SABIC: Implementing Internationalization

Introduction:

A strong power based on information has pushed the entire world to become an single entity. This power is technology. Technology has developed tremendously in recent times and has brought different parts of the world closer, irrespective of cultural and communication gaps. A proletariat has been created based on enhanced and more efficient modes of communication, transportation, and travelling. These developments have made disjoint areas and deprived people become aware of the modern amenities. This has increased a demand for products and services which were out of reach earlier, in turn, creating international markets for business. For example, suppose a new type of mobile phone launched by a particular brand is not available in some countries. But, due to the internet and other forms of media, the people from these countries have become aware of the product and are interested in it. This provides the brand with a new customer base located in different countries. This opens up the door for international business and generates a globalized market. Technology plays a major role in this as it is through technology that the products and services get promoted initially and people from different faraway parts of the world come to know about them (Handy, 1976).

This has generated a new reality in commerce. This reality is the globalized markets which provide a platform for international business. This has created standardized development of products that cater to different kinds of consumers from different parts of the world. Also, the globalized markets have created the possibility of producing huge amounts of products which were not even imagined before globalization. The numerous corporate organizations accepted this global reality and focused on internationalization, thus creating numerous markets that aimed to maximize profits through the new heights of economics, manufacturing, distribution, promotion, etc. involving the global demand for products and services. The advantages of globalized trade have been reflected in standardized products, but, the prices have been adjusted as per the markets. The global prices have been decreased to fight off rival companies. Earlier, consumers had distinct national and international preferences in terms of products and services. But post globalization, international business has minimized the gap between the quality and price of local and international products and services, in turn, increasing demand for international brands in the global markets (Handy, 1976).

But the global standardization of products or services is an important factor. Today, a company cannot expect to sell inferior versions of its products or older models of products, at under developed nations. This is because, communication and technology have made the consumers from even the most under developed nations aware of the details of the actual products or services. The profits margins cannot be higher as compared to the local markets. The globalization of markets has become extremely common these days and the importance of the multinational company has reduced. There are some differences between the multinational company and the globalized corporate. A multinational company has operations in multiple countries and alters its products, services and rates with respect to each country. Thus, in case of a multinational company, the quality of products or services and the prices are country specific. On the other hand, a global corporate caters to the global markets and focuses on standardization of quality and, to some extent, the prices (Janis, 1972). The price differences are relative to different factors like taxes and vary slightly from country to country, but otherwise, a global corporate provides the same product or service at every part of the world. In this paper, the different aspects of international business will be assessed by observing the activities and performances of the company SABIC in the global markets.

SABIC (Saudi Basic Industries Corporation) is an organization that manufactures a diverse range of products, primarily, chemicals, polymers, fertilizers and different kinds of metals. It is the biggest company in Saudi Arabia with public listing, but, 70% of its shares are owned by the government of Saudi Arabia. The other shareholders originate either from Saudi Arabia itself or from the six countries belonging to the Gulf Cooperation Council (GCC) (Karam, 2011). Being the biggest organization in the entire middle east, SABIC represents this part of the world in the international business world, and has strong market presence in many international markets (Sullivan, 2007). SABIC is one of the most renowned and biggest petrochemical companies in the entire world and is headquartered at Riyadh in Saudi Arabia. SABIC was initiated in the year 1976 and has expanded by leaps and bounds over the years. Now, it is a major player in the international markets with respect to various genre of products and has presence in more than 40 nations in different parts of the world. The company has a staggering global human resource of more than 40,000 highly skilled professionals (Sullivan, 2007). The internationalization of SABIC has been analyzed in this paper and the different issues faced by it have been identified. The steps taken by it to solve these issues have been highlighted as well and effective solutions have been recommended too.

Organizational form:

SABIC’s organizational form is innovative and comprises of several branches. Prince Saud bin Abdullah bin Thunayan Al-Saud is the chairman and he is supported by Mohamed H Al-Mady, who doubles up as the Vice chairman and the CEO (Karam, 2011). A board of directors comprising of both government and private sector professionals monitors the functioning of the company and provides advice. SABIC is comprised of six separate domains of business and each segment is led by a different executive vice president. This distribution of responsibility makes running of the different business units easier and no single person is overloaded with work duties. The different business segments of this company are chemicals, polymers, chemicals related to performing, fertilizing substances, metals and state of the art plastics. These different units lead to the creation of four different groups of products: chemicals, plastics, fertilizers and metals.

Headquartered at Riyadh, SABIC has a lot of important operations running in Al-Jubail, which is an important industrial zone, and in Yanbu. Both these locations are on the coast, enabling SABIC to transport products easily. The international presence of the company has been increasing at a very past pace and has led to the establishment of numerous factories, production plants, distribution offices, corporate offices and storage units in numerous locations spread all across the world. The different aspects of business in different parts of the world are controlled by four region based offices positioned in strategic locations to cover a huge area. These offices are placed at the Middle East region, the African region, the USA region and the European region. The company has always focused on producing state of the art products, and hence, has made a lot effort for research and development of technology. The Technology and Innovation (T&I) units of SABIC are present in different parts of the world and provide platforms to numerous scientific talents to improve technology.

In the month of June of the year 2006, SABIC introduced “SABIC Sukuk Company” in order to provide Islamic bonds (Sukuk) which were valued from SAR1 billion (USD266.67 million) to SAR3 billion (USD800 million) (Karam, 2011). Over the years, the company has used mergers and acquisitions to expand its global presence. In 2007, it acquired the Huntsman Corporation plants of UK. Also in 2007, SABIC took over the plastic products unit of General Electric, and paid $11.6 billion for it along with the $8.7 billion worth of liabilities (Karam, 2011). After this the SABIC Innovative Plastics was launched. In 2009, the Chinese government supported the company and allowed it to create a petrochemical hub worth US$3 billion. This enabled the company to get a strong position in the world’s rapidest growing market for chemicals (Karam, 2011).

Issues faced by SABIC while implementing internationalization:

There are some significant issues faced by companies in implementing internationalization. These issues have been mentioned as follows:

Finding the identity of the actual market requirements:

An important aspect of successful internalization of a company is by providing goods or services that are highly in demand. For this, it is important to identify the needs of consumers in different global markets. The consumer has an issue which has to be sorted. The product or services of a company should be presented as a solution to the issue. The problem with this is that it is very difficult to understand the needs of consumers in a foreign market. The only solution is to do extensive market research by involving marketing and research companies which originate from the country of the target market. Sending local representatives abroad for this research will not generate accurate results due to communication and cultural gaps. Another effective solution is using mergers and acquisitions to understand the market and its demands, before launching fully fledged operations. SABIC has a very strong presence in the petrochemical market of Europe. There is a huge demand for materials like polymer, and there are not enough plastic materials producing companies in Europe to meet the needs of the consumers. A common mistake that companies make in this area is thinking that all consumers think alike. The reality is that, an American customer and an European customer each have very different sensibilities and needs. Through detailed research, SABIC identified the needs to the European consumers and realized that there was huge demand for different kinds of plastics, polymers, etc. Plastics and polymers are needed in large quantities in Europe for several purposes like packing shopped items at supermarkets, storing things at home, accumulating dust and garbage for throwing out of home, offices, restaurants, etc. Hence, SABIC entered the European market in 2002 (Kennedy, 2000).

The brand power of a company can get diluted:

The internet and other modern communication tools have made it easier for a brand’s name to reach far. However, this does not indicate that the brand’s products will surely be accepted in foreign shores. This is a major problem of internationalization and has been face by even the biggest corporate giants. For example, Coca Cola’s soft drink Vanilla Coke, a spinoff of the original Coke, is a popular product in the American market. It was launched with much hype in the Indian market and was expected to be very successful here too, especially due to the popularity and success of the original Coke in India. However, shockingly, Vanilla Coke was a disaster and sank without a trace in a few months (Goelzer, 2004). Achieving the appreciation and faith of consumers is a very time consuming process. The reason behind this issue is the fact that every market has its local producers and the consumers, though aware of international brands, are habituated to using the local options. Getting consumers to switch preference to a foreign brand can be very difficult. SABIC faced the same issues in its internationalization process. Though the brand was well known as a renowned petrochemical manufacturer, it was difficult for it to get accepted in foreign markets. To solve this issue, SABIC tied up with well recognized companies in the foreign markets, so that, consumers would not have problems in connecting with the brand. In Europe, SABIC acquired the Dutch company DSM for this purpose. DSM was a popular manufacturer of plastics and polymers and acquiring it made it easier for SABIC to get accepted by the European consumers. SABIC has used this same strategy to enter the UK and USA markets as well (Daniel, 1990).

Cultural issues: The promotional messages sent to the consumers are responsible for the purchase decision, and, the marketing message is highly dependent on cultural background of the consumer. The cultural gap can be a big issue in internationalization. Suppose an American company uses humor in a promotional advertisement in TV as well as print media in a new foreign market. Now, if the sensibility of the consumers in the foreign market is different from American consumers, chances are that the advertisements will be seen as offensive. The consumers might not get the humor and can feel insulted. Thus, cultural awareness is very important while designing marketing strategies for the global markets. The perspective of the consumer should always be considered. SABIC has used to marketing strategies of the firms it acquired in the global markets to learn about the cultural aspects of the consumers (Worley, 2004). In turn, it has come up with promotional strategies which are respectful towards the consumers and cater to a particular nation specifically. The cultural issues have been focused upon in depth in a next section dedicated entirely to this aspect of international business.

Communication gaps: Language barriers among professionals and business representative from different countries are a major obstacle for business in the global markets. The traditions and work culture of different countries is different. For example, American companies believe in fast processes, whereas, Japanese and Chinese companies want to spend time and bond with prospective business associates before finalizing a deal. Not adhering to these kinds of practices can be considered offensive. Thus, in order to minimize the communication gaps, it is important to have a specific approach for each country. It is necessary to do a little research and know about the customs and business practices of the target country (Jehn, 1994). SABIC provided special training to its business representatives and professionals on specific cultures before sending them for operations in the global markets. Thus, SABIC representative in Europe is well versed in the local language and is aware of the culture and traditions. Also, in order to minimize communication issues, SABIC believes in recruiting extensively from the country where operations are taking place. Due to this strategy, over 3000 European people are employed in SABIC’s European operations (Quinn, 1999).

Location and travel duration: Though modern communication tools like conference on video are becoming more popular day by day, there are a lot of countries which prefer personal interactions with business associates. Also, time zone differences and huge travel distances make communication difficult and it can be a problem to interact personally. This can be detrimental for any business scenario. To solve this issue, SABIC has made sure that the majority of its employees in its foreign operations are people belonging to the respective foreign countries. Also, SABIC has positioned key professionals originating from Saudi Arabia in the foreign markets so that the time zones and distances are not obstacles. The company has also made sure that the employees who are positioned abroad get to take their families with them (Evans, 2008).

Getting trustworthy business associates in global markets: Finding trustworthy business associates in a foreign land can be a major issue. Due to lack of understanding of the details of the foreign business scenario and processes, it is very difficult for a company to find efficient supply chains, effective distribution networks, productive human resources, etc. The solution is to involve local PR companies, marketing companies, etc. to gain entry into a market. SABIC hires local sales representatives in every foreign country it targets. Also, SABIC uses the connections and channels of the firms it acquires in order to make the operations run smoothly in foreign shores (Caldwell, 2004).

Foreign Direct Investment and the Eclectic Paradigm:

Foreign direct investment or FDI has grown noticeably as a major form of international capital transfer for the last few years. Between the years 1980 and 1990 the world flows of FDI has been tripled. Foreign direct investment has become the major form of international fund borrowing for the countries like Japan and it has also grown rapidly in various countries of Europe (Asiedu and Esfahani, 2001). There are different theories that describe foreign direct investment and these theories predict the scope and scale of multinational firms by looking into the differences in competitive advantage across various firms or countries which leads to extension of corporate control across various countries. So, it can be considered that management capability, better technology, product design, strong consumer allegiance and greater complementarities in product and use of technology can help a domestic firm to control in the foreign market more efficiently than a foreign firm and can attract foreign investments (Barrell and Pain, 1996).

The traditional theories of FDI are quite helpful to explain the long term patterns of FDI. The theories of FDI includes International Trade Theory, theory of firm specific ownership advantages, product life cycle theories, firm based theories of FDI and the eclectic paradigm. The FDI of SABIC can be considered with the eclectic paradigm of FDI. Many economists stated that the ownership specific advantages and the internationalization theories are useful to justify the existence of FDI but there is a lack of logical explanation in these theories (Askari, 1990). Dunning (1979) stated that the partial explanations of the international production and the lack of a formal theory have influenced the economists to develop an eclectic theory of the subject. He also stated that there is no single theory that can explain all forms of cross border transactions of goods and services satisfactorily and all the theories of FDI are complementary rather than substitutable to each other.

Internalization advantages and complementary to ownership are considered as location specific advantages. Location specific advantages state that the companies can gain competitive benefits by locating in the foreign countries; otherwise, they do not need to take any foreign investment. The companies can minimize the transaction costs or transportation costs by producing the product close to the final customers and by developing production and manufacturing plants in the foreign countries, companies can minimize their transaction costs by taking the resources in the foreign countries (Bell, 1996). The OLI paradigm states that a firm must be able to gain ownership advantage by locating in the foreign countries. In case of SABIC, they have their own manufacturing units in USA and various countries of Asia, Europe and Middle East and Africa and that is why SABIC enjoys significant location specific advantages. The location advantages of SABIC can be described in terms of geographical environment, the regulatory framework of government of the countries in which SABIC operates their business, the political environment of the countries where SABIC have their manufacturing plants, the taxation rules and policies of the countries, the production and transportation costs (Benito, 1996). The government policies in countries like India are quite good and the company also gets various advantages from these countries. The fiscal policies and the rules of taxation in India is also quite helpful for SABIC to operate their manufacturing plants in India. The government of India always welcomes the companies with innovative products which will help them to make the market for the products. SABIC also get various types of helps from the government to develop newer products in their manufacturing plants in India. The tax rules are quite better in India compared to USA or European countries and that is the reason why major part of production is done in India and Saudi Arabia (Bhuian, 1997). Being headquartered in Saudi Arabia, the government of Saudi Arabia help SABIC a lot to operate their business from Saudi Arabia. The political environment of Asian countries such as India, China etc are quite unstable and a lot of conflicts arise between the political parties and as a result, the business process of SABIC suffers. The political environment of countries in Europe and USA is quite stable compared to other countries and SABIC enjoys these benefits. There are some other advantages too that SABIC enjoy such as the low cost of raw materials, low wages of labors etc. The standard wages of workers in countries like India is less than the standard wages of workers in USA and it is a great advantage of the company to run their manufacturing plant in India. They can hire highly experienced production managers and highly skilled workers from India for their production plants in India and they also purchase the raw materials from Indian market. It helps them to save transportation costs. In this way, the profit generated by SABIC in Indian market is quite good and it helps them to get investment from India. They also receive foreign investments from Europe due to various types of advantages (Biswas, 2002).

The internalization advantage of FDI assumes that contracting with external firms in foreign markets is a risky option for any company as it can lead to reveal the ownership specific advantages to the firms located in foreign market and the contracting firms might be the future competitors. This is a major issue for the companies operating their business globally and it is also needed to be considered for SABIC too. It is very important for SABIC not to contract with external firms in foreign countries. SABIC is one of the leaders in the chemicals plastics, metal and fertilizers market. So, they should make all the processes internal. They should try to develop more plants in various countries to manufacture the products and all the manufacturing processes should be taken care by the SABIC only (Bolbol and Fatheldin, 2006). No other companies should interfere in the process.

Dunning (1988) extended the eclectic paradigm by including the industry, country and firm specific structural variables. He also stated that the OLT characteristics can vary as per the country, industry and firm specific considerations. For example, if the home country can provide the advantages such as resources, skilled labors, large market and government policy then the country specific advantages can be considered as nature of ownership, location specific and internalization of the firms. In this example, the ownership advantages of the firms might be affected and it can also lead firms to have the access to the resources. The location advantages are determined as per the characteristics of the home and the foreign country but unlike ownership advantages, the location advantages are immobile and it is quite difficult to transfer. Country characteristics help any company to choose the location. Physical and psychic differences between countries indicate the cultural and economic differences between host country and home country (Buckley and Casson, 1976). The positive links between home country and host country help the organizations to do their business properly and the firms always want a country to do their business that have links with their country. The economic and cultural ties between the host country and home country can reduce the political risk and it makes it more attractive for FDI. Government intervention also plays a significant role in choosing the location to develop the plants in foreign location. It is very important for multinational corporations to have proximity between countries and the policies of the governments of the countries. Industry factors are also important to choose the location of FDI. In many industries, it is found that there are low or high transportation costs and there might also be low tariff barriers which can also affect the decision of foreign investors. The extent of competition between the firms also varies according to the location (Cantwell and Narula, 2001).

Internalization advantages are enjoyed by the companies when they tend to use their ownership advantages and place their investment in foreign countries in order to get benefits from the location advantages. Different countries have different policies and it affects the MNCs to internalize their business transactions such as government policies, transfer pricing etc. If the policies of a country helps internalizing transaction costs then the MNCs will be more willing to invest in that country. The control procedures also differ from firm to firm and the firm’s attitude towards the diversification and growth such as franchising, subcontracting, licensing etc also differ from organization to organization. In case of SABIC, the transfer pricing and government policy towards mergers differ in countries in which they run their business such as USA, India, China, Saudi Arabia and countries of Europe (Cantwell and Narula, 2001). The eclectic paradigm developed by Dunning is considered as the most useful framework to describe foreign direct investment.

New Trade Theory:

New trade theory is a theory of economics developed by the economists in the early 1970s which contradicts the arguments of unlimited free trade which were very popular during that time. The new trade theory states that a particular company can benefit countries in producing some goods which is meant to protect the trade of the goods. In this way, the producing company can gain economic advantage. The theory also suggests that oligopolies and monopolies are not a bad thing in the world market, for consumers as well as the businesses (Cantwell and Narula, 2001). In case of SABIC, they cannot be considered as monopolies in world market but they are market leader in Saudi Arabia. They also benefit countries such as India, USA, Japan, UK, Italy, Germany, Netherland, Spain, Belgium and Austria by producing products such as plastics, chemicals and innovative plastics. These countries used to purchase the goods from other countries and the process was quite costly too. So, the production process of SABIC helps them to gain advantage in these countries (Cantwell and Narula, 2001).

There are many principles in the new trade theory and one of the founding principles of the theory is perfect competition principle. It suggests that multiple producers producing same goods actually reduces price for the consumers and it is an added advantage of society. Some countries have various advantages in producing some goods. This theory is not completely against the global trade between various countries. The new trade theory suggests that companies with comparative advantage can produce more of a product at lower cost than the competitors and in this way they can dominate the market and it also benefits the customers (Biswas, 2002). These competitive advantages can come due to various factors in a country such as natural resources or climate or the companies can also enjoy labor advantage when they produce a particular product. SABIC also enjoys significant advantage in the countries where they have their manufacturing units such as Italy, UK, Japan, Germany, Netherland etc. The advantages are in terms of labor, raw materials etc. The labor wages in India, Italy etc are quite less than the labor wages of countries like USA and other countries in which they operate their business. As SABIC produces more plastics, chemicals etc in the above mentioned countries, they can provide the goods at lower cost and they can also dominate the market in these countries (Biswas, 2002).

The new trade theory also helps to understand and explain the way in which global trade affects the goods available to the consumers across the globe. The countries can also import the products from other countries and it also helps them to offer more varieties of products to the consumers. In case of SABIC, they produce different products in many countries and these countries also import the products from other countries too. It helps the countries to offer goods of different varieties to the consumers. The new trade theory states that consumers might enjoy varieties of products but the process decreases the variety of the products around the world. This is because the brand names are attached to the world economy. In this way, the small industries are often ignored in the world economy.

Implications of cultural, legal and economic systems in the countries where SABIC operates:

SABIC operates their business in various countries such as Netherlands, Germany, UK, Italy, Austria, Spain and Belgium and the cultural, legal and economic systems of these countries have various effects on their business. The cultural environments of different countries are different in which the SABIC operates their business. SABIC employs the workers from different countries in which they operate their business and it helps them to fulfill the cultural gaps between the employees. As all the employees employed by SABIC in the particular country are from same cultural background, they can work nicely in teams. They also engage employees in various organizational decisions and the professional human resources management and talented employees programs (Dunning, 1974).

The legal system of different countries is also different. SABIC operates their business in multiple countries and the business operations of these countries are dependent on the legal systems. There are various legal troubles SABIC needs to face. On May 31, 2012, the US Environmental Protection Agency (EPA) and US Department of Justice announced SABIC Innovative Plastics US LLC and their subsidiary had to pay $1 million civil fine and they had to also improve the leak detection and they also repaired the practices to settle the violations of the Clean Air Act at the chemical manufacturing facilities in USA (Dunning, 1974). There are a number of people live near manufacturing plants in Alabama, Indiana. The settlement with SABIC will reduce the hazardous emissions and air pollutants in these areas.

SABIC has also faced problems in Saudi Arabia too and the problem is faced in terms of striking workers. They also had to face problems in Japan due to the production of innovative plastics. The government of South Korea banned them from producing the innovative plastics. They had to transfer the production of innovative plastics to India as the Indian government welcomed them to manufacture the innovative products.

The economic systems of different countries are also different. The taxation policies in India are quite better compared to other countries such as USA, UK etc. The strategic partnership of SABIC with KAUST at a cost of $150 million will help the company to develop new plants and expand their business. SABIC also invests $500 million in the new R & D centers (Biswas, 2002). As the economy of Saudi Arabia is dependent on the business of SABIC, they are planning to develop two research centers at the research institutes. It will also create more than 150 jobs in these two centers. Two major manufacturing plants will be established in 2013, one is in Bangalore and the second one will be developed in Shanghai. These two centers will employ a total of 500 people.