Saudi Arabia is going electric to launch a domestic auto industry

Saudi Arabia has been trying for decades to start its own auto industry with nothing to show for it. Now they are trying again – but this time with electric vehicles.

The electric vehicle initiative is part of the kingdom’s ambitious diversification effort to break away from its dependence on oil revenue, which is its main source of income as the world’s largest energy exporter.

It intends to pour billions into the project to create an electric vehicle manufacturing center with a goal of producing 500,000 cars a year by 2030.

US-based Lucid Motors, in which Saudi Arabia has acquired a majority stake for around $2 billion, intends to produce about a quarter of that target in the kingdom.

Saudi Arabia hopes that the transition to electric propulsion will also give the country a better chance of success, since the dominance of established automakers in Europe, the US and Japan makes it extremely difficult to break into the petrol engine market.

The battery-powered market offers a level playing field as combustion, a Saudi official said, and would pit the kingdom against other big electric vehicle makers like China, Germany and the US.

In addition, Saudi can use its financial strength to buy into the electronics market, aided by its large surplus of petrodollars.

“It’s an already developed sector,” added Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“She [the Saudis] can embrace and invest in it rather than building something from scratch. It is gaining traction in global use and is also playing a role in the history of the energy transition.”

There are some doubts about the country’s ability to compete against companies like China with its strong electric vehicle manufacturing base, robust technology, high productivity and low labor costs.

Still, electric vehicle manufacturing is planned as a key pillar of the kingdom’s diversification efforts, which will be overseen by the Sovereign Wealth Fund, the $600 billion public investment fund.

The diversification initiative aims to expand the local workforce, teach workers new skills and create private sector jobs while attracting foreign direct investment.

The country’s broader economic plan includes the creation of the futuristic new city of Neom, a financial center in Riyadh and tourist resorts.

The Saudis will also continue their spending spree on sports and tech companies overseas.

Electric vehicle production is at the heart of the initiative as the kingdom looks to capitalize on the expected expansion of the industry. Electric cars should account for about 60 percent of annual vehicles sold by 2030 if net-zero targets are to be met by 2050, the International Energy Agency said.

Key to the Saudi electric vehicle plan is the creation of Ceer, Arabic for drive or walk, which the country hopes will produce 170,000 cars a year in partnership with Taiwan’s tech giant Foxconn and BMW.

The first cars are slated to go on sale in 2025 at the affordable end of the market.

PIF has also acquired a majority stake in Lucid Motors, which aims to produce 150,000 cars a year in the Kingdom by 2025, and has signed deals with Hyundai and Chinese electric vehicle group Enovate.

Building an electric vehicle industry would significantly reduce the kingdom’s import bill, said Tarek Fadlallah, the Middle East’s managing director of Nomura Asset Management.

“Transport accounts for about 15 percent of the Saudi import bill and is the largest single consumer of foreign exchange. There is a strong incentive to replace these imports with domestically produced cars.”

In addition, the electric initiative fits in with Saudi Arabia’s goal to have 30 percent of all vehicles in Riyadh run on batteries by 2030, while also being one of the top five manufacturers in the world.

There are headwinds, however, said Al Bedwell, director of global powertrain at LMC Automotive, as chip shortages and high mineral prices needed for batteries threaten development.

He said recessionary forces around the world are likely to limit the expansion of the electric vehicle sector.

“By the end of this year, the industry is hoping to build enough cars, but unfortunately, at that point, people may not have enough money to buy these cars.”

He added: “The point at which you could produce an electric vehicle at the same cost as an ICE vehicle was thought to be around 2025, but now it’s more likely to be towards the end of the decade.”

The electric car industry has also been hit by inflation and supply chain shortages in minerals and components that could disrupt Saudi plans.

With this in mind, PIF has set up a company to invest in mining overseas to ensure its supply of lithium and other minerals used in batteries.

At the same time, Australian battery manufacturer EV Metals is planning a lithium hydroxide plant in the UK.

For its part, Lucid aims to begin assembling vehicles in Saudi Arabia this year, with cars being built entirely in the country in 2025.

The Lucid and Ceer factories will be located in the King Abdullah Economic City, a Red Sea zone built to attract investment and boost the economy, which Cyril Piaia, the city’s chief executive, said will act as a hub for the supply chain will function.

“There is a complete value chain. The suppliers are fully integrated. You will become part of the automotive hub. There will be a number of suppliers that will settle here,” he said.

Faisal Sultan, Lucid’s Managing Director for Saudi Arabia, stressed the importance of government taking the initiative in building a supply chain.

“Supply chain will be a main thing that we will look into,” he said. “The supply chain is not typical for an OEM[manufacturer]. . . For that reason, it is more of a government-driven initiative than an OEM-driven initiative.”