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Etisalat Company’s Risks and Risk Management Strategies Research Paper


Executive Summary

Etisalat is the monopolist telephone and internet communications operator in the UAE with a vast and expansive network stretching across several countries in the Middle East, Asia, and Africa. Its total number of customers as of 2012 is over 170 million individuals (“Annual Report 2016” 2). Being a large multinational corporation, Etisalat faces numerous risks when running its enterprise, ranging from financial and currency risks, compliance risks in regards to national laws and international internet privacy and security standards, operational and management-related risks, and strategic risks in regards to the implementation of new technology and developing the company’s expansion strategy. While Etisalat has a multitude of strong points, many of which arise from their fortified position within the UAE, it also faces numerous risks that arise out of its current model of operation. This report provides relevant data on Etisalat’s financial and enterprise risks and offers recommendations on overcoming them.

Introduction

Etisalat is the biggest telephone and internet communications operator in the UAE. It is a multinational corporation that operates in Asia and the Middle East, covering over 16 countries in its web. The total number of customers as of 2012 is stated to be at circa 170 million individuals (“Annual Report 2016” 3). Its primary service lies in wireless and mobile connections, as it is known to be the world’s 14th largest mobile phone operator, and one of the most powerful corporations in the region. According to the financial reports of 2015, the company’s consolidated revenue stands at over 51 billion AED, with net profit at the end of 2015 is over 8 billion AED (“Annual Report 2016” 3). The company’s total market capitalization rate between 2017 and 2018 balances between 87 and 88 billion AED (“Annual Report 2016” 3).

Within the UAE, Etisalat has a monopoly on all sorts of communications – other companies are not allowed to operate within the borders of the country without getting permission from Etisalat to connect to its web. Naturally, the only companies that operate in the UAE are daughter-companies and subdivisions of Etisalat created solely for domestic use. The biggest daughter-company is Emirates Integrated Telecommunications Company, also known as dU. Etisalat maintains a host of servers and points of presence in all major continents of the world, server locations found in New York, Paris, London, Amsterdam, Frankfurt, and Singapore, which are considered hub cities due to their developed Internet and server infrastructure (“Company Profile”).

The reason for Etisalat’s dominance in the domestic market lies in the fact that it was one of the founding companies in the region that helped develop the country’s widespread telephone and Internet infrastructure. UAE’s vast and all-encompassing internet network was not constructed overnight. It began in 1995, when Etisalat – the country’s leading and only wired and wireless communications provider, began building up the infrastructure required for internet communication within UAE. As it was the only company in the country with the monopoly overall communication, it was in charge of constructing one of the most modernized Internet systems in the Middle East (“History”).

The Internet boom in UAE happened between the years 2002-2005. The world had just emerged out of the recession that happened in the year 2000 and began investing in new technologies again. High oil prices motivated UAE’s economic growth and promoted the prosperity of its citizens. This was very beneficial for internet communication development, as not only the people were able to afford to connect to the internet web, but local companies and businesses were motivated to do so as well. The construction of Dubai Internet City in 1999 and the admittance of foreign technologies into the market facilitated internet growth even further, as Etisalat was enabled to profit from foreign experiences and technologies while maintaining its solid monopoly overall communication (“History”).

By 2009, the construction of an efficient and all-encompassing internet network within the UAE was complete. However, any further development was mitigated by the financial crisis of 2009, which was followed by the oil crisis of 2014. Despite these negative influences, UAE maintains one of the most developed internet networks within GCC up to date, with the majority of the population having access to the Internet from their computers, laptops, and mobile devices (“History”).

However, despite having a solid footing and a long-standing reputation for innovation, as well as substantial government backup, there are various risks that the corporation would need to be prepared for in order to maintain its leading positions not only domestically, but also in the international arena. While the company does not spread its influence outside Asia and the Middle East, various economic and geopolitical factors may have an influence on its business and development. The purpose of this paper is to outline Etisalat’s current risks, evaluate the adequacy of those risks, and analyze the company’s enterprise risk management strategy (“History”).

Potential Risks in Internet and Telecommunications Industry

The Internet and telecommunications industry, just like any other kind of industry, has several risks to it that the companies, big and small, need to account for in their financial and corporate strategies. As a rule, any risk that can be predicted and identified falls into one of the four categories, which are as follows (Griffin):

  • Financial Risks – these risks refer to a company’s ability to generate financial revenue, cover its operational expenses, manage its debts, and maintain its financial leverage.
  • Compliance Risks – these risks are associated with local and regional governance and legal issues that may force the company to lose profit or even forfeit its property and possessions, in certain cases.
  • Strategic Risks – strategic risks are risks generated by the company’s general direction and the pursuit of various strategic goals. They are associated with the maintenance of old products and the introduction of new ones. A failure to choose the right direction in which to expand may cost the company profit, market share, and can even force it out of business.
  • Operations Risks – these risks refer to the company’s ability to manage its operations effectively and provide the highest quality of service using the least amount of resources necessary for doing so. In order words, it reflects on the company’s efficiency and various factors that diminish that value.

According to the EY report of 2014, there is a number of risks associated with the Internet and telecommunications that are universal to all companies worldwide. Financial risk, aside from the standard currency exchange risks and revenue drops, also include poorly defined inorganic growth agendas and failures to extract value from network assets (EY 8). Compliance risks are associated with new demands and imperatives for privacy and security, as well as a lack of legal infrastructure in the new markets, where Etisalat is planning to expand towards (EY 8). Operational risks for telecommunication companies include a lack of reliable data in order to estimate the company’s performance and providing new ways of improving organizational efficiency and agility (EY 8). Lastly, strategic risks include marketing research failures, as well as failures to adopt the latest technological advancements and incorporate them into the company’s operational model in order to maintain a competitive edge (EY 8). Of course, for each company, the situation is different, as some risks prevail over others depending on the market specifics, the geopolitical and economic situations, and the positioning of the company.

Etisalat Financial Risks and Risk Management Strategies

According to Etisalat’s 2016 Annual Report, the company identifies several financial risks that have the chance of affecting its assets, profits, and financial integrity. These risks are as follow (“Annual Report 2016” 127):

  • Foreign Currency Sensitivity
  • Interest Rate Sensitivity
  • Credit Risk
  • Liquidity Risk

Foreign currency sensitivity risks for Etisalat arise out of the necessity to convert their profits in other countries to AED, which is the main currency in the UAE, which acts as the company’s base of operations. Since most home currencies do not allow direct conversion to AED, Etisalat is often forced to use the Euro as an intermediary between the two, which exposes the company to additional risks. Currencies involved in Etisalat’s operations include Egyptian pounds, Pakistani rupees, Moroccan Dirhams, and Central African Francs (“Annual Report 2016” 127). In order to manage this risk, Etisalat chose to decrease the portion of Euro conversion, instead choosing to increase the portion in other currencies and using them to conduct local payments and operations. For example, between 2015 and 2016, the company’s equity ratios for the Euro have dropped from 970 million to 906 million, whereas the portion of Egyptian pounds has increased more than two-fold, from 41 million to 90 million (“Annual Report 2016” 127). The usage of Pakistani rupees has increased tenfold, from circa 2 million to 21 million (“Annual Report 2016” 127). Moroccan dirhams have seen a 50 million increase in use. In addition, in 2016 the company started implementing the Central African Franc as an operational currency, totaling at 32.5 million within the first year (“Annual Report 2016” 127).

According to the Annual report, Etisalat is exposed to interest rate risks due to the fact that it is forced to borrow cash from banks and private entities as both fixed and floating interest rates. At the end of 2015, the company’s net profit was increased by 2% due to a favorable interest rate. The total amount of revenue generated by favorable interest rates was 79 million AED (“Annual Report 2016” 127). The company implements a series of precautionary methods and strategies in order to account for these risks. Etisalat constantly monitors the market’s interest rates and compares them to the current borrowing rates, which serves as the company’s primary tool for determining which actions are to be taken. The company analyzes the current costs of borrowing, future interest rates, favorable terms of debts, and the period during which the implemented interest rates are fixed (“Annual Report 2016” 127).

Credit risks are associated with banking facilities. The company needs to be prepared for an event in which the counterparty is unable to follow its contractual obligations and fail to provide the required credit when necessary. This can result in a potential loss of Etisalat’s trade and receivables, as the company would experience a currency shortage in order to conduct payment operations. In order to counteract this potential crisis, the company chooses its partners very carefully, in order to establish their creditworthiness and to obtain sufficient collateral as a precaution measure against potential defaults. In addition, the company diversifies its banking partners in order to ensure that in the event of default, the potential damage is minimized. According to the financial report, the company’s investment activities are largely centered around the UAE, with 88% of all investments being into the domestic banking system, while the remaining 12% were made outside the country (“Annual Report 2016” 127).

Etisalat’s liquidity risks arising from the amount of money it currently owns to various stakeholders. Every year, the company needs to pay its liabilities or face losses in property, reputation, and potential investors in the future. As of December 2016, the company’s total liabilities account for approximately 56.3 million, out of which 30 million are trade payables and other expenses, 22 million are loan payments, 3.8 million are individual investment payments and licensing expenses, and the rest being financing lease obligations and other expenses. Etisalat manages its liquidity risks by maintaining reserves necessary for paying the projected liabilities for the next year and using banking facilities and reserve facilities in order to monitor the company’s cash flows in order to adjust to any potential changes in the liability payment plans (“Annual Report 2016” 127).

Etisalat’s Compliance Risks and Risk Management Strategies

Etisalat’s compliance risks lie in the field of compliance with various telecommunication laws and procedures acts of different countries, where their branches operate. In the UAE, Etisalat enjoys a position of power due to the fact that the government owns a large margin of the company’s shares, effectively making it a state enterprise. Its monopoly over the Internet and telecommunication spheres means that the country’s telecommunications act is largely tailored to maintain the state’s monopoly. However, in other countries, it is not the same. Etisalat as a foreign company is forced to accommodate various changing rules and regulations, which often a political subtext in order to curb the influence of foreign providers in the alleged countries. For example, Etisalat is currently facing a number of charges in India and Pakistan due to partial failures to comply with various established regulations (Fashogbon).

Privacy and security demands are a large issue for Etisalat, as in the UAE the company allows the government various disclosure preferences to various types of private client information. In addition, the government uses Etisalat’s all-encompassing influence around the country in order to block “undesirable information,” which is a violation of freedom of speech and user rights. Such policies are considered unacceptable in other states. As it stands, the company’s policies in regards to these risks that damage the company’s reputation and have the potential of restricting its activity in the region are reactionary, as it is engaged in lawsuits and remains unaffected on home turf (Fashogbon).

Etisalat’s Operational Risks and Risk Management Strategies

Etisalat is a multinational corporation with numerous branches located in different countries in Asia and the Middle East. According to the company’s employee roster, the total number of company employees exceeds 11,000 in UAE alone, meaning that the organization has a large number of people to manage in day-to-day activities (“Company Profile”). This increases certain risks in regards to the management and operations system, as a larger number of employees means it is harder to effectively manage them, especially since the company’s HQ is located in the UAE, from where Etisalat controls all of its branches. Ineffective management is a persistent problem for Etisalat, as at home it does not have a competitive pressure that would actively force it to improve its management and decision-making systems. Still, the necessity to compete on an international level forced Etisalat to start adopting Total Quality Management (TQM) techniques and Sigma Six in order to increase the company’s efficiency and quality of work. However, in its implementation of TQM in training and everyday practice, Etisalat ran into a problem of measuring the effectiveness of TQM implementation due to a lack of a comprehensive data gathering and performance measurement system in place. The top management of Etisalat is, thus, skeptical towards TQM’s implementation as it is used to working with numbers, and if the company has no means of measuring the quality of performance, then it is impossible to tell if TQM measures were successful or not (Fashogbon).

Etisalat’s Strategic Risks and Risk Management Strategies

The greatest strategic risks for the Internet and telecommunications industry lie in the company’s ability to identify future trends and adopt new technology in order to remain on top of the technological tree. Etisalat is famous for its dedication to innovation, as the company achieved one of the highest internet penetration rates in its home country, with over 89% of penetration rate (“History”). The company’s current policy is aimed at implementing the newest 4G bandwidth technology in order to increase internet speed and responsiveness in order to maintain its competitive edge. However, the company’s strategic acumen is not without flaws. Problems with internet speed and connection in UAE have persisted for years, and the prices at the domestic market are still high. The reasons are related to the company’s monopoly over the internet industry – without any competition, Etisalat is free to enforce poor quality on the end users with no repercussions. It also affects the company’s attitude in the other regions, where it does not have the same type of unfair advantage that it enjoys in the UAE. In addition, slow internet speeds are often associated with the implementation of package filtering and spy software. There were reports of Etisalat’s involvement in the Blackberry controversy in 2009, which involved the company installing spyware created by a US company in order to collect data on its users (Fashogbon).

Financial and Enterprise Risk Management Analysis and Recommendations

The company’s financial strategies are well-developed and have been successfully implemented for a significant period of time, particularly when it comes to liquidity and interest risks. The company’s liquidities have been slowly declining from one year to another, meaning that Etisalat is slowly starting to rely on its own monetary assets rather than on borrowed sums and investor shares. However, one of the weaknesses in Etisalat’s financial strategies is associated with investing in large-scale projects in other countries that do not work out, ending up in project suspension and significant investment losses for the company. The development of the network in Nigeria, Iran, and a 2G network fraud in India have been halted due to unsavory practices and risky projections. It is recommended for Etisalat to stop investing large sums of money into regions that are considered unsafe and unstable in a political and economic sense, and wait until the situation in these countries stabilizes (Edwards and Bowen 123).

Etisalat’s compliance risks are largely related to the company’s inability to comply with various national regulations and trying to establish an overwhelming presence in the foreign markets. Issues in Pakistan, Iran, and India are the result of the company’s disobedience with national compliance laws and violating the national security of those states by trying to work using UAE standards and policies in countries that clearly disallow it. The only reasonable recommendation in this situation is to respect the international laws for client privacy and security and comply with all the regional telecommunication protocols in order to avoid unnecessary lawsuits (Edwards and Bowen 135).

In terms of operational risks, the company’s weakness lies in the inability to assess the quality of its own services and the effectiveness of measures implemented to improve the quality of service and the efficiency of operational methods. Any attempts of TQM implementation, which the company currently struggles with, will not be successful until a comprehensive assessment tool is developed. Etisalat should involve itself in a thorough company analysis process that includes multiple surveying and statistical data analysis prior, during, and after implementing TQM on a wide scale (Edwards and Bowen 144).

In regards to strategic risks, Etisalat seems committed to building large and elaborate networks implementing top-tier internet and communication technology both domestically and abroad. However, the inability to provide high-quality service may leave it vulnerable to competition in the outside markets, where they cannot establish a monopoly. In order to overcome this weakness, it is recommended to invest in quality promotion and increasing internet speed and bandwidth. It is also necessary to reconsider the company’s policy towards internet security and privacy by discarding all and any agendas that may compromise the company’s good name, such as data fishing and espionage. Etisalat would need to adopt a less aggressive marketing strategy in order to be accepted into Indian and Pakistani markets without being viewed as a hostile company that may compromise the nation’s security (Edwards and Bowen 192).

Conclusions

Etisalat is a large and powerful Internet and Telecommunications company that holds a dominant position in its home market due to possessing a monopoly on all communications and extensive governmental support. Its dominant position in the UAE is motivated by its long-standing service and being the founding corporation to establish an Internet web in the UAE in the 1990s-2000s. Ever since, it has expanded to other regions in the Middle East, Africa, and Asia, and is considered the 14th largest internet provider in the world. Despite this brilliant history of achievement and a general tendency for financial growth, the company faces a series of risks that are intertwined and stem from one another.

The majority of these risks revolve around aggressive expansionist policies to other regions coupled with a lack of competition at home and systematic violations of customer privacy and security. Other risks revolve around the inability to establish proper mechanisms for improving management agility and implementing effective management practices. Lastly, the company faces financial risks from investing in expensive projects that are shut down due to political reasons, which is an amalgamation of compliance and financing risks. In order to lessen potential losses and minimize these risks, the company needs to conduct a thorough revision of its policies in consideration of financial, compliance, operational, and strategic risks. Having a solid base at home and superior technology allows the company to sustain its losses in other regions, but with the inevitable emergence of local competition, the company may lose significant assets as well as their market share.

Works Cited

“Annual Report 2016,” 2016, Web.

“Company Profile.” Etisalat, 2017, Web.

Edwards, Peter, and Paul Bowen. Risk Management in Project Organisations. Elsevier, 2013.

EY. Top Ten Risks in Telecommunications 2014. 2014, Web.

Fashogbon, Labake. This Day. 2017, Web.

Griffin, Dana. Chron, Web.

“History.” Etisalat, Web.

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