Zain Telecom Company in Saudi Arabia From an International Business Perspective - Case Study Example

Zain Telecom Company In Saudi Arabia From An International Business Perspective Introduction History of Zain Zain Telecom Company started in the year 1983 in Kuwait. Initially it was known as Mobile Telecommunications Company, abbreviated as MTC. The Kuwait government had a 49 percent stake; however, this reduced to 25 percent stake in the year 2001. 16 percent of the company is owned by the Al kharafi family. It was the first mobile phone operator in the region. In the year 2003, as an expansion strategy, MTC acquired a number of existing mobile operators in the Middle East and Africa (Huang, 2011). This led to their rapid expansion from a regional player into an inter-continental operator. In the month of September 2007, MTC changed its name to Zain as a branding and marketing strategy. Since then Zain was used as the company’s brand name (zain.com, 2015). By 2008, Zain was the fourth largest operator in according to geographical presence. It had spread its presence to 15 and seven states in Africa and Middle East respectively (Huang, 2011). As the company grew and expanded, it formed a fifty-fifty partnership with a Moroccan mobile operator, Al Ajial Investment Fund Holding, in order to acquire a 30 percent stake of Inwi. Al Ajial Investment Fund Holding was the third largest operator in morocco. In focus for the Middle East and N. Africa market, Zain sold 100 percent of Zain Africa to Bharti Airtel at a price of 10.7 billion US dollars (Prasad, Goyal & Dharmakumar, 2010). Sale of Zain led to the loss of the 15 African countries that it served. This countries include; Kenya,Ghana,Tanzania,Niger,Madagascar,Nigeria,Malawi,Burkina Faso, Chad, Democratic Republic of Congo, Sierra Leone, Uganda, Republic of Congo, Gabon and Zambia (Huang, 2011). Zain group has since placed its mark as the leading mobile and data operator in Middle East and North Africa in 8 countries (North Africa Telecommunications Report, 2015). It employs over 7,000 employees and a consumer base of about 44.3 million users since December 31st, 2014. It operates in Jordan, Bahrain, Iraq, Saudi Arabia, Southern Sudan, Sudan and as touch in Lebanon (zain.com, 2015).It was the first mobile operator to introduce GSM, prepaid, ZAP and 3G services in the areas it has served over the years. Why telecom companies such as Zain are going global Over the past years, there has been a significant rise in the number of mobile operators going global. This has been influenced by the various milestones that the companies have set among themselves. This also has been influenced by the need for the companies to gain a large market for their consumer packages and services. Just like Zain had projected in the year 2007/2008, they had expanded from the Middle East to the African market where they gained additional 15 countries to the existing 7 Middle East countries. This was a move to tap the upcoming African market that had a lot of potential in the number of mobile users as technology advanced. The move to be global company is another way of increasing the telecom companies’ revenue and reducing the cost of offering their operator services. This is attributed to the high economic growth occurring in the all the countries. This rate of economic growth has created a demand for high-speed connectivity, therefore, a niche for the telecommunication industry. Globalization of telecom companies has enabled them to share network resources. These resources include antennas and base stations. This reduces network cost and time required by the company to start up in a particular market. It also enables the creation of friendly business environments for the companies. All this adds up to the creation of data roaming agreements that enable clients to use networks over a range of different service providers (Prasad, 2010). Compared to famous network providers gone global Globalization of Zain can also be compared to the Chinese telecommunications company, Huawei. Huawei started in 1988, just a few years after Zain started as MTC, as an IT sales company. It has then grown into an international distributor and provider of next generation telecom networks and serves about 50 operators worldwide. It has grown from its hometown of Shenzhen, south-east China, into occupying more than 100 countries with a consumer base of about 1 billion users. Just like Zain, Huawei globalization was achieved by targeting developing countries market since 2001 (Cooke, 2012). This strategy was coupled with setting up offices and performing intensive research on the intended market. It later established its presence in the European market starting in Germany, Sweden and United Kingdom in the following years. Huawei sales to the international market have surpassed its local sales in China. In 2006, it had a revenue of 11 US billion dollars. In 2007, Huawei won the most globally competitive Chinese company award (Cooke, 2012). Almost similar to this, Zain was also awarded the 2009 global telecoms business innovation award for being a leading telecommunications operator (zain.com, 2015). However since 2010, Huawei has restructured its globalization strategy, and it currently uses An ABC model strategy to gain more consumers. It has been working towards this strategy by increasing its bandwidth and reducing cost. It has also changed from being a product-driven company to an end to end service company. This enables them to focus on consumer services more addition to the provision of high-quality products and services. It has also based its products on current and emerging trends in technology. This technology includes expansion of broadband in order to keep up with the upcoming demand for high speed data rates. The strategy also includes reduction of product prices but still maintain the quality of the product. It has also changed its consumer base by focusing more on enterprise companies rather than focus on telecommunication companies. Zain in Saudi Arabia Zain Saudi Arabia is based in Kuwait and is also listed on the Kuwait Stock exchange. It has 100 percent publicly traded shares which have no restrictions. Its largest stakeholder is the Kuwait Investment authority which has a 24.2 percent stake since 31st December 2014(zain.com, 2015). It has over 46.1 million consumers and enjoys a market lead in six out of the eight countries it has operations in. It also offers a range of commerce services to its consumers. In 2009, it formed a partnership with Western union forming the ZAP platform that offers money transfer services. In the year 2007, Zain KSA was granted a 25-year license on the basis of GSM and 3G standards of technology. The license was granted by the communications and information technology commission of Saudi Arabia. It, therefore, is allowed to operate, purchase, manage and maintain both telephone and paging systems present. Commercial operations were launched after the licensing whereby messaging and voice services covered 34 cities initially, covering about 53 percent of the Saudi population. 3G data and services covered 43 percent of the population. In the year 2013, number of subscribers was at 8.7 million users. In order to increase connectivity, Zain constructed voice and data infrastructure covering 600 cities and along 120 highways. This was serving about 93 percent of the population on 2G networks, and 82 percent was covered by 3G and 52 percent was covered by LTE. In light of this expansion, Zain opened up 192 outlets for its products and franchise along with 12 customer care service bays.Zain also has ties with other companies such as Motorola, who have been servicing and upgrading its networks since 1994. However, Motorola was overtaken by the fast-rising Chinese telecommunication company, Huawei. By 2011, Zain was running about 3,000 sites using Motorola technology. The number has grown to over 5,000 sites to date. Zain performance in Saudi Arabia Zain has recently announced its significant rise in its financial results in the first quarter of 2015 financial year. It has shown an increase of EBITDA from SR275 million to SR348 million which is 27 percent increase since 2014. This Margin was also reported to have risen from 17percent to 21 percent in 2015 from the last quarter (marketstoday.net, 2015). There is a 9 percent increase in revenue to the first quarter 2015. This was given by a revenue increase from SR 1,545 million in first quarter 2014 to SR1, 678 million in the first quarter 2015. This was also a 6 percent increase from the last quarter 2014 with a margin of 52 percent (marketstoday.net, 2015). An increase in profit has also led to the reduction of the net loss of 16 percent for the quarter. Loss reduced from SR306 million to SR257 from the previous quarter. This was a 19 percent reduction in comparison to the first quarter 2014 (marketstoday.net, 2015). Regarding consumer numbers, the quarter witnessed a 135 percent increase of mobile broadband users. This was attributed to the rise in demand for broadband services by consumers and the company’s improvement in coverage and speed of the network(marketstoday.net, 2015).An example of this improvement is doubling of 4G or LTE internet speeds by 100 percent to all its new and current consumers for life (telecompaper, 2015). However, despite the profits seen in 2015, Zain has witnessed a decrease in its net income since 2008. The company’s income dropped from SR14 billion to SR 4.8 billion. In 2010, the net income was SR2.36 billion which dropped to SR1.27 billion in 2014. This was the net income before extraordinaire (marketwatch.com, 2015). In 2013, revenue dropped to 8.5 percent as compared to the last quarter of 2012. The total revenue that year amounted to SR 1,524 million. However, profit margin compared to 2012 was 50.34 percent. In 2012, it was 44.38 percent in the same period. A 4.69 percent increase was observed in expenses that amounted to SR 461 million. Therefore in the last quarter of 2013, a net loss of SR 462 million was observed in comparison SR 443 million in 2012. In the same year, 2013, a 5.70 percent increase was observed in comparison to 2012. This was in light of an increase in data and post-paid income. The number of consumers also augmented by 10 percent thus reaching 8.7 million. An increase of 2.33 percent in the cost of goods sold reached 3,388 million resulting in an increase by 171 points of the gross profit margin. The margin was 48.06 percent compared to 46.35 percent of 2012. On the other hand an increase of 13.29 percent, amounting to SR 2,244, occurred in selling, administrative and general expenses. Zain recorded a loss of SR 1,651 in comparison to SR 1,749 of 2012. In 2014, Zain had a 33.7 percent reduction in loss compared to 2013. Total loss amount dropped from SR462 million to SR 306 million. This was attributed to reduced maintenance expenses. Comparing 3rd quarters 2014 and 2013, there was a 3.16 percent loss on QoQ cost optimization and a further 7 percent drop in financial cost. Gross profit had a 2.81 percent increase followed by a 43.73 percent drop in operating loss. A drop from SR 949 million in 2013 to SR 543 million in 2014 was witnessed. Gross profit also had 6.39 percent increase in the fourth quarter in 2014 compared to 2013’s fourth quarter. This saw an increase from SR 767 million to SR 816 million. Operating losses also dropped from SR 271 to SR 137 million, depicting a 49.45 percent decrease. In the same year, a 24 percent increase in EBITDA was observed, totalling up to SR 1,100 million in comparison SR 890 million of 2013. This led to widening of EBITDA margin from 14 percent to 18 percent. In comparison to the fourth quarter of 2013, a 33 percent increase was observed, that saw an increase from SR 206 million to SR 275 million.In June 2013, the Saudi ministry of finance and Zain signed a contract for deferment of its annual tax and other payments to the ministry. The deferred amount is at an estimated at SR 800 million per year and will be payable from the year 2021 as a total of SR 5.6 billion. This amount will be handled and repaid as a commercial loan. In the same year, Zain also signed a SR 2.25 billion long-term debt intended to mature in three years. It also prolonged the maturity date of its Murahaba facility, syndicated for SR 9 billion, for five years till July 31st, 2018. However, the company had repaid the facility partially using revenue sourced internally, remaining with an outstanding balance of 2.3 billion US dollars. The structure was restructured forming an amortizing facility. 25 percent will be paid in the last two years of the 5th of the facility while 75 percent will be paid in maturity. In June 2013, Zain partnered with Ericson for a three-year field maintenance and operation of all Zain’s network sites across Saudi. This was a strategy to allow Zain to focus more on improving consumer services. In the same year, Zain and Vodafone formed an international roaming service known as Vodafone passport. This service was to make better and easier customers travelling to European countries. During this period, LTE was launched enabling consumers to access speeds up to 150 megabits per second, making it the first operator in the region to use this kind of infrastructure. Zain uses a 3x3x3 plan in their marketing strategy. This strategy fuels Zain to becoming a global brand in regional, international and global platforms. It also focuses on improving consumer services by providing the best and use of latest telecom technology. In 2013, Zain started providing the Hajj network targeting 3 million consumers during the Hajj season. Alongside this, it installed 4G LTE technology in main cities namely, Dammam, Riyadh, and Jeddah followed by an upgrade of all other cities with up to date radio transmission systems. In 2012, Zain was chosen by the communications and information technology commission to provide telecommunications services to remote areas that saw the setting up of 170 sites that serve about 175,000 people. The company also performs a Strength Weaknesses Opportunities and Threats (SWOT) analysis every year (Zain Group, 2014). This intends to test every aspect of the company and make improvements where necessary. It also eliminates threats by using strategic plans such as forming partnerships with other telecom companies or buying them out of their market share. In the year 2012, Vodafone and Zain merged in a 3-year strategic partnership meant to provide better services to their mutual customers. This partnership gave Zain a chance to participate in Vodafone’s international projects and offer services alongside Vodafone in its over 1,400 partners and companies. Zain also has a well-organised customer service department that caters for all client needs or complaints. Complaints and suggestions collected by the customer service department are used to improve services as needed be. Zain also applies customer relationship management in which it goes beyond than developing its market rather it seeks to contribution and participation in developing areas. It does so by supporting projects that benefit various sectors of the region. All this in a strategy to increase its market share and acquire new consumers, it competes with rival companies by always to be closer to the consumer needs. it has created websites for customers that provides fast access to information and transaction of various processes. In 2013, Zain, in order to retain their customer base, introduced offers for all popular Smartphone devices making them easily affordable as well as enable their customers to access 4G networks. Zain is also involved in various campaigns and awareness programs that enable it to reach the lives of its customers. In the recent past, Zain participated in the breast cancer awareness campaign. It also runs a capacity building event known as Zain great idea that targets youths with great ideas and sponsoring them achieve their goals by providing resources such as cash prices, mentorship, and incubation. This program not only target customers, Zain is highly involved with their employees by providing the required training and work ethics. Each employee of Zain is highly trained and insured against risk as the law depicts. Employees are also involved in consumer programs that enable them to interact directly with the customer. It also has policies that guide working environment and behavior. Each employee is a made aware of this policies and knows how to enact them On the other hand, each consumer who accesses Zain’s website is prompted to register their personal details. This data is stored and is used to perform analysis that gives out useful information that the company uses to its advantage or make decisions. This information is also used to notify consumers of new or upcoming services, special offers, new features, products and advertisements that may be of use to the consumer. It also uses this data to provide personalized services. These personalized services let the Zain system greet consumers using their names as they browse its web page or other services. In order to create customer loyalty, Zain has come up with loyalty programs that check for frequent users of its services and strengthens ties with them by offering special offers to them. One such service is the Z-bonus program that targets young users below the age of 25. It gives the consumers bonuses like 200 percent free bonus SMS on recharge, per second billing among other surprises. It also launches campaigns that provide internet at cafes, home or work. Such a campaign is the Zain’s internet campaign dubbed z-internet which targets students with reduced prices, more Internet, and free downloads. In 2013, Zain was voted the most recognizable brand in survey that was conducted over 54 Arab countries and had 200 Arab brands for comparison. It has, beyond Zain’s logo, a phrase that encompasses Zain strategy to its consumers. The use of the phrase a wonderful world is intended to speak to customers need and provide an environment that customers feel the operator has their needs, dreams and services in check. It is intended to provide a fun environment which the consumers can relate. However, it does not only depict fun but it targets all kind of consumers, from family members to corporate businesses. In 2013, its brand value was an estimated 1.67 US dollars and was ranked number 73 out 500 telecom companies in the world. It has also been able to reach people’s hearts by supporting sports and games. This was done through a televised advert in support of the Gulf cup located in Bahrain. The advert featured popular celebrity and music enabling its consumer to relate to it. Zain has also been seen promoting its services by creating promotional packages during the festive season or holidays. These promotions are bundled out during internationally and locally recognized festivities and are tailored to suit the festivity. While commemorating the 30th anniversary in 2013, it launched the v-corporate promotion that featured the key corporate player as brand managers. This package targeted corporate customers. The package was tailored to fit typical corporate workers and firms. It contained reduced prices and also helped start-up businesses benefit from 4G speeds. In 2014, in spite of showing a strong EBITDA growth in the first quarter, Zain reported a weak top line. This was linked to the loss of over one million foreign workers, who were illegally working. Due to the losses it has incurred over the years, Zain seems to have a long way to go before it starts making profits and free cash flow. It also underinvested in branding; these are major setbacks for the company. Zain issues-conflicts in Saudi market Conversely, Zain has been facing competition in its market share from new emerging companies referred to as over the top players such as Skype, viber, Facebook among others. This has led to strain in revenues. In Jordan, it faces intense rivalry that lead to unfair pricing and consumer retention costs.Zain operations are in areas that are highly saturated mature markets. Kuwait, Bahrain,Saudi Arabia and Jordan have the following saturation levels 215,170,170 and 155 percent respectively. This market saturation levels provide no or weak future growth prospects.This affects directly the services provided as it tops up pressure to the administrative and technical departments of Zain. This means that these departments will not be in full service in catering for the needs of customers. Over the years, Zain has faced a rise in operation cost. This has been attributed to the rise in expenses as it seeks to invest in upcoming technologies. It has also been faced by challenges arising from economic changes. Saudi Arabia’s economy has been affected due to the varying changes in oil prices. This in turn translates to a lower economy that sees many customers having cutbacks.Zain also operates in different states, therefore, it faces challenges when it comes to foreign exchange currency exchanges. Foreign exchanges vary from time to time raising risks for any intended transactions in future. This fluctuation affects directly the net income revenue. Conclusion Zain future in the global market In light of technological advancement, more need for data, connectivity and internet use, telecommunication companies such as Zain have to keep up with the demand the consumers pose. This has seen Zain become on the few mobile operators in the world to embrace fully LTE national wide coverage. In a partnership with Huawei, since 2013, Zain has had plans to take LTE network to the next stage. This stage is possible by the introduction of LTE-advanced technology in Kuwait. LTE-A is expected to introduce high Internet and broadband speeds for the target consumers. This comes in light as technology is moving towards cloud based applications and that are bandwidth intensive. LTE-A also has a higher capacity and connectivity. However, there are no LTE-A chips available for single users but only available for enterprise consumers. In anticipation of the future, Zain’s partnership with Huawei has seen its consumers easily acquire LTE-enabled devices such as smart phones, dongles, routers and MI-FI hotspots. In addition to this, both parties announced that they would jointly open a joint innovation centre whose main aim is to focus on LTE. Zain’s global plan also includes the implementation of sustainability strategies that depict the improvement of the organization by the provision of inclusivity, better quality and accessibility for their consumers. Zain’s future also involves reductions in emissions with improved efficiency. This plan also seeks the use of green environmentally friendly technology. This has seen the use of solar panels and hybrid generators in some of its cell tower locations. This is in accordance with 2020 world emission reductions. This also includes recycling programs of used handsets and their refurbishment. It also seeks to address noise and waste disposal methods. Zain has started rolling out its strategy by use of palm tree like cell towers that blend to the landscape and also occupy less space compared to the conventional models. In order to fit as a global company, Zain has set goals that are in par with UN regulations. These goals include the performance of CSR surveys and aligning them with those of post-2015 development agenda and UN millennium development goals. This also means meeting standards required to join the UN Global compact and improved cooperation with GSMA. Financial stability is one of the major milestones set by Zain in its plan to be a global operator. It, therefore, has to ensure financial stability as it takes on the global market. This plan is being implemented and is an ongoing activity till it achieves the set goal. This milestone is being handled by introduction of new and innovative products and services. Improving and increasing data services over a wide range of consumer packages. Financial stability also requires building of better relationships with customers, suppliers, regulatory bodies such as the communications authority and various investors. Zain has also set goals, in preparation for the future, risk management register which is updated by conducting an assessment on risk. This register enables the company to look at existing risks, address the risks and predict likely risks. These reports are used by the company’s management for decision-making and incorporation of some inevitable risks such as climate change. Zain benefits from Saudi market Zain KSA has witnessed numerous benefits from the Saudi Arabian market since its establishment. In the recent past, it has witnessed a reduction in call termination fees. This reduction was by 40 percent imposed by the Saudi Arabian telecommunication regulator. It led to the reduction of calling fees from 0.25 riyals to 0.15 riyals per minute. This was a big boost to Zain since high termination fees have been contributing to Zain’s loss-making trend. Over the years, it has witnessed an increase in prepaid subscribers who make up 86 percent of the total number of users. This has contributed to high average revenue per user. This also contributes to provision of better consumer services such as higher data speeds. This also saw the rise to the number of post-paid users. It has continued, however, to report continuous growth of the consumer base. This is a big sign showing that Zain has been benefiting from the Saudi Arabian market despite the stiff competition it faces from other mobile operators. Teaching Notes Case synopsis In this text, its core intention encompasses addressing Zain Telecom Company KSA from a global perspective. This includes analyzing its performance as well as expansion not only in Saudi Arabia but also in North African states. Zain despite in the former seeing to have a commanding presence, its emergency in North African states ought to deal with stiff competition. This is from already dominating players for instance, Safaricom in East Africa. Target audience The text does not have a particular audience for it acts as an informative piece meant to highlight as well as address the position and performance of Zain. Objectives To present information about Zain’s history, present and future prospects. To highlight on Zain Company KSA performance from a global perspective. Discuss Zain’s issues and conflicts that adversely affect its market. The above objectives comprise key benchmark aspects mostly used in the business world to ascertain how a given firm is performing. Hence, being relevant to the course I am teaching because in most cases the highlighted aspects will be key aspects that determine whether a certain fir is thriving or not. Teaching Plan Suggested time Time for this course will be appropriately from morning until noon. This is because of the content, which I have to cover when students’ minds are still fresh to understand certain aspects like those involving simple calculations and analysis. Monday 8:00 – 10:00 Am – Company History and other Market related factors Tuesday 10:30 AM – 12:30 PM – Current Market performance e.g. Market share and expansion Wednesday 10:30 AM – 12:30 PM Tackling and reviewing case studies that during the week’s lessons students had to do them on their own as homework Thursday 8:00 – 10:00 Am – Company Financial position analysis. This will be more of using interpretation ratios to interpret how the business is thriving e.g. Profit margin, Gross margin, gearing of other companies online Friday 10:30 AM – 12:30 PM – Company Analysis using ratios and addressing any emerging difficulties because this section requires much time compared to others. Student assignment Company case studies, which are listed and their financial statements are available in the market. This is to ensure they gain adequate expertise meant to ascertain whether a certain company is performing better or not. Opening (10-15 Minutes) The initial minutes will be for reviewing the last time’s lesson and its key facts to link them, with the current lesson. Then introduce the current lesson coupled with showing how the lessons link with each other if they are. Challenging case discussion questions This will encompass both open and closed ended questions meant to arouse students’ thinking as well as urge to seek answers on their own despite helping them. This will also include group discussions for students to analyze case studies (like Zain’s subsidiaries and associates if there are in other states) before reviewing their respective difficulties in class especially on Fridays. Zain Saudi Arabia (associate) Combination of closed and open-ended questions, for instance, What are subsidiaries or associates of Zain Group and their respective shareholding? MTC Touch – Lebanon Celtel/Airtel – Kenya Vodafone (wrong) To counter stiff competition especially in East Africa, what are the most appropriate strategies for Zain Company? What the Zain’s revenue trend? Upward trend (Not really) Declining (yes in most of the regions due to competition as shown in the charts below) In which regions does Zain dominate? Kuwait, Lebanon, S. Sudan, Jordan & Kuwait Best telecom brand Middle east Closing 10-15 minutes Despite group cited to have heightened dominance in Middle East, its influence in other regions especially Africa and developed states seem not to have any significant effect due to competition. This section will be after each lesson whereby I will revisit the entire lesson in brief pinpointing the key aspects or factors. Supporting materials in form of chart 2014 2013 2012 2011 2010 Revenue ($)CAGR 2.5% 4,268 4,376 4,584 4,791 4,719 Clients (000s) CAGR 4.4% 44,288 46,102 42,714 40,263 37,239 Income ($ Million) 685 764 902 1,033 1,022 Figure 1: Zain Overview. Retrieved from Figure 2: Zain Overview Retrieved from Figure 3: Zain Client Base. Retrieved from References (2015). “Mobile Telecommunications Co. Saudi Arabia (Zain).” Marketwatch.com. Retrieved 22 April 2015, from (2015). “Zain Jordan doubles internet capacities.” Telecompaper. Retrieved 22 April 2015, from (2015). “Zain KSA logs marked growth in Q1.” Marketstoday.net. Retrieved 22 April 2015, from (2015). Overview - Zain. Zain.com. Retrieved 21 April 2015, from Cooke, F. (2012). “The globalization of Chinese telecom corporations: strategy, challenges and HR implications for the MNCs and host countries.” The International Journal Of Human Resource Management, 23(9), 1832-1852. DOI:10.1080/09585192.2011.579920 Huang, J. (2011). Analysis of Telecommunication Markets of India, Singapore and Thailand and Research Their Global Competitiveness. Telefonica International Wholesale Services. From North Africa Telecommunications Report. (2015). North Africa Telecommunications Report, (1), 1-117. Prasad, R. (2010). Globalization of mobile and wireless communications. Dordrecht: Springer. Prasad, S., Goyal, M., & Dharmakumar, R. (2010). Bhartis Safari. Forbes Asia, 6(3), 16-20. Zain Group. (2014). Zain Group SWOT Analysis, 1-7. From Read More