Investment Project in the Gulf Area - Case Study Example

Executive summary Qatar is one of the most progressive gulf regions making it the best area of investment. Guided by the need to realize its Vision 2030, the country has opened room for investment (Allen 89). The real estate industry is one of the most thriving sectors in the country. The demand for contraction materials is high. Investing in this area will therefore be a prudent step. The increased number of immigrants to the country in search of jobs has put pressure on the available social amenities. The country is experiencing some of the worst traffic congestion due to high volume of vehicles especially in the cities (Rahman 98). The government in collaboration with the private sector has moved in to address these problems and make the country one of the most attractive within the region. Currently, there are various projects aimed at reducing congestion. The Doha Expressway and the New Doha international airport are just some of the mega projects the country has been carrying out (Allen 76). Therefore, investment in the real estate will be a feasible endeavor. There is high demand for more affordable housing. The country has also embarked on the efforts to revive the tourism sector with a view to diversify its economy. It is estimated that upon the completion of the Doha international airport, the country will be in a position to attract more than 50 million people annually (Allen 20). This number offers an opportunity for the growth of the real estate. There is need to contract more hotels to accommodate such a large number of individuals. With the state of art structures, technology and strong economy, the country has become one of the best place to invest in. Introduction With the $100 million, investment in real estate will be one of the best endeavors. Qatar offers an opportunity for this kind of investment owing to the increasing population. There is high demand for housing and expansion of infrustructure. The proposed investment is however, the provision of raw materials for construction materials and work force. Being a new company, being involved in the actual construction may not pick in the market. Such projects are performed by companies which have already demonstrated their competed in that area. However, there are various challenges that are incurred by new market entrants. This includes taking long before a market can pick and begin its operations. Apart from that, the current competition in the market might also make it difficult for a new market to make any significant gains. The attitude of the consumers towards a new investment plays a big role in determining the success of a new business. In addition to these challenges, there is the cost of marketing that the company has to incur. To avoid these setbacks, the new investment seeks to use join venture strategy. The Mazaya Qatar is the main target company to work alongside. It is a well-established real estate company that hopes to be included in the Doha Securities Market. Established in 2008, the company has won the international favor and has been contracted to undertake projects in countries such as China. However, the increased cost of operation has been one of the major concerns for the company. Increased cost of labor and raw materials has denied the company more revenue. This is a gap that the newly proposed investment will be willing to take advantage of. The management will seek to convince the Mazaya Qatar Company to allow it to provide the raw materials at a subsidized cost and also cheap but qualified work force. History of Qatar With an absolute monarch form of government, the country has an estimated population of about 1.9 million (Rogers 20). The immigrants seeking to work in the country are however more than the population. The country has one of the fastest growing economies in the world, mostly attributed to the investment projects. Currently, it is estimated that the country has attracted more than $ 100 billion in investment (Rogers 78). The United States is the major investor mostly in the energy sector. The country relies heavily on the oil exports to run its economy. About 70% of the GDP is obtained from the oil exports. The rest comes from the industries, which have been on the increase in the country. Both the Islamic and conventional banking systems have made it possible for people to receive their services. However, the government has been on the verge of diversifying its economy. In 2008 for instant, the government allocated about $17 billion to be used in the expansion of the tourism sector. According to the government, there was need to expand the hotel capacity by more than 400% (Roger 78). This has been prompted by the fact that the government estimates an increase in the number of tourists. This explains why the real estate projects have taken toll in the country. The expansion of roads, contraction of new airports and increasing the number of residential houses has offered the real estate a great opportunity to conduct businesses. Industry of investment As indicated above, the new company seeks to concentrate its investment in the real estate industry, particularly to provide the raw materials and work force. The rationale behind this type of investment is the high demand for housing and related services. With the population surge as a result of the increased number of foreigners, it is estimated that the country will be the home for millions of people in near future. This is supported by the government’s effort to construct an airport estimated to serve about 50 million tourists annually. Apart from that, the fact that the government seeks to increase the accommodation and hotels by more than 400% is an indication of expected increase in population. This coupled by the Vision 2030 has created the demand for housing services and related services. In Qatar, the housing cost is high making it difficult for most people to achieve the cost. The new company will seek to take advantage of this gap to provide more affordable houses for the growing population. Reduction of the cost of production will the main aim in order for the consumers to reap the benefit. However, the company will not only focus on the housing issues but also on infrastructures. The government in addition to skyscrapers has proposed major road and airport projects. With the raw materials locally available, this project therefore becomes one of the most viable that the new company seeks to invest in. with the presence of experienced management team, the company is likely to pick immediately an agreement is reached with the proposed partner. Investment structure The business management proposes to use the joint venture as strategy to conduct its business. However, this will be done for a specific period of time before the company can fully operate independently providing not only the raw materials but also the actual construction. It will be able to apply for construction tenders and maybe receive due to the experience it will have obtained working with the most experienced companies. The main target company that has been in existence is Mazaya Qatar. It is a real estate company, which has recently been listed in the Doha Securities Market. The company has experts who have been involved in the contraction of major structures. It is involved majorly in the construction of houses and roads. It is becoming an international company due to its reputation and the quality of services. However, one of the major challenges for the company has been the increased cost of operation. The increased cost of raw materials and high labor costs denies the company more revenue. As indicated before, the new proposed company seeks take advantage of this one area. Before providing the rationale for the joint venture, the following are some of the services that the new company wishes to provide to Mazaya Qatar: Raw material and logistics This is the major business that the new company seeks to invest in. the raw materials in this regard refers to cement, sand and ballast and any other materials used in construction. The company seeks to have large-scale production of these materials to reap the benefit of economies of scale. With the high volume of materials and obtaining them directly from other producers, there will be reduced cost of raw materials. This will be much lower than what the Mazaya Qatar has been spending. It will therefore be an added advantage for that company since it will be able to cut its cost of operation. Apart from the provision of raw materials, the company seeks to take advantage of logistics. This involves transportation and packaging of the raw materials. The company will be able to provide transportation to all parts of Qatar using both the road and railway transport. The new company seeks to use this strategy to increase revenue. For that purpose, trucks will be obtained to facilitate the transportation of materials to their final destination. Outsourcing services One of the biggest headaches for many companies has been the increased cost of labor. Mazaya Qatar has been a victim of the same predicament. For that reason, the proposed project seeks to take advantage of this market niche by recruiting and providing qualified and experienced work force to provide services for Mazaya. Outsourcing has become a major social phenomenon in the world of business. It is explained as the process through which employees are obtained from other countries. However, the rationale behind is the low cost of labor compared to obtaining them internally or other places. However, apart from providing cheap labor, such employees need to be not only experienced but also competent in what they do. Though Mazaya has been outsourcing, it does not have the capacity to vet its employees in a view to know whether they are competent enough. This is what the new company seeks to provide to ensure the quality of services by the two businesses. The company will have the ability to receive employees from countries such as China and India, vet them, and then supply them to Mazaya upon request. This will enable the new company increase its revenue. Need to begin operations immediately One of the main challenges of new market entrants is time taken to begin its operations. Many activities such as advertisement have to be carried out. This is especially for the purpose of ensuring that the company is known in the market. This may take several months or years depending on the attitude of the consumers towards the company. This is not good for a company owing to the high capital outlay. As a company takes time to pick, the chances of making losses and plunging in debts is high. Costs of transport, labor, and rent will be paid whether a company is in full operation or not. This is a scenario that the newly proposed industry seeks to avoid through joint venture. This however does not mean the company loses its independence. There will be a mutual agreement to operate the business together but the two companies will have their own autonomy. This means in the event there is a conflict, the contract can be terminated. The company seeks to use Mazaya as an avenue to becoming a more successful and independent business in the next five years. It will be borrowing experience and other business strategies in the course of interaction with the expected partner. It is therefore estimated that the new company will be able to begin its operation immediately the negotiation yield positive results. Cut down cost of marketing This is an important strategy used by businesses to make themselves known to the intended consumers. Being a new company, the management is likely to use a lot of money before the company can be known by other investors. However, this is an expensive undertaking that may cost a company thousands of dollars especially if the company is in its infantry stage. With the limited capital, the management will decide to use joint venture to spend very little to make the advertisements. It will rely on the current reputation of Mazaya to begin its operations without having to be involved in aggressive marketing. This will reduce the cost of operation for the new company and assist in increasing its revenue. Being a provider of raw materials for Mazaya, the company will not have to do any major advertising. However, it can take the advantage of having slogans on its tracks, which will be used in the provision of transportation services. This will give other outsiders an opportunity to develop an interest in the new company. This is important considering the fact that the company seeks to become fully autonomous in the next five years. Overcome competition from rival groups Competition is a major external threat dreaded by every investor. It has the ability the ability to affect the operation of a given business. Competitors aim at dominating the market by ensuring that the other rivals become insignificant. With the real estate business booming, there are many other rival groups including the Mazaya Qatar. It will be difficult for the new market to begin its operation and make significant progress in the presence of such investors. It is for this rationale that the new business has decided to be involved in a joint venture. The company will benefit in the sense that there is already an established market that will be ready to take the raw materials. For that reason, the effects of other competitors will rarely be felt so long as the new company is faithful in terms of cost and timely delivery of raw materials upon request by the partner company. Expected return on investment This is explained as the total income a company receives out of the investment that is made. It is calculated by getting the difference between the gross income and the total expenses incurred. If the result is positive, then the business is worth taking and vice versa. There is a high hope that the company will make profits out of this investment. For the purpose of determining what the company is likely to gain out of $100 million investment, several scenario analyses will be considered. The term refers to the future projections of the company’s performance based on a number of factors. The past and current economic events are used to make predictions of how a company is expected to perform in future. With the proposed company, the main expenses are twenty trucks for transportation, labor, electricity, water, rent and transportation cost. The income will come from its sale of raw materials, supply of labor and transportation cost. For the purpose of estimating the expected future performance of the business, the following three scenarios will be focused upon: Optimistic scenario This is a type of scenario that assumes that the cost of production will remain as low as possible. The optimists in business work under the assumption that the economy will remain stable and the exchange rate will also remain the same. The developmental cost is also perceived to be as slow as possible. in other words, this is an ideal environment through which a business seeks to operate in. the acquisition of the trucks are likely to cost the company about 12.8% of the provided capital, assuming each truck cost about $160,000. The acquisition of the materials is however likely to take about 40% of the capital. The remaining expenses will take about 15% in the first quarter. In the total therefore, the company wishes to invest about 70% of the provided capital. Under optimistic scenario, the company will make 20% profit in the first financial year. This is working under the assumption that all the materials acquired will have been sold, and that the economy will remain stable. Realistic scenario The realistic scenario focus on all possible opportunities and threats to the establishment and operation of a business. This is arrived at by focusing on the realities in the market, and the economic status. The economic crisis for instance affects the demand of goods and services. The purchasing power of people is affected. When it happens, no country is immune. As stated above, the main target population are the tourists and other foreigners wishing to relocate to Qatar. Considered that the economy is likely to worsen, many people will find it difficult to own a house. The number of tourists is also likely to reduce affecting the business. Construction materials are also likely to increase as a result. Under this scenario, the increased expenses will result in a fall in the total revenue. Under the realistic scenario, it is estimated that the company will make a profit of about 5% in the first financial year. This is considering the fact that not all the raw materials purchased will have been used by the partner company. Pessimistic scenario It is a scenario where investors think of the worst happening even when the economic indicators show otherwise. For instance, it is assumed that the demand for the materials will be relatively low. For that reason, a business will be expected to sell its goods at a lower price than it was earlier expected. This is likely to lower the revenue. It is also estimated that the cost of operation is likely to be high. The transport, labor, rent, and energy costs are perceived to increase. From this analysis, it is clear that the business management does not think of making a lot of revenue. In this case, therefore, it is estimated that the business will make less than 5% profit at the end of financial year. The business will not be able to sell all its raw materials. This coupled with an increased cost of operation will lead to low income in the company. Whichever the scenario that the management seeks to use for analysis, the fact remains that the business will make profits. It is also imperative to note that only 70% of the money has been injected in the project. The remaining 30% is for the purpose of future expansion depending on the performance of the business. However, the management will seek to use the realistic scenario in its analysis of the situation. This is the only way through which the actual expected revenue and subsequent profit can be projected. In conclusion, Qatar is one of the greatest economies in the gulf region. Its GDP is said to be one of the fastest growing in the world. With a population of less than 2 million, the country requires work force from outside to run its many projects. The main source of income for the country has been the oil. With the need to realize the Vision 2030, the country has been involved in a number of projects. This includes the expansion of roads and airports to mitigate the congestion and handle the high number of immigrants. With a strong economy and stable government, most of investors have moved into the country to conduct businesses. This has led to investments going to about $100 billion with the United States being a major beneficially. Investing in the real estate is therefore one of the best business shots in Qatar. There is high demand for houses and need to expand infrastructures. The proposed business seeks to take this opportunity by providing raw materials needed in the construction. However, operating in isolation may become expensive and almost impossible for a new business. For that purpose, the management will be willing to approach the Mazaya Qatar Company for businesses negotiations. The main goal is to be allowed to provide the raw materials at an affordable cost. The Mazaya Company on the other hand will be allowed to take the actual projects of construction and application of tenders. Apart from the provision of raw materials, the new company seeks to provide cheap, qualified, and experienced work force to Mazaya. This is aimed at enabling the company to cut down its cost of operations. Work cited Allen Fromherz Qatar: A Modern History. p. 43. ISBN 9781848851672. Retrieved 2013-04-07. 2012 Rahman, Habibur. The Emergence of Qatar. London/New York: Regan Paul 2005 Rogers, Simon; Sedghi. "How Fitch, Moody’s, and S&P rate each countrys credit rating.” The Guardian. Retrieved 28 May 2011. 2011 Read More