Introduction
Saudi Arabia’s economy continues to attract a lot of attention from foreign investors. “It is one of only a few fast-growing countries in the world with a relatively high per capita income of $24,200 in 2010” (Central Intelligence Agency, 2011). In the recent years, the country has recorder a rapid population growth. This, combined with reducing oil shortages, serves as a motivation for the nation to develop its other sectors.
It further supports the need for the company to diversify on its sources of income. As a result of a stable and vibrant economy, Saudi Arabia has attracted a lot of interest lately as an investment destination. Managing an EPC company in such an environment is not an easy task. There is a need for a business to have clearly set objectives. A successful business model and its management are guided by defined goals and timescale.
This study explores the relocation of JGC’s Engineering services to the Kingdom of Saudi Arabia and its effect on the costs, and the development of the local expertise, through the execution of Engineering, Procurement, and Construction “EPC” major projects in the Kingdom.
Moreover, it explores the conventional In-Kingdom/Out-Of-Kingdom “IK/OOK-EPC” model where the Engineering process is being executed out of the Kingdom of Saudi Arabia, and the Procurement and Construction are executed in the Kingdom of Saudi Arabia.
Then compare it to the In-Kingdom Engineering Procurement and Construction “IK-EPC” model, where the three phases are being executed in the Kingdom of Saudi Arabia. Through the utilization and development of the local resources during the establishment of those new projects, such IK-EPC Companies are enhancing the local content and developing the local market.
The research project is valuable in the following respects: First, it may help to understand the role IK-EPC Companies play in the economic growth of Saudi Arabia. Secondly, supporting the government’s initiatives in improving the local economy and enhancing the local content in such huge projects.
Thirdly, understand the challenges those IK-EPC Companies are facing. The results will be presented through a comprehensive study of the relevant topics, as well as developed recommendations at the end of the paper.
Background Of The Company (Jgc)
JGC is a leading engineering company in Japan, as well as the whole of Asia. It was established in 1928 and has since completed more than 20,000 projects in different parts of the globe.
The company’s expertise is wide ranging from chemicals, hydrocarbons, petrochemicals, pharmaceuticals and industrial field, among others. Like JGC (2011) explains, “from basic planning to commissioning and everything in between design, procurement of materials and equipment and construction, JGC’s engineering services provide a total and consistent system that has been highly evaluated by clients all over the world”.
JGC Gulf International Co. Ltd was established in February 2008. It is owned by JGC Corporation and JGC Singapore Ptd in the ratio of 75% and 25% respectively. The company’s head office is located in the Kingdom of Saudi Arabia. It also has offices in the Kingdom of Bahrain.
According to JGC (2011), the company has carried out various EPC projects in the field of oil and gas/refinery/petrochemical for the services throughout the project, from planning to construction, and operation and maintenance (O&M).
In order to maximize benefits for its customers, the business performs other roles such as being contractors for industrial facilities, offering consultation in the project management industry, and serving as an advisor for those who want to venture into industrial investors.
Aim Of The Study
Study the relocation of JGC’s engineering services to Saudi Arabia to execute oil and gas and petrochemical related projects as an IK-EPC company.
Objectives Of The Study
This research explores JGC’s movement from IK/OOK model and the adoption of the IK-EPC model in the Kingdom of Saudi Arabia in executing Projects in the Oil and Gas, and the Petrochemical Industries by answering the following research questions:
- Strategies used by JGC to efficiently and effectively relocate the engineering services and develop the local Engineering expertise as an IK-EPC Company.
- Challenges facing JGC in localizing the Engineering Design Services.
- Which of the models (IK-EPC Vs. IK/OOK-EPC) is better for JGC in terms of technical, economical, and practical feasibility.
- Whether it is profitable to localize the design services to Saudi Arabia.
- How IK-EPC model affects the growth of JGC as a corporation.
- Whether JGC Gulf should expand and invest in growing as an IK-EPC company.
Literature Review
Saudi Arabia Economy
Statistics by Energy Information Administration (2009) reveal that “Saudi Arabia’s economy command economy is petroleum-based; roughly 75% of budget revenues and 90% of export earnings come from the oil industry”.
Comparing revenues from the oil industry and other sectors, the region’s over-dependence on oil is evident. The country’s gross domestic product further proves this. According to Central Intelligence Agency (2011) “the oil industry comprises about 45% of Saudi Arabia’s gross domestic product, compared with 40% from the private sector”.
In the recent years, the country has recorder a rapid population growth. This, combined with reducing oil shortages, serves as a motivation for the nation to develop its other sectors. The country has in the past experienced inconsistent income due to contracting oil reserves and a high rate of population growth.
As Bowen (2007) records, “per capita income fell from a high of $11,700 at the height of the oil boom in 1982 to $6,300 in 1998”. Such periods reveal the need for the government to have diversified sources of income. Other sectors need to have increased contributions to the GDP.
The private sector today plays a significant role in the country’s economy (Ammari, 2008). With a realization that the future of the nation relies heavily on the sector, “the government is attempting to promote growth in the private sector by privatizing industries such as power and telecommunications” (Bowen, 2007).
The country has continued to prove its commitment to the strategy by privatizing some of the government owned businesses such as the telecommunications company. Due to the importance placed on the industry, the government invests in a diversified program to provide all the stakeholders in the industry with the required support.
The industry attracts a lot of interest from the foreign investors and provides the much needed job opportunities. According to the International Finance Corporation, the Kingdom of Saudi Arabia is rated number 13 in the list of most economically competitive countries globally.
Factors That Influence Markets In Saudi Arabia Costing
Costing is a significant factor to consider when investing in a new market. After all, a business would make no sense if it is not profitable. As explained by Bragg (2010), “all the costing processes documented contain three major steps, market driven costing, product-level costing, and component-level costing”. The input and desired results may vary depending on the number of factors influencing the process.
The cost and complexity of achieving the desired results many further vary with the industry, level of expertise, and different market trends in the industry. A product’s characteristics further play a significant role in determining how the target will be achieved.
“Each of the steps involved in costing have defined output: allowable cost, product-level target cost, and component-level target costs respectively” (Weygand, Donald and Paul, 2010). While these factors are similar in every firm trying to implement costing, the process is more complex in some industries and may result in different outcomes.
The market-driven costing portion is affected by the nature of target customer, as well as the intensity of the competition in the specific industry. Product-level costing is influenced by a product’s characteristics, and the firm’s product strategy (Bragg, 2010). Finally, the component-level target costing is affected by the company’s supplier-base strategy.
Managing Intensity Of Competition
The amount of attention a company is paying to competitive offerings is highly dependent on the intensity of competition a product is facing. The levels of importance a company places on its target costing process can be easily judged from the amount of importance it places on competitive offerings.
A study conducted on six Japanese companies by Bragg (2010) “reveals that all the firms had adopted a confrontational strategy because they lacked the ability to develop sustainable competitive advantages over each other”.
In markets where competition is stiff, businesses are left with no alternative but to compete with each other on the basis of quality and cost. When this happens, low profit margins, less fast mover advantage, and low customer loyalty among other outcomes, become a reality to many businesses.
When such a situation occurs, the benefits of costing cannot be under-estimated. The situation puts businesses in fragile position where they cannot afford to make any mistakes, especially when launching new products.
By putting the competitive pressure into consideration when designing new products, a business has higher chances of ensuring that the new product is within its survival zone when it is introduced to the market (Bragg, 2010).
The results are increased profits for a product, and increased customer loyalty for a product. When the level of competition is low, Weygand, Donald and Paul (2010) explain that strategies that are less confrontational strategies can be used.
The Degree To Which Customers Understand Their Future Product Requirement
The more customers understand their needs, the easier to become for a business to rely on their preferences and feedback. Survey of what they expect can be trusted and results used to locate future survival zones.
In contrast, when customers are not certain of their needs and preferences in future, businesses have to spend a lot of money and resources to locate future survival zones. Many times this is hard and they are forced to launch products that eventually fail due to poor approximation of survival zones.
Customers have a varying understanding of their future needs for different industries. For example, customers are more aware of what they want in future for food products, but thus may not be so in the electronic industry.
As a result, when using customers’ feedback on what they need in future, a business must put this factor into consideration. A business would be in a safer zone if they can exceed their expectations. When this happens, target costing becomes easier since business saves money by being ahead of what customers expect.
Benefits Of Ik-Epc Compared To Ook-Epc
A Stable And Healthy Economy
Saudi Arabia’s economy is considered among the most vibrant in the world today. “These favorable economic conditions are matched by positive demographic drivers. The kingdom of Saudi Arabia is the world’s fastest growing large country with a current population in excess of 25 million, 40% higher than the combined population of the rest of the GCC” (Central Intelligence Agency, 2011).
Unlike other economies in the world, Saudi Arabia has been able to recover from the global crisis more soon than others did. This is attributed to the fact that the country’s main source of income is oil, whose demand was not very much affected during the crisis. Furthermore, the oil industry has been on an upward trend for the last two years, a trend that is expected to continue.
The country’s GDP indicates healthy economy, which would offer a business the much-needed stability. “Saudi Arabia is the region’s largest economy with a nominal GDP of $608 billion, over 20% greater than the total combined GDP of the other GCC countries” (EDC, 2011). This gives it an advantage over its neighbors. Investing in Saudi Arabia therefore offers business opportunities in the country and its neighboring countries.
Saudi Arabia is considered a strategic location for any business with intentions of reaching the whole of the Middle East for business. “The country has delivered five years of continued economic growth, with GDP increasing by an average of 15% per annum since 2002” (Central Intelligence Agency, 2011).
It also remains the central point for foreign direct investors in the region. It is estimated that in 2007 alone, Saudi Arabia received over $17 billion as direct foreign investment.
Demographics
Even though there is still a deficiency in the labor markets for some professional fields, Saudi Arabia offers a good environment for any business that want to set up base in the country. The country’s demographics offer a big population of vibrant and energetic citizens to work in engineering, procurement and construction firms. 67.6% of the country’s population is aged between the age of 15 and 64.
Its population growth rate stands at 1.5%. 82% of the total population is in the urban areas. Its literacy level stands at 78.8% (Central Intelligence Agency, 2011). JGC Gulf has largely benefited from availability of casual laborers.
This makes it easy to accomplish projects, especially in an industry that is very dependent of casual and manual labor. Increased rates of urbanization further means that more people will access to better education. A more learned population will then provide the much needed professional skills for businesses such as JGC.
Improved Country’s Economy
In-Kingdom businesses not only benefit the investors, but also the nation of Saudi Arabia. The country’s over-dependence on oil as explained before is risky. This is evident from the amount of instability experienced in the country every time oil markets are not consistent. IK-EPC Company such as JGC brings in revenue for the country through taxes and funds invested in the business by foreigners.
Furthermore, having all the aspects of the business carried out in the country creates the much needed job opportunities for the locals.
When such businesses are developed in Saudi Arabia, the country realized the need to develop skills in the country, and invests more in education and training. JGC Gulf has had to import a big percentage of its human resources, a situation that offers the much-needed motivation for locals to invest in developing their skills.
Challenges
Information Technology
IT has been the heart of every subsidiary of JGC. This is the same for JGC in Saudi Arabia. Gas and petrochemical plants are built in remote areas where there is minimum infrastructure. The role of IT is evident in the level of sophistication of some of the projects. Logistics involved in most of the projects are also immense and require high level of technology.
It is for this reason that Saudi Arabia must encourage more in-kingdom business to help create independence in every industry. Currently, JGC Gulf has to rely on JGC Japan to supply most of the IT requirements of its design and construction projects. The company needs to compute infrastructure to allow for more of automated management systems.
Communication Style
Quoting Bowen (2007), “differences in communication styles can often be a cultural challenge and as a result, international organizations doing business in Saudi Arabia without adequate briefing may often find themselves feeling confused and frustrated”. JGC has to import most of its human resources, especially in the engineering division.
A majority of its engineers are Japanese and depending on the technicalities of a project, the company gets experts from America and Europe. Since the majority of Saudi Arabians speak Arabic, communication is a significant challenge for the company.
The country’s communication style is different from that in most parts of the world. It tends to be quite indirect and may make it hard for a foreigner to understand. People in Saudi Arabia tend to use body language and change of tone to communicate. In a professional setting, this may make it hard to communicate details or lead to mis-communication.
Religion
Religion plays a significant role in every area of life in Saudi Arabia. It influences the way people relate, the way business deals are made, and the way employees are treated. The country’s regulations and policies are based on the Sharia law.
As a result, businesses are expected to adhere to specific customs and social duties as dictated by the Islam. It is important for an investor in the country to take time and reach to Islam to ensure a proper co-existence between the business and the people. Ignorance to the Islamic way of life could damage a business’ relationship with employees, suppliers and its clients.
Labor
Engineering, Procurement and Construction are all areas that are heavily dependent on the availability of casual and manual labor. The size of projects being set up in Saudi Arabia requires a large number of employees for timely completion. Most Mega projects in the region have had their completion dates delayed due to a number of factors, the most common being a shortage of labor.
This situation is expected to ease with increased population rate, but this could take a while. The country has put in place measures to attract foreigners that work in different fields, but this has not totally eased the situation.
JGC Gulf’s costs of operation are still high due to the need to import most of their professional labor. Most foreigners working for the company have to be paid in foreign currency, a situation that could make it hard to predict labor costs due to fluctuating currencies.
Competition
Competition in the region could lead to a saturated market. Operating fully in Saudi Arabia makes it hard for the business to diverse to other markets due to logistical and transportation challenges. The business is put under pressure to perform and maintain profitability in one region when they set up full operations in a country. JGC gulf, currently, still faces competition from Korean and Chinese contractors.
The Chinese make it particularly hard since they are able to source materials from their country for cheaper prices. IK/OOK-EPC business model would allow JGC to diversify its markets more easily without having to incur the costs of relocating some of the resources from the region.
JGC Gulf’s strategy
JGC has a good reputation in the Middle East dating back to the 1960. The company has in the past been awarded some of the biggest oil projects to be completed in Saudi Arabia. In 2004, the company was awarded the engineering, procurement, and construction contract for one of the biggest styrene plants in the region. The integrated facility was completed at Al Jubail in just three years.
The project which is owned by Saudi Industrial Investment and Chevron Philips Petrochemical Company Limited exposed JGC to other major projects since the owners are big stakeholders in the oil and petrochemical industry in Saudi Arabia. JGC was responsible for handling the fractionating columns, crackers, process units and associated infrastructure and utilities.
“JGC Arabia has a strong background in lump-sum tunkey operations of both hydrocarbon and non-hydrocarbon related projects with annual sales of approximately US$billion” (JGC, 2011). The company has earned itself a reputation as a reliable, consistent company, with the ability to manage extremely projects and deliver quality.
After awarding the project to JGC, Chevron Phillips Company’s CEO is quoted as saying that“ the company was selected on the basis of its project execution capabilities and due to its record of successful completion of large-scale petrochemical projects in the Middle East, especially in Saudi Arabia” (JGC, 2011).
Other outstanding projects completed by the company include one for Saudi Aramco, another major stakeholder in the region, the Haradh gas plant and the Hawiyah gas plant, both among the biggest gas plants in Saudi Arabia.
On-going projects in Saudi Arabia include the Hawiyah NGL and the Manifa crude oil processing plant in the oil and gas sector. In the petrochemical and chemical industry, the company has three projects to complete namely Rabigh, Jubail Chevron Phillips Petrochemicals (JCP) and Narmada Chematur Petrochemicals Ltd. (NCP).
Swot Analysis and Risk Zones
Industrial diversification (survival, safe zones)
Strengths
JGC’s experience in the EPC business is a key strength. JGC International has been in existent for the almost 100 years. JGC Gulf, which was established almost four years ago can use the mother company’s experience to gain clients’ evidence.
Another strength is the company’s good reputation in the region, putting it in a more advantageous position than its competitors. A significant strength for the company is its financial status. JGC’s profitability since its establishment puts is in a better position to influence the market trends.
Weaknesses
The company lacks a well defined strategy to deal with stiff competition in the country today. Competition in the region could lead to a saturated market. JGC gulf, currently, still faces competition from Korean and Chinese contractors. The Chinese make it particularly hard since they are able to source materials from their country for cheaper prices.
IK/OOK-EPC business model would allow JGC to diversify its markets more easily without having to incur the costs of relocating some of the resources from the region. The company also lacks a human resource development program. Easy access to experts from other countries leaves the business reluctant to develop human resources skills in the local communities.
Opportunities
The company has an opportunity to create new value in line with its customers’ needs while reinforcing their competitiveness as the best EPC company in Saudi Arabia. This will further allow it to create a new wave of growth in other areas of their business.
The market environment in the hydrocarbon engineering, procurement and construction sector in Saudi Arabia is expected to remain positive in future. However, this will depend with the company’s ability to manage competition, which is one of its biggest threats. Among the most significant competitors include Koreans and Chinese.
The other opportunity for JGC Arabia arises from the fact that the non-hydrocarbon sectors in Saudi Arabia are steadily expanding. This offers the company a more diverse market.
In an effort to encourage more in-kingdom businesses in the country, the government of Saudi Arabia is growing the social infrastructure investment such as power, water and transportation into a massive market. Such development offer promising developments in the hydrocarbon EPC sector for JGC Arabia.
Southeast and Central Asia have registered vibrant economies in the recent past. JGC Arabia is strategically located to benefit from any oil and petrochemical EPC in the regions. These areas are particularly focused on social infrastructure and capital investment. This further creates a more vibrant economy that would benefit JGC Arab.
Threats
Operating fully in Saudi Arabia makes it hard for the business to diverse to other markets due to logistical and transportation challenges. The business is put under pressure to perform and maintain profitability in one region when they set up full operations in a country. Increasing levels of competition further threatens the company’s future profitability trends.
Strategies
Some of the strategies that have worked for the company include;
The mother company’s experience
JGC Gulf has used the experience of the mother company to develop its business model in Saudi Arabia. Being in existent since 1928, the mother company has completed enough projects to prove its business model. When JGC gulf was established in 2008, most senior positions in the business were assigned to people who had been working in JGC Japan.
This has helped the company retain high quality products and services to its clients, even as a new and young company. Furthermore, the company had enough financial support from JGC International. This has enabled the business to take a shorter period of time to settle down and develop a strong business foundation for itself.
Understanding The Nature Of The Customer
The intensity of customer analysis carried out by JGC is influenced by customer’s characteristics. Most of these characteristics, as identified by the company, are; degree of sophistication, degree to which they understand their future requirements, and rate at which their expectations and needs are changing.
As Monden (2000) explains “these three characteristics appear to help determine the benefits that a firm can potentially derive from target costing because they deal with the width, rate of change of location, and ease of predicting the location of survival zones”.
Understanding the customers is particularly beneficial to businesses whose competing environments have smaller survival zones. Locations with such zones are changing rapidly, and businesses need to stay constantly updated on the changes.
Understanding customer satisfaction has enabled JGC to know how sensitive its customers are to differences in functionality, price and quality among other parameters of products in the market.
The more sophisticated a customer is, the more they are likely to detect the smallest on differences in competitive products. The EPC industry requires a deep understanding of target customers through constant interaction, surveys and feedback. In the process of doing so, the business is able to satisfy its customers by having products custom made to meet their needs.
“The rate at which customer requirements change defines how rapidly the location of survival zones moves over time” (Monden, 2000). The process of understanding the requirements over a long period allows JGC Gulf to develop a pattern that can be used to predict customers’ future needs. An analysis of customers’ needs is therefore a practice that can be used to develop products that keep a business ahead of others.
It is also easy for JGC Gulf to schedule changes early and avoid producing products that may be considered already irrelevant in the market. When consumer expectations and requirements are stable, businesses have a tendency to relax on innovations. However, the opposite happens, they are forced to expend significant amounts of resources and effort to understand and predict customers’ needs.
It is such situations that have led to constant innovations in the market, and more profitability for the most creative companies. Companies which are able to keep up with the new developments in the market such as JGC have remained profitable, even during the recent global economic crisis.
This proves how important understanding customers’ needs can be to a business. It supports JGC gulf through a need to predict the needs of their clients in order to achieve the best cost for the products before they are needed and released to the market.
Opportunities
The company has an opportunity to create new value in line with its customers’ needs while reinforcing their competitiveness as the best EPC Company in Saudi Arabia. This will further allow it to create a new wave of growth in other areas of their business.
The market environment in the hydrocarbon Engineering, Procurement and Construction sector in Saudi Arabia is expected to remain positive in future. However, this will depend on the company’s ability to manage competition, which is one of its biggest threats among the most significant competitors including Koreans and Chinese.
The other opportunity for JGC Gulf arises from the fact that the non-hydrocarbon sectors in Saudi Arabia are steadily expanding. This offers the company a more diverse market. In an effort to encourage more in-kingdom businesses in the country, the government of Saudi Arabia is growing the social infrastructure investment such as power, water and transportation into a massive market.
Such development offer promising developments in the hydrocarbon EPC sector for JGC Gulf.Southeast and Central Asia have registered vibrant economies in the recent past. JGC Gulf is strategically located to benefit from any oil and petrochemical EPC in the regions. These areas are particularly focused on social infrastructure and capital investment. This further creates a more vibrant economy that would benefit JGC Gulf.
Succeeding As An Ik-Epc Company
Proactive Approach To Cost Management
Understanding costs and profitability allows businesses to take a proactive approach to cost management. Traditionally, businesses manage costs when a product is already finished. Direct costs, which make up more than half the cost of a product, remain a challenge to many investors.
Target costing as has been evident in many Japanese businesses such JGC international can help a business manage costs by cutting on it at the design level. By having a set cost of production, a business is able to have control of their profitability. A proactive approach reduces speculation and yet makes it possible to approximate profits.
Orienting A Business Towards Clients
In such a competitive field, it is important for a business to orient itself towards its clients. The size of projects managed by JGC means that losing one client could means significant losses for the business. Furthermore, more EPC companies continue to register a presence in the country, leading to a high level of competition.
Orienting a business towards clients ensures that a business knows what to expect from the customers, as well as what is expected from them. Since the EPC industry is very much dependent on survival zones, a business is forced to understand its customers comprehensively.
This includes their needs, expectations and spending trends, among others. It further forces a business to understand its competitors, strengths and weaknesses. This kind of knowledge and market understanding empowers a business to design and offer services that are needed in the market. Chances of being in the low survival zones are reduced and profitability soars.
Breaks Down Barriers Between Investors And Locals
For a business to succeed in any foreign country, it is important that it establishes a healthy relationship with the locals. Understanding the market can only be done through feedback. A good relationship with local employees, clients, financial institutions and even the government ensures that a business has access to genuine feedback from different stakeholders.
The government of Saudi Arabia plays a significant role in ensuring that foreign investors are accorded all the support that they need. Furthermore, it is only through improved relationships that a company will be able to access the best labor in the market.
Having Synchronized Departments
The design and production of a product in EPC field is very dependent on the logistics, purchasing, human resource, production, and quality department (Carrillo, 2005). These departments are responsible for ensuring availability of raw materials, how they are managed, designed and how the final product looks like as well as how much it costs.
Working together in the initial stages of a product keeps the department and their activities synchronized. When products are out in the market, managing them is an easier task since every department is well conversant with its strengths and weaknesses.
Profitability And Feasibility
According to the company’s fiscal 2011 first half results, “increasing demand for energy in emerging countries and population expansion in resource-rich nations are major drives for the business’ profitability” (JGC, 2011b). In the first half of this financial year, JGC international received orders worth over 128 billion Japanese Yens (1.65 billion US Dollars).
JGC Gulf has received two major contracts this year both in Rabigh for the Joint Venture of Saudi Aramco and Sumitomo Chemical Company. The tenders have already been issued but the business still faces challenges from Korean investors. The business aims to achieve target-consolidated orders of over $300millon by receiving the above projects as well as other small and mid-sized projects in the Middle East.
Profitability in the company has been greatly affected by the European financial crisis as fears of global slowdown become more real. Project plans in Saudi Arabia are designed to meet domestic energy demands in the region, and other countries where it exports. The European debt crisis is expected to significantly affect projects.
Another significant factor as the business works to improve profitability is democracy movements in Saudi Arabia, which has in the past more or less subsided. Nuclear energy and its development in Saudi Arabia will play as significant role in the company’s profitability.
Currently in Saudi Arabia, natural gas is used as an alternative. The development of more renewable energy sources will cut, which means more projects for the company, as well as reduced costs of energy.
In its recently released report, the company observes that there is a good overall progress in all its projects being carried out by JGC Gulf, there is a stable market for equipment, material and labor, and a general improvement in the company’s management capability. The company’s plan for the second year targets a continued identification of investment and infrastructure such as resource development.
Conclusion
“Saudi Arabia is one of only a few fast-growing countries in the world with a relatively high per capita income of $24,200 in 2010. The country will be launching six “economic cities” which are planned to be completed by 2020” (Bowen, 2007).
This study was aimed at exploring the relocation of JGC’s Engineering services to the Kingdom of Saudi Arabia and its effect on the costs, and the development of the local expertise, through the execution of Engineering, Procurement, and Construction “EPC” major projects in the Kingdom. The region offers several advantages and to JGC. Urbanization offers the company a significant opportunity.
It translates into more demand for petroleum and gas products. If the company is able to place itself strategically, the global markets offer a significant opportunity. The whole Middle East is expanding and offers JGC a bigger market to venture into.
The expansion of the global markets results in demand increase for the company’s products and services in the petroleum industry. A stable economy offers the company a significant strength. Saudi Arabia’s economy is considered among the most vibrant the world. It was among the first to recover after the global crisis, proving its level of stability.
Having an IK-EPC company further comes with more challenges. Key among them for JGC include lack of professional labor, cultural differences, communication and religion policies which an investor has to adhere to.
Due to stiff competition developing in the country, costing has become a significant factor for investors. As explained by Bragg (2010), “all the costing processes documented contain three major steps, market driven costing, product-level costing, and component-level costing”. The input and desired results may vary depending with the number of factors influencing the process.
The cost and complexity of achieving the desired results many further vary with the industry, level of expertise, and different market trends in the industry. A product’s characteristics further play a significant role in determining how the target will be achieved.
Despite all the above explained challenges, an in-kingdom business model for JGC has major benefits to the country and the business.
They include an improved economy due to increased economic activity in the country. JGC on the other hand benefits from a stable and healthy economy and demographic patterns that provide a more vibrant workforce. JGC Gulf Corporation needs to take advantage of these benefits to improve profitability, as well counter the challenges that may arise from being an IK-EPC company.
Reccomendations
EPC in the oil and petrochemical industry is getting very competitive. JGC faces stiff competition especially from the Koreans and Chinese. The Chinese have the advantage of accessing most of the products at a cheaper price from their country.
Increasing competitiveness therefore has to focus on the issue of cost. The company has in the last few years drastically improved its cost competitiveness to increase its business and market base in the oil and petrochemical sector. Having competitive prices makes the company attractive to more clients including the small and upcoming players.
Depending on the risks that arise from the market, the level of diversification required, and risks involved, the most suitable business model management strategy for JGC Gulf should be comprehensive and long term to ensure preparedness.
Formulating a strategy should involve selection of designs after a fundamental and comprehensive analysis of parameters the company’s products are interested in focusing on (Weygand, Donald and Paul, 2010). In the oil and petrochemical EPC industry, the company should focus on the reliability, durability, ease of the product’s usage and uniqueness.
Execution will play a significant part of the plan. Just like any other investment management, a business model management requires constant revision and evaluation. Changes in the price of inputs automatically change the value of a product in the market (Bragg, 2010). Changes in a country’s regulations and policies affect how processes are implemented.
Any possible changes in a market will affect a business and must be put into consideration. This calls for regular changes on the investment plan to take care of fluctuations. Change of the business model or implementation may be necessary.
Evaluation should be done from time to time to determine what is working and what is not. Like Monden (2000) explains, “it helps the investor to realize if the strategy’s returns are in proportion with its risk exposure”.
Reference List
Ammari, S.S., 2008. Saudi Arabia real estate market set to grow significantly over next years, says Jones Lang LaSalle. Web.
Bowen, Wayne H. (2007). The history of Saudi Arabia. New York: Routledge Publishers.
Bragg, S., 2010. Business ratios and formulas: A comprehensive guide. Hoboken, N.J.: Wiley.
Carrillo, P., 2005. Lessons learned practices in the engineering, procurement and construction sector”. Engineering, Construction and Architectural Management, 12 (3), pp.236-250.
Central Intelligence Agency, 2011. The world factbook: Saudi Arabia. Web.
EDC. (2011). Saudi Arabia. Web.
Energy Information Administration (2009). World proved reserves of oil and natural gas: Most recent estimates. Web.
JGC, 2011b. Business overview: Fiscal 2011 first half results briefing. Web.
JGC, 2011. Company profile. Web.
Monden, Y., 2000. Japanese cost management. London: Imperial College Press.
Weygand, J.J., Donald, E.K. and Paul, D.K., 2010. Managerial accounting: Tools for business decision making. Hoboken, NJ: Wiley.