KPMG report: Saudi Arabia should nurture SMEs in industrial sector

02 February 2023 4 min. read

As Saudi Arabia looks to diversify its oil-based economy and increase the contribution of SMEs to its national income, supporting small and mid-sized enterprises in the country will be vital.

Similar to other major economies, SMEs play a key role in Saudi Arabia’s economic mix. According to the latest data from Monsha’at (the country’s General Authority for SMEs), the Kingdom now has over 750,000 SMEs – together they contribute around 20% of the GDP and employ 62% of the private sectorworkforce.

However, Saudi Arabia’s Vision 2030 aims for further growth of the SME segment, with the contribution to GDP envisioned to hit 35% by 2030 – which given the strong sector-wide economic growth agenda of the Kingdom means that the SME scene will need to shift gear twice to realise its ambition.

Kenan Nouwailati and Omar Alhalabi - KPMG

Achieving this agenda will not be an easy feat. In a new white paper, experts from KPMG explore the journey SMEs will have to undergo, with specific focus on players from the industrial sector, concluding that a range of challenges lie ahead. These challenges lie both at institutional and sector level, as well as in the different segments of the varied industrial landscape.

At the macro level, SMEs are for a large part dependent on government policy for foreign investments and the regulatory ecosystem, among others. Meanwhile, government policy also plays a large role inthe development of the labour market, with the SME sector currently facing a shortage of skilled talent.

Especially for foreign industrial groups seeking to establish themselves in the Kingdom, such factors can be key determinants of their broader location decision as to where they should base their operations within the Gulf Cooperation Council.

“The broad challenges that may plague any industrial SME looking to establish itself in the Kingdom’s local industrial complex include fluctuations in demand and supply, attracting investments, attracting a skilled workforce with the right experience and regulatory challenges,” said Kenan Nouwailati, Head of Procurement & Supply Chain at KPMG in Saudi Arabia.

Omar Alhalabi, a Saudi-based Director in KPMG’s Strategy Group, added that government policy also plays a role in the sector’s resilience to black swan events, such as the Covid-19 pandemic or major global disruption to supply chains. “The challenges faced by SMEs can be exacerbated by global occurrences and shocks.”

Navigating challenges

Against this backdrop, KPMG’s report puts forward a number of recommendations to government policy makers. “A government strategy coupled with an ecosystem to boost the industrial SME presence can set up SMEs for long-term success and equip them to deal with the challenges they face in the Kingdom,” said Nouwailati.

This strategy should span policies that mitigate key challenges, and at the same time lay the foundation for a supportive ecosystem. According to Alhalabi, much ground has already been made in recent years. “For example, the ease of doing business in the Kingdom has improved significantly over the last few years.”

The Kingdom has been making changes to regulations to boost entrepreneurship, most recently in June 2022 with the new Companies Law, which is meant to improve financing and business dynamics in all sectors of the economy. The government has also introduced regulations to prioritize local SMEs ingovernment tenders and procurement.”

KPMG’s analysis nevertheless shows that more still needs to be done. As one example, “difficulties remain in navigating the regulatory framework for industrial SMEs and investors,” and in the procurement realm, “a lack of visibility into the government tender pipeline remains, which hinders industrial SME planning and operations.”

Drawing insights from their international counterparts, Nouwailati and Alhalabi said that the Saudigovernment could learn from best practices applied by other states. In its report, KPMG places the spotlights on Australia, which has an en elaborate federal support program for SMEs; the UAE, which does a lot to direct foreign attention to its local industry; and Singapore, which is a leader in nurturing a supportive infrastructure.

In conclusion, Alhalabi said: “As Saudi Arabia looks to diversify its sources of revenue and increase the contribution of SMEs and the industrial sector to the GDP, supporting industrial enterprises will be vital. A concerted effort to guide industrial SMEs through their journey from setting up their industrial supply chains to finding their way onto the global market will help bring Saudi Arabia closer to its Vision 2030 goals for the industrial sector.”