SAUDI f15

A Saudi F-15 fighter jet landing at the Khamis Mushayt military airbase, some 880 km from the capital Riyadh. (FAYEZ NURELDINE/AFP via Getty Images)

BEIRUT — Almost two years ago, the Kingdom of Saudi Arabia announced that it would stop doing business with foreign firms that don’t have their regional headquarters in the Kingdom by the start of 2024.

But while the mandate appeared far-reaching, so far it has done little to sway major defense firms to relocate their regional hubs, largely based in the nearby United Arab Emirates, even if the Saudi rule has managed to draw in some smaller companies, according to analysts and a review of public announcements.

“If a company refused to move their headquarters to Saudi Arabia it is absolutely their right and they will continue to have the freedom to work with the private sector in Saudi Arabia,” Saudi finance minister Mohammed al-Jadaan told Reuters in February 2021. “But as long as it is related to the government contracts, they will have to have their regional headquarters here.”

The clock is ticking, and if KSA sticks to its guns, foreign firms — including such major defense power players as Lockheed Martin, Raytheon Technologies, Northrop Grumman, Leonardo, Thales, General Dynamics and others — are on paper just 14 months away from losing out on the lucrative Saudi market. It should be causing panic in industry, but analysts said that the biggest players appear confident they can find workarounds — including the use of local partnerships and subsidiaries, as they’ve done in other countries — to keep the market open.

“So far the announcement has not come with any serious strings attached. While many companies have created subsidiaries in Saudi Arabia, the vast majority of the main defense players still see the UAE as the main regional hub for the business in the Gulf,” said Andreas Krieg, senior lecturer at King’s College London, and CEO of MENA Analytica, a London-based strategic risk consultancy firm focusing on the wider Middle East region.

Though Saudi Arabia is reportedly the world’s second largest major arms importer [PDF], Krieg didn’t foresee major firms shifting their strategies according to KSA’s decisions.

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“For the big multinationals, it is a sellers’ market, [meaning] these companies are aware of their market weight and leverage. Saudi is desperately bidding for their defense products and would not deny them access to market if they received an import license. Western defense tech is still the Holy Grail for Saudi Arabia and they cannot afford antagonizing them,” Krieg told Breaking Defense.

Meanwhile, smaller firms appear to have taken KSA’s mandate more seriously, said Theodore Karasik, Senior Advisor at the Gulf State Analytics think tank.

“The small companies have made this decision because of licensing issues and entry into market and then the foreign companies adjusted accordingly,” Karasik said.

He added that the Saudi rule was targeted towards Western companies, and was meant to bring back home-grown Saudi firms that until recently would have had infrastructure and other concerns.

Mohammed Soliman, the director of the Cyber Security and Emerging Technology Program at the Middle East Institute, said the Saudi strategy could work, with time. Soliman said that based on his understanding, there existing plans for many companies to open offices in Riyadh.

“Eventually, the procurement power of Saudi Arabia will create an incentive for companies to at least open an office in Riyadh. It is a matter of when not if,” he told Breaking Defense.

He added that because of its status as a G20 economy, energy superpower and whole-of-government economic diversification approach, the Kingdom is an economic success story today.

“Companies want to be in the Saudi market. More companies are expected to open offices in the Kingdom in light of the global economic forecasts,” Soliman said.

In October 2021, Reuters reported that Saudi Arabia had licensed 44 international companies to set up regional headquarters in the capital Riyadh, but no specific defense firms were named in this announcement.

Headquarters In KSA

A number of major foreign defense firms — companies such as Lockheed Martin, Raytheon Technologies and Rheinmetall — are already established in the Kingdom through subsidiaries or joint ventures with local firms. Those, analysts said, would likely allow the firms to duck the Saudi mandate.

In March 2022, Raytheon inaugurated the new headquarters of its Saudi Arabian subsidiary company in Riyadh.

“The opening of our new headquarters is a natural step following the creation of Raytheon Saudi Arabia five years ago and symbolizes our ongoing collaboration with the Kingdom to develop greater self-sufficiency within its military and security ecosystem, and to sustain jobs and create value in the Saudi economy,” Raytheon Saudi Arabia CEO David Hanley said during the inauguration.

In September 2022, the smaller Polish WB Group established WB Middle East for Military Industries LLC (WB ME) with headquarters in Riyadh, as a joint venture with Saudi Middle East Systems and Technology Co. (MEST). The company has a mixed portfolio of unmanned systems, digital communication platforms, tactical aerial platforms and software defined radios.

“Our new [joint venture] was formed to meet the growing demand for WB Group products in the Saudi Arabian market. WB ME represents an invaluable opportunity to be part of and strengthen our support to the Kingdom’s rapidly developing defense ecosystem,” Mirosław Janicki, WB Middle East for Military Industries general director told Breaking Defense.

In response to Breaking Defense question about whether this decision is a direct outcome of the earlier announcement by the Kingdom, Janicki suggested that wasn’t the case.

“WB GROUP long-term strategy is to expand its presence on global markets by creating local subsidiaries, either as entities fully owned by us or in partnership with local companies,” he said. “Saudi Arabia offers excellent opportunities for manufacturing and long-term development. It was an obvious and natural step to establish our operations in the Kingdom. We were simply looking for a trustworthy, appropriate and longstanding local partner to embark on ‘a new journey.’”

Another smaller company that did recently open its regional HQ in Saudia Arabia was the Monaco and UK-based MARSS, which opened an office in Riyadh in 2021. That helped the company ink a multimillion Euro deal with a local entity to secure its facility with a major RADiRguard installation in September 2022. (RADiRguard is a multisensory smart perimeter surveillance system that was showcased by the firm at World Defense Show in KSA earlier this year.)

MARSS managing director in KSA, Andrew Forbes, told Breaking Defense that MARSS is developing a new version of the system, with extended detection ranges and designed for border security, with installations spanning hundreds of kilometers. The company is “currently testing and refining its components in KSA, specifically the solar powered capabilities and long-range wireless communications,” Forbes added.

After opening its headquarters in KSA, MARSS is expecting to increase its cooperation with all GCC countries from its Saudi facility as the drone threats are increasing in the Gulf.

But with the relative lack of movement from larger companies, it’s unclear what changes the 2024 deadline could bring – if any. Soliman, for his part, is optimistic it’ll spur defense investment in the Kingdom.

“Riyadh is gradually transforming itself into a regional center for finance, business, and logistics, and the defense industry is no exception. From my point of view, the policy is working, and we see many international defense companies opening — or planning to — open offices in Riyadh instead of sending their executives to the Kingdom periodically,” he said.