Recommendation
The main problem that Emaar needs to address when it comes to expansion and development is related to the very source of its success, namely: Dubai. What must be understood is that from a development perspective, the Dubai Model (i.e., the model of development utilized to expand and develop Dubai) is not sustainable with the current way in which the global economic environment works. This model focuses on developing Dubai into a prime location for trade and tourism through real estate development as well as significant investment into the creation of a robust financial infrastructure.
While this has to lead to numerous projects for Emaar and its rivals, the fact remains that there is a significant role in economic fundamentals that the model does not address. First and foremost, what must be understood is that the global economy operates under a “boom and bust” cycle wherein periods of economic highs leads to periods of economic lows and vice versa. This was one of the main reasons behind the sudden issues with the property sector within the U.A.E from 2007 till 2010 that was mentioned in this analysis since the local real estate industry was adversely affected by the “boom and bust” cycle. Taking this into consideration and the cyclical nature of the global economic activity, it can be stated that the current period of recovery and growth will inevitably be followed by a time of economic inactivity and lackluster growth potential.
This is a problem that Emaar needs to focus on since it would definitely impact the viability of any of its construction projects within the region. Going back to the case of the Dubai Model for growth and development, what must be understood is that the “hole” in economic fundamentals that it fails to address is the presence of a substantial industrial base. The present-day economic infrastructure of Dubai is oriented towards tourism, real estate development, and financing, all of which are the first to be affected once the global economy enters into its “bust” cycle. A strong industrial base centered on the manufacture of certain consumer goods is a necessity so as to offset the decline in other local industries, yet this is not present within Dubai and in several of its surrounding regions. There is an overdependence on tourism, real estate, and the oil industry, which makes the region especially vulnerable to external shocks to its local economy.
What is needed in this particular case is to focus development into other sectors of the economy, which Emaar can help spearhead? The following is a recommendation entailing the possible route for development that Emaar can utilize in order to both contribute towards the company’s continued success as well as enable the region to sustain itself in the face of a period of decline in the global economy.
Development of Industrial Parks
As stated earlier, Emaar has the opportunity to diversify revenue streams by moving away from construction and more towards other developments. By doing so, Emaar increases the number of revenue streams available to them. An important benefit of this is that it protects Emaar from any industry-specific problems that crop up. It is within this context that this report recommends that Emaar focus on the development of industrial parks near Dubai within the current large areas of land that it currently owns. While the type of product that could be manufactured in such areas is still relatively unknown, what can be done is to create the necessary infrastructure that would make such areas viable locations for companies to establish new centers for manufacturing their products. First and foremost, what must be understood is that within the context of the current labor force within the U.A.E, only 20% of the total manpower originates from locals. The remaining 80% consists of the various contract laborers that come into the country that are seeking better lives for themselves via better salaries.
This one of the primary sources of labor for Emaar for its various construction projects and can also be the labor source for various blue-collar jobs that can be created through an industrial park. What must be understood is that the establishment of a large industrial manufacturing complex within certain areas can have a considerable “spillover” effect that creates numerous opportunities for companies.
For instance, if a large industrial park were to be created near Dubai, this would cause an influx of foreign workers from other regions. It would, of course, be necessary for such individuals to live in some sort of low-cost housing complex which Emaar could construct near to the industrial park. Not only does this allow the company to venture into different types of construction, but it also allows it to penetrate into different types of markets, whereas in the past, it used to focus on mid to high-level types of construction. This method of generating demand for housing enables the company to better estimate the amount of housing needed, which would create increased operational efficiency. The end result is that the company would be able to expend only the necessary amount of resources resulting in fewer operational losses when it comes to construction projects.
This differs significantly from its current method of operations wherein it cannot accurately determine the level of demand for particular mid to high-end projects given the considerable level of competition within Dubai and other regions within the U.A.E. It should also be noted that from a competitive standpoint, generating demand for low-cost housing through the creation of industrial parks is actually a very good way of entering into a new market where there is relatively little competition. An examination of the various competitors of Emaar within the local market of the U.A.E shows that they tend to focus on mid to high-end development projects rather than low-cost construction projects. It is due to this that if Emaar were to allocate resources for low-cost housing for workers for the various industrial parks, it would create, this would result in higher long term profits for the company. Other potential avenues of approach that could be utilized take the form of developing low-cost malls, grocery stores, and other similar infrastructure projects that are near to the planned industrial parks.
This would allow Emaar to maximize the amount of money that it would derive from foreign workers that would be arriving in the country. Another benefit that should be taken into consideration when it comes to the proposed plan is the fact that through the creation of numerous industrial parks, this would result in higher local demand for various goods and services that would enable the local economy to thrive despite declining trade and demand in the global economic market due to the downturn. One example that showcases the effectiveness of the proposed system can be seen within the context of China and its focus on developing the potential of both its manufacturing industries as well as its real estate infrastructure.
China and the U.A.E have a lot of similarities in that development in both regions have governments that have extensive influence over the development of real estate and industries within their local markets through state-owned enterprises. In the case of China, what occurred was concurrent development of both its real estate and manufacturing industry resulting in considerable gains. The end result was that when the 2008 financial recession hit, this enabled China to “ride” the lackluster demand for real estate through the robustness of its manufacturing industry. The same cannot be said within the case of the U.A.E., which experienced a considerable decline in local demand both for real estate as well as other products. Taking this into consideration, it can be seen that the proposed development of industrial parks that focus on manufacturing would be a great boon to both Emaar and the U.A.E region as a whole since this would enable a greater level of diversification resulting in a local economy that would not be as vulnerable to external shocks should a global economic downturn occur.
International Expansion
Another potential means of continued survival that Emaar could potentially pursue is to expand outside the current context of the U.A.E market and focus on expanding into other countries. The fact of the matter is, the current climate for real estate development within the U.A.E. is rife with a considerable amount of local competition, which is further complicated by the lackluster demand for real estate within the country that has yet to recover fully. There is an atmosphere of uncertainty that is surrounding the region at present, and, as such, it would be reasonable to think that expanding into other markets that are not as difficult would be the best route to take.
For example, the Jumeirah Group, which is one of the largest hotel and resort companies within the U.A.E has actually embarked on a strategy of international expansion wherein it has focused on developing new hotels and resorts in other countries such as Brazil and various parts of Europe. The reasoning behind this strategy is quite simple, they see better opportunities in these areas where the market is not as congested with developers and other hotels as seen within the case of the U.A.E. It is based on this that this paper recommends Emaar to expand into developing high-end apartment buildings or resorts in other countries where it can expand upon its brand and create a better means of brand position which would enable it to dominate other international markets.
In order to bring about such a scenario, it is recommended that the company attempt to expand into other countries where there is still a relatively small amount of local competition yet has a considerable level of potential, which would enable it to expand. Some potential areas where this becomes applicable can be seen within the case of various Southeast Asian countries such as the Philippines, Thailand, Malaysia, and Indonesia, where there has been a considerable level of growth as of late. Various news reports have been stating that such areas are prime locations for investment given the relatively young population as well as the fact that they have become relatively “cash-rich” as of late.
This can be seen within the context of the Philippines, wherein due to the influx of foreign direct investment into the country due to the outsourcing industry, there has been a considerable level of increased consumer demand for both high-end goods as well as luxury resorts. By entering into a joint development project with a local developer, Emaar could potentially expand into the Philippine and take advantage of the growth potential the country provides. The potential for high returns from investing is not limited to merely constructing apartment buildings, given the expansive level of beachfront property available within the country; Emaar could also expand into developing an assortment of resorts that would cater to both local and foreign clients. The expansion would not only be limited to South East Asia alone, but rather, Emaar could also expand into South America, which has also experienced a considerable degree of growth as of late.
Taking all these factors into consideration, it can be seen that expansion into new markets would be one of the ideal methods by which the company could continue to thrive as compared to having to deal with the considerable level of competition within its local markets.
Utility developer for the U.A.E local consumers
The last recommendation that this report will make would be to focus on attempting to become a utility developer for the various local consumers within the U.A.E. While it is true that at the moment the U.A.E has one of the lowest energy prices in the world brought on by its considerable oil deposits, the fact remains that oil is a finite resource and, as such, it is bound to “dry up” eventually.
Taking this into consideration, one of the primary methods of operation that Emaar could get into would be to become a utility developer that focuses on the use of renewable energy resources. One of the advantages that the U.A.E region has over other locations in the world is the fact that it has vast areas of the desert that are prime locations for the creation of various solar power arrays. By diversifying into renewable energy development, which has yet to catch on within the U.A.E, this would enable the company to become a market pioneer into a particular industry that would enable it to create a dominant position within the U.A.E energy market in the foreseeable future.
Concluding Remarks
Going back to the case of the Dubai Model for growth and development, what must be understood is that the “hole” in economic fundamentals that it fails to address creates numerous problems that local developers such as Emaar need to take into consideration when it comes to planning out the creation of their future real estate projects. The present-day economic infrastructure of Dubai is oriented towards tourism, real estate development, and financing, all of which are the first to be affected once the global economy enters into its “bust” cycle. It is based on this that through the various recommendations presented in this section, Emaar would be able to avoid the potential pitfalls of such a scenario and emerge as a much stronger company.