Doing Business in Saudi Arabia - International Franchise Association
Doing Business in Saudi Arabia - International Franchise Association Doing Business in Saudi Arabia - International Franchise Association
Return to table of contents Chapter 3: Selling U.S. Products and Services • Using an Agent or Distributor • Establishing an Office • Franchising • Direct Marketing • Joint Ventures/Licensing • Selling to the Government • Distribution and Sales Channels • Selling Factors/Techniques • Electronic Commerce • Trade Promotion and Advertising • Pricing • Sales Service/Customer Support • Protecting Your Intellectual Property • Due Diligence • Local Professional Services • Web Resources Using an Agent or Distributor Return to top American exporters are not required to appoint a local Saudi agent or distributor to sell to Saudi companies, but commercial regulations restrict importing for resale and direct commercial marketing within the Kingdom to Saudi nationals, wholly Saudi-owned companies, and Saudiforeign partnerships where the foreign partner holds 25% equity. Nationals from the Gulf Cooperation Council (GCC) countries, which include Saudi Arabia, Kuwait, Qatar, Oman, Bahrain, and the UAE, are also allowed to engage in trading and retail activities, including real estate. Agent/distributor relations are governed by the Commercial Agency Regulations of the Kingdom of Saudi Arabia that is administered by the Ministry of Commerce and Industry. Saudi businesspeople cannot act as commercial agents unless their names are entered into the Register maintained by the Ministry of Commerce and Industry. In July 2001, the Council of Ministers cancelled a decree compelling foreign companies with government contracts to appoint a Saudi service agent. The old decree also specified a maximum commission of 5%. Some government contracts, however, still require a minimum participation by a Saudi entity. In addition, government contracts typically include a clause requiring training programs for Saudis. Terminating an agent/distributor agreement can be difficult even though Saudi policy has changed to permit registration of a new agreement over the objections of the existing distributor. While most prospective Saudi agents and/or distributors generally prefer exclusive agency contracts, these are by no means required. Given the close-knit nature of business circles in Saudi Arabia, replacing an agent or distributor could damage a U.S. firm’s reputation if not handled sensitively. A U.S. company should at all costs avoid being viewed as lacking adequate commitment to its Saudi business relationships. Saudi agents may request “parting compensation” in the event the foreign exporter decides to dissolve a business relationship.
Since this is a common practice in this market, U.S. companies should address this eventuality prior to executing a contract. U.S. firms interested in the Saudi market are cautioned against trying to use lists of importers for “cold calls” on prospective agents. Saudis prefer to do business with someone only when they have been properly introduced and have met face-to-face. To help dispel reluctance on the Saudi side, an introduction by a “go-between” typically serves to vouch for the reliability of both parties. Appropriate third parties for such introductions include other Saudi firms, U.S. companies that have successfully done business in Saudi Arabia, banks, trade associations, chambers of commerce, and the U.S. Commercial Service in Saudi Arabia (CS Saudi Arabia). Saudi law is based on the Islamic Shari’a and differs considerably from U.S. practice. Nonetheless, the Saudi Government has earmarked nearly $2 billion to overhaul its judicial system and court facilities in an effort to streamline the legal process. A Royal Decree M/78 dated October 1, 2007, approved the Charter of Judiciary system and the Grievances Board Charter, and implemented relevant mechanisms. American firms contemplating an agency or a distribution agreement are advised to consult with a local attorney. The U.S. Commercial Service, through its domestic U.S. Export Assistance Centers and overseas offices in Embassies and Consulates, offers a variety of services to assist American firms in selecting a reputable and qualified representative. Our Gold Key Matching Service is a personalized and targeted matchmaking service that combines an orientation briefing, a profile of each Saudi prospect, interpreter services for meetings, a Commercial Specialist from the Embassy to escort you to your meetings, and assistance in developing follow-up strategies. The International Partner Search provides pertinent information on up to six pre-qualified potential Saudi representatives. This customized search will put you in touch with firms that have expressed an interest in representing your product or service. The International Company Profile provides follow up background information on potential partners. Establishing an Office Return to top The procedures to establish an office in Saudi Arabia differ according to the type of business undertaken. The most common and direct method is simply to appoint an agent/distributor who can set up the office under its own commercial registry. The agent/distributor agreement should be registered with the Ministry of Commerce & Industry. The Commercial Agency regulations govern the agent/distributor agreement. A second method might be to establish a technical and scientific service office, which also requires a license from the Ministry of Commerce and Industry. This approach preserves the independence and identity of the foreign company and provides for more leeway in managing and marketing the company’s products or services. Technical and scientific service offices are not allowed to engage directly or indirectly in commercial activities, but they may provide technical and advisory support to Saudi distributors, as well as conduct market surveys and product research. A third method is to establish a branch office. Saudi Arabia’s Foreign Investment Law allows international companies the possibility of 100% ownership of projects and property required for the project itself, while enabling them to retain the same incentives given to national companies. A branch office involves a more direct presence than a commercial agent. Branch offices are largely restricted to an administrative role and may not engage in trading activities. Nevertheless, a branch office can be very useful as a liaison presence for a U.S. company. A
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Return to table of contents<br />
Chapter 3: Sell<strong>in</strong>g U.S. Products and Services<br />
• Us<strong>in</strong>g an Agent or Distributor<br />
• Establish<strong>in</strong>g an Office<br />
• Franchis<strong>in</strong>g<br />
• Direct Market<strong>in</strong>g<br />
• Jo<strong>in</strong>t Ventures/Licens<strong>in</strong>g<br />
• Sell<strong>in</strong>g to the Government<br />
• Distribution and Sales Channels<br />
• Sell<strong>in</strong>g Factors/Techniques<br />
• Electronic Commerce<br />
• Trade Promotion and Advertis<strong>in</strong>g<br />
• Pric<strong>in</strong>g<br />
• Sales Service/Customer Support<br />
• Protect<strong>in</strong>g Your Intellectual Property<br />
• Due Diligence<br />
• Local Professional Services<br />
• Web Resources<br />
Us<strong>in</strong>g an Agent or Distributor Return to top<br />
American exporters are not required to appo<strong>in</strong>t a local <strong>Saudi</strong> agent or distributor to sell to <strong>Saudi</strong><br />
companies, but commercial regulations restrict import<strong>in</strong>g for resale and direct commercial<br />
market<strong>in</strong>g with<strong>in</strong> the K<strong>in</strong>gdom to <strong>Saudi</strong> nationals, wholly <strong>Saudi</strong>-owned companies, and <strong>Saudi</strong>foreign<br />
partnerships where the foreign partner holds 25% equity. Nationals from the Gulf<br />
Cooperation Council (GCC) countries, which <strong>in</strong>clude <strong>Saudi</strong> <strong>Arabia</strong>, Kuwait, Qatar, Oman,<br />
Bahra<strong>in</strong>, and the UAE, are also allowed to engage <strong>in</strong> trad<strong>in</strong>g and retail activities, <strong>in</strong>clud<strong>in</strong>g real<br />
estate. Agent/distributor relations are governed by the Commercial Agency Regulations of the<br />
K<strong>in</strong>gdom of <strong>Saudi</strong> <strong>Arabia</strong> that is adm<strong>in</strong>istered by the M<strong>in</strong>istry of Commerce and Industry. <strong>Saudi</strong><br />
bus<strong>in</strong>esspeople cannot act as commercial agents unless their names are entered <strong>in</strong>to the<br />
Register ma<strong>in</strong>ta<strong>in</strong>ed by the M<strong>in</strong>istry of Commerce and Industry.<br />
In July 2001, the Council of M<strong>in</strong>isters cancelled a decree compell<strong>in</strong>g foreign companies with<br />
government contracts to appo<strong>in</strong>t a <strong>Saudi</strong> service agent. The old decree also specified a<br />
maximum commission of 5%. Some government contracts, however, still require a m<strong>in</strong>imum<br />
participation by a <strong>Saudi</strong> entity. In addition, government contracts typically <strong>in</strong>clude a clause<br />
requir<strong>in</strong>g tra<strong>in</strong><strong>in</strong>g programs for <strong>Saudi</strong>s.<br />
Term<strong>in</strong>at<strong>in</strong>g an agent/distributor agreement can be difficult even though <strong>Saudi</strong> policy has<br />
changed to permit registration of a new agreement over the objections of the exist<strong>in</strong>g distributor.<br />
While most prospective <strong>Saudi</strong> agents and/or distributors generally prefer exclusive agency<br />
contracts, these are by no means required. Given the close-knit nature of bus<strong>in</strong>ess circles <strong>in</strong><br />
<strong>Saudi</strong> <strong>Arabia</strong>, replac<strong>in</strong>g an agent or distributor could damage a U.S. firm’s reputation if not<br />
handled sensitively. A U.S. company should at all costs avoid be<strong>in</strong>g viewed as lack<strong>in</strong>g adequate<br />
commitment to its <strong>Saudi</strong> bus<strong>in</strong>ess relationships. <strong>Saudi</strong> agents may request “part<strong>in</strong>g<br />
compensation” <strong>in</strong> the event the foreign exporter decides to dissolve a bus<strong>in</strong>ess relationship.
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