Presentation on theme: "Potential Impact of WTO on Saudi Construction Firms"— Presentation transcript:
1Potential Impact of WTO on Saudi Construction Firms Presented By Group 1:Ali Al OtaibiMuhammad Faisal SiddiquiAli K. Al FardanSami Murtada
2Presentation Outline Introduction Literature Review Research Methodology & DesignResearch ResultsProposed StrategyConclusionRecommendationsThesis Critiques
3IntroductionThe World trade Organization (WTO) is an international organization positioned at Geneva, Switzerland, and it was set up in 1995,WTO was replacing another international organization known as the General Agreement on Tariffs and Trade (GATT). GATT was formed in 1948 when 23 countries signed an agreement to reduce customs tariffs.The WTO has a much broader scope than GATT. Whereas GATT regulated trade in merchandise goods, the WTO also covers trade in services, such as telecommunications and banking, and other issues such as intellectual property rights.Membership of the WTO now stands at 150 countries.
4Saudi Arabia became WTO membership to 149 On 11 December 2005; Saudi Arabia becomes the 149th Member of the WTO. It is the world's 13th largest merchandise exporter and the 23rd largest importer.The Saudi construction firms will be braced with new opportunities and challenges. GATS Framework of Liberalization (GFOL) is expected to bring both disadvantages and advantages for the large Saudi construction firms.For instance, it allows overseas firm’s access to the domestic market, but on the other hand, it opens opportunities for domestic firms in overseas markets.
5Objectives of the Research The specific objectives of this research are:To explore features of the WTO and the GATS which are likely to impact the Saudi construction industryTo investigate the impact of the economic globalization and GATS Framework of Liberalization (GFOL)To discuss the pertinent issues identified and synthesize appropriate conclusionsTo identify the suitable strategies for Saudi construction firms in the WTO environmentTo recommend areas of further research
6Literature Outline Introduction & History WTO: Objectives & Functions Benefits of Joining WTOGATSWTO & Saudi ArabiaCase Studies of Oman & UAESWOTExternal FactorsInternal Factors
7Introduction & History WTO History & DefinitionWTO Short for World Trade OrganizationDuring research = 148 Member Countries“Covers Rules of Trade in Goods, Services & Intellectual Properties under one (1) umbrella”Primary Agreements Forming WTOGeneral Agreements on Tariffs and Trade (GATT)General Agreements on Trade in Services (GATS)Trade-Related Intellectual Property Rights (TRIPS)Agreement on Dispute Settlement Procedure (DSP)
8WTO Objectives & Functions Promote free and fair Trading EnvironmentHelp trade flow smoothly, freely, fairly & predictability via sustained & imposed provisions of trade laws and conventionsAscertain complete employmentIncrease living standards of peopleFunctions:Administering shared and mutually gainful trade agreementsActing as Trade Negotiations CentralSettling trade conflictsReviewing national trade policiesExpanding trade in goods and servicesCooperating with the other international organizations like World Bank etc.Assisting developing countries in trade policy issues thru technical assistance & training programs.
9Benefits of Joining WTO General Benefits of Joining WTO/GATSInspiration of economic growth and national incomesAppropriate settlement of trade disputes and peace among trading nationsMore choices for products/services and qualities for usersGreater certainty and clarity about the trading conditionsTechnology and managerial skill transferGreater transparency and predictabilityReduced costs of living for general publicReduced corruptionsFaster innovations
10GATS GATS GATS Main Objectives Premier set of multilateral and legally enforceable rules that cover global trade in services including C&RE servicesAll WTO Members must sign GATS Agreement tooGATS Main ObjectivesAssuring transparency and predictability of rules and conventions concerning the trade in servicesActing as a body for reciprocal trade negotiations and enforcement of trade agreementsMaintaining progressively higher level of liberalizationBring down the principles of Most-Favored-Nation and National TreatmentContinuing the economic growth of all trading partnersProtecting the development of developing countries
11GATS GATS Services Classification 12 Core Economy Sectors & 160 sub-sectorsAll WTO Members must present their schedule of specific commitments for each of these twelve (12) service sectors which includes C&RE serviceSince GATS comply with United Nation’s (UN) Central Product Classification (CPC) series, C&RE service is further classified into nine (9) groups (CPC and CPC – 8674) as follows:Construction & Related Engineering service division into nine(9) groups as per UN-CPCS #CPC CodesGroup Name1CPC 512General Construction Work for Buildings2CPC 513General Construction Work for Civil Engineering3CPC 514, CPC 515Installation and Assembly Work4CPC 517Building Completion and Finishing Work5CPC 511, CPC 515, CPC 518Other Construction Services6CPC 8671Architectural Services7CPC 8672Engineering Services8CPC 8673Integrated Engineering Services9CPC 8674Urban Planning &Landscape Architectural Services
12WTO & Saudi Arabia Impact of WTO on Saudi Construction Firms: No custom duties on construction materials, equipments, machineries, tools and plantsRestriction for foreign construction-related firms to own only minority shares (less than 5 %) in KSAPlots of lands for the domestic construction firms are provided on nominal rates for individual projects and developmentsLow rates of utility services (electricity, water, etc.) for domestic firmsEconomic & Legal Reforms in KSA:Establishment of a supreme economic councilOpening of stock market to foreign investorsPrivatization of several vital sectors like power, telecom etc.Approval of a new Foreign Direct Investment LawApproval of a new Saudi Labor LawAmendment of real estate law to allow foreign ownership
13Limitations on Market Access Case Studies of Oman & UAEOman’s Experience:KSA & Oman Commonalities:Both are members ofArab Monetary Fund (AMF)Gulf Co-operation Council (GCC)Arab LeagueOrganization of Arab Petroleum Exporting Countries (OAPEC)Budgeted Construction Spending (2001 – 05): Oman’s Schedule of Specific Commitments under GFOLS#Ongoing Projects (2001 – 2005)Allocated Funds1Low Cost Public HousingUS$ 42 Million2Utilities and Municipal ServicesUS$ 650 Million3The PalaceUS$ 210 Million4Road BuildingUS$ 380 Million5Total Spending on ConstructionUS$ 1282 MillionSectorLimitations on Market AccessLimitations onNational TreatmentConstruction and Related Engineering ServicesMode I: NoneMode II: NoneMode III: NoneMode IV: Unbound (except as indicated in the horizontal section)
14Limitations on Market Access Limitations on National Treatment Case Studies of Oman & UAEUAE’s Experience:Recent Trends of UAE Construction Sector:GDP Contribution15 to 16 Thousand Million UAE Dirham7 to 10% of UAE National GDPConstruction Sector Employment in UAE = Approx. 250,000 – 300,000 Employees (17 to 19% of total UAE Workers)Key Facts about UAE Construction Market: UAE’s Schedule of Specific Commitments under GFOLKey FactsRemarksSize of Construction Market$15 billion (Approx.)GDP Contribution7-10%Cost of building projects (first six mon. of 2002)$3 billionNo. of multi-story building projects under construction in 2004.337SectorLimitations on Market AccessLimitations on National TreatmentConstruction and Related Engineering ServicesMode I: NoneMode II: NoneMode III: NoneMode IV: Unbound (except as indicated in the horizontal section)Mode III: None (except as indicated in the horizontal section)
15SWOT AnalysisObjective: Gain better understanding of Strengths, Weaknesses, Opportunities & Threats (SWOT) in case of WTODefinition: “A structured approach that helps strategists to imagine systemically about strategic issues”Strength & Weaknesses = Internal FactorsOpportunities & Threats = External Factors
16SWOT Analysis Typical SWOT Matrix: The first cell (S-O strategies cell) shows opportunities that are a good fit to the organization strengthsThe second cell (W-O strategies cell) overcomes weaknesses to pursue opportunitiesThe third cell (S-T strategies cell) identifies ways that the organization can use its strengths to reduce its vulnerability to external threatsThe fourth cell (W-T strategies cell) establishes a defensive plan to prevent the organization weaknesses from making it highly susceptible to external threatsInternal FactorsExternal FactorsStrengths (S)Weaknesses (W)Opportunities (O)“S-O” StrategiesGenerate Strategies here that use strengths to take advantage of opportunities“W-O” StrategiesGenerate Strategies here that take advantage of opportunities by overcoming weaknessesThreats (T)“T-S” StrategyGenerate strategies here that use strengths to avoid threats“W-T” StrategyGenerate strategies here that minimize weaknesses and avoid threats
17SWOT Analysis Three major steps in SWOT Analysis: Step1: Analysis of Internal Factors:Strengths & Weaknesses AnalysisIs used to separates strengths and weaknesses of a firm and to assess their internal capabilitiesThe criteria for determining the firm’s strengths and weaknesses should be in comparison with existing as well as impending key players
18SWOT Analysis Step2: Analysis of External Factors: Opportunities and Threats AnalysisAims at revealing the external factors due to the prospective environmental changes (Saudi Arabia joining the WTO in this case) that forces the firms to alter their strategies.For instance, the imminent GFOL in Saudi Arabia would alter the way the Saudi construction firms do business today and would create a standard shift.Step3: Proposing SWOT Strategies:Matching Internal & External FactorsCarried out once the consensus is reached concerning the contemporary strengths, weaknesses, opportunities, and threatsThis stage of strategies formulation needs brainstorming among the concerned people.
19GATS Features/External Factors GATS Features/External Factors Some relevant features of GFOL are listed, with their Article Reference number in GATS, in the following twenty two (22) points:S#GATS Features/External Factors1Most-Favored-Nation (MFN) Treatment (Article II)2National Treatment (Article XII, XIV, XVI, XVII, and XXI)3Government Subsidies (Article XV)4Transparency (Article III & VI)5Recognition (Article VII)6Progressive Liberalization (Articles XIX, XX, and XXI)7Specific Commitments (Articles XV, XVII, XIX, XX, and XXI)8Horizontal Commitments (Article II, III, IV, and V)9Additional Commitments (Article XVIII)10International Payments and Money Transfers (Article XI &XII)11Dispute Settlement and Enforcement (Article XXIII)S#GATS Features/External Factors12Government Procurement Agreements (Article XIII)13Trade Policy Reviews (Article III)14Electronic Commerce (Articles I, II, III, IV, VI, VII, VIII, IX, XVI, XVII, GATS Basic Telecommunication agreements and the relevant Annex)15Increasing Participation of Developing Countries (Article IV)16Domestic Regulation (Article VI, XVI, and XVII)17Business Practices (Article IX)18General and Security Exceptions (Article XVI)19Technical Cooperation (Article XXV)20Emergency Safeguard Measures (Article X)21Market Access (Article XVI)22Others (Economic Globalization)
20Internal FactorsFrom the review of literature, twenty-six (26) Internal Factors that might constitutethe strengths or weaknesses of construction firms are identified in the following 26 points:S#Internal Factors1Financial resources2Technological capabilities3Managerial capabilities4Organizational structure5Plant and equipment management6Suppliers selection7Products/services quality8Human resources9Marketing skills10Innovation in services11Global operations12R&D activities13Market sharesS#Internal Factors(contd…)14Government policies15Procurement management16Production efficiency17Strategic planning18Training/retraining19Clients relations20Experience21Strategic alliances (locally)22Joint ventures (overseas)23Utilization of IT24Information systems and knowledge acquisition25Size of the firm26Related and supporting industries
21Research Methodology Survey results of internal factors The main aim of this paper is to investigate what are the important features of GFOL, assess the internal factors of Saudi construction firms and propose some strategies for themThe researcher utilized both quantitative and qualitative methods to answer the statement of the problemQualitativeQuantitativeSurvey results of internal factorsInterpretation from the Literature
23Results & DiscussionThe aim of this part of the thesis is to assesses the internal factors (strengths/weaknesses) of the Saudi construction firmsA survey and quantitative method were usedFrequency distribution of the responses was used to determine both the level of the status of the internal factor in Saudi construction firms and what does it representA matrix of two dimensions has been used that result in 9 possible cells
24Analysis CriteriaTo have a sufficient degree of consensus about any intersected cell of the matrix the following conditions have to be met50% or more of respondents agree that the status of a factor in Saudi construction firms is (high –Med –Low)50% or more of respondents agree that the factor is representing (strength – neutral - weakness)The resulted intersected cell from the intersection of the two dimensions get 33% or more of responses
26Survey ResultsThe survey revealed that there was a reasonable agreement between the respondents with regards to only 8 internal factors where all status is low in Saudi construction firms and represents a major weaknessInnovation in servicesGlobal operationsR&D activitiesStrategic planningTraining activitiesJoint ventureIT utilizationIS & knowledge acquisition
27Survey ResultsOn the other hand there was a low level of agreement among the respondents about the other internal factors. This has two main implicationsIt indicates a high level of uncertainty of the Saudi construction business in working under the WTO environmentIt curtails the development of a comprehensive strategic plan for the Saudi construction industry in the WTO business environment
28The Proposed Strategies Outline The SWOT Strategies Matrix of Saudi Construction Firms.The general strategies and the proposed strategies.Applying the proposed strategies to major weakness factors in Saudi construction firms.
30Proposed StrategiesProactive Strategies: Strengthening the weakness to reap the benefits of Saudi Arabia joining the WTO.Defensive Strategies: To defend locally in the post- WTO scenarios by minimizing the exposure to weaknesses.The proactive & defensive strategies are generated by combining two or more from the following strategies:
31General Strategies1) Concentrated Growth (specialization in and targeting on selected markets & product / services).2) Market Development (adding new markets for the range of services).3) Product and Services (modification or improvement in existing product / services)4) Innovation (offering new alternative for existing product / services).5) Horizontal Integration (acquisition of firms with the same product / services).6) Vertical Integration (acquisition of suppliers and / or users organization).7) Joint ventures.8) Concentric Diversification (acquisition of business with specific intention to improve weakness or exploiting contemporary strengths).9) Conglomerate Diversification (acquisition discrete firms).10) Retrenchment (reducing assets or scale of activities).11) Divestiture (closing or selling parts of the firm).12) Liquidation (step-by- step closure of the business).13) Monopolization (protection of present markets).14) Cost leadership (cost reduction of product / services).15) Differentiation (offering special value to the customer through distinguished quality and performance).
321) Innovation in Services Proposed Strategies to Overcome Weakness FactorsWeaknesses FactorProactive StrategiesDefensive Strategies1) Innovation in ServicesMaking joint venture, product & service development.Concentrating growth, Product or Service Development2) Global OperationMarket development.Concentrating growth, Retrenchment, cost leadership or Divestiture,3) R&D ActivitiesMaking joint venture, Concentric diversification and support construction research in Saudi universities.Concentrating growth, Market development.4) Strategic PlanningConcentrating growthStrategic Planning is unavoidable which mean there is no defensive strategy.5) Training / Retraining Activities.Some important areas where construction personnel must be trained:Problems solving & decision making.Job managementPerformance analysisTQM & continuous improving.Business/Engineering Economics.Beside the on job trainingDefensive strategies are no applicable.
33Proposed Strategies to Overcome Weakness Factors Weaknesses FactorProactive StrategiesDefensive Strategies6) Joint VentureMaking joint ventures wherein technology/ organizational capability can diffuse gradually over time to move over ultimately to a time bound plan into a stand alone accomplished entity.Saudi construction firms need to obtain ISO 9000 or equivalent certification to attract the potential joint venture partners, minimize the operational difference through possession of similar processes & systems.Concentrated growth, Products/services development, Retrenchment, and defending locally by making strategic alliance with local firms.7) IT Utilizationusing IT models such as 3D during conceptual design phase, web-based information system for construction project management to facilitate data exchange among concerned project members during different phases of construction, online construction negotiationRetrenchment, Divestiture, and Concentrated growth.8) Information Sys. & Knowledge AcquisitionIT infrastructure in term of computing facilities, internet, and intranet. Using an e-business model to sustain supply chain dealing in construction. Common database.Making joint venture agreements with local and global giants. Acquisition information by utilizing:Electronic catalogs.Online learning.Online tendering.Virtual marketing.
34ConclusionGFOL is a double-edged sword for the large Saudi construction firms.Kingdoms’ entry into the WTO endow the large Saudi construction firms with the overseas opportunities in the 150 member countries,The large Saudi construction firms are not prepared enough to compete with the potential international competitors in the WTO.
35RecommendationsBased on what has been presented in this study, the following are recommended:Saudi construction firms need to develop and adopt a culture of strategic planning/thinking.Saudi construction firms need to assess themselves with respect to all the twenty-six factors discussed and surveyed in this study.Saudi construction firms must address the issues raised in this study properly so as either to improve or avoid being exposed to their obvious weaknesses such as innovation in services, global operations and so.
36RecommendationsSaudi construction industry and hence the professionals involved therein must develop a clear understanding of the WTO and GATS rules and obligations.More interactions through meetings/seminars/conferences among construction and related engineering professionals.Provide an initial medium for assessing the contemporary status of the large Saudi construction firms as compared to those of global giants.Saudi construction firms must be flexible and in accordance with their mission, objectives, aligned suitably with contemporary internal and external environment as indicated in this study.
37Thesis Critique Sample size was small Purposive sampling Relationship among factors was ignoredEach Internal factor was treated independently when proposing strategiesSome strategies proposed to one internal factor are contradicting with others proposed for other internal factors