The Wall Street Journal reported Monday that General Electric is planning to invest $1.4 billion in Saudi Arabia. GE is joining with other investors to pursue opportunities in energy, water, and aviation.
I find this news particularly interesting when I contrast it with Jeff Immelt’s commencement speech last week. Immelt, the GE CEO, noted that because of increasing protectionist measures, GE will have to build up its local presence in countries around the world. This kind of investment in Saudi Arabia certainly qualifies.
How Saudia Arabia plans its transition
About a month ago, Bloomberg published an article about the transformation of Saudi Arabia’s economy. The deputy crown price of Saudi Arabia, Prince Mohammad bin Salman, is pushing to end his country’s reliance on oil. He’s outlined an aggressive economic agenda to achieve this goal. And he’s only 30 years old.
One big step in the plan is to create the world’s largest sovereign wealth fund. The idea is to exchange some of the value Saudi Arabia has in its oil and gas assets for cash it can use to invest in other parts of the world.
How would Saudi Arabia extract value from its oil and gas assets? Sell a piece of Saudi Aramco, the country’s state-owned oil and gas company. Aramco is the world’s most valuable company. A sale of even 5% of the company would likely generate over $100 billion.
GE is broadening its global footprint
We have a compelling convergence of interests here. First, Saudi Arabia wants to diversify its economy and move at least slightly away from oil and gas. Second, GE wants to beef up its presence outside the US, to mitigate against increasingly protectionist US economy policy. That’s how you get this kind of marriage.
What does this mean to us, as scientists and engineers? It means that we’ll have new challenges on our hands. In the “old world”, as GE engineers, we might design and prototype aircraft engines in one place. In the “new world”, we’ll need to work with many different design and manufacturing teams around the world.
The idea of globalization is that nations specialize. If the US is most conducive for designing new products, then we design new products there. If Southeast Asia is most conducive for manufacturing new products, then we manufacture new products there. Through its investments in Saudi Arabia and elsewhere, GE is mitigating against a turn away from globalization.
Why would we turn away from globalization? I already wrote about Jeff Immelt’s fear over increasingly protectionist tendencies of the US government. In the case of Saudi Arabia, you might find social value in keeping the means of production within the country. In Europe, fears over immigration may lead to firmer borders, politically and economically.
The global financial crisis reset the world’s economy. Interest rates are ultra low, even negative in some cases. Real deflationary concerns exist. It’s a struggle to find an acceptable return on investment, as hedge fund managers can attest.
Where you find uncertainty and fear, you’ll often find a lurch toward protectionism. For a company like GE, which makes half its revenue outside the US, protectionism is dangerous. If goods and assets are harder to move across borders, GE must replicate these goods and assets in each country it wants to operate in.
That’s a costly proposition. But if it’s the least risky, GE will dive in. That’s exactly what they’re doing in Saudi Arabia.
The dollars aren’t the most important part of GE’s investment
True, a $1.4 billion investment isn’t much for GE. It’s less than 20% of its 2015 investment in property, plant, and equipment. Still, it’s a serious move. Immelt is putting his money where his mouth is, making a real effort to build up a local presence in Saudi Arabia.
Immelt and Prince bin Salman have common interests. At least in the immediate future, Saudi Arabia is more predictable politically than the United States. Plus, Saudi Arabia is staring down a barrel. The recent oil price crash has shown how precarious a petro-economy can be. The motivation to quickly transition to a post-petro-economy will encourage the commitment, speed, and flexibility that GE likes.
It’s too quick to say whether we’re seeing a fundamental shift in how large companies conduct international business. Regardless, as scientists and engineers, we’re on the front lines. It’s a good time to get up to speed on international markets. As the world copes with extreme economic and political forces, we need to position ourselves to contribute in as many ways as possible.