SABIC Strategic Analysis

Transcription

1 King Fahd University of Petroleum and Minerals MBA PROGRAM MGT 580 REPORT SABIC Strategic Analysis Done For Dr. Salem Alghamdi Done By Abdullah Al-Otaibi ID# Ahmad Al-Humayyed ID# Ali Al- Darweesh ID# Walid Merdah ID# DATE May 29, 2006

2 Index INDEX FORWARD INTRODUCTION HISTORY COMPANY CURRENT OPERATION MARKET/ SALES PRODUCTION/ OPERATION Basic Chemicals Intermediates Polyolefin's PVC and Polyester Fertilizers Metals FINANCE RESEARCH & TECHNOLOGY/ INNOVATION HUMAN RESOURCES/ PERSONNEL MANAGEMENT SABIC S GENERIC STRATEGIES BASIC CHEMICALS INTERMEDIATES POLYOLEFIN'S PVC AND POLYESTER FERTILIZERS METALS INDUSTRY ANALYSIS THE INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF ENTRY THREAT OF SUBSTITUTE PRODUCTS FINANCIAL ANALYSIS CURRENT RATIO: INVENTORY TURNOVER: COLLECTION PERIOD: DEBIT RATIO: RETURN ON SALES (ROS): RETURN ON TOTAL ASSETS (ROTA): Page 1 of 24

3 8 FUTURE OPPORTUNITIES NEW PRODUCTS NEW BUSINESS LINE GOING GLOBAL (CHINA, S. AMERICA...ETC) MAJOR STRATEGIC ISSUES MAJOR AND RAPID CHANGES HIGH DEMAND ON PROFESSIONAL RESOURCES WORLD WIDE WTO AVAILABILITY OF RAW MATERIALS PARTNERS AND RIVALS AS WELL THE REGIONS POLITICAL CHANGES AND ITS EFFECTS GOVERNMENT CULTURE CHANGE BARRIERS TO ENTER OTHER MARKETS KNOWLEDGE MANAGEMENT ENVIRONMENTAL AND HEALTH BOYCOTTS AND REGULATIONS PERSONAL RECOMMENDATIONS HORIZONTAL INTEGRATION (ACQUISITION) VERTICAL INTEGRATION Backward Forward MORE RESOURCES FOR CHANGE REFERENCES Page 2 of 24

4 1 FORWARD This paper is about SABIC company and its strategic position and goals. All the information available here should not be shared outside the purposes of the course in any form. Most of the exhibits that we have used were not included in this report due to the fact that they are owned by SABIC and we could not get a permission to use them directly in this paper. To overcome this obstacle we did not use that information directly. We have extracted the information out of those reports and included them within the text of the paper instead. Page 3 of 24

5 2 INTRODUCTION SABIC was established in 1976 to add value to Saudi Arabia's natural hydrocarbon resources. Today, SABIC is among the leading petrochemical companies in terms of sales and product diversity. Headquartered in Riyadh, SABIC is the Middle East's largest non-oil industrial company in terms of market capitalization at more than US$ 100 billion and total assets of US$ 33 billion. SABIC is now the 7th largest petrochemicals manufacturer in the world, 3rd in polyethylene production, 6th in polypropylene and 4th in overall polyolefin's production. It has leading market positions in glycols, methanol, MTBE and fertilizers. SABIC's manufacturing network in Saudi Arabia consists of 18 affiliates. Most of these are based in the Al- Jubail Industrial City on the Arabian Gulf. Three are located in Yanbu Industrial City on the Red Sea and one in eastern province city of Dammam. SABIC is also partners in three regional ventures based in Bahrain. In July 2002, SABIC Europe Petrochemical (SEP) was born after the acquisition of the petrochemicals business of Dutch group DSM. SEP has two major manufacturing locations in Geleen in the Netherlands and Gelsenkirchen in Germany. The vision that led to the creation of SABIC was closely associated with the aspirations of Saudi Arabia as a developing nation. SABIC continues to play an important role in achieving some of those aspirations, including the development of the country's human resources. SABIC also committed to Saudi social and cultural values and international business and environmental standards. SABIC is owned by the Saudi Government (70%) and the private sector (30%). Private sector shareholders are from Saudi Arabia and other countries of the six-nation Gulf Cooperation Council (GCC) Page 4 of 24

6 3 HISTORY When we look back now, creating SABIC through a marriage of resources with technology seems stunningly simple. Yet in the early days the challenge of building world-scale industries in an undeveloped Saudi Arabia was both exciting and intimidating. SABIC has started from scratch. For several decades, Saudi Arabia had been flaring off crude oilassociated gases at oil well-heads. In the 1970s, the Kingdom decided to capture these hydrocarbon gases by establishing a Master Gas System (MGS) that would deliver the gases for use as fuel and raw material to make value-added industrial commodities. It would be done through a chain of basic, large-scale industries located close to these resources. The industries would be export- oriented, but their local availability would set the stage for downstream industrial diversification in Saudi Arabia. In September 1976, the Saudi Basic Industries Corporation was established through Royal Decree. The late 1970s and early 1980s saw the transformation of a fishing village on the Gulf coast (Arabian Sea), Al-Jubail, into a modern industrial city. The Royal Commission for Jubail and Yanbu built the infrastructure; SABIC built the basic industries. The first SABIC joint venture plant came on stream in 1983, followed by a quick succession of several affiliates. Three major phases of expansions have earned Sabic a place among the world's fastest growing companies. Industry media described Sabic emergence in 1980s as "one of the most rapid and coherent industrialization developments of the 20th century". The growth in subsequent years was equally dramatic. In 1985, Sabic total production capacity was about 6.2 million metric tons per year. By the end of 1999, it had crossed 2.5 million metric tons and in 2000, nearly 10 million metric tons of new capacity was added through several expansion projects. By 2008, Sabic intend to be among the top industry players, with a targeted capacity of 60 million metric tons per year. The concept of partnership was at the core of Sabic growth and business strategies. SABIC entered into joint venture partnerships with industry leaders from around the world, offering a share in Sabic resources for their technology, support in human resource development and global marketing. Sabic success in joint ventures is often cited as a model for developing countries. Twenty- five years is a short time to make tall claims to history. But over these years, SABIC have grown to claim a place among the world's leaders. Page 5 of 24

7 4 COMPANY CURRENT OPERATION 4.1 Market/ Sales Sabic global presence has grown steadily over the years. Efficient and on-time products supplied to expanding markets are only one aspect of SABIC global operations. SABICs global network consists of offices, distribution centers and storage facilities, all strategically located to serve key markets around the world. SABIC Europetrochemicals also has two major manufacturing complexes in Geleen in the Netherlands and at Gelsenkirchen, Germany. Other additions to SABIC global profile in recent years include SABIC Technology Centers (STCs) that act as satellite research and development (R&T) units. Currently, SABIC expanding its business to enter China market by building new plants there. 4.2 Production/ Operation SABIC consists of 18 world-scale manufacturing affiliates in Saudi Arabia. Eight of these are joint ventures with foreign partners, three are wholly owned by SABIC and six are joint venture partnerships with local and regional private sector investors. SABIC also partners in three regional ventures in Bahrain. Most of the affiliates in the Kingdom are based in the Al- Jubail Industrial City and in Dammam on the Arabian Gulf; others are located at Yanbu on the Red Sea. With the acquisition of SABIC Europe in 2002, SABIC has added manufacturing complexes at Geleen in the Netherlands and at Gelsenkirchen in Germany. SABIC's businesses are grouped into six strategic business units, supported by corporate departments and a Shared Services organization. The SBU's are Basic Chemicals; Intermediates; Polyolefin's; PVC and Polyester; Fertilizers and Metals Basic Chemicals Basic Chemicals Group is comprised of three main parts - Olefins, Oxygenates and Aromatics. Basic Chemicals are fundamental to SABIC industries and are the primary building blocks for petrochemicals produced from the abundant hydrocarbon gases associated with crude oil production Intermediates Intermediate chemicals are mainly used by the petrochemical industry as ingredients to manufacture other products downstream. Intermediates SBU is organized into three management units: Chemical Intermediates, Fibers, and Linear Alpha Olefins. Intermediates are produced for other SABIC affiliates and for export around the world. Page 6 of 24

8 4.2.3 Polyolefin's SABIC is the world's fourth leading producer of polyolefin's. The production capacities are expanding to meet the increased demand for these products in overseas markets as well as in Saudi Arabia's own plastics industry. The Polyolefin's SBU is the producer of polyethylene (PE) and polypropylene (PP). The PE product range includes essential polymers such as linear low- density polyethylene (LLDPE), low-density polyethylene (LDPE), and high-density polyethylene (HDPE). The PP product range includes random and homo- polymer resins PVC and Polyester PVC & Polyester SBU produces Polyester & Melamine and PVC & Polystyrene. Polyester & Melamine include many staple fibers used in textile & carpet manufacture and weaving & knitting, resins used to make bottles, trays and packaging, and melamine adhesives, laminates, surface coatings and molding compounds. PVC & Polystyrene products include PVC homo-polymers used in piping, wire & cable coating, bottles, windows, artificial leather, book coverings and wallpaper. Polystyrenes are used in a wide range of applications, from toys and disposable cutlery to insulation and industrial packaging Fertilizers SABIC is one of the largest producers of urea and ammonia fertilizer. A wide range of nitrogen, phosphate and compound fertilizers are shipped worldwide Metals SABIC's wholly owned HADEED affiliate is the Gulf's leading steel maker. Since 1980, it has produced long steel products for the Kingdom's construction industry and now its output includes flat hot and cold rolled steel. The Metals SBU also manages large offshore aluminum shareholdings in Bahrain as well as sales and marketing of ferro- alloys produced in the Kingdom. 4.3 Finance Sabic follow different schemes to finance its growth and expansion, it is using both IPO and loans from banks to finance it future demands of funds. Currently Sabic has launched new company specialized for issuing Islamic Bonds, it is the first in Saudi Arabia. 4.4 Research & Technology/ Innovation At R&T, Sabic create value through research and innovation. R&T has helped the company gain a vital competitive edge to help its customers and affiliates to maximize product quality. Page 7 of 24

9 In 1994 SABIC formally dedicated its new, integrated, state-of-the-art Industrial Complex for Research and Development on the outskirts of Riyadh. The complex today includes a full range of R&T activities and technical services to strengthen SABIC's technological capabilities, as well as its environmental and industrial hygiene services. SABIC expects there will be many growth opportunities as it pools its R&T resources with government agencies, university research centers and other specialized research oriented businesses and organizations in both the public and private sectors. One example of SABIC's R&T expansion is its focus on developing the most relevant technology in the most relevant country which we call "Cross National Development." At the heart of this program is the establishment of SABIC R&T operations outside Saudi Arabia SABIC's own satellite research centers in the United States and India. 4.5 Human Resources/ Personnel Human Resources is core to SABIC's success. In a complex industry, such as Petrochemicals, nurturing human talent is essential. SABIC's key strength, therefore, rests in more than 16,000 employees worldwide, including 2,300 employees at SABIC Euro Petrochemicals. Under its umbrella Sabic employs multinational workforce that incorporates Saudis and people from different parts of the world, at company locations across the globe. SABIC Human Resources puts emphasis on training and developing employee skills employees. It has successfully trained a generation of Saudis in different disciplines such as manufacturing, marketing, finance, Research and Technology, Personnel and Administration. The company employs both traditional and non-traditional means to attract talented individuals from all over the world, to ensure its reputation as a truly global company. SABIC Human Resources concentrates on the following elements concerned with regarding the training, deployment, and growth of employees. Job specifications Required qualifications Identification of training centers Training programs and syllabus based on current and future requirements Continued follow up and evaluation of training programs Development of competencies required for career ladders Development of career path plans Page 8 of 24

10 While the company takes pride in its multinational workforce, the number of Saudi nationals in SABIC and its affiliates has increased over the years in the spirit of providing jobs to eligible Saudi nationals. The percentage of Saudi technical manpower against the total number of Saudi employees has risen considerably. Saudi nationals now occupy 99% of management positions in SABIC and its affiliates. Saudi nationals account for 81% of the total number of employees (13,816 employees) most of whom are engineers and skilled technicians. Most SABIC companies have achieved high Saudi employee ratios; some exceeded 90%. Saudis form 79% of employees in the administrative field, 77% in technical areas, 63% in engineering, 72% in IT, 78% in finance and 100% in safety and security. SABIC Human Resources successfully implemented enterprise resource planning (ERP) and enacted a program of change management through effective employee communication. 4.6 Management As highlighted earlier, SABIC businesses are grouped into six strategic business units supported by four corporate departments "Corporate Finance; Corporate Human Resources; Corporate Control and Research and Technology (R&T)" and a Shared Services organization each with its own Vice President. The SBU's are Basic Chemicals; Intermediates; Polyolefin's; PVC and Polyester; Fertilizers and Metals. SABIC's manufacturing network in Saudi Arabia consists of 18 affiliates. Most of these are based in the Al-Jubail Industrial City on the Arabian Gulf. Two are located in Yanbu Industrial City on the Red Sea and one in eastern province city of Dammam. SABIC is also partners in three regional ventures based in Bahrain. In July 2002, SABIC Europe was born after the acquisition of the petrochemicals business of Dutch group DSM and has two major manufacturing locations in Geleen in the Netherlands and Gelsenkirchen in Germany for the production, marketing and sales of polypropylenes, polyethylene's and hydrocarbons. Each of SABIC affiliate has its own board of director and assigned president that reports directly to the CEO. All the technical support "operation, maintenance, engineering" lies within each affiliate structure and each affiliate has the authority to manage it, common services like" Accounting, General Services, IT, Project Management, Employee relations etc." are supported by the Shared Services Organization. In term of growth, it is dictated by each product SBU were they allocate each new expansion to the proper affiliate after getting SABIC approval and the affiliate BOD approval. Page 9 of 24

11 5 SABIC S GENERIC STRATEGIES Each of SABIC business units has its own unique marketing strategy but in general we can say with confidence that cost leadership strategy is more the norm for SABIC in the petrochemical market. Growth is the a goal for SABIC in general and it have declared its intentions to do so by announcing that it will be #1 in Poly Ethylene product in the world in the coming few years from now. More commitment towards growth is clear in SABIC 2020 strategic plan Basic Chemicals Cost Leadership is the main strategy for the basic chemical business unit. 5.2 Intermediates Cost Leadership is the main strategy for the intermediates business unit. 5.3 Polyolefin's Cost Leadership is the main strategy for the basic chemical business unit with a strong focus towards capturing the market share in the world market. 5.4 PVC and Polyester Cost Leadership is the main strategy for the intermediates business unit. 5.5 Fertilizers Cost Leadership is not the main driving strategy for the fertilizers business unit. This business unit sells mainly to Saudi farmers based on government support but still we can say that it is more towards focused cost leadership for Saudi farmers. 5.6 Metals Differentiation strategy is the main strategy for the metals business unit. SABIC have failed to become a cost leadership in the steel industry but it was successful towards quality of HADDED product as compared to others. Big contracts are becoming a norm nowadays for steel to ensure the supply of it with high quality standards especially for the construction boom in Dubai city. Page 10 of 24

12 6 INDUSTRY ANALYSIS 6.1 The intensity of rivalry among existing competitors Until few years back, Sabic enjoyed some sort of monopolistic position in Saudi Arabia. It was the only petrochemical company operating in the kingdom. It enjoyed cheap feedstock such as methane, ethane, propane, butane, light naphtha and other natural gas liquids from Aramco and free land- lease from the government. The availability of raw materials in the Eastern province, the presence of Saudi Aramco that supplies required feedstock at very competitive prices and in large quantities, the ease of export from the city via KFIP [King Fahd Industrial Port] and its relative proximity to South Eastern Asian countries to which most petrochemicals are exported, make Jubail Industrial City attractive for investment (Sabic website 2006). More than 80 percent of the petrochemical exports from the GCC region come from Saudi Arabia (al- Dabibi 2003). A-Mady predicted that in the Eastern Province of Saudi Arabia, there are more than 14 million metric tons per year of petrochemical capacity planned for construction over the next three years (al- Mady 2005). Recently several petrochemical projects have been constructed by private sectors. Among these projects are: Sipchem [Saudi International Petrochemical company, and Tasnee Petrochemicals, part of the state owned NPI [National Petrochemical Industries company]. These companies produce several similar products to those produced by Sabic. Sipchem, Saudi joint stock Company, established in late 1999 in Jubail, produces three main products: Methanol, Butanediol (BDO), and Acetic Anhydride (AAnh). Tasnee Petrochemicals, created in 2001 to construct a plant producing acetic acid, vinyl acetate monomer (VAM) and methanol, in addition to Propylene and Polypropylene. Sabic faces competition not only from these local companies but also from regional and international ones as well. In the gulf area, companies operating in Qatar and Iran represent another competing rival in the petrochemical industry. The same situation globally, there are several big players operating in the field of petrochemical industry. Companies like ExxonMobil, Dow, Shell, and BASF enjoy significant market coverage, while their Middle East counterparts are not (al- Mady 2005). But in terms of differentiation, they all produce similar quality products and have high switching cost. The petrochemical industry is capital- intensive and usually requires technology- licensing to build, operate, and maintain. These characteristic and requirements create high barriers to exit. 6.2 Bargaining power of suppliers Sabic has several important suppliers; some of them are local while others are international. Aramco is one of the major local suppliers providing Sabic with the feedstock required for most of its plants. These feed stocks are vital for the operation of the majority of Sabic plants. Fortunately Aramco is owned by the government of Saudi Arabia so does the 70% of Sabic. Other suppliers such as those of catalyst producers represent other important ones to Sabic. Catalyst likes enzymes, which causes change Page 11 of 24

13 in the rate of chemical reaction without itself being consumed in the reaction, comes in different types such as: sulfur removal, dearsenication, and polymerization. Fortunately, there are many catalyst producers and Sabic was successful so far in signing purchase agreement with some of them. They do not pose any threat of forward integration. Other important group of suppliers is those who provide Sabic with maintenance services. Those suppliers can be categorized into two: routine maintenance activities that requires low to medium skill labor; and specialize activities that requires high skill labor. Both types of service providers are small to medium companies and are contracted under blanket purchase agreement which enables them to mobilize into any plant within very short time. Some of these contractors are a joint venture with international companies, but they do not pose any threat of forward integration. 6.3 Bargaining power of buyers Sabic sells some of its products in the local market to companies and consumers, and the majority is exported. There are agreements among Sabic affiliates whereby product of one company could be used as input for another. There is no concern among Sabic affiliates with regards to the setting of prices and settling of cost among them. The local consumers of Sabic products are either companies who use the products as input for their operation or retailers who sell the products for direct consumption. Being the largest producer of metals and petrochemical products, Sabic does not experience bargaining power of the buyers in the domestic market for the coming two to five years. Local buyers depend heavily on Sabic's products. In the international market, the situation is different. In his speech to the 7th Iran Petrochemical Forum, al- Mady, the vice chairman and CEO of Sabic said "Most petrochemical companies in the Middle East are narrowly focused on certain geographic areas. This puts us in a difficult position, if the majority of our products are going to just one region of the world. If this trend continues, one dominant region could become powerful enough to effectively control our industry". Here Sabic CEO is concern about the bargaining power of buyers and the risk of concentrate selling to one region. 6.4 Threat of entry The high profit margin of the petrochemical industry opens the appetite of hungry investors to the region. In addition, entering the World Trade Organization (WTO) in December 2005, the kingdom represents a lucrative place for foreign direct investment. One of the issues that would be raised is Sabic access to feedstock at below world prices (Zahid 2005). The Gulf region attracted large investment in the past years. For example, "Of 25 new ethylene plants commissioned in the past five years, 17 are situated outside of the highly developed regions of North America, Western Europe and Japan. And the bulk of those 17 plants are either near natural gas resources such as the three, Sabic has built in Saudi Arabia or close to customers in those markets with the highest projected growth, such as China and Page 12 of 24

14 India" (al- Sayyari 2002). Due to the nature of petrochemical industry, there are some barriers to industry and some attraction to industry at the same time. One of the barriers to industry is the need for economies of scale. New entrants need to come in on a large scale if they want to compete with the giant petrochemical companies. This would require a huge capital investment, access to distribution channels, and be in a cost advantage location. The accession to WTO, the high oil and gas reserves, and the huge profit on petrochemical industry would make Saudi Arabia an attractive place for new comers. Companies with high capabilities on research and development may try to enter this lucrative market. Owners of new technologies will try to compete on a cost advantage basis. Given the nature of newly developed industry, right now, some Middle East petrochemical producers are content to simply purchase off- the-shelf technology and call it a day. But those who only buy the technology will forever be followers and never leaders (al- Mady 2005). Sabic started to invest in the research and technology, now it has three centers, one in the US, one in India, and one Jubail, in addition to the one located in Riyadh. 6.5 Threat of substitute products Sabic is fortunate in having a diverse basket of products. Its six strategic business units: basic chemical; intermediaries; polymers; fertilizers; and metals make it conglomerate company in its industry. Until now, the world market could not find any economically feasible substitute for the products produced by Sabic. In fact, the world is becoming more and more dependent on the petrochemical products as research finds more uses for these products. Page 13 of 24

15 7 FINANCIAL ANALYSIS 7.1 Current Ratio: Current ratio indicates a company's ability to meet short-term debt obligations that means it is a measure of liquidity and solvency. It is equal to current assets divided by current liabilities. The current ratios of SABIC for the last two years exceeded two which means the current assets are twice the current liabilities, therefore we have considered SABIC having good short-term financial strength. 7.2 Inventory Turnover: Inventory turnover ratio shows the company's effectiveness in a sense to what extent the company holds excessive stocks of inventory. It is equal to annual sales divided by inventory. The trend of inventory turnover rate in SABIC was increasing during the last three years from 96 to 101 days, therefore This is unfavorable sign in SABIC which need more improvement. 7.3 Collection Period: Collection period indicates the average time period for which accounts receivable are outstanding (before receiving payment). It is equal to accounts receivable divided by average daily sales. The collection period has significantly decreased from the last year which means SABIC has improved its accountant policy to convert account receivables into cash. 7.4 Debit Ratio: Debit ratio will measure how much the company relies on debt to finance assets. It is equal to total debt divided by total assets. The debit ratios has decreased during the last three years form 45% to 33% which indicated SABIC is balancing between the funds provided by creditors and its equity to take advantage of leverage option with less risk. 7.5 Return on Sales (ROS): ROS is a measure of a company's profitability which is equal to net income available to common stockholders divided by total sales. The ROS has increased more than 70% during the last three years from 14% to 24% which indicated to income has soundly increased, therefore, SABIC is considered a profitable company. Page 14 of 24

16 7.6 Return on Total Assets (ROTA): ROTA is a measure of how profitability a company by using its assets, liquidity and debit. It is equal to net income available to common stockholders divided by total assets. The ROTA has increased radically to more than double during the last three years from 6% to 14%. This is another ratio indicates that SABIC is a profitability company and efficient uses of resources. Ratios Current Ratio Inventory Turnover Collection Period Debit Ratio % % % Return on Sales % % % Return on Total Assets 6.13 % % % Table - 1: Financial Ratios of SABIC for the Last Three Years Page 15 of 24

17 8 FUTURE OPPORTUNITIES SABIC financial position and brand name can be used to support many new developments and growth for the company. We have list some of those opportunities in the following few lines. 8.1 New Products As a clear opportunity is to have new petrochemical based products that is not yet is produced by SABIC. Many of the new small companies (compared to SABIC) like PMD Company, have identified such new products and started to have planning to install new plants for producing them. One of the negative things about having new products is that SABIC does not want to take risks on new products or new technologies that did not have any solid grounds internationally which off course results in SABIC missing some of the important chances to expand its line of products. Another obstacle to this is the lengthy process for approving new product/technology for new products that may lead again to lose of valuable time to market for those products. This lengthy process has its reasons off course. In the petrochemical business, investments nowadays are measured by Billions of dollars. That's a lot of money to commit a mistake with! 8.2 New Business Line Jack Welsh of GE (GE's Case) have successfully changed the company to one of the highest profitable companies in the world due to the fact that he did not stick with the core business of GE. He sold the weakest parts of his company and purchased many profitable companies and plants using the cash that is generated by selling declining business. SABIC have a lot of cash and can do similar action for its growth in more profitable business/industries like oil sales, Engineering services, Car manufacturing, plastic related final products (too many), technical licensing, logistics, TV... etc. Sky is the limit for investments. SABIC should not limit it self to petrochemicals. This exercise was done by SABIC when it went started HADDED (steel) as one of its products, steel is not a petrochemical product but it is considered one of SABIC most profitable company and have the highest number of employees (more than 3,000). This success should be an indication for many profitable projects out the range of the mercy of petrochemical raw materials and its limitations. 8.3 Going global (China, S. America...etc) SABIC is an international company and this is a fact no matter how big the internal culture is different from this approach. I do not think that we will not see non-saudi executives who served SABIC globally to reach the top management levels. Page 16 of 24

18 When we speak about international business nowadays, China is the common focus for such strategies. As seen in Figure 1, petrochemical products growth are very high and most of this growth will end up to china and Asia where they are the biggest customers for SABIC and for the petrochemical products in the world. That's why SABIC started to negotiate investing in building several plants near towards its main customer which will help SABIC to reduce a big part of logistics cost and ensure long relationship with its main and strategic customers. Same thing apply for the rest of the world. South America is a very big petrochemical and petroleum reserves especially in the fertilizing business and plastics. It is expected to be a big supplier for north America market in addition to Europe and Africa in the coming few years. % Growth History LLDP 8 Alpha ME P 6 Propylen HDP Propylen 4 SBR e Butadien Ethylen 2 LDP Acrylonitril 0 Bubble size is relative to market volume Figure 1 Petrochemical Historical Growth Rate (CMAI) Page 17 of 24

19 9 MAJOR STRATEGIC ISSUES Listing all the possible strategic issues for a company as big and diverse as SABIC needs thousands and thousands of reports and papers that contains thousands of pages. We did our best shot and listed some of what we can say as the most office challenges that can face or currently is faced by SABIC top management as a whole not as each SBU level. We came up with a big list and the following are a short explanation of each issue. 9.1 Major and rapid changes SABIC started as an investing company to bring good solid technological knowledge of the petrochemical industry from the entire world to Saudi Arabia. This main purpose was completed successfully and now Saudi engineers and management are running almost all of SABIC plants without the dependants on foreigners and outsiders. The main problem is that there were 17 different companies each with its own way of running its business and separate organization and strategic development plans, culture and ownership. Changing that was and still is the biggest challenge SABIC is facing. Change to one strong international petrochemical power was a must to have move. It started with purchasing and inventory systems. Then marketing was uniformed under the umbrella of SABIC for all of its affiliates. By May 2005 all Sabic affiliates have became under the umbrella of SABIC Shared Services and using one single Enterprise Resource Planning system (SAP). This move took SABIC less than eight months for each affiliate (several affiliates in the same time) to shift from old SABIC were each affiliate had its own identity to one uniformed SABIC identity. The change impact was and still is difficult and faces some resistance from many who they lost in a way or another some benefits or future benefits from this transfer. This change was done so fast and was followed with SABIC biggest expansions, investments, growth and highest demand and busiest period ever since it started with more than $20 billions of investments in and outside Saudi Arabia within the next five years. The following figure is from Gulf SOL meeting in Daharan early may 2006 that will show the distriputions of such mega projects for SABIC and Aramco in the coming few years. Page 18 of 24

20 Aramco Existing Aramco Development $6 $5 Jubail Area $50 BN $9 $12 $5 $6 $11 $6 $8 $4 $2 $9 Sabic Existing Sabic Development Figure 2 Future Mega Projects in KSA by SABIC and ARAMCO (Gulf SOL) 9.2 High demand on professional resources world wide Due to the current boom in petrochemical projects all over the world, resources availability is becoming very critical for every one in the industry. The average wage of an experienced engineer have raised 20-30% in one year in specialized areas, some Forman jobs have tripled in its pay in the two years alone. As seen in Figure 3, the required number of manpower required for constructing Mega projects of SABIC and ARAMCO alone is expected to reach a constant level of 225,000 employees just for construction stage of projects. By resources we mean also materials necessary for building and running petrochemical plants. The huge demand on steel and some essential materials such as platinum is becoming a serious issue and a danger that faces the current and existing plants all over the world. Those main changes in the cost of resources and its scarcity will have a huge impact on the financial analysis and profit feasibility of many of current products and for sure will impact the prices on the consumers later on, which mean a possibility of inflation period world wide. Page 19 of 24

21 Manpower Required 250, , , ,000 50, Paint/Insulation HVAC Instruments Electrical Piping Mechanical Structural Civil Figure 3 SABIC and ARAMCO combined construction manpower requirements 9.3 WTO Saudi Arabia has joined WTO recently, this will allow SABIC to enter the European market easily and compete with local companies without the heavy costumes and taxation that is applied on SABIC products currently. This is for sure a great step for SABIC and will ensure a competitive edge due to the fact that SABIC products are far cheaper than any other competitor in the European market due to many reasons. But this comes with a price. ARAMCO gives SABIC and any other local petrochemical manufacturer in Saudi Arabia a subsidiary to the cost of the raw material (Feedstock) 30% of its cost world cost due to the fact that logistic and government support. By WTO agreement this subsidiary should be stopped by year 2011 and that means an increase of 30% of the cost of production. SABIC still beliefs that this issue will not change its competitive position as one of the cheapest in the market. 9.4 Availability of raw materials Raw materials (feedstock) availability is a major issue in the world and that's why some of the petrochemical giants like Shell have pooled out form petrochemical business. Nowadays no one except SABIC Europe is investing in Europe (in petrochemical industry) due to the fact that there are not enough resources available for a profitable and long running business. Saudi Arabia and the gulf region have big reserves of oil but not that much of associated gas (the feedstock of petrochemical industry). The required time to build a cracker for gas to supply petrochemical plants with feedstock requires at least three to four years. This boom of petrochemical projects was not expected and has consumed all of the available capacity of feedstock in the area which leads to a race against the time to support all of those projects. This heavy task is in the hand of ARAMCO Company and it really needs a lot of efforts to match its customer s requirements. Page 20 of 24

22 9.5 Partners and rivals as well The huge profits been made in last year and the year before were an eye opener to many. The privet sector, ARAMCO and many of SABIC s partners like Dow and Exxon have started to build petrochemical plants in Saudi Arabia. This issue will increase the competition on the resources and will take many advantages that SABIC enjoyed for several years as the soul petrochemical produces in the area. Aramco is the most difficult one to compete with because it is the only source for raw materials and it will enjoy the lowest cost for raw materials compared to others due to its monopoly of feedstock. 9.6 The regions political changes and its effects 9.7 Government As been explained before, SABIC is 70% owned by the government and that means its decisions are some times not market or profit oriented. Politics some times (not always) play some role in strategic decision making of the company. This matter will not decrease unless the government starts selling some of its shares in the company to the public, which is not foreseen in the near future. 9.8 Culture change SABIC is 100% Saudi Company but now it became an international one. This shift is still not yet accepted by many of its employees and becoming a multinational corporate is still fare from being conducted. This shift is the next step for SABIC culture and it is a very big one. Only time will till when the day will come to see a multinational top management for SABIC but for sure it will not be in the near future because we do not see any changes towards this direction yet. 9.9 Barriers to enter other markets Europe and some other countries (Some of them are Arabs!!???) have established some laws to prevent SABIC from entering its market to protect its national interests and national products from Basic s low priced products. This issue alone is a major headache for SABIC marketing and always of a Mega concern. WTO may help in this matter but it will not solve it completely. Other ways to solve this issue is to have a trading agreement to ensure free trade between the countries which off course have many difficulties due to the uniqueness of Saudi Arabia as a country that commit to its Islamic values and believes. Page 21 of 24

23 9.10 Knowledge Management The loss of many skilled manpower from allover SABIC's sectors have created a new challenge for SABIC which is to ensures the implementation of knowledge management practices and becoming a learning organization. This challenge is so difficult nowadays due to the extreme pressure towards rapid growth in all directions. We believe that this task by its own needs really more attention and emphasize from management to assure of its implementations. This can not be done without top management full commitment (Walk-the-Talk) and full dedication of required resources towards this goal Environmental and health boycotts and regulations Due to the fact that petrochemical industries are pollution makers. The Saudi Government and most of other centuries have raised their environmental regulations to higher levels to match the improvements of the technologies and the increase of such plants in the area. USA for example have boycott the production or import of MTBE (a petrochemical product used with car fuel), this act have caused all the plants that produce this product in North America to close and some of SABIC plants to convert to other possible products. New and stricter regulations are possible to be issued which means more production cost. This factor may impact the price of the products but will insure a healthier environment for the new generation. Page 22 of 24

24 10 PERSONAL RECOMMENDATIONS 10.1 Horizontal Integration (Acquisition) Just few weeks ago SABIC have taken over KAYAN (a PMD company project) which worth more than $8.5 Billions. The new name is Saudi Kayan for this new affiliate. Acquisition is very clear opportunity for SABIC to grow and reduce its possible rivals in the market, not forgetting that by this step it will increase its market share and become a major player in almost every sector of the petrochemical industry. We recommend that SABIC continue with this approach with high care onto the future he future and political changes Vertical Integration This approach is possible but not likely for the time been. There are two types of such integration Backward In this type, we recommend that SABIC joins ARAMCO or any other feedstock provider in other countries to insure a cheap and reliable feedstock. This act will support SABIC competitive edge as a low cost strategy and cuts the way for any new possible rivals. The availability of feedstock is the most important elements for establishing a petrochemical plant and by securing this source SABIC can cut the way for others to enter the market Forward Forward integration is very profitable and complex thing to do. Forward integration will give SABIC without any doubt a competitive edge based on the price. The only problem in this approach is that such forward integration requires a great deal of management and different business thinking and faster response to the market which many large companies are lacking and SABIC is not an exception. SABIC have tried this approach few years ago where TAIF was established to produce plastic plates. The project still faces some difficulties. SABIC should understand that it must deal with such business unit with different management setup that supports it totally which was not the case More resources for change Time, money and manpower are essential resources for change management. Without the right and full integrated systematic change with close feedback and monitoring process the chances of global Page 23 of 24

25 competition and market growth will be risky. All this is for sure must be under full support of the top, middle and functional management of the organization. One level support is not enough at all. 11 REFERENCES Sabic Intranet 3. SABIC News letters 4. Engineering and Project Management reports 5. Gulf SOL (Society of learning) Khobar May 2006 Page 24 of 24