Vehicles Testing Lab - Case Study Example

Introduction The motor industry is one of the largest industries in the world. In Saudi Arabia, the demand for new cars is at an all time high. People are importing new cars in large numbers, and this has directly led to the growth of other related industries. Any company that deals with motor services and related products is experiencing a period of growth and profitability. As a result, the main aim of this report is to show the viability of the Motabaqah Company opening a vehicle testing lab in Dammam. As regards the sale of automobiles, the Middle East is the leading region in terms of importation. Throughout the region, Saudi Arabia leads the rate of importation of auto parts and vehicles, with annual car sales reaching 760,000. According to research by Abushakra (34), new car sales rise by an average of 7% in the country, and it is expected that by the year 2020 the level of annual car sales will be over one million. Throughout the country, there is a growing middle-class population, and they have a demand for much smaller and low priced car models. Averagely, majority of the population within the country is below 30 years old, and they have high disposable incomes. Currently, the main source of automobiles is imports. However, the government is further trying to encourage original equipment manufacturers to set up shops within the country and as such, enhance its manufacturing capacity (Wilson, 45). Based on this imitative, the development of the domestic automotive industry is at the core of the industrial diversification strategy and is an important segment in terms of the development strategy of the country. The aim of this report is, therefore, to provide an in-depth analysis of this opportunity and state the strengths, weaknesses and opportunities for the company in regards to opening up of the motor lab. It will include the technical and financial assessment and in conclusion, and provide a justification for the company to open up the vehicles lab in the country. Market Analysis The marketing analysis is an important part of the feasibility report as it considers the factors that make the investment in the target market a profitable venture. This will be evaluated using three methods: the SWOT analysis, the ‘Depest model’ and the ‘Porter’s five forces model. Each of these considers various aspects related to the business and leads to a summary decision of whether such a venture should be undertaken or discarded. SWOT ANALYSIS Strengths There are various factors within Saudi Arabia that make it viable to open up the vehicle lab at his time in Dammam. These include the presence of vehicle manufacturing plants, automobile parts manufacturing plant. Plus the availability of government support and regional market reach. Isuzu, the Japanese car manufacturer, has established a car production factory in Dammam. This is based on the fact that this is the company’s growing market. At the moment, the company assembles vehicles at this facility using imported parts, but with time, vehicles will be produced using parts that have been manufactured within Saudi Arabia. As of 2012, the plant was producing 600 units but with planned expansion, the plant is set to produce 25,000 units on an annual basis. This will not only be used to meet local demand but will also be exported to neighboring countries. Apart from this, prominent luxury automakers such as JLR have also shown interest in the country with plans underway to set up a land rover manufacturing factory in the country. Annual production is set to be an excess of 17,000 units per year by 2017. Apart from the small personal units that are the focus of these companies, commercial retailers have also set up shop in Saudi Arabia, and there is a truck assembly plant in Jeddah that is operated under the National Automobile Industry Company (Birn and Patrick, 26). The production rate of the company is 800 heavy duty trucks. Given that there are many infrastructure projects that have been lined up in the kingdom; the demand for these vehicles is set to increase. All these vehicles will require use of the vehicle testing lab and the Motabaqah Company will be guaranteed of a constant market for the facilities that will be offered. At the moment, Saudi Arabia hosts 180 of the 300 parts and auto assembly plants that are within the gulf region. The country is looking forward to expanding its role as the one of the leading countries in terms of the automotive components sector. Production of these components is made easy because the Saudi Arabia mining company operates one of the largest aluminum facilities in the world. They have managed to integrate technology in their operations hence making it very cost efficient. The facility comprises of a rolling mill, aluminum refinery, the bauxite mine and an aluminum smelter. This has attracted several companies wishing to establish plants in the country based on the fact that they can easily access the required raw materials. An example is Tata Motors that has expressed interest of setting up operations near the aluminum facility (Patrick, 77). It is one of the motor companies across the world that has started use of aluminum bodies on its automobiles so as to reduce overall vehicle weight and thereby to increase their efficiency. Another aspect that makes Saudi Arabia the best option of setting up a new vehicles car lab is the presence of the Saudi Basic Industries Corporation that deals in plastic technology specifically for used in automobiles. Averages of 60 % of the plastics that are used in cars throughout the world are manufactured at this facility. The company is also seeking to expand its operations and has entered into an agreement with Montefibre, an Italian company, for the establishment of a carbon fiber plant within the country. Carbon fiber is slowly becoming the choice material for vehicle manufacturers as it is light and can be used to enhance the performance of motor vehicles. Another supplement to the components industry is the construction of the Sadara Chemical Company that will offer products specifically targeted at the automotive sector. This will go a long way in increasing the number of new vehicles producing locally, pushing up the demand for new vehicle labs in the region. Companies that have expressed interest to set up shop in the area have full support of the government. The government has gone out of its way to developing a pro –business tax and regulatory environment so as to attract foreign investment. In accordance with the prior commitment to the World Trade Organization, the government has liberalized the automotive sector and foreign companies can now have full control of their businesses. In the past, any foreign investor had to look for local partners’ before opening up any enterprise in the region.. Additionally, the government has done away with income tax, land tax, sales tax, property tax, and value added tax; it has also set the maximum tax on corporate benefits at 20%. Businesses can further access loans from the public investment fund at low cost so as to boost their businesses. These factors point t the viability of the auto industry in Saudi Arabia, and it is an appropriate time for any interested company to open up base within the country. In our case, the vehicle testing lab can grow with time and there is a guarantee that there will be the constant demand for the services based on the number of new vehicles that are sold on an annual basis within the kingdom. Weaknesses Based on statistics on the auto industry in Saudi Arabia, there is an opportunity for investment in this country. It can translate to a huge demand for the products and services that the vehicle testing plant may have to offer. The direct impact of this is that the company may be forced to make heavy financial investments so as to establish a plant that can meet the demands that are expected by the customers. Such a move will, therefore, force the company to incur additional debt as it seeks for money to be used in this investment. Heavy borrowing affects the liquidity of any company and can have long-term effects in regards to the management and operations of the company. Opportunities Saudi Arabia has plans to not only manufacture vehicles domestically, but also to design them locally. This led to the launch of the Ghazal 1 at the Geneva international Motor show; this is an automobile designed by engineering students in Saudi Arabia and built to withstand the gulf climate. This vehicle is designed to be cost efficient and will cost between 9000- 10000$ per unit. There are plans to produce 20,000 units on an annual basis. In the year, 2012, Aramce Research and development center developed a vehicle that captured and stored the vehicles carbon dioxide emissions. At the moment, the vehicle system has the possibility of capturing up to 10 % of the carbon dioxide emissions from the vehicle. Continuing research is expected to increase the amount that is captured to 70%. The system works by separation and restoration of the carbon dioxide from the vehicles exhaust system; this is disposed of off when the vehicle will be refueling. To enhance its popularity, it has been developed as an independent component of the vehicles. As a result, it can be fitted to any vehicle that has the current combustion system. This is set to be an alternative for electric vehicles that are more expensive and require a huge capital investment to set up and operate smoothly. Saudi Arabia has access to various domestic markets, and this makes it a good location for opening of any company. The country is part of the gulf corporation council and as such, traders can benefit from tariff – free access to the other Gulf States such as Kuwait, Oman, Qatar and the United Arab Emirates. Together, the annual car sales in this region are an excess of 1.3 million cars, all of which are imported from countries outside the Middle East (Plunkett, 197). Any company that sets up in the kingdom has access to over 400 million consumers who located in North Africa and the Middle East region. Threats ` Transparency within Saudi Arabia: There have been concerns about the procurement system in regards to Saudi government tenders. Supply tenders are often rewarded irregularly. This might represents a challenge to the company based on the fact that the government is one of its targeted clients. Competition: The large demand for automobiles in Saudi Arabia has not only been noticed by the Motabaqah Company. Other large brands around the globe have already set base in the country and are already establishing a hold of the market. If the company wants to set up a lab in the region, it should do so with the utmost urgency before customers become loyal to other brands. THE DEPEST MODEL This model used to analyze the macroeconomic situation of the target country. It includes an in-depth analysis in the following areas: political, demographic, economic, ecological, technological and social. Demographic situation Qatar has a total population of 28.29 million. The population is composed of citizens with various ages as shown in the table below. Age range Percentage 0-14 years 12.5 15-24 23.9 25-54 59.5 55-64 3.3 65-- 0.8 The population consists predominantly of Arabs; they account for 39% of the total population. Pakistanis and Indians follow at 17% each while other minorities exist in small figures. 97% of the population live in urban areas and since this represents the target market of our products it is a positive indicator. Most of the Arabs are part of the elite families and the economy revolves around them. The minorities are mostly casual labourers. Arabic is the main national language, but the use of English is common in all parts of the country. According to the table above, the percentage of people who lie within our target age group is over 70%- these are people with an interest in automobiles and their components. Economic situation Despite the financial crisis across the globe, Saudi Arabia has continued to grow economically. The Saudi Arabia GDP expanded by an average of 4.7 % in 2014 mainly driven by government capital expenditure (Parker, 51). The kingdom recorded a growth rate in its GDP of 17%; this huge growth can be attributed to the high gas and oil prices across the globe. Between 2004 and 2011, there was an increase in the rate of growth from gas and non-oil sectors by 26.7%. By 2015, the GDP per capita of Saudi is expected to increase to $25,316. It is part of the few countries in the world where its citizens do not pay income tax. This translates to more spending power by the people. Political situation The political station is stable. The country is ruled by an Emir, who is the head of state and government. He is assisted in his duties by the consultative assembly. These are the advisors to the emir (Fleisher and Babette, 88). The country is run according to Islamic law, despite this; the rule of law is fair and all the rights of citizens and foreigners are safeguarded. Additionally, the Saudi government is pro-business and encourages foreign investors. Social Aspect Given their spending power, the Saudi people have an extravagant attitude. These means they are always ready to try new products. Status is a major aspect of their lives and majority want to be considered as trendsetters, they, therefore, do not mind lavish expenditure on products. As long as the products are of high quality, they would always find a market among the Saudi people despite the price range. Technology aspect The Saudi people are open to trying new goods and services. This makes them at the forefront in uptick of new products. It means that for any product effectively to penetrate this market it should embrace new technology features (Plunkett, 34). Such goods will have more demand within this select market. To make the facility and our products more attractive, it is important that we can incorporate latest designs and technologies. PORTER’S FIVE FORCES MODEL This is an analysis model of how a particular company will face the external environment in a particular field of industry. These factors are discussed below: Threat of entry: This plays a critical factor in the success of this company in Saudi Arabia. The main barriers in this regard will be access to distribution channels, government policies and product differentiation. Access to the distribution channel is important when trying to enter new markets. Saudi has its form of distribution systems; this can create a challenge for our company. It will have to analyse the systems critically in place so as to suitably adapt. The company should look for strategic partners to help it in this sector and based on this; both of these parties will benefit from this mutual business relationship. For product differentiation, analysis of the Saudi consumers suggests that cheap affordable products are not suitable for the majority of them. In this regard, the company should develop a unique combination of products so as to adapt effectively to this market. Competitor rivalry: According to Saudi investment journals, the automobile industry is rapidly expanding. The increase in the population in the country has increased the demand for new automobiles. Furthermore, economic growth has contributed to rising in the personal wealth of the citizens who have an array of tastes will regularly demand new car models from their dealers. The level of economic activity especially in the manufacturing sector has increased the demand for automobile components equipment. Pressure from substitute products: After assessing the competitive situation in Saudi, some specific brands of automobile components have an advantage in this market. The promising fact about the automobile market is that it is majorly controlled by foreign firms. This represents a challenge to the company; this is because the target market for its products is in the automobile segment. This segment is already infiltrated by other global manufacturers from Japan and Korea. Competitor analysis Based on research that I carried out personally in the area, there is an opportunity for growth in this sector. The only competition that stands in our way is a small shop that deals in similar products. They deal in inspection of cars check, engine and transmission check and the car body check. These are the same types of products that we also expect to be offering to our clients. Their costs for these services were SAR200 to SAR250 for small cars and SAR300 to SAR350 for big and luxury cars. These prices are fair enough given that their customers are individual car owners they will offer very little competition. Our main target is large automobile companies that will have a mass market for our services. Based on this, with the appropriate license, the organization can reap maximum benefits from this venture. The only issue is that other companies dealing in the same goods can notice this gap, and while Motabaqah is still evaluating its options, other companies can set up shop in Dammam and takeover potential clients. Marketing strategy For the marketing strategy, we will consider the various P’s of marketing: Price The target group of Motabaqah Company in Saudi is not so price sensitive, this is because majority of the population commonly use high-quality products. However, this also means that they are critical in the type of equipment they purchase. Based on the range of our products, they will most compare the price level among several brands –Our services and those offered by the competitors – the only company that is present charges the following for a full body check.SAR200 to SAR250 for small cars and SAR300 to SAR350 for big and luxury cars. Price also has another important element. In Saudi, it is a common assumption that the higher the price, the higher the high quality, especially for foreign products. This is an indication that in order to penetrate this market a high price is necessary. Product After close consideration of the place, the products option is next considered, the Motabaqah Company has several products and therefore selection of the key products to introduce into this market is very important. It will however be based this will be based on several factors such as the culture in the chosen place, spending power and the degree of competition. The chosen product to penetrate this market should be equipment to be used be a service that is used by a majority of the population. This is because such services will have a constant rotation of clients in the region. Individual buyers can also be targeted in this campaign with services that are targeted to give them a wholesome level of service in one complete package. This will represent a huge market for these products. Promotion Given its history and presence in other markets, the Motabaqah Company will use a high pitched strategy to penetrate the Saudi market. The suggestion is to use advertisement as the main instrument of communication; however, this should be closely seconded by having exhibitions based on the products by the company. Firstly, the advertisements should be available at various venues and can be used to reach a large segment of the target market. Additionally, they are fairly cheap and as such can be run extensively. Secondly, commercials can be played in major television channels throughout across the country; this will effectively reach the targeted group. Finally, the exhibitions are likely to be popular with the automobile companies since they are always on the lookout for such services that can make them more effective. These are the main target market of our products. Place Before we come up with a decision of what kinds of the products are suitable for Saudi, the characteristic of the market should be analysed at first. It has been decided that the initial market is the city of Dammam. According to recent studies, Dammam is one of the fastest growing cities in the world. There is a boom in the construction industry that has attracted many foreign investors. Supporting industries such as those dealing with heavy duty equipment are opening up in the area so as to meet the demand of these industries. It is set to be one of the premier Arab cities, and a lot of efforts is being put to this. Dammam is well developed and has managed to develop connections with all the major cities in the world. The approach planned will have to be grand because this city strives to be the best in regards to the manufacturing sector in the region. Entry and Development Strategy According to the culture of the region, the most suitable the entry mode that the Motabaqah Company should adopt is opening up of an independent branch. This entry mode may be prone to several hurdles, but given the fact that our target customers are large automobile firms, they will likely increase business to the company and will want individualised attention. As such, the company has to have enough space and the right equipment that will enable it operates without any mishaps. The main advantage of this method is that the company will have full control of its operations, unlike other entry strategies such as franchising that result in the reduction of power and authority over the particular brands. Finance Costs Office: The location of the shop should be in Dammam. This is because this is the hub of the automotive industry, and many companies are setting up shop in the area. Given that our main target is big automobile companies such as Saudi Aramco, Sabic, Bechtel and Weatherford. There is a huge demand for retail space in Dammam, and the price is high for real estate. Knowledge of the city and know which spots are more marketable. The estimated cost space that could fit the office could cost an average of SAR 50000 per month. This might be high but is necessary as the shop should be located in a prime area. Shop branding and interior design: The shop will have to be branded like other Motabaqah outlets all over the world. This will cost a one-off sum of SAR 35000 since this will be done by the same marketing company that has branded our shops in the Middle East region. This figure is a cumulative cost representing cost labour plus equipment. These costs will be paid by FAW; this is because it has established a partnership with a company that does this. Employees’ Salary: this will be based on the salary schedule of other Motabaqah shops, the average salaries of employees is SAR 60000. This will push the salary cost of the company to over SAR 600000, in addition to the salaries for the casual labourer; the average expenditure on salary would be an estimated SAR 900,000. Marketing (Ads, promotions): To ensure that all the potential clients are aware of the company and the services that it offers; all forms of marketing avenues will be used to market this product. It will involve advertisements in the form of TV commercial and billboards among other. Costs are expected to run in excess of SAR100, 000. Organization & Human Resource This part will include the human resource requirements of the new outlet if it opened in Dammam. The new shop will have to follow regulations in regards to HR management from those of the main office. However, this will have to be aligned to the operational needs of the outlet once it is operational. This proposal for the most effective organisational structure is based on other manufacturing firms that have set up base in the country. The organization of the Motabaqah shop in Dammam: The new shop will require about ten full-time employees. These will include the overall manager, then the departmental heads. Each of these will be in charge of a single unit such as cars inspection, engine and transmission check, and the car body check. These will be supported by the finance manager and a marketing manager. To help in their duties, these departmental heads will be assisted by several technical laborers who will do the physical work. Recruitment: All recruitment will be based on merit of the individual candidates, and this should be done preferably by external recruitment firm. It is important that all the staff members have the appropriate experience in the automobile industry. The manager is required to have a diploma of college; other employees should have the diploma over the senior middle school at least. All employees should be accommodating, easy-going, passionate, etc. The employees, who have the experiences in the retail field, will have priority of being considered. Training: Motabaqah should provide training programs to the successful employees so as to integrate them of the culture of the organisation. Ideally, it should run for between 3-6 months. During the program, these employees will be tasked to learn everything in regards to the company and its service range. Trade Regulations, Customs and Standards Trade barriers: There are no trade barriers for importation and exportation of goods. This is because Saudi Arabia has signed World Trade Organisation agreements and followed them strictly. Import documentation and requirements: As, per the law, all importers are required to have an import license. The company must be registered with the Ministry of trade and business so as to be granted an import license. Although on a temporary basis, there is free entry of goods. Due to this, some goods can be admitted into the country without collection of customs. Such goods include heavy machinery or equipment for project execution. Trade agreements: Saudi supports regional cohesion and integration and has established close ties with several Arab league countries. In line with this, Saudi has signed agreements for bilateral investment protection. Procedure for applying for a license Opening a business in Saudi Arabia is relatively easy given the support that government is giving foreign firms. However, it would be advisable to use local agents who are more knowledgeable with dealing with local business climate, local government and the handling of related official matters. After choosing an appropriate agent, the company needs to provide them with the products recipe and products introduction. Basic information when incorporating a business in Qatar: The company needs a minimum of 2 shareholders and 1 director. All companies must submit an annual tax return. This should be accompanied by financial papers audited by registered local auditors. As long as a business is duly registered in Saudi, it will have to protect its interests when contracting with other parties. The parties involved, even in case of an international contract are free to choose the jurisdiction and law that will govern the contract. If this is not done then the Saudi civil code will be used. A limited company has to pay corporate tax on its profits. There is a minimum capital requirement when setting up of new companies. Foreign companies can fully repatriate their profits and capital in foreign currency to any country of their choice. All licences within the country are issued by the Ministry of Trade and Business Recommendations The main goal of any business is to generate profits and increase shareholders value. Based on these factors, I have done a critical analysis of the requirements and the viability of opening up a business in Saudi Arabia. This feasibility study has included an in-depth analysis of the factors that can affect the business in the country such as the strengths, weaknesses, opportunities and the threats which the company will be faced with. Additionally there is an inclusion of the ‘Depest’ model and Porter’s five models to examine the viability of a given idea. All of these pointed out that it would be profitable for the company to open up a Lab in the region as all indicators point to increased demand for these services. The marketing strategy that has been included shows the best approach that the company can utilize so as to effectively penetrate the market and get the right customers for its products. Just like in any other business, there are risks and successful companies are those that can rise above these challenges and become operational in the particular region. As the project manager, I know the importance of logistics, and this has to be taken into consideration. Operations may prove difficult for a start but with time, there is a guarantee things will run smoothly. In terms of financing, a large sum is required to finance the investment and pay for the basic such as rent or putting up a facility and the required machinery. However, based on the high level of the estimated sales revenue, it is quite easy to seek for funding to increase capital circulation within the business. Based on the comparisons that I have made, another auto mobile related companies have been able to enter the Saudi Arabian market successfully, as such; it should not be a big challenge to the Motabaqah Company. Works Cited Abushakra, Eyad. Driving Arabia: A History of the Automobile in the Arab Middle East and the Role and Influence of General Motors. Dubai: General Motors Overseas Distribution, 2006. Print. Birn, Robin, and Patrick Forsyth. Market Research. Oxford, U.K.: Capstone Pub., 2002. Print. Fleisher, Craig S., and Babette E. Bensoussan. Business and Competitive Analysis: Effective Application of New and Classic Methods. Upper Saddle River, NJ: Financial Times, 2007. Print. Guide to Industrial Investments in Saudi Arabia. 4th ed. Riyadh: Industrial Studies and Development Centre, 1974. Print. Parker, Philip M. 2007-2012 World Outlook for Automobile Trimmings, the. ICON Group, 2006. Print. Plunkett, Jack W. Plunketts Automobile Industry Almanac. Houston, TX.: Plunkett Research, 2003. Print. The World of Project Management: PMI/INTERNET Joint Symposium, Boston, MA., U.S.A., Sept. 28-30, 1981. Drexel Hill, Pa.: Project Management Institute, 1981. Print. Transnational Corporations in the Plastics Industry. New York: United Nations, 1990. Print. Wilson, Rodney. Economic Development in Saudi Arabia. London: RoutledgeCurzon, 2004. Print. Read More