Western MNCs must adapt to Saudi Arabia’s shifting labor landscape

Saudi Arabia is identified by most of Frontier Strategy Group‘s clients as their number one market in the Middle East and North Africa (MENA). Foreign investment opportunities abound as the government aggressively diversifies its oil economy by executing on plans to spend more than US$300 billion on education, healthcare, IT infrastructure, and other non-oil sectors.

At the same time, doing business in Saudi Arabia can be difficult due to operational challenges. The introduction of new and stringent labor regulations, which could begin to affect MNCs as early as December 2011, is the latest example.  The new law, known as Nitaqat, seeks to bolster Saudi employment in the private sector by imposing limits on the number of foreign workers that companies can maintain.  In response, some companies are considering relocating operations or shifting strategic focus in MENA. FSG advises clients that such a shift would not be wise, as it would significantly weaken any regional investment strategy.

The kingdom’s economy makes up nearly 40% of regional GDP and high public spending on the local population and government projects ensures opportunities across sectors. Any company eschewing this opportunity will not be able to make up for the losses incurred.

The Saudis are unlikely to back down

The latest iteration of the Saudization program introduces the most comprehensive measures to achieve higher employment yet.  The numbers explain why: more than 60% of Saudi Arabia’s population is under the age of 24, and youth unemployment rates are upwards of 25%.  In order to keep up with demographics, the economy must create 400,000 new jobs every year.  Increasing private sector employment would ease pressure on the public sector, which cannot carry the full burden of job creation in the long-term.  Currently, 90% of the private sector’s workforce is composed of expatriates. The government is likely willing to take a hit to FDI to accomplish its goal, which it believes could play a large role in staving off domestic unrest and supporting its young population in a sustainable way.

Christopher Johnson, who is managing attorney at Sharif law office in Riyadh, comments that, “Saudi Arabia sees the labor issue as an existential one, and crucial to flowing with rather than against the ‘Arab Spring‘.  There are also strong pressures from the Majlis al-Shura, the king’s advisory body, to limit foreign investment, on the theory that many of the services currently provided by foreign companies should be reserved for Saudis.”

What MNCs need to know about Nitaqat

Nitaqat updates quotas for the percentage of a company’s workforce that must be composed of locals. It designates non-compliant companies as red or yellow, and compliant and exceptional companies as green or blue.  Companies finding themselves in the yellow or red categories could face a host of restrictions, such as limitations on issuing or renewing visas for expatriate workers. On the other hand, compliant companies will benefit from an expedited hiring process. For example, there will be fewer restrictions on hiring away stand-out workers from other major players. Nitaqat replaces the blanket 30% quota across industries that failed to shift the composition of the workforce significantly.

The new labor plan varies in application by company size and industry. For example, while a manufacturing company only needs to employ 15% Saudis to avoid penalties, oil and gas sector players must employ at least 45% to meet the same threshold. Zahid Hussain, head of OD for an Al-Rajhi Group Company based in Jeddah, says that some industries will be impacted less than others. “Medicine and pharmaceutical, aviation, education, fashion, media, advertising, marketing, will be less affected compared to automobile, telecom, IT, and HR as the former already have a large chunk of locals on the job.”

MNCs must adapt to the new labor regulations

While Nitaqat will pose new challenges, an informed executive can take the right steps to successfully navigate the shifting labor landscape and capitalize on new opportunities as a result. Even though private sector salaries will rise to compete with public sector wages, Zahid Hussain points out that the new regulations will save companies money in other areas such as visas, travel, and relocation.

Matthew Lewis, Director of the Middle East at executive search firm Boyden advises foreign companies to, “hire locals and concentrate on training. It is easier than in other Gulf countries when you consider the size of the population and deeper talent pool as a result.” Christopher Johnson is finding success in hiring Saudi expatriates, who are returning in increasing numbers to the kingdom. “There are 100,000 Saudi students abroad that are beginning to return. They are more flexible and adaptable than their brothers who stayed home,” says Mr. Johnson. This ‘re-pat’ strategy is one that other companies have found success in implementing in Sub-Saharan Africa.

Small to medium size businesses may be the most affected by the new regulations.  As a result, companies should make sure that local partners are not impacted and offer help if so. The Saudi government admits that up to 20% of companies could find themselves in the red zone with punitive action beginning in December 2011. Leveraging resources to assist a local partner now is a much more palatable option than the disruptions to business operations over an extended period of time.

No escape from the new Middle East

MNCs must adapt to the new environment due to Saudi Arabia’s market opportunity, but also because more stringent labor regulations are becoming a wider regional trend. In October, Gulf Cooperation Council labor ministers agreed to provide greater employment opportunities to their citizens through new policies. This year’s regional unrest has acted as a catalyst to accelerate the implementation of rigorous nationalization standards. The new regulations are not anti-globalization, but they are nationalistic in character and protectionist in some instances. While this is the new reality of the Middle East, the fundamentals of investment remain as strong as ever: high government spending, oil revenue, economic diversification programs, and attractive demographics.

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