Saudi industrial diversification: test the customer before the capacity

The first gate is not technical feasibility. It is whether a defined customer, in a defined segment, has a requirement you can meet. That means naming the segments, naming the buyers within them, and establishing what they currently buy, from where, at what delivered cost and against what specification.

Qualification should be specific enough to be falsifiable. 'Construction sector demand' is not a segment. 'Contractors in a named region purchasing a defined product grade to a named standard, currently imported from a named origin' is. The second can be tested; the first cannot.

Where possible, qualification should involve direct conversation with the buyer about specification, volume, seasonality and the conditions under which they would switch supplier. Buyers are frequently more forthcoming about switching conditions than about price, and the switching conditions are often the binding constraint.

For import-substitution propositions, the decisive comparison is not the ex-works cost of a domestic plant against the ex-works cost of a foreign one. It is the delivered, duty-paid, specification-equivalent cost to the customer. That difference is where most of the commercial argument actually sits.

A domestic producer avoids freight, import duty and some working capital tied up in transit inventory, and can offer shorter lead times and more responsive service. It may face higher input costs, particularly for imported raw material, and higher energy or labour costs than the origin it is displacing.

The comparison must be like-for-like on specification and packaging, and it must be honest about volumes. A domestic plant serving a small order book will rarely match the unit cost of a large foreign producer running a long campaign. The case usually rests on delivered cost including logistics and duty, service and lead time — not on ex-works parity.

Business cases are usually built on a utilisation curve, and the curve is usually optimistic. Ramp assumptions should be justified by something concrete: comparable products in comparable markets, the rate at which buyers actually switch, and the qualification period each customer requires.

Two features deserve particular attention. First, the cost position at low utilisation — a plant at 40 per cent output rarely covers its fixed costs, so the question is how long that period lasts and what funds it. Second, the working capital requirement during ramp, when raw material and finished goods inventory are both building while revenue is still thin.

A useful discipline is to state the minimum utilisation at which the plant covers cash costs, and then to test how much of the projection sits below that line. If a large share of the early years does, the plan needs either a smaller first phase or more patient capital.

The practical mechanism is a set of gates, each with a defined evidence requirement and a decision that cannot be taken until it is met. The value is not bureaucratic; it is that it prevents a technical or political enthusiasm from carrying a project past the point where commercial evidence should have stopped it.

Two further gates deserve inclusion beyond customer and cost. Logistics capability — whether inbound inputs and outbound product can actually move at the required reliability and cost — and local supplier capability, including whether required quality, documentation and lead times can be met domestically or must be imported.