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Saudi and Japan trade must move beyond oil-for-Landcruisers

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13 Jan 2020 02:01:34 GMT9
Frank Kane
13 Jan 2020 02:01:34 GMT9

The traditional image of Japan-Saudi Arabia trade relations — crude oil heading east, Toyota cars heading west — is an oversimplification, but there is enough truth in it to make it more than a cliché.

Crude oil remains the Kingdom’s main export, and that will be the case for a long time even as Vision 2030’s plans to diversify the economy away from oil dependence evolve; Japan — with no indigenous oil reserves, needs big energy imports to fuel its huge manufacturing capacity.

In contrast, the Kingdom wants those manufactured good that Japan produces so efficiently — high specification motor cars, electronic goods and other consumer hardware. Oil-for-Landcruisers is not far off the mark.

The challenge for policymakers from the two countries who want to move beyond that template is that there is not much that Saudi Arabia produces that Japan wants, apart from oil.

That is in the nature of commodity-dependent economies and will only change as Saudi Arabia develops new industries and technologies, as the Vision plan intends.

The National Industrial Development and Logistics Plan adopted a year ago is the masterplan for this industrial revolution.

It lays out a network of special economic zones across the Kingdom to incubate expertise in industry, driven by the technologies of the Fourth Industrial Revolution and by big foreign investment.

The foreign element is where Japan comes in. What the Kingdom wants is to learn from Japan’s innovation-driven economy, and this necessarily involves some form of technology transfer.

Saudi policymakers make no bones about the fact that they want to to buy the technology that makes the Toyotas, as well as the cars themselves.

But these ambitions have encountered challenges in the past. It is no secret that Saudi Arabia has been talking to Toyota for some time about the possibility that Japan’s premier car manufacturer could set up a production facility in the Kingdom.

That would bring jobs for Saudis, and training in the hi-tech industrial skills the Japanese have perfected, as well as an indigenous base for selling cars in the Saudi and Middle East markets.

But the talks have stalled over Japanese reservations about the efficiency and cost of the local workforce, the relatively small local market, and the unavailability of local supplies and components.

Without a big subsidy from the Saudi government, it simply does not make financial sense for Toyota.

Though that impasse could be broken, or another car manufacturer — from South Korea or China, say — could step in, it illustrates two factors that are holding back Japan-Saudi trade and investment.

First, Japan’s conservative corporate culture means they do not take risks in overseas investment and expect to be paid what they think their expertise is worth.

For example, Japanese companies lost out to South Korea in the competition to build nuclear power stations in the UAE.

Tokyo gambled once in the region — with the contract to build the Dubai Metro — and got their fingers burned there.

Second, the regional policymakers who decide such things have usually decided on the basis of cost and deliverability.

Japanese products are generally of higher quality compared with Chinese or South Korean equivalents, and therefore are more expensive and take longer to complete.

Nonetheless, there are some high-profile areas where it would be logical for Saudi Arabia to look to Japanese expertise.

The nuclear industry is one, where the Kingdom and Japan could benefit from recent advances in technology to cooperate on the next generation of safer, non-military reactors.

High speed transport is another. The big projects on Saudi’s western coast — like Neom and the Red Sea Developments — would seem natural candidates for the “bullet train” link the Japanese have perfected.

Perhaps the big breakthrough in Saudi-Japan trade relations will come in energy technology.

Saudi Aramco is very keen on developing hydrogen as a fuel of the future, where the Japanese also have advanced plans.

If, as some analysts expect, Aramco decided at some point to have a secondary listing of its shares on a foreign market, a Tokyo flotation might be accompanied by big joint venture investment in hydrogen technology.

The visit of Shinzo Abe, Japan’s prime minister, to the Kingdom, could be the event that helps break the logjam in trade relations with Saudi Arabia. He should tell his corporate compatriots to be less ask averse and more adventurous.

For its part, perhaps the Kingdom should make a conscious decision to invest in Japanese quality.

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