Introduction
Sabic is a Saudi company that specializes in packaging various products. The firm operates in Europe and the Middle East. Sabic operates in an industry that is not crowded with competitors. However, it faces major operational issues of sustainability and innovation. Shortage of raw materials is also a potential issue. The company has managed a steady financial growth despite problems in the economies it operates, which is attributable to the dependency of other companies on its products to package their own. The major method of growth has been by mergers and acquisitions.
The company’s financial ratios have been compared with industry statistics in the report. The company performs well in its industry. It also has good growth prospects as portrayed by the pro-forma financial statements and ratio analyses. Sabic Packaging is worthy investing. This report is a proposal to Nestle for a joint venture to package their products. The venture is aimed at shoring up the business prospects of the three companies.
Profiles of Nestle and Sabic
The following are the profiles for Nestle and Sabic companies that are to be involved in a joint packaging venture.
Profile for Nestle.
Profile for Sabic.
Investment Decision
Initial Pro-forma Financial Statements
These financial statements predict the future position and performance of Sabic Packaging based on the historical financials and some assumptions of growth. In this case, the growth rate for year 2013 is assumed to be 15% while that of 2012 is assumed 20%. The results for 2014 are projected according to 2013 projections.
Risk Free Rate
Risk free rate is the expected return on a security with no inherent risk such as a government bond. Government bonds are taken as the proxy for risk-free securities because the risk of default in payment is very low unlike corporate bonds, which are prone to default depending on the company’s financial status.
Beta Coefficient
Beta coefficient is a measure of the riskiness of a security. It is determined by the business risks facing a company and its environment of operation. Sabic Packaging operates in an environment that is prone to change. The beta coefficient incorporates such risks. Any beta coefficient higher than one indicates that the security in question is more risky than the market. Conversely, coefficients lower than one indicates securities less risky than the market.
Expected Return on the Market
Every stock market has an average return it is expected to produce in a year. The expected return depends on the portfolio of securities in the market (Reilly & Brown 2007).
Market Risk Premium
Market risk premium is the difference between the risk free rate and expected rate of return on the market. It represents the amount an investor expects to be compensated for putting funds into that particular securities exchange (Anderson 2005).
SWOT Analysis
Strengths and Opportunities
Market and Distribution Channels
Distribution channels will always determine success of a firm, or otherwise. When a firm has a huge market, and the product involved is durable, then longer distribution channels may be used. However, when the product is perishable, or when the number of customers is limited, then a shorter distribution channel may be appropriate. For this firm, a longer distribution channel may be used to reach out to a large number of customers (Armstrong 2006).
Promotional Activities
Promotional activities are very important in ensuring that the firm succeeds in the market. Sabic company has been able to popularize its products using mass and social media, which has helped in giving it a global image (Hill & Westbrook 2006). A high ratio relative to a competitor shows that a company is worth investing.
Product description
The product will be a plastic packaging for the products of Nestle. The product will have a green outlook to reflect the greening initiative of the UAE governments.
Estimated price
The estimated price for the product will be AED 120 per batch. The price will incorporate agreements between the two companies in terms of production and market. The estimated price will be subject to changing inflation. The rate of inflation in Saudi Arabia has remained relatively low in 2013. This stability has led to minimal changes in the price of goods and services. In 2014, the rate of inflation should increase marginally because the demand for goods and services should increase in the coming months. For example, the price of rent should increase because the demand for housing greatly outstrips its supply. Similarly, the continued subsidization of energy products and essential goods and services should increase the rate of inflation as the national population increases.
Production technology and Manufacturing capability
The manufacturing capacity will determine the production technology. Recently, there has been debate that outsourcing kills jobs of the country from which it emanates. This is likely to happen in Saudi Arabia. Most firms may decide to outsource noncore parts of their operations to countries outside Saudi Arabia. This may complicate the situation even further. This will be the best move to cut costs in light of this policy. Some of the departments that may be outsourced include security, human resource among others. The kingdom of Saudi Arabia may not have anticipated this but it may be the undoing of the policy.
Other companies may decide to relocate their headquarters and major operations from Saudi Arabia to their neighboring countries only maintaining braches in Saudi Arabia. Although this may not be possible with manufacturing firms in the short run, in the end it might a possible restructuring though. It is also going to be easily possible for service firms such as airline booking agencies.
Locking out qualified personnel
The enactment of this policy locks out major asset. This is the benefit of acquisition of qualified personnel. This is because as a person goes into Saudi Arabia they will not be assured of a lasting placing. Hence, a person seeking to settle in the job market will not even consider this country. Among the locals, according to a CIA fact book, there is a high illiteracy level. Hence, the policy is good because it guarantees that illiterate will get a job as security men, hotel service, and servers. What about the professional positions that locals cannot fill? Although this disclaimer appears in the Nitaqat policy, it is explicitly clear how the assessment will be done to determine to what extent this is true. It only gives a general guideline. Therefore, the government may be lagging behind economic growth from this point of view
Staff requirements and training
The policy has immensely empowered the Saudis. It has also given unlimited or almost unlimited powers, to the premium and green rated companies. These companies may play manipulative tactics to increase their power further. They will ensure that they meet the threshold for assessment at all times. This way they will take the best of expatriate workers from the red and yellow companies who do not get visa qualification. This may happen strategically where those companies ensure that they hire at the least cost. This is at the time when this expatriate worker who desperately needs a visa and work permits renewal takes any kind of deal to remain afloat in the job market. Hence, there will be a combination of power (from the green and premium rated companies) and desperation (from expatriates). These two will combine to kill red and yellow rated companies and compound an already existing precarious human resource problem. In addition, a situation may play out where find themselves in different categories at different times. This will spell doom for the companies, as they not have permanent employees. Employees will be switching companies at their convenience since the government protects them adequately. Employees will not have permanent contracts any more. This is because an employer will not want to commit to a permanent employee when he or she is not sure of the economic situation. On top of that, there is no guarantee of maintain the status of premium or green which means an employee may move.
Technological know how
At its best, the labor market is Saudi Arabia is a mess currently. There is a lot of uncertainty in the air. Companies falling in the red and yellow categories do not know what to do. There is also a situation where foreigners feel mistreated. This is a similar situation to what happened in South Africa a few months ago. They feel like they are been treated as outsiders. People who are hanging onto long-term contracts are confused. Employers who entered into long term contracts with employees are feeling the heat of a policy that may make them pay for cancellation contracts.
The private sector has many small and medium sized enterprises. These enterprises may not have a legal department that is adequate. This means that they not have seen all these coming. Hence, they are faced by a situation where this has come too fast. The government is accused of having not had enough awareness campaign to enlighten the job market of the situation. It is also evident that this policy does not touch on women specifically. In the past, women have been mistreated in their job places in Saudi Arabia.
Weaknesses and Threats
Market analysis
The population of Saudi Arabia should increase in the next 12 months. This population growth should increase the total demand for goods and services. The population of expatriate population should also increase in the same periods because labor reforms have allowed the expatriate population to obtain Saudi citizenship. Particularly, foreign nationals who have a higher education degree are likely to increase the number of expatriate population in the kingdom because the law favors them (for citizenship). An increase of expatriate population would increase the level of skill specialization in the Saudi Arabian economy, thereby increasing its efficiency.
Analysis of competitors
Sabic faces a massive competition in its operational processes. The main competition comes from other developed packaging companies in this region. International Paper Company is one of the main competitors. Other Competitors include MeadWestvaco Corporation, Graphic Packaging, and Klabin (Anderson 2005).
Distribution channels
Future forecasts of goods and services in the Saudi Arabian market are positive. The government plays a vital role in sustaining some of the domestic demand for goods and services. Particularly, its focus on expanding specific sectors of the economy, such as the construction and education sectors, plays a significant role in sustaining future demand for goods and services.
Supply utility and transport requirements
The Saudi Arabian unemployment rate has been relatively stable. The current unemployment rate, of about 6%, should decrease in the next 12 months because the government has introduced several economic expansion plans that aim to diversify the economy from oil to non-oil sectors. Therefore, several industrial sectors should expand to create more opportunities for employment. The government’s public expenditure should also contribute to the reduction of the unemployment rate, as most investments aim to expand the economy and create more jobs.
Legislation constraints
The Kingdom of Saudi Arabia thought about this policy in the 1990. The policy’s main area of interest is the employment of Saudi nationals in the private sector. Nitaqat refers to categories when directly translated. Under the policy, there are four categories of companies. This includes red, yellow green and premium. The classification defines the strictness with which major private firms in Saudi Arabia follow the ministry of labor guidelines towards making sure Saudi nationals get priorities in employment. Firms, which fall under the premium and green category, are compliant. Consequently, they receive special treatment from the government. On the other hand, companies that fall in the red and yellow category do not comply with the requirements under the auspices of the Nitaqat policy. Therefore, they face sanctions and unfavorable treatment from the government. The ministry of labor decided to use the policy amid a growing unemployment rate among Saudi nationals. Compliance with the policy is mandatory since late September last year (2011). The policy became stricter when the ministry of labor announced that it would penalize any company that fell in the red category without any explanation for back up.
Environmental impact
The environmental impact will be minimal because the company will adhere to green policies in the UAE region and the world. Additionally, Sabic will produce environmentally friendly packaging products. There is a high risk of how well to implement this program. It is too detailed and may be very hard to implement it widely. It is also likely to face major resistance as companies find other ways to cut costs. The country has so many companies and small businesses and follow up may be the hardest thing to do. However, employees are likely to be the major driving force. This is as they seek to position themselves better in the workplace or want a person they favor to come in. in the short term the costs may be too high for this program.
Social benefits
Increase the purchasing power of the locals. Since they do not send money anywhere because their families are with them, they will use it there. Services account for 71% of the economic activities that Saudis engage. With an assuredness of job security under the Nitaqat policy, the Saudis will be happier to use their money. This is going to increase the economic activity leading to a budding economy. Increased economic activity will mean more consumption of goods and services. Hence, there is likely to be firms that will come up to meet this demand. This will create more jobs.
A continued trend of this nature will mean better living standards for the people of Saudi Arabia. Increased purchasing power and vibrant economic activity may mean better payment for a unit of work done and improved relations. Saudization may eventually be a real concept. This is where all Saudis will be employed live better lives. Contrast to what we are seeing in other Middle East countries such as Syria, Libya and Egypt, this also translates to a better political scene.
Conclusion
The paper analyzes Sabic Packaging’s operational and financial details. Sabic faces major operational issues innovation and sustainability. It is evident from the ratio analysis that the company is doing well compared to the industry statistics. Additionally, ratio analysis on the pro-forma financials indicates that it will continue to do well. Therefore, Sabic Packaging is worthy to invest. Nestle can enter into the proposed joint packaging venture with Sabic.
References
Anderson, G. (2005). Framework for marketing planning. Michigan: Michigan Business school.
Armstrong, M. (2006). A handbook of Human Resource Management Practice. London: Kogan Page.
Hill, T. & Westbrook, R. (2006). Business analysis: It is time for a product recall. Long Range Planning, 30 (1): 46–52.
Menon, A. (2010). Consequences of marketing strategy making. Journal of Marketing (American Marketing Association) 63 (2): 18–40.
Reilly, K. & Brown, C. (2007). Investment Analysis and Portfolio Management. New York: Southwestern Thomson.
Steenburgh, T. & Avery, J. (2010). Marketing analysis toolkit: Situation analysis. Case Harvard Business Review, 12 (5): 76 – 81.