American oil men made two discoveries in eastern Saudi Arabia: oil and the human resources of Saudi intelligence, energy and initiative. Part One of this article (Aramco World, January 1962) told the story of the dilemma of the Arabian American Oil Company in operating in a distant land. 'We're oil men," was the company policy. But it had to become many things: grocer, road-builder, druggist, and so on. Part One also told the story of one solution to the dilemma: the growth of the Saudi Industrial Gas Company whose processing towers have become an area landmark. The increase of industry, importing and farming have proved an Aramco theory: modern business methods are the best foundation for a rational local economy. Today Aramco is well on its way out of its non-oil businesses. In a few years it will buy 50 per cent of its supplies through Saudi merchants. The story behind this achievement in "local purchasing" is told here in the second of two parts.
Aramco faces a curious set of related problems arising from its company policy to purchase as much as possible from Saudi merchants.
In the first place, the company must operate efficiently. This rules out unjustified premium prices in support of local merchants—they must compete with the going rates and practices in world markets.
In the second place, Aramco spends huge sums on technology (the design, fabrication, snipping and installation of complicated machinery and processing units). Such purchases require a very high level of technical know-how. High cost rules out anything less than stringent inspection and supervision from drawing board to installation.
The purchase of technology on this scale presumes a technical sophistication that Saudi merchants have not yet acquired or brought under contract.
Aramco has had to build up a world-wide purchasing organization to be sure that required volumes of materials meeting precise specifications will be readily available for continuous operation of its many facilities.
After years of shopping the world the company is now passing on its experience to Saudi businessmen. It is this know-how, combined with his own experience, that will enable the Saudi importer to become self-sufficient and to be treated with fairness and respect abroad. Sometimes local merchants have not been given the benefit of price fluctuations in world commodity markets, and Aramco has had to step in and arrange fair adjustments.
All in all, the problems of the Saudi merchant under the Aramco competitive purchasing system have been formidable. Here are some of the functions he has had to, or will have to, master in his role as a supplier to Aramco:
Pricing, quoting, ordering in a foreign language or languages, inspecting, shipping, clearing, warehousing, delivering and financing.
Now, look at purchasing from the viewpoint of the company and you will get an additional perspective on the accomplishments of the Saudi merchants. The purchasing man has basic criteria: he wants to know the quality of the product, the reliability and integrity of the supplier, the price, the ability of the supplier to meet delivery dates and what services the supplier is capable of providing.
Sitting in the Local Purchasing office in Dhahran, he must also have available at his fingertips these facts about local merchants:
Suitability of facilities and organization to handle a specific contract, familiarity with and experience in the supply business, financial ability to conduct a business and assume risk, knowledge of markets and prime suppliers, adequacy of representation, ability to communicate and maintain proper liaison, and self-sufficiency.
Such are the practical hurdles.
And yet, this year the Arabian American Oil Company plans to spend about $12,000,000 with Saudi suppliers.
There have been three general phases in the evolution of a modern economy in eastern Saudi Arabia. In the first the Saudi was a company employee who received training in many skills and gained first-hand experience with modern business methods. In the second phase many Saudis left the company to go into business themselves and became contractors or merchant-suppliers to Aramco.
The present phase began with the capitalization of a domestic private industry and the switch by merchants from their early role as commission-agent-importers to their newer role as importers on their own account who began to sell to Aramco from their warehouse inventories. (Some of the capital came from Saudi businessmen in Riyadh, Jiddah and other Saudi Arabian business centers.)
The evolution of local purchasing began in the second phase of Saudi economic development when local merchants first emerged. From the first days of local purchasing Aramco encouraged two main streams of progress: the development of local industry based upon indigenous or locally manufactured commodities, and the development of an import business based upon Saudi consumer needs, present or projected. The thousands of Saudi employees of Aramco provided a substantial new consumer base with an increasing potential.
This rational approach to economic development helped the Saudis put down firm roots in their natural business environment. There have been Aramco purchases such as line pipe for which the company is, of course, the sole consumer at present.
Paper products (bags, towels, tissues), concrete building blocks, fresh produce, soft drinks, industrial gas—these were some of the indigenous and locally manufactured products Aramco bought as its local purchasing program swung into high gear. At the same time, the import merchants with an eye on Saudi consumption began to supply a large part of Aramco's canned and packaged foods and commissary items (cosmetics, shaving materials, film, and so forth).
These latter items were subject to import duty for both Aramco and the merchants; thus the Saudis could compete on even terms with the company's own purchasing organization as far as duty costs went. However, there were and are many Aramco imports classified as duty-free under the Concession Agreement. These are materials and equipment the company uses directly in its oil operations. Saudi merchants are now close to the day when they will be able to import such items for Aramco's Concession use under a duty-free system. Some items are already handled on a duty-free basis through bonded warehouses.
The Saudi merchant must test every move he makes not only for present complexities but for future implications. He would be foolish to build a business exclusively based upon an Aramco contract. An unforeseen fluctuation in company supply requirements could leave him without a business. In developing other markets for his products, the Saudi merchant needs a ready supply of business ingenuity.
Some Americans in Saudi Arabia remember an incident that well illustrates the ingenuity of local entrepreneurs. There was a standing contract for hauling silica sand at Ras Tanura where Aramco has its refinery. The contract was a dud in the eyes of the Saudis. Several had tried it and lost money. Then Yusuf Zuwawi of al-Khobar decided to try it. Zuwawi had gone to work for Aramco in 1938 when he was 14 and ten years later had begun his career as a contractor.
He bought some old Austin dump trucks with hard tires. The trucks were cheap and the hard tires cost one-fifth the price of sand tires. He then knocked both ends out of old oil drums, slit them down the side and flattened the metal. These sheets were cut in half lengthwise. He then laid the flat strips end to end and so created a two-track metal roadbed for the hard tires. The trucks thus got through the sandy stretches to the work roads.
Zuwawi made money and later built Aramco's first administration building.
But sometimes even ingenuity has its limits. A Saudi merchant cannot always deal on even terms with a prime supply source in a distant land using a different language. Then Aramco's world-wide purchasing experience, plus its persuasion as a tremendous buyer, goes into action.
For instance, a Dammam merchant contracted to supply coffee to the company. Near the end of the contract period world coffee prices dropped, but no adjustment was made by the Dammam supplier. And in his new bid he submitted the old price. The lower world market price had not been passed along to him. Aramco purchasing experts interceded. The prime supplier in Europe lowered the price to the Saudi merchant who was then able to submit a truly competitive bid.
Other instances could be cited. In the past Aramco has entered into freight rate negotiations to assure Saudi importers fair and proper transportation costs. And in a recent purchase of pipeline pipe through a local importer, Aramco became involved in the arrangements to the extent of paying the mill directly to save the Saudi merchant the added cost of interest charges. This particular purchase amounted to about $1,250,000. It illustrates the magnitude of some of the local purchases being made by the company today.
"If this assistance had not been rendered," an Aramco official remarked, "the local merchant would have been priced out of the market."
He then added an optimistic outlook: "But, in the future the company expects that less and less of this type of assistance will be necessary."
As the Saudi merchants gain more experience in the complex supply business, local purchasing is bound to increase.
By 1954 such purchases first passed the half-million dollar mark. That was the milestone year from which local purchasing took its present momentum. In 1955 the company placed over two million dollars in purchase orders with local merchants. Then in 1958 another big jump came when company payments to local suppliers advanced to $5,588,000—a figure that is some two-and-a-half times the 1957 payments.
The biggest year to date was 1959 when total payments made through the company's Local Purchasing office reached $6,263,000. The following year Aramco's total purchasing dropped, and the drop was reflected in the dollar value of local purchases. However, local purchasing held to its basic gains: the per cent of local purchases in relation to total Aramco purchases remained the same.'
At the time this article was written only unofficial estimates were available for 1961. However, it appeared late in the year that the total of local purchases was headed for a new record—possibly as much as $10,000,000.
There are many good businessmen among the Saudi merchants. Their cumulative experience is built into the momentum behind the upward sweep of Aramco's many local purchases.
How far can their ever-increasing business know-how take them?
Robert S. Hatch, the vice president who has the responsibility for Aramco's over-all purchasing, has a blunt answer in terms of the foreseeable future: "Within five years the company expects to spend 50 per cent of its purchasing bill with Saudi merchants."
Aramco applies its own pressure to speed up the growth, and speed is in the air these days in the Local Purchasing offices in Dhahran.
"We aimed to introduce sound business practices in encouraging local merchants," Hatch says. "Our idea was to help them develop good business organizations. And they had what it took.
"They have had difficulties. For example, we decided that we would help to get manufacturers' representatives to come to Saudi Arabia to call on the merchants here. We set certain limits though. We would facilitate contacts, but we would not participate in their negotiations. Also, we expected the representatives to handle their own visa matters after the first visit.
"There were very limited hotel accommodations in the area, so some of the merchants installed living quarters in their business premises just for the convenience of their business visitors.
"The modern wholesale system was first introduced in supplying Aramco when Yousuf Mahmood Hussain of al-Khobar became a Colgate wholesaler and began to supply Aramco from his warehouse inventory," Hatch continues.
"It was this sort of development that led us to clear out about one-half the items we bought, imported, stored and sold through the Aramco canteen. In the 1955-1956 period the employees started buying such items from the Saudi stores in al-Khobar. We got out of that business as far as we could. Today, 54 per cent of what we still carry in company commissaries is purchased through local suppliers.
"We wanted to get out of the produce business, and Dr. Grover Brown's agricultural assistance program—a company project—has been a big help in that direction. Better Saudi farming methods have led to more local produce and a wider variety of crops. Now there is a Vendors' Market in Dhahran where Saudi farmers sell their produce directly to Aramco employees.
"We estimate that for 1961 it took about 1,250,000 pounds of produce to supply Aramco employees. The company imported directly 300,000 pounds and bought 500,000 pounds from Saudi merchants. Half of this latter amount was grown here. The remaining 450,000 pounds of produce that Aramco employees consumed was sold to them through the Vendors' Market—and about half of that amount was from local farms.
"We believe that these developments illustrate progress on a broad base that provides a firm underpinning for Saudi economy. And they have been very helpful to us in getting out of non-oil business and services," Hatch says.
What about the progress curve in local purchasing?
"We are currently making about 20 per cent of our purchases through our Local Purchasing Department. But it isn't enough," he continues.
"By 1963 we should be buying about 33 per cent through Saudi merchants. And as I said, we should reach 50 per cent in five years."
But there are qualifications.
"We still have to assume the responsibility for costly purchases that are highly technical in nature. For example, we had to purchase specially designed compressors manufactured under license in Italy for a gas injection facility. And only recently we purchased a refrigeration plant for liquefied petroleum gas. This highly specialized equipment demands on-the-spot inspection and step-by-step supervision. As I say, we cannot shift this responsibility.
"In any forecast," Hatch concluded, "you must take into consideration the fact that the real future of our local purchasing will rest largely upon the broad expansion of local industry. This will in turn depend upon diversification and growth in Saudi consumer demand.
"But you must keep in mind that the Saudi businessman has accomplished a great deal in a short time."
After he had studied Aramco's Arab Industrial Development program in action, Carleton S. Coon, a world-famous authority on Middle Eastern life, wrote: "It may go on record as one of the outstanding jobs of social engineering in this phase of the history of the world..."
"Of course," he continued, "the Saudi Arabs deserve equal credit for their intelligence, energy, capacity for hard work under adversity, and for their honesty, fair-mindedness, and generosity."
Such was the other discovery Aramco's oil men made in Saudi Arabia.