Etisalate in the UAE - Costs of Production - Case Study Example

Name: Tutor: Course: Date: Etisalate UAE PART 1 Introduction Etisalate is brand name for a company in the United Arabs Emirates which is called Emirates Telecommunication Corporation. This is a service provider specialized in telecommunication and operates across close to eighteen countries in the Middle East, Asia, and Africa. At the beginning of this year, Etisalate was the 15th largest company operator in mobile network in the world. It had a customer base of above 135 million (Kirman 118). Forbes Middle East named Etisalate as the powerful company in the United Arab Emirates. The company is located in Abu Dhabi which is one of the cities in United Arab Emirates. In the year 2011 in February, Etisalate recorded net revenue of 8.4 billion US dollars (AED 31.9 billion) and net profits of 2.07 billion US dollars (AED 7.631). Etisalate is one of the only two companies providing telecommunication services in UAE; the other company is Emirates Integrated Telecom (Du) (UAE NBS, 2011) Etisalate is an internet hub in the Middle East. It provides connectivity to other communications operations in the Middle Easy region. The company provides telecommunication services and carrier services. The company provides internet services. Apart from services, the company has manufactured telecommunication products such as BlackBerry Bold 7990 and BlackBerry Curve 9390, which are smart phones. The company latest products include iPhones like the 4S iPhones. The prices of the iPhones are AED 2749, AED 3149, and AED 3549 for 16GB, 32GB, and 64GB iPhones respectively (Thompson, 2009). The prices of the iPhones have not changed in the recent past since the products are still new in the market, but it is anticipated that they will decrease in due time. The main competitor of Etisalate is Emirates Integrated Telecom (Du). The two companies are the main rivals in the telecommunication service provision. Costs of Production Costs incurred by the company include rent, maintenance costs, electricity, and warehousing. Rent as cost to Etisalate assist in hosting the company’s offices and other outlets that the company might have. Rental premises cannot be avoided for such a huge corporation. Rent as a cost is fixed unless the owners the premises decide to increase it, which does not happen easily or often (UAE NBS, 2011) Maintenance costs are funds used to buy small gadgets to repair the big equipments or the money paid to skilled and skilled manpower used in fixed any hitch that occur in the daily running of machines and equipments. Etisalate is a technological company that has sophisticated gadgets that are used to provide internet and other telecommunication services (UAE NBS, 2011) The maintenance fee for various equipments is high. Maintenance costs will depend on the number of faulty occurrences that will happen in certain financial period. Maintenance costs can be classified as variable costs since it dependents on other aspects and it is not fixed. Electricity costs are very important to Etisalate corporation since they power the various machine possessed by the company. Use of electricity will depend on the activities that will go on in the company and the unit fee of the electricity supplied to the company. Electricity is therefore a variable cost that would not be constant from one period to another (Kirman 126). Demand and supply analysis One product produced by the company is 4S iPhone. The demand curve for demand curve for 4S iphone will appear as follows: A 4S iPhone is a normal product which means that decrease in price for the product will lead to increase in demand for the product. On the other hand, increase in price of the product will lead to fall in demand. Increase in consumers’ income Increase in the income of consumers will translate to increase ion disposable income. Therefore, the demand for 4S iPhones will also increase. When the income of consumers decreases the demand for 4S iPhones also goes down. 4S iPhone is a normal good that experiences a normal demand curve. Increase in price of competitors’ product/service If the price of the competitor’s product increases the demand for Etisalate product will go up. The consumers will find the product from Etisalate Company to be more affordable as compared to that of the competitor’s (Kirman 118). Technology A breakthrough in technology will lead to increase in supply of products of the company like iPhones. With increased supply, the prices will be forced to go down to realize equilibrium. The technology could be a type of advanced way of multi-production of iPhones. Increase in number of consumers Increase in number of consumers particularly those employed and have a substantial income will lead to increased demand. If the demand is more that the product produced; the price of the product will be rise to attain equilibrium in the market. Increase in the number of competitors When the number of competitors goes up, there will be overproduction as the companies strives to outdo each other. To cope with the competition, there will be price reductions to as demand will be less than the supply. One competitor that Etisalate has is Emirates Integrated Telecom (Du). Increase in One cost of production An increase in cost of production will lead to reduced profit margins. In this case the company will have to raise its prices of the product to cater for the increase in price. With increase in the cost of production, supply will do down, demand will increase and hence prices will go up. Elasticity of demand of 4S iPhones The elasticity of demand is the degree responsiveness in demand as a result of changes in price of the 4S iPhone. Price elasticity of demand shows how the consumers will react in case the price of the product is changed. If the elasticity of the product is elastic then price change will shift demand drastically. The elasticity of demand curve is as shown below: P e Quantity (dd) The price elasticity of demand indicates that it is elastic for 4S iPhones. Increase in price will affect the demand for iPhone negatively. The market structure The market structure that Etisalate operates in is an oligopoly. This is where there are a small number of companies operating in particular market. The telecommunication service industry in the UAE has only two major service providers which are Etisalate Corporation and Emirates Integrated Telecom (Du). This market structure is not easy to entry. There is no free entry and exit. There could be cartels which lead to abnormal increase in price (Kirman 118). Barriers to entry One barrier to entry into the market is the huge cost required to put up a telecommunication service company. Many investors shy away from the huge costs of putting up the company. The second barrier to entry is the numerous legislations that are required before a telecommunication company begins to run (Zawya Dow Jones, 2012). There should many authorizations across countries that will allow the telecommunication company to get access to other network outside the country of operation. The company is a price maker since it is the leading company in the Gulf region. PART 2: The impact of the industry on the Macro Economy Introduction The company operates in the service industry which is providing telecommunication services. Similar businesses in the industry have shown increases prowess in the production of the products as advances in technology is achieved (Thompson, 2009). Technology breakthrough has increased telecommunication and internet services across the Gulf region. Industry’s Impact on the UAE’s GDP and Economic Growth Gross Domestic Product is the total gross income within the country. Economic growth is the rate of increase in economic activities due to favorable conditions like increased production owing to good weather. It can also be brought about increased mining activities or technology advancement. Contribution to UAE economic growth Etisalate Corporation has lead to increase in the economic growth rate in UAE. The company provides essential telecommunication services that lead to increased trading activities within and across countries. As the speed of communication and connectivity grows, various parts of UAE are opened up for various economic activities. It also increases trading with other countries. Investors will come due to increased means of communication (Gulfnews.com, 2012) The industry has also led to UAE’s GDP growth as companies and individual participate more in economic activity. Increased connectivity leads to increase in the speed of doing business. The industry has played an important role to the society in UAE. There is a great contribution to the society as companies engage in charitable activities like building of schools and helping the less fortunate in the society (ETISALATE, 2012) However, the industry has also led to environmental degradation as telecommunication services that are outdated are not always disposed in the right way. Some diseases have been traced to the use of some of the telecommunication gadgets. Impact on UAE’s employment The industry has resulted in creation of jobs as they companies employ qualified personnel to help them meet their objectives. Some engineers who were previously unemployed in manufacturing sector have found jobs in the telecommunication service industry (UAE NBS, 2011) Job creation have increased source of livelihood to UAE nationals and hence uplifting their living standards. Increased income has led better standards of living. Impact on UAE’s Inflation Consumer price index measures the level of changes in prices of consumer services and goods bought by households. The products of the company which were listed as smart phones (Black Berry) and iPhones have led to increase in inflation since their prices are high which have resulted into other products adjusting their prices upwards (AMEinfo.com, 2009). Part 3: The impact of the Macro Economy of the Industry UAE’s growth rate on the industry’s sales When the growth rate of UAE economy goes up, the sales of the industry will also go up. Positive growth rate increases the purchasing power of consumers by improving their living standards. When the customers have increased income, they will buy more goods from the industry. UAE’s inflation rate on the industry’s costs When the inflation rate goes up, the industry’s costs will also go up. Inflation raises the prices of supplies and other needed materials. Rising inflation affects negatively the profitability of the companies in the industry. If the inflation rate decreases, the production costs of the industry will also go down. Industry response to UAE’s Macroeconomic conditions The industry will respond to UAE’S economic growth by expanding its business across the country and across nations. The industry will have more money to invest elsewhere. Etisalate has invested in many countries across the gulf region and the Middle East due to increased economic growth in UAE that can support expansion and diversification (AMEinfo.com, 2009). Inflation rate increasing will cause the industry to raise the prices of its products to deal with the effect of increased costs. Works Cited UAE National Bureau of Statistics (UAE NBS) (2011) – economic statistics – at http://www.uaestatistics.gov.ae/ReportsByDepartmentEnglish/tabid/104/Default.aspx?M enuId=1 Thompson, Ben (21 July 2009). UAE Blackberry update was spyware, BBC. Retrieved 13 April 2012 from http://news.bbc.co.uk/2/hi/technology/8161190.stm Kirman, Alan, "The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes", The Economic Journal, V. 99, N. 395, Supplement: Conference Papers (1989): pp. 126-139 ETISALATE (2012) Emirates Telecommunication Company retrieved from http://www.zawya.com/middle-east/company/profile/334652/ on April 13, 2012. Gulfnews.com (2012) Etisalat fibre-optic network to top Dh5b, retrieved from http://gulfnews.com/business/general/etisalat-fibre-optic-network-to-top-dh5b-1.525620 on April, 2012. AMEinfo.com (2009). Etisalat officially secures third mobile license in Iran. Retrieved from http://www.ameinfo.com/181006.html on April 13, 2012. Zawya Dow Jones (2012). Online trading and portal solutions – at http://www.dowjones.com/product-dj-local-languages-middleeast.asp Read More