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What Elon Musk doesn’t get about Saudi Arabia

Saudi Arabia’s actual investment in the electric car market is so different to what Musk proposed.

Step on to any plane heading to Riyadh tomorrow and you will rub shoulders with returning Saudi families, pilgrims, oilmen and a new swell of eager Western consultants, clutching their ex-McKinsey CVs and frequent flyer cards. Vision 2030, Saudi Arabia’s plan to wean itself off oil, may not be going all that well, but it has become a gold rush for the consultant industry.

The question is whether what these consultants try to build will ever be attractive enough for mega-rich institutional investors to swing into Riyadh as well. Will their plans be nicely thought out, but ultimately never come to fruition? Will cronyism, factionalism and greed, mixed with resistance from the Saudi religious establishment, mean that Vision 2030 ends up a dud?

A fair few private equity funds, regional banks and lending institutions are intrigued, but the larger financial institutions and economies have shown little interest. This has left Saudi Arabia caught between the two remaining interested parties, China and the United States. Not a bad pair to be sure, but nonetheless putting the Kingdom at the mercy of two superpowers.

Crown Prince Mohammad Bin Salman should be praised — although this will never overshadow his faults — for setting out a new road map for reform. His family are wealthier than their grandparents’ wildest dreams, with lifestyles much, much grander and opulent than those of their subjects. To modernise the Saudi economy necessarily means diluting the large ruling family’s closely guarded wealth, reducing their relative privilege, and opening up their most coveted economic opportunities to a wider pool of entrepreneurs and investors, some of whom will be foreign and most of whom will not be even remotely royal. This treading on toes will lose Bin Salman many potential allies.

The prince is taking on the religious establishment too. In June, it was announced that a Shura Council proposition to subsume the Committee for the Prevention of Virtue and the Prevention of Vice into the Ministry of Islamic Affairs was being approved. The move is calculated to outflank the more extremist elements in Saudi high society. It comes on top of restricting the mutaween (religious police) from working outside office hours and removing their right to arrest people and stop women driving alone and attending sporting events. The backlash from this will come soon; it will be distracting; and it will deter foreign investors even more.

China remains the wildcard in whether Bin Salman’s plan could ultimately succeed. At a Beijing-Riyadh summit in March last year, the two countries announced $65 billion of agreed future investment and trade partnership agreements in energy, defence and other partnerships. By October, China had announced it was making a major play into Saudi Aramco, demonstrating that the trade summit promises were not hollow.

One appeal of the Chinese as far as Saudi treasury officers are concerned is that their money comes with few strings attached. As with their efforts in sub-Saharan Africa, Beijing has exploited the recent economic chaos in the Gulf to its enormous advantage by not caring about human rights, and keeping matters focused on business.

The communist and socialist left has always insisted that the free market cannot grapple with the major challenges of the day; the environment and human rights are a major bugbear for all of us. However, capitalism clearly can and is playing that role. China’s economy has liberalised massively, making it a global rather than bit player in the international business climate. In Saudi Arabia, the liberalising of the economy has promoted a surge in human rights, particularly for women.

The free market has also produced the electric car business, the best opportunity yet for mankind to reverse climate change. The rock star of that world is Elon Musk, formerly of Paypal. The present travails of his company, Tesla, are well documented. He recently attracted a Securities and Exchange Commission investigation over his suggestion that the Saudi sovereign wealth fund would be buying up shares in the electric car maker, possibly in its entirety. Reuters later reported that there were no such plans in place.

There was no way that the Saudis were ever going to make such a massive play, not least because their funds are stretched by the lower oil price, while the planned part-privatisation of Saudi Aramco has disappeared into ignominy. More than half of the Public Investment Fund, the main sovereign wealth vehicle, is tied up in domestic stocks which would be hard to sell off at short notice. The PIF already has major commitments to Uber, Virgin Group and Blackstone, among others.

China may play a part in Riyadh’s decision making too. It is particularly sensitive to any issues surrounding electric cars. Communist economic planners in Beijing are in a position to mandate the mass adoption of electric cars with the stroke of a pen, generating in an instant the largest electric car market on earth. This would give vast economies of scale which Western car manufacturers, particularly Tesla, will hurt at the mere thought of. These are brands like BYD, backed by Warren Buffett, which already sells more cars than Tesla, but almost nobody in the West has heard of. Nevertheless, China is hedging its bets and has a five per cent stake in Tesla already, similar to Saudi Arabia. It wants to keep its main competitors under close guard.

This is just a theory then, but had Riyadh taken the fantastical route that Musk proposed, and bought out the largest Western electric car manufacturer in its entirety at considerable risk to the rest of the Saudi portfolio, this would have sent a chilling message to Saudi Arabia’s Chinese partners. Beijing could only interpret economic irrationality as a politically motivated attack.

Perhaps this is why Saudi Arabia’s actual investment in the electric car market is so different to what Musk proposed. Instead of backing him, the Saudis are rumoured to be taking a punt on one of his competitors, Lucid Motors Inc, set up by a former Tesla executive back in 2007. This will eat away at the reputation of both Musk and his share price. Chinese billionaire Jia Yueting, venture capital firm Tsing Capital and the Chinese state itself – through Beijing Automotive — are also investors, putting Riyadh back into safer territory when it comes to wooing China to make Vision 2030 a reality.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.

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