract any portion of it. Purchases of Saudi products and services and of imported products from Saudi distributors may count toward the 30 percent requirement.
Protecting your Product from IPR Infringement Saudi Arabia has a patent office, but has only issued a few patents, and has an enormous backlog of patents pending. Saudi Arabia has made important strides in improving intellectual property rights (IPR) protection, including a series of well-publicized raids on stores selling pirated material and the release of a fatwa by the Grand Mufti of Saudi Arabia confirming that piracy is theft, and therefore forbidden under Islamic law.
However, piracy remains a problem in Saudi Arabia and, as of 1998, the Kingdom remains on the U.S. Trade Representative's "Watch List" of countries that need to improve IPR protection. U.S. firms that wish to sell products in Saudi Arabia should work through their local representative to register their trademarks with the Ministry of Commerce and copyrighted products with the Ministry of Information, which are responsible for IPR protection in these areas, and report any suspected incidents of piracy or infringement to the Ministry.
Despite the backlog of patent applications, the Embassy recommends that if a U.S. company is concerned about the possibility of patent infringement, it should "file" a patent application request with the Saudi Patent Office. To learn more about the procedure, we recommend interested companies consult a local attorney who specializes in this area. The Embassy can provide a representative list of qualified attorneys.
Need for a Local Attorney Saudi law is based on the Islamic Shari'a and differs considerably from U.S. practice. U.S. firms contemplating a joint venture, licensing, or distribution agreement are advised to consult with a local attorney. The American Embassy and Consulates can provide a list of attorneys.
Performing Due Diligence/Checking Bona Fides of Banks/Agents/Customers In 1995, the Commercial Service in Saudi Arabia ceased to offer company and business checks, namely, International Company Profile (ICP) reports. Nonetheless, CS Saudi Arabia will provide bona fides checks in support of a U.S. company's due diligence process, if requested. Complete background and credit reports can be produced by Dun and Bradstreet's local agent, Sawabih Information Services. The company can be reached at (966 1) 419-1111, Fax: (966 1) 419-1144, attention: Mr. Waleed S. Abalkhail,President.
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