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3 Ways President Xi and King Salman Can Move China and Saudi Arabia Beyond Oil

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10448751163_6a5f763f67_zEarlier this month, Saudi Arabia’s King Salman bin Abdulaziz Al Saud met with Chinese President Xi Jinping in Beijing. Saudi Arabia is now aggressively seeking foreign investment to diversify its economy away from oil. So this meeting in China was arguably the most important of the King’s month long Asia trip.

The Xi-Salman meeting produced the usual photos and an announcement of $65B (potentially) of oil deals, mostly between Sinopec and Saudi Aramco. It also produced the usually discussion of how more investment between the countries can be encouraged. But outside of some larger than normal oil deals, I expect this to produce little of the investment into Saudi Arabia that the country wants. And that’s a problem for Saudi Arabia, because they now really need such inbound investment to happen.

Before moving full-time to China, I spent over 8 years working for Prince Alwaleed in Saudi Arabia. I spent a lot of time looking at China-Saudi deals – and I probably interviewed +30 Middle Eastern investment groups about their deals with Chinese companies. Based on this, here are my 3 predictions for China-Saudi Arabia going forward:

1. Don’t expect any significant private deals or investments between China and Saudi Arabia.

Over the past thirty years, Western companies have brought brands, businesses, technology and other capabilities into Saudi Arabia. Everything from refining technology to McDonalds franchises. This has been through new ventures, joint ventures and various management, franchise and technical agreements. These private deals helped develop Saudi industries and also attracted both domestic and foreign capital. In return, KSA companies and the government have placed over $500B in the US and Europe over the years.

This has been most of the US-KSA relationship since the 1970’s. It has mostly been a story of inbound private Western companies and outbound KSA capital.

In contrast, few private Chinese companies are operating in KSA today. You can find Geely dealerships in Riyadh. And Chinese goods fill the Carrefour stores. But these are mostly trade arrangements. On a larger scale, Huawei is active in the region and has offices on King Fahd road in Riyadh. But overall, the presence of Chinese companies in Saudi Arabia is quite small compared to their international expansion elsewhere.

And similarly, KSA companies and the government have placed little capital in Mainland China (Hong Kong is a different story). There has been no tide of petrodollars or private investment going from MENA to China, like there has been into Europe and the USA. I don’t expect any of this to change.

2. Private KSA-China deals and investments aren’t happening because of a lack of trust and necessity.

So why aren’t such deals happening? I argue it is mostly not because of any of the commonly cited reasons, such as language barriers (both Saudis and Chinese speak English), inconvenient flights or visas, security issues (such as Yemen), or a lack of opportunities.

My experience has been that it is a lack of trust and necessity. Private deals are face-to-face, relationship-based and long-term. And Chinese and Saudi business people just don’t trust each other very much. There is no history of working together. There are few close friendships. There is no history of going to university together. And the deals thus far have been prone to problems. There just isn’t a lot of trust or comfort. And when you are operating in environments without clear rule of law and easily enforceable contracts(such as in both China and Saudi), you rely on close relationships far more.

The other problem is necessity .There actually is no need to do private China-KSA deals. Chinese companies can make investments in lots of places. And Saudis can continue to work with Western companies, just like they have for decades. China-Africa have the same trust issues but the deals happen because there is a real need for resources. China-Germany deals happen because there is a need for technology (by China) and market access (for Germany). But there is no such need for KSA and China. And absent a compelling need, the lack of trust is not overcome.

So the Chinese and Saudi groups meet, drink tea, take photos and express interest in working together. Maybe they even sign an MOU. But then, outside of basic trade, not much happens. Ultimately, nobody writes big checks or makes long-term commitments. So we have not and I do not think we are going to see hundreds of private deals between Saudi and Chinese private companies in the near future.

Ok. That was pretty pessimistic. However, here’s the good news.

3. China and Saudi Arabia are both State-capitalism – so SOE-SOE deals can happen easily.

When the Saudi King and the US president meet, they typically talk security, military and other government issues. But not much commercial activity happens, mostly because the US government does not have State-owned or other commercial enterprises it can utilize.

However, when the President of China and the King of Saudi Arabia meet they can both turn to their SOEs and do commercial deals based on their discussions. In fact, the CEOs of companies like Sabic, Saudi Aramco, and Sinopec are usually in the delegations, if not the actual room. These are both state capitalist countries that have direct extensions into various commercial activities. The mentioned $65B in oil deals are only one example of this. You can go back to 2007, at the re-opening of the new Silk Road, and see similar China-KSA SOE-SOE deals. One of the first was a $5B deal between Sinopec and Saudi Aramco.

This is a real opportunity today. KSA and Chinese government leaders can turn to their SOEs outside of oil and petrochemicals. They can reach out to other energy SOEs (such State Grid), to their agriculture SOEs (both China and KSA have big food security issues), to their education SOEs, to their technology SOEs, and so on. And because of the long-term strategic relationship between China and Saudi Arabia, these two countries can do SOE-SOE deals in a way that virtually no other two countries can.

So if King Salman is looking to bring Chinese companies and capital into KSA quickly, this is how you do it. Forget private companies. Do SOE-SOE deals between China and KSA in lots of sectors outside of oil – and then you open these State-sanctioned (and probably guaranteed) projects to other foreign private capital. This approach can have an outsized effect on activity and investment in Saudi Arabia. My advice is for KSA and China to go with what has actually been working. Just do it a lot bigger.

Note these types of SOE-SOE platforms can also spur growth in ancillary businesses. A KSA-China energy project (say between Sinopec and Aramco) creates a long-term operating platform that can lead to ancillary projects in areas such as operations and maintenance, housing, software and technology, business services and so on.

3. There are three types of Chinese Companies that are particularly attractive for KSA-China projects.

Based on the above argument, here are three types of Chinese companies that would work with this approach.

The first group to look at, as mentioned, is the large Chinese SOEs. China has approximately +120 state-owned entities – most of which are unknown in the Middle East today. They cover infrastructure, technology, energy efficiency, medical research and just about every other area. SAGIA should pull this list and start setting up meetings with them. Go for SOE-SOE deals.

These Chinese companies are actually advancing rapidly – and increasingly have their own brands, technologies, products, services, etc. They are also advancing rapidly into areas previously thought to be the domain of Western companies (high quality products, innovative technologies, etc.).

The second group to look at is what I call “Europe Killers”. These are Chinese companies that are increasingly matching the quality of Western products. And they are increasingly commoditizing Western technologies. So Middle Eastern projects can increasingly draw from these Chinese companies for higher quality products and technologies – and can directly replace those same items and technologies currently being sourced from Europe. An example of this is Huawei which has already pushed Western companies out of much of the MENA telecommunications equipment market.

A final group to think about is what I call “Game Changers”. Historically, Middle Eastern business has been limited by what was possible independently – or through partnerships with Western companies. So hamburger franchises (McDonalds and Burger King) are common in KSA – but agricultural and power problems have persisted for decades.

However, Chinese companies are from a developing economy and can bring a different set of capabilities – many not seen before in the Middle East. These new capabilities can sometimes solve long standing problems (such as Riyadh’s problems with its power generators and power grid). We refer to them as Game Changers. For example, State Grid is increasingly active in the Middle East building power plants and new power grids across the region – at prices below what was previously thought possible. Similarly, Chinese agriculture, water, and railroad companies are entering the region and creating game-changers in other industries.

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Overall, the meeting between President Xi and King Salman was in many ways symbolic of Saudi Arabia’s current problem: the need to move beyond oil. Therefore, the key question is whether the China-Saudi Arabia relationship can also move beyond oil?

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Thanks for reading. My writing (and speaking) are on:

  • How rising Chinese consumers and companies are disrupting global markets. #ConsumerChina
  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. #China2025

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If you would like my recommended China reading list, you can get it at www.jeffreytowson.com. You can also get a free chapter of my One Hour China Book there as well.

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About: I am a Professor of Investment at Peking University Guanghua School of Management in Beijing. I am also an investor, consultant and former executive / slave to Prince Alwaleed.

top photo by pontla, Creative Commons license with link here.)

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