How Saudi Arabia’s Programme HQ plan will affect the Gulf tech sector

Beginning on January 1, 2024, companies that want to participate in contracts with the Saudi Arabian government and state-backed institutions must move their Middle East headquarters to the country. The policy aims to boost the Saudi economy but has the potential to affect the availability of technology used by organizations in the region, as well as business for tech vendors.

The policy, dubbed Programme HQ, aims to limit economic leakage and create more jobs in the kingdom by ensuring that more goods and services used by government entities are produced locally.  The Ministry of Investment believes that the programme’s incentives — including a 50-year tax holiday and preferential selection for government tenders — will lure many top international companies to set up their regional base in Riyadh.

Tech companies that decide to maintain their regional headquarters elsewhere will still be able to do business with the private sector in Saudi Arabia. However, even Saudi companies in the private sector rely on state-backed contracts for the majority of their business, and so may be prevented from using technology from companies that do not have headquarters in the country.

HQ plan stirs up tension between KSA, UAE

The announcement has stirred up tensions between Saudi Arabia and the UAE, currently the region’s top hub for talent in the tech industry. Many view the news as an ultimatum, others see it as fostering healthy economic competition between two historic allies with ambitious diversification strategies, offering mutual opportunities for growth.

The 44 companies that have received licenses so far are expected to relocate their headquarters to Riyadh over the next year, according to the president of the Royal Commission for Riyadh City, Fahd al-Rasheed. The goal is to attract 480 firms before 2030. As soon as the news was announced earlier this year, Saudi Arabia set a new record for issuing foreign investor licenses, awarding 478 in the first quarter alone — a 36% increase from 2020.

“For some companies, it may not be cost effective to have different offices in different countries. So, they will have to make a decision,” says Abdulwahed Al Janahi, chief executive at The Benefit Company, an employee benefits consultancy. “Big companies might now be thinking of certain strategies on how to accommodate their operations. You don’t want to lose a market like Saudi Arabia.”

‘Nameplate’ HQs will not suffice

In order to access government contracts and $3 trillion in investment opportunities outlined in Saudi’s 2030 vision, companies are expected to set up regional HQs in earnest, not merely symbolic offices in Riyadh created to circumvent the new policy. On an episode of the “Frankly Speaking” interview programme, Minister of Investment Khalid Al-Falih made it clear: “A superficial nameplate saying ‘this is the regional headquarters’ will not fly,” adding that companies will be expected to move top-level executives and consolidate regional business in their new Saudi headquarters. “That’s our interest and that’s our right, and we want to do it with partners that are not truncated — where the body is here, but the brain is somewhere else; the response time is delayed and the optimisation of decision-making is impacted by that lack of presence of their management team.”

Companies that make the move can benefit from relocation assistance, no corporate tax for 50 years, and no quotas for the employment of Saudi nationals. Saudi Arabia is focusing its efforts on attracting companies to Riyadh, although if businesses could potentially set up headquarters in Dammam or Jeddah if they make a compelling case in their application.

The ramifications of Programme HQ

While some industries such as financial and business services might be able to transition easily to a new environment in Riyadh, questions remain about the feasibility of moving large-scale manufacturing operations that are subject to rising fuel and electricity prices. Other challenges companies will contend with are a shortage of skilled workers and ambiguous information surrounding business regulations.

“It will financially affect our countries, and small- and medium-sized companies. Some other countries in the region are totally depending on the Saudi market, and those companies will be badly affected because more than 50 percent of their business is in Saudi Arabia,” says Sohaib Mohamed Al-Abdi, CIO and head of the Information Networks division of the University of Bahrain. “I’m not sure if those companies will shift there, as it depends on their business model and financial situation, but if they can, they will definitely move their headquarters there. Saudi Arabia is our biggest market. Even if they are not moving, they will at least open an office there to be in touch with the Saudi market.”

Dubai’s position as a tech talent hub has been aided in no small part by the city’s vibrant lifestyle offerings such as shopping, night-life, resorts, restaurants, beaches, entertainment, arts, and music. Life in Saudi Arabia is considerably more restricted, with ubiquitous gender segregation, a ban on public religious practise for non-Muslims, and public decency laws dictating modest dress and forbidding the consumption of alcohol. Saudi Arabia still has a long journey ahead to make Riyadh an attractive destination for the region’s young international tech talent.

Luring companies away from UAE

Luring top companies away from the UAE’s entertainment and lifestyle amenities will be a top priority for Riyadh, and some changes are already under way.

The Ministry of Investment announced plans in October to establish four to five special economic zones across the kingdom, including one in Riyadh’s King Abdullah Financial District and a special logistics zone at Riyadh Airport (Integrated Logistics Bonded Zone). The zones include lucrative incentives for businesses that establish operations there such as 100% business ownership and no customs, import, or capital repatriation restrictions. The newly developed financial district will try to sway new tenants by eliminating Saudization policies that are unpopular with foreign companies, like quotas that dictate a certain percentage of employed nationals for at least 10 years.

We’re in: Tech companies confirm the move

Among the 44 companies that have been awarded licenses to set up their regional HQ are many technology and companies, including TrendMicro, Siemens, Bosch, Philips, Boston Scientific, and Schlumberger.

Cloud service providers are creating strategic arrangements to accommodate the new policy as well: Google Cloud announced at the end of 2020 that they were deploying a new cloud region in Saudi Arabia for the first time in partnership with Saudi Aramco, who will sponsor a local reseller to offer cloud computing services to businesses. Alibaba Cloud signed a $500 million deal with Saudi Telecom, setting up a new regional headquarters in Riyadh and partnering with Saudi-Chinese eWTP Arabia Capital Fund to accelerate the growth of local technology ventures like the first accredited training centre for drones.

But as the deadline approaches for companies to apply for their licences and retain access to lucrative Saudi government contracts, many top tech companies such as Microsoft and Oracle have yet to announce their plans.

 “We don’t see any impact on our company. I don’t know about moving headquarters, but we are expanding our presence there, our footprint there. I have headquarters resources there that work out of the Saudi office. We have a virtual set-up. I would assume that most international companies have a local presence there,” says Ihab Foudeh, manager of professional services at Microsoft MEA. “Saudi Arabia is a very big market for all of us and partnerships are very strong. If there is an expansion, it is good, because you hire more people, you train more people, and collaborate more.”

Next steps for tech vendors

The solution for most companies based in other regional hubs like Dubai is to move their official headquarters to Saudi Arabia while still maintaining strategic parts of their business elsewhere. A Cisco insider, who wishes to remain anonymous, confirmed that the company plans to split its operations between the UAE and Saudi Arabia, perhaps managing local business from Saudi Arabia and regional business from Dubai.

 “These things happened in the 90s when many companies moved from Bahrain to Dubai. But Bahrain is still there; it survived the move, and strived to become the financial hub of the region,” said the Cisco insider.  The impact of the Saudi government’s warning about “nameplate” HQs is yet to be seen, as more information about the programme will be released at the end of 2021 according to the Saudi Ministry of Investment.

“Companies will still keep big operations here to cover the GCC. It will not affect the income of the UAE, but definitely boost Saudi business,” says Yaman Abosaleh, managing director of NIL Data Communication Middle East, based in Saudi Arabia. “Now that the kingdom is open for foreign investors, they will definitely move there.”

Abosaleh confirmed that NIL will be moving their headquarters from Dubai to Saudi Arabia. “Saudi Arabia is the biggest GCC market, and the future of the technology exchange is going to be great.”

While many analysts have interpreted the programme as a direct challenge to the UAE’s status as a regional tech hub, some experts forecast that shifting headquarters to Saudi Arabia won’t negatively impact the tech industry for either side.

With so many major companies choosing to maintain a presence both in Saudi and beyond, the regional race to build societies built on innovation and not oil is not winner-takes-all — and businesses throughout out the region are likely to continue to have access to technology from all major IT vendors.

 “The technology market, in general, will not be affected,” says the University of Bahrain’s Al-Abdi. “The trend will remain the same: new technologies like cloud and AI will keep growing.