INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH
ASSIGNMENT OF INTERNATIONAL BUSINESS ENVIRONMENT ON: INTERNATIONAL TRADE OF UAE
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Industries Achieving Success In U.A.E
Introduction of U.A.E:The UAE is a major player in the global oil industry (4th in the world) and its oil resources are the main basis of the country's growth. The emirate of Abu Dhabi alone contains 10% of the world's oil reserves (98 billion barrels). The trade industry is also booming as each emirate has established a Free Zone to encourage companies to setup there. The emirates of Ras Al Khaymah and Fujairah are the main agricultural centers as they are both substantially better watered than the other emirates. The emirate of Dubai has become a commercial center and has now consolidated its position as the key trading route between the East and the West. It has also been named the business capital of the Middle East and has become a large tourism attraction. The oil and gas industry of UAE contributes to the Government revenues. The largest producer of oil in the UAE is Abu Dhabi. The prosperity of the United Arab Emirates and its rapid transformation from a backward desert region to one with a booming economy has been made possible by revenue from oil exports. The UAE possesses nearly 10 per cent of the world‟s total reserves, and there is no doubt that oil will continue to provide the income for both economic growth and the expansion of social services for several more decades at least. . In a matter of a few decades, Abu Dhabi, supported by Dubai, turned the UAE into one of the major players in the international oil export industry. Proven recoverable oil reserves in 2000 were put at 98.8 billion barrels. The United Arab Emirates is a constitutional federation of seven emirates; Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras al-Khaimah and Fujairah. The federation was formally established on 2 December 1971.
Industries Successful in U.A.E:i. ii. iii. iv.
Oil & Gas Industry Real Estate Tourism & Service Industry Logistics Industry
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PORTER’S DIAMOND THEORY Firm Strategy, Structure and Rivalry
Factor Endowmen ts
PORTER'S DIAMOND THEORY
Demand Conditions
Related and Supporting Industries
1) Oil and Gas Industry:The UAE is a major player in the global oil industry (4th in the world) and its oil resources are the main basis of the country's growth. The prosperity of the United Arab Emirates and its rapid transformation from a backward desert region to one with a booming economy has been made possible by revenue from oil exports. The UAE possesses nearly 10 per cent of the world‟s total reserves, and there is no doubt that oil will continue to provide the income for both economic growth and the expansion of social services for several more decades at least. In the coming years, natural gas will play an increasingly important role in the UAE‟s development – particularly as a fuel source for power generation, petrochemicals and manufacturing industry. By far the biggest deposits of oil in the Emirates have been found in Abu Dhabi. The emirate controls more than 85 per cent of the UAE‟s oil output capacity and more than 90 per cent of its reserves.
Abu Dhabi’s Involvement in Overseas Operations: Aside from developing its own oil industry, Abu Dhabi has investments in several overseas ventures through the government-owned International Petroleum Investment Company (IPIC). In October 1999, IPIC announced that it had reached an agreement with South Korea‟s Hyundai Group to acquire a 50 per cent controlling interest in the latter‟s Korean oil refining and Page 3 of 15
marketing subsidiary, Hyundai Oil Refinery Company (HDO), with Hyundai affiliates retaining the other 50 per cent. The 50 per cent acquisition was effected through the purchase by IPIC of new HDO shares to the value of Won 612.7 billion (US $510 million).
MICHAEL PORTER’S DIAMOND MODEL FACTOR ENDOWMENTS
World oil markets Oil continues to be the world‟s most important source of energy. It met 38% of global energy needs in 2003 while its nearest rivals, coal and natural gas, met only 26% and 24% respectively. Oil‟s share is even higher than this in most regions. The exceptions are Asia-Pacific, where coal (44% of consumption) is the leading energy source, and the former Soviet Union (FSU), where it is gas (54%). THE FACTORS MAINLY REQUIRED ARE: 1) Resources (raw material): UAE‟s abu dhabi and dubai are the most favorable places to acquire raw material i.e. crude oil. 2) Cost: cost incurred in extracting and processing oil is less as compared to other countries is less. 3) Infrastructure: the oil can be easily transported and exported. 4) Technology: technology required for this industry is easily available in the country like UAE.
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Where is it? The Middle East dominates proven reserves of oil, specifically oil that has been discovered and is considered economic to produce at today‟s prices, cost structure and technology. The Middle East currently has almost two-thirds of the 1.15 trillion barrels of the world‟s proven reserves (BP Statistical Review), which is why the region has disproportionate geopolitical importance. The distribution of proven reserves is only a rough approximation of how oil is distributed around the world. For example, the deep waters of the Gulf of Mexico and offshore West Africa have only been added to the proven reserves list relatively recently, as technology to develop their oil has become available. In addition, countries that are open to private industry tend to be underrepresented, because commercial incentives encourage companies to hold only as many reserves as they can develop and bring to market within a reasonable timeframe.
DEMAND CONDITIONS Global trends:World oil demand averaged 78.1 mb/d in 2003, a fifteenth consecutive new high and now more than 17% greater than 10 years ago, helped recently by China‟s burgeoning economy. This sustained growth parallels the path that demand followed in the 1970s but contrasts sharply with what happened in the 1980s. As that decade began, Middle East instability helped to drive prices to record highs, in what became known as the second oil price shock. Struggling with the repercussions of this price run-up and subsequent recession, world oil demand initially slumped, and then finished the 1980s at a level barely higher than its earlier, 1979 peak. Globally, oil demand growth has lagged economic growth because the world has become much more energy and oil-efficient. The US, for example, uses just two-thirds of the energy and half the oil per dollar of GDP that it needed 25 years ago.
Regional trends:Demand in the former Soviet Union (FSU) dropped by 40%, or over 3.5 mb/d, in the first four years after the collapse of communism in 1990, slowing global growth to a crawl. After 1994, as the FSU‟s demand decline slowed, world growth picked up to 1.6 mb/d annually, tripling its average early 1990s rate. The 1998 Asian financial crisis abruptly and almost completely reversed this pickup. Asia, with its fast-growing economies, urbanization and industrialization, has been the driving force behind the most recent period of sustained growth in global oil demand. It accounted for two-thirds of the nearly 14 mb/d of growth between 1985 and 1997, even though it initially represented less than 20% of global demand. As a result of the deep recession that swept across Southeast Asia in 1998, Asian oil demand, instead of maintaining its trend rate of growth of 700,000 barrels per day per year, declined for the first time since 1985. Page 5 of 15
The region has however recovered, with demand in 2003 growing over 850,000 barrels per day due largely to China‟s oil-intensive growth.
Product trends:The growth in oil demand has been biased toward the higher-quality, harder-tore fine products, as the graph below illustrates. Light distillates (gasoline and naphtha) and middle distillates (diesel, jet fuel, heating oil and kerosene) now account for two-thirds of world oil demand. Each has a market share that is at least double that of residual fuel oil, which has dropped from 23% to 12% in the last 18 years. In the US, residual fuel oil has been almost completely substituted and now accounts for only 5% of US primary energy demand.
FIRM’S STRATEGY, STRUCTURE AND RIVALRY:The UAE which, from the earliest days of oil discoveries, has demonstrated its realization of the need for constant technological improvements in the oil industry to keep pace with the world at large and the necessity to strive for an increasingly efficient and safe industry, is ideally suited to act as a catalyst for the research needed to adapt oil products to the stringent environmental regulations of the twenty-first century. Given the UAE‟s determination to keep its place among those nations that are quick to realize the need of oil producers to adapt to changing circumstances and consumer demands, it can look forward to many more decades in which its oil and gas industries will provide a secure and dynamic base for economic growth. Rivals are already discussed above.
RELATED AND SUPPORTING INDUSTRIES The supporting industries of the oil industry are automobile industry which helps in supplying oil in UAE and transport industry that supplies oil worldwide. The related industry is:
Lubrication, and
Power industry
2) Real Estate in U.A.E:The UAE is one of the largest and fastest growing economies in the Middle East. The country has witnessed massive investments in the construction industry from both public and private enterprises during the past few years. It outpaced Saudi Arabia and became the largest construction market in the GCC region in 2008. The UAE accounted for around 20% of total Arab construction industry in 2008. Despite the sluggish growth in 2009 amidst the global Page 6 of 15
financial distress, the UAE construction industry managed to record strong growth during 20072009 and contributed approx. 8% to the country‟s GDP in 2009. According to our new research report “UAE Construction Industry Outlook to 2012”, the UAE construction industry is expected to grow at a CAGR of around 7% during 2010-2013. Rapid economic development is the major factor driving construction activities and infrastructure development in the UAE. The country has drawn investments from around the world. Most of the investments are mainly focused on the development of infrastructure for hospitality, retail, real estate, and healthcare industry. Moreover, the government efforts to diversify its economy from oil-based to other industries will boost infrastructure investments in future. Despite the global economic slowdown, the UAE will continue to develop several projects in tourism, housing, industrial & commercial facilities, education & healthcare amenities, transportation, communications, utilities, and ports & airports. The report has analyzed all emerging trends including the important drivers and key challenges confronted by the industry. It has also identified the possible growth areas for expansion and presents a broad overview of competitive landscape in the UAE infrastructure industry. The report presents a complete and coherent analysis of the performance of the UAE construction industry.
FACTOR CONDITIONS: are human resources, physical resources, knowledge resources, capital resources and infrastructure. Specialized resources are often specific for an industry and important for its competitiveness The factor condition of construction cluster are geographical condition, labour productivity, level of technology for business processes, product development, construction plants and equipment implementation policies, roles of professional associations & construction associations, construction services board, government and the availability of basic infrastructure There has been a shift away from residential and commercial construction towards large infrastructure projects. Financing and delivery of the some of these large projects, particularly in the power and water sector, have opened up to the private sector. Transport projects are taking centre stage. Abu Dhabi is building and rejuvenating a series of large ports. Government investment in Abu Dhabi is flowing into regional areas such as Al Ain in the south, and Al Gharbia (known in English as the Western Region). Green building and sustainable infrastructure is being championed and mandated in Abu Dhabi by the Urban Planning Council and Department of Municipal Affairs under new building codes effective Over 100 buildingrelated Australian companies have established themselves in the UAE. Many take advantage of the UAE‟s advanced transport, financial and communications infrastructure and make the UAE Page 7 of 15
their regional base. Australia's advanced engineering and building-services, innovative products, „can-do‟ approach and ability to deliver are ideal for the UAE's large infrastructure programs. The UAE Government is continuing to invest heavily in infrastructure projects which present opportunities for Australian companies.
DEMAND CONDITIONS:In the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products that those of competitors. The demand condition in construction cluster is represented by construction market and its growth prospects, transaction processes, client's quality requirement, cost, services, delivery and quality level of the implementation. Some years back Dubai real estate market got badly hit by great slump and got crashed like a deck of cards. Now after considerable period of time Dubai property market is regaining its lost status. Although, currently Dubai is not enjoying the same high status as it was some years back but as far as construction sector is considered, it is now on the right path of restoration. Authentic data shows that in the year 2010 approximately 3500 buildings were completed in the first 9 months worth more than DH 25 billion. Recent reviews state that the construction sector is currently heading towards the crossroads of success. Banks and financial institutions will also capitalize the growth out of necessity. The overall growth of construction of buildings in 2010 is 24 percent more than the previous year. The growth is expected to further boost due to Qatar's winning bid to host FIFA World Cup 2022. Qatar government has showed its interests to invest more than 57 billion dollars on its infrastructure. This will directly impact the construction companies of Dubai and Abu Dhabi real estate sector as they will get major share of projects. The growth of construction sector can also be estimated by looking at the record breaking buildings of Dubai. In the fourth quarter of 2011 world's tallest residential building will be completed. The princess tower located at Dubai Marina is 107 storey high and will break the record of world's tallest residential building. These types of buildings are the avid proof of the conditions of construction companies located in Dubai. When the slump hit, Dubai market was on its peak and the major reason of slump was oversupply of completed projects. The supply was increased and the demand decreased. Now as the market is stabilizing itself, the demand is also started to increase in a steady manner. This will ultimately push the construction companies to start the construction works again. Besides all this, government of Dubai is also encouraging the construction companies by introducing different rules and laws to protect Dubai property market in future. According to reports government has funded one fifth of total value of all completed projects in the year 2010. Page 8 of 15
Different property experts are of the view that the coming years will prove to be the pre-booming years of construction sector as well as of Dubai property market. The whole discussion above shows some positive signs about the construction sector of Dubai and it all tells that Dubai still hold the potential to gain its lost regime.
RELATED AND SUPPORTING INDUSTRIES: It can produce inputs which are important for innovation and internationalization. These industries provide cost-effective inputs, but they also participate in the upgrading process, thus stimulating other companies in the chain to innovate. The rise in oil income, Progress toward diversification into service sectors such as high- tech, logistics , port s , tourism, financial services , health, education and media, Global increase in oil consumption and oil price rise, Private sector- led economic expansion, promotion Oil - rich country, Political stability, International business and investment from overseas Growing non-oil sector, Tax free environment, Attractive salaries.
FIRM STRATEGY, STRUCTURE AND RIVALRY: It constitutes the fourth determinant of competitiveness. The way in which companies are created, set goals and are managed is important for success. But the presence of intense rivalry in the home base is also important; it creates pressure to innovate in order to upgrade competitiveness. The context for structure, strategy and rivalry of the construction cluster are the level of competition among construction companies, the level of trustworthiness and fairness, the entry barriers in the forms of policies that prevent new entries, and the ratio between direct and indirect costs. The 2007 financial market collapse affected and still affects the construction industry in the UAE. Projects were delayed , put on hold , or cancelled at an unprecedented rate . Comp anise confidence declined and organizations began to rethink their strategy and prepare for a dramatically changing lands cape by analyzing their micro- environment : markets , customers and competitors . Many organizations experienced problems adapting to the environment all changes, and, unprepared for a change, they adopted a survival strata gy rather than a growth strategy. The changing dynamics in the competitive environment heralds the end of the previous market expansion and suggests that the companies need to reassess their strategy in order to remain viable and move forward . The 2007 recession in the construction industries economic environment created severe competition and changed the nature of t h e business. Consequently, there may be major structural changes in the industry. The severe competition may force organizations to submit tighter tenders, and it will push Page 9 of 15
companies to reduce their labor force. Companies will be required to adopt even more flexible forms of organization and management in order to quickly respond to change , for example , a numerical flexibility so as to vary the headcount according to changes in the level of demand ,such as an increase in the number of temporary contracts . Companies also may start to outsource the production of materials to subcontracting companies.
3) Tourism in U.A.E:Factor Conditions:The most important factor conditions that have benefited Dubai‟s tourism cluster have been its excellent physical infrastructure, and abundance of immigrant labor. The physical infrastructure, in particular the fast growing airport, has provided Dubai‟s tourism cluster with the tools to leverage its geographic location; 130 airlines operate out of Dubai International Airport, flying to 220 destinations in 6 continents. As a result of continued investments in Dubai‟s airport, the UAE has consistently ranked in the top 5 of the GCR for airport infrastructure. It was also recognized as the „Best Worldwide Airport in 2010. It is the 15th busiest airport in the world by passenger traffic. There have also been strong investments to aggressively improve the local transportation infrastructure through new roads and a metro system. The UAE has been climbing up the GCR for quality of road infrastructure and currently stands at 5th. Dubai‟s attractiveness to low-skilled foreign workers is particularly critical for a service sector like tourism. Another factor that deters locals from this sector is its perceived low status in society. The lack of participation of foreigners in higher skilled jobs can be explained by the fact that these firms are run by Emiratis, who seek to fill these positions only with their fellow Emiratis. Emirates Airlines is one exception, which hires several high skilled foreigners, and is in fact run by foreigners.
Demand Conditions:Dubai‟s demand has showed consistent growth from 4.3 million tourists in 2004 to 6.3 million tourists in 2008. The recent economic crisis slowed down this growth. This decline has come primarily from European and American tourists, which declined from 2.8 million to 2.4 million visitors. In contrast, demand from neighboring Arab countries increased during the same period from 1.5 to 1.7 million. Instead, Dubai‟s lavish shopping and high-end hotel industries largely drove demand from high-end tourists. As with Singapore, Dubai has built a base investment of airports, ports, and shopping infrastructure that is sufficient to drive future demand without the need to constantly build megaprojects. Another important driver to Dubai‟s demand was the tourism resulting from its foreign transit passengers.
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Related and Supporting Industries:Despite little natural demand for tourism, Dubai‟s strategic location and forward looking policies fostered the development of four clusters that were most influential to the development of the tourism cluster: the transportation, retail, real estate, and finance clusters. In the transportation cluster, the airline industry provided the most important boost for tourism. Dubai‟s airline industry started with the development of the Dubai International Airport in 1965. Since then the airport has developed to be the busiest airport in the middle-east and the 15th busiest airport in the world by passenger traffic with over 4 million passengers handled in March 2010. The airport serves over 130airlines and 220 destinations in six continents. Much of the passenger traffic goes through Emirates Airlines, which is the world‟s largest airline, flying to 106 destinations with 142 aircrafts and serving 27.5m passengers in 2010. Emirates Airlines has also played an important role in marketing Dubai as an international tourist destination. Beyond airline transportation, Dubai has also built ports that host cruise ships from around the world, and was recently awarded as the Middle East‟s leading cruise port in 2010. The real estate cluster has been the primary driver for the development of hotels, with help from the finance clusters to finance the projects. As over 80% of visitors visit Dubai to shop, Dubai‟s retail industry has been a key driver to the development of the cluster. To satisfy the needs of these shoppers, Dubai has built more retail space than any other GCC country and has the most retail space under development.
Context and Strategic Rivalry:Dubai‟s openness to foreign investment, secular policies with regard to issues such as alcohol, and diversification away from oil has led to an environment that is conducive to the development of the tourism cluster. Dubai‟s Government also promotes the growth of the clusters directly through government owned companies and through the government-run DTCM. The Government promotes open competition in most sectors despite having large state-owned companies that compete directly in each sector in the tourism cluster. For example, despite having its own national carrier, Emirates, Dubai‟s open skies policy promotes open competition between airlines and ensures that there is sufficient competition in the logistics cluster. Qatar and Abu Dhabi are also appearing as competitors through Qatar Airlines and Etihad respectively. Despite the promotion of competition, competition in sub-clusters within tourism, especially tourism and shopping is still very low. Emirates Airlines and Flydubai, both government owned, still control 62% of Dubai Airport. Emaar Malls, another government owned entity control, 49% of the retail space in Dubai. Only the hotel sub cluster is competitive, with 47 international brands present despite the Jumeirah Group‟s prominence.
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4) Logistics Industry in U.A.E:Dubai as a logistics cluster is one of the most successful cluster at the global level. It is a highly developed region of the United Arab Emirates (UAE). The country enjoys with relatively high income per capita (approximately 36.2 thousand USD). In the UAE the service sector represents 47 percent of GDP. As for Dubai, it has the most dynamic economy within the UAE where logistics play very important role in economic activities. Its share in GDP is 8.8 percent (including communication). Besides logistics are an industry that influences on the competitiveness of an economy. Logistics comprise transportation, inventory, material handling, warehousing, and packing and also very often security services. Dubai has developed a dynamic logistic cluster that is playing a central role in the Europe-AsiaAfrica trade. It also serves local markets and operates as a regional trade hub. Three main factors must be underlined in explaining why Dubai is such a successful logistic cluster. These factors are: advantageous geographical location, market conditions, and the role of the government.
Factor Conditions: From firm strategy point of view 6 factors must be highlighted: open markets in logistics and transportation sector, business supportive economic policy, favorable complementary policies, massive infrastructure investments, attractive regulatory and business environment, and growth oriented governmental companies. In fact these became contributors of Dubai‟s logistic cluster development. It is also worth noting that massive and aggressive infrastructure spending became a key element for a success.
Demand Condition:Dubai‟s ability to operate as a regional trade hub has been spurred by the demand conditions as well. Six main demand conditions can be underlined: Jebel Ali Free Trade Zone, domestic manufacturing sectors, Dubai Industrial City, population growth, increased import caused by economic growth, and trade measures against Iran. Among them most important factors are free zone, industrial city and domestic production. These determinants create economic activities and push significant demand for logistical services and much of it is captured by Dubai.
Related Support Industries:Related and supportive industries play considerable roles in the Dubai‟s logistic cluster development. It, in fact, includes not only industries but also trends in related sectors, clusters and markets, associations and supportive governmental organizations. There are 6 main factors in this regard: highly developed finance, insurance, construction, and tourism clusters, substantial increase of FDI, and rise in local capital markets, cluster associations, Dubai Industrial City, and rapid growth in trade. These industries and organizations provide necessary Page 12 of 15
services, markets and information for improvement and strengthening of competitiveness of the logistic cluster. Dubai‟s logistic cluster has some beneficial factor conditions – in particular its natural assets (harbor, oil, and gas), advanced physical infrastructure (ports, airports, highways) and geographical proximity with the potential suppliers (mainly China and India) and buyers (EU, Asia). All factors listed above reinforce the potential of Dubai‟s logistic sector to be competitive at the global level. State plays very important and active role in Dubai‟s logistic cluster. In order to promote logistic sector the government (both local and central) actively intervenes. It has 5 main priorities: 1. Spurring growth by massive infrastructure spending; 2. facilitating collaboration (public-private and personal relationships); 3. Strengthen links between port, free zone and customs; 4. Evolve innovations (for example airport in the port), and 5. Develop complementary policies (trade, fiscal, business environment improving).
Context and Strategy:The UAE‟s government succeeded in creating world class infrastructure in transportation (seaport, airport, roads) energy, communication, and tourism sectors. This infrastructure is a strong asset and plays essential role in encouraging logistical development. Recently, for instance, a new logistics centre in Dubai Logistics City has been launched. The UAE government attempts to facilitate interactions between the government and business sector. This is crucial for a success of the logistics cluster because public-private and personal relationships are central issues in improving the competitiveness (Porter, 1998). In this regard, the major institution is the Chamber of Commerce. Its objectives are: encourage collaboration with private sector and support the development of small and medium sized enterprises. It is also worth noting that the UAE government also uses complementary policies to spur logistics sector. It implemented business friendly tax system (very low corporate tax) which significantly reduces the cost of doing business. I addition, creation free zones also have positive impact on the cluster. It attracts capital from abroad and raises mobility of it. Hence, the main forces that make Dubai‟s logistics cluster successful are favorable geographical location, market (factor, demand) conditions, effective complementary policies, highly developed related industries, and the world class physical infrastructure.
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THANK YOU.
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