Potential Impact of the WTO on by r5uhfBp

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									                           CEM520 Construction Contracting & Administration




          Potential Impact of WTO on
           Saudi Construction Firms

               Presented By Group 1:
                     Ali Al Otaibi
                Muhammad Faisal Siddiqui
                    Ali K. Al Fardan
                     Sami Murtada



May 22, 2007
                              CEM520 Construction Contracting & Administration



   Presentation Outline
         Introduction
         Literature Review
        Research Methodology & Design
        Research Results
        Proposed Strategy
        Conclusion
        Recommendations
        Thesis Critiques




May 22, 2007
                                         CEM520 Construction Contracting & Administration



     Introduction
     The World trade Organization (WTO) is an international organization
      positioned at Geneva, Switzerland, and it was set up in 1995,

     WTO was replacing another international organization known as the General
      Agreement on Tariffs and Trade (GATT). GATT was formed in 1948 when
      23 countries signed an agreement to reduce customs tariffs.

     The WTO has a much broader scope than GATT. Whereas GATT regulated
      trade in merchandise goods, the WTO also covers trade in services, such as
      telecommunications and banking, and other issues such as intellectual
      property rights.

     Membership of the WTO now stands at 150 countries.




May 22, 2007
                                           CEM520 Construction Contracting & Administration



  Saudi Arabia became WTO membership to 149

    • On 11 December 2005; Saudi Arabia becomes the 149th Member of the
      WTO. It is the world's 13th largest merchandise exporter and the 23rd largest
      importer.

    • The Saudi construction firms will be braced with new opportunities and
      challenges. GATS Framework of Liberalization (GFOL) is expected to bring
      both disadvantages and advantages for the large Saudi construction firms.

    • For instance, it allows overseas firm’s access to the domestic market, but on
      the other hand, it opens opportunities for domestic firms in overseas markets.




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                                            CEM520 Construction Contracting & Administration



  Objectives of the Research

    The specific objectives of this research are:

    • To explore features of the WTO and the GATS which are likely to impact the
      Saudi construction industry
    • To investigate the impact of the economic globalization and GATS
      Framework of Liberalization (GFOL)
    • To discuss the pertinent issues identified and synthesize appropriate
      conclusions
    • To identify the suitable strategies for Saudi construction firms in the WTO
      environment
    • To recommend areas of further research




May 22, 2007
                                CEM520 Construction Contracting & Administration



   Literature Outline
         Introduction & History
         WTO: Objectives & Functions
         Benefits of Joining WTO
         GATS
         WTO & Saudi Arabia
         Case Studies of Oman & UAE
         SWOT
            External Factors
            Internal Factors




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                                                     CEM520 Construction Contracting & Administration



   Introduction & History
       WTO History & Definition
                WTO Short for World Trade Organization

                During research = 148 Member Countries

                “Covers Rules of Trade in Goods, Services & Intellectual Properties under one (1)

               umbrella”


       Primary Agreements Forming WTO
                General Agreements on Tariffs and Trade (GATT)

                General Agreements on Trade in Services (GATS)

                Trade-Related Intellectual Property Rights (TRIPS)

                Agreement on Dispute Settlement Procedure (DSP)


May 22, 2007
                                                     CEM520 Construction Contracting & Administration



   WTO Objectives & Functions
       Objectives:
           Promote free and fair Trading Environment
           Help trade flow smoothly, freely, fairly & predictability via sustained & imposed
            provisions of trade laws and conventions
           Ascertain complete employment
           Increase living standards of people


       Functions:
              Administering shared and mutually gainful trade agreements
              Acting as Trade Negotiations Central
              Settling trade conflicts
              Reviewing national trade policies
              Expanding trade in goods and services
              Cooperating with the other international organizations like World Bank etc.
              Assisting developing countries in trade policy issues thru technical assistance &
               training programs.



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                                          CEM520 Construction Contracting & Administration



   Benefits of Joining WTO
       General Benefits of Joining WTO/GATS
           Inspiration of economic growth and national incomes
           Appropriate settlement of trade disputes and peace among
            trading nations
           More choices for products/services and qualities for users
           Greater certainty and clarity about the trading conditions
           Technology and managerial skill transfer
           Greater transparency and predictability
           Reduced costs of living for general public
           Reduced corruptions
           Faster innovations




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                                                CEM520 Construction Contracting & Administration



   GATS
       GATS
              Premier set of multilateral and legally enforceable rules that cover
               global trade in services including C&RE services
              All WTO Members must sign GATS Agreement too


       GATS Main Objectives
              Assuring transparency and predictability of rules and conventions
               concerning the trade in services
              Acting as a body for reciprocal trade negotiations and enforcement of
               trade agreements
              Maintaining progressively higher level of liberalization
              Bring down the principles of Most-Favored-Nation and National
               Treatment
              Continuing the economic growth of all trading partners
              Protecting the development of developing countries



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                                                           CEM520 Construction Contracting & Administration



   GATS
       GATS Services Classification
              12 Core Economy Sectors & 160 sub-sectors
              All WTO Members must present their schedule of specific commitments for each of these
               twelve (12) service sectors which includes C&RE service
              Since GATS comply with United Nation’s (UN) Central Product Classification (CPC)
               series, C&RE service is further classified into nine (9) groups (CPC 515-518 and CPC 8671
               – 8674) as follows:
                   Construction & Related Engineering service division into nine(9) groups as per UN-CPC
                   S#    CPC Codes                       Group Name
                   1     CPC 512                         General Construction Work for Buildings
                   2     CPC 513                         General Construction Work for Civil Engineering
                   3     CPC 514, CPC 515                Installation and Assembly Work
                   4     CPC 517                         Building Completion and Finishing Work
                   5     CPC 511, CPC 515, CPC 518       Other Construction Services
                   6     CPC 8671                        Architectural Services
                   7     CPC 8672                        Engineering Services
                   8     CPC 8673                        Integrated Engineering Services
                   9     CPC 8674                        Urban Planning &Landscape Architectural Services


May 22, 2007
                                                   CEM520 Construction Contracting & Administration



   WTO & Saudi Arabia
       Impact of WTO on Saudi Construction Firms:
                No custom duties on construction materials, equipments, machineries,
                 tools and plants
                Restriction for foreign construction-related firms to own only minority
                 shares (less than 5 %) in KSA
                Plots of lands for the domestic construction firms are provided on
                 nominal rates for individual projects and developments
                Low rates of utility services (electricity, water, etc.) for domestic firms

       Economic & Legal Reforms in KSA:
                  Establishment of a supreme economic council
                  Opening of stock market to foreign investors
                  Privatization of several vital sectors like power, telecom etc.
                  Approval of a new Foreign Direct Investment Law
                  Approval of a new Saudi Labor Law
                  Amendment of real estate law to allow foreign ownership


May 22, 2007
                                                             CEM520 Construction Contracting & Administration



   Case Studies of Oman & UAE
      Oman’s Experience:

              KSA & Oman Commonalities:
                Both are members of
                               Arab Monetary Fund (AMF)
                               Gulf Co-operation Council (GCC)
                               Arab League
                               Organization of Arab Petroleum Exporting Countries (OAPEC)

              Budgeted Construction Spending (2001 – 05):     Oman’s Schedule of Specific Commitments under GFOL
          S     Ongoing Projects (2001 –   Allocated                   Sector         Limitations on       Limitations on
          #     2005)                      Funds                                      Market Access           National
                                                                                                             Treatment
          1     Low Cost Public Housing    US$ 42 Million
                                                                     Construction   Mode I: None          Mode I: None
          2     Utilities and Municipal    US$ 650 Million           and Related    Mode II: None         Mode II: None
                Services                                             Engineering    Mode III: None        Mode III: None
                                                                      Services      Mode IV: Unbound      Mode IV:
          3     The Palace                 US$ 210 Million
                                                                                    (except as            Unbound (except
          4     Road Building              US$ 380 Million                          indicated in the      as indicated in the
                                                                                    horizontal section)   horizontal section)
          5     Total Spending on          US$ 1282
                Construction               Million

May 22, 2007
                                                                    CEM520 Construction Contracting & Administration



   Case Studies of Oman & UAE
      UAE’s Experience:

       Recent Trends of UAE Construction Sector:
                  GDP Contribution
                              15 to 16 Thousand Million UAE Dirham
                              7 to 10% of UAE National GDP
                  Construction Sector Employment in UAE = Approx. 250,000 – 300,000
                   Employees (17 to 19% of total UAE Workers)

              Key Facts about UAE Construction Market:               UAE’s Schedule of Specific Commitments under GFOL
                            Key Facts                  Remarks              Sector         Limitations on         Limitations on
                                                                                           Market Access             National
                                                      $15 billion                                                   Treatment
               Size of Construction Market            (Approx.)
                                                                                         Mode I: None           Mode I: None
               GDP Contribution                       7-10%                              Mode II: None          Mode II: None
                                                                          Construction
                                                                                         Mode III: None         Mode III: None
                                                      $3 billion          and Related
               Cost of building projects (first six                                      Mode IV: Unbound       (except as indicated
                                                                          Engineering
               mon. of 2002)                                                             (except as indicated   in the horizontal
                                                                           Services
                                                                                         in the horizontal      section)
               No. of multi-story building projects   337                                section)
               under construction in 2004.

May 22, 2007
                                         CEM520 Construction Contracting & Administration



   SWOT Analysis

                Objective: Gain better understanding of Strengths,
                 Weaknesses, Opportunities & Threats (SWOT) in
                 case of WTO

                Definition: “A structured approach that helps
                 strategists to imagine systemically about strategic
                 issues”

                Strength & Weaknesses = Internal Factors

                Opportunities & Threats = External Factors




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                                                              CEM520 Construction Contracting & Administration



   SWOT Analysis
      Typical SWOT Matrix:
                               Internal Factors     Strengths (S)             Weaknesses (W)


                           External Factors

                                                    “S-O” Strategies           “W-O” Strategies
                                                    Generate Strategies     Generate Strategies here
                                                  here that use strengths    that take advantage of
                           Opportunities (O)       to take advantage of         opportunities by
                                                       opportunities        overcoming weaknesses


                               Threats (T)           “T-S” Strategy              “W-T” Strategy
                                                   Generate strategies       Generate strategies here
                                                  here that use strengths   that minimize weaknesses
                                                     to avoid threats            and avoid threats



               The first cell (S-O strategies cell) shows opportunities that are a good fit
                to the organization strengths
               The second cell (W-O strategies cell) overcomes weaknesses to pursue
                opportunities
               The third cell (S-T strategies cell) identifies ways that the organization
                can use its strengths to reduce its vulnerability to external threats
               The fourth cell (W-T strategies cell) establishes a defensive plan to
                prevent the organization weaknesses from making it highly susceptible to
                external threats
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                                                  CEM520 Construction Contracting & Administration



   SWOT Analysis
       Three major steps in SWOT Analysis:
                                             SWOT Analysis




                  Analysis of Internal Factors           Analysis of External Factors




                                       Proposing SWOT Strategies




       Step1: Analysis of Internal Factors:
                Strengths & Weaknesses Analysis
                Is used to separates strengths and weaknesses of a firm and to assess
                 their internal capabilities
                The criteria for determining the firm’s strengths and weaknesses
                 should be in comparison with existing as well as impending key
                 players
May 22, 2007
                                                 CEM520 Construction Contracting & Administration



   SWOT Analysis
       Step2: Analysis of External Factors:
                  Opportunities and Threats Analysis
                  Aims at revealing the external factors due to the prospective
                   environmental changes (Saudi Arabia joining the WTO in this case) that
                   forces the firms to alter their strategies.
                  For instance, the imminent GFOL in Saudi Arabia would alter the way
                   the Saudi construction firms do business today and would create a
                   standard shift.

       Step3: Proposing SWOT Strategies:
                  Matching Internal & External Factors
                Carried out once the consensus is reached concerning the
                 contemporary strengths, weaknesses, opportunities, and threats
                This stage of strategies formulation needs brainstorming among
                 the concerned people.



May 22, 2007
                                                                CEM520 Construction Contracting & Administration



   External Factors
    Some relevant features of GFOL are listed, with their Article Reference number in GATS, in the
    following twenty two (22) points:

     S#            GATS Features/External Factors                   S#             GATS Features/External Factors

      1   Most-Favored-Nation (MFN) Treatment (Article II)          12   Government Procurement Agreements (Article XIII)

      2   National Treatment (Article XII, XIV, XVI, XVII,          13   Trade Policy Reviews (Article III)
          and XXI)
                                                                    14   Electronic Commerce (Articles I, II, III, IV, VI, VII,
      3   Government Subsidies (Article XV)                              VIII, IX, XVI, XVII, GATS Basic Telecommunication
                                                                         agreements and the relevant Annex)
      4   Transparency (Article III & VI)

      5   Recognition (Article VII)                                 15   Increasing Participation of Developing Countries
                                                                         (Article IV)
      6   Progressive Liberalization (Articles XIX, XX, and
          XXI)                                                      16   Domestic Regulation (Article VI, XVI, and XVII)

      7   Specific Commitments (Articles XV, XVII, XIX, XX,         17   Business Practices (Article IX)
          and XXI)
      8   Horizontal Commitments (Article II, III, IV, and V)       18   General and Security Exceptions (Article XVI)

                                                                    19   Technical Cooperation (Article XXV)
      9   Additional Commitments (Article XVIII)
                                                                    20   Emergency Safeguard Measures (Article X)
     10   International Payments and Money Transfers (Article
          XI &XII)
                                                                    21   Market Access (Article XVI)
     11   Dispute Settlement and Enforcement (Article XXIII)
                                                                    22   Others (Economic Globalization)



May 22, 2007
                                                     CEM520 Construction Contracting & Administration



   Internal Factors
      From the review of literature, twenty-six (26) Internal Factors that might constitute
      the strengths or weaknesses of construction firms are identified in the following 26 points:
       S#                   Internal Factors
                                                                             Internal Factors
                                                     S#
                                                                                 (contd…)
        1      Financial resources

        2      Technological capabilities            14   Government policies
        3      Managerial capabilities               15   Procurement management

        4      Organizational structure              16   Production efficiency

        5      Plant and equipment management        17   Strategic planning
                                                     18   Training/retraining
        6      Suppliers selection
                                                     19   Clients relations
        7      Products/services quality
                                                     20   Experience
        8      Human resources
                                                     21   Strategic alliances (locally)
        9      Marketing skills
                                                     22   Joint ventures (overseas)
        10     Innovation in services
                                                     23   Utilization of IT
        11     Global operations
                                                     24   Information systems and knowledge acquisition
        12     R&D activities                        25   Size of the firm
        13     Market shares                         26   Related and supporting industries


May 22, 2007
                                                 CEM520 Construction Contracting & Administration



     Research Methodology
                              The main aim of this paper is to investigate what are
                              the important features of GFOL, assess the internal
                                factors of Saudi construction firms and propose
                                            some strategies for them


                                 The researcher utilized both quantitative and
                               qualitative methods to answer the statement of the
                                                    problem




                                                                          Qualitative
               Quantitative


      Survey results of internal factors                   Interpretation from the Literature

May 22, 2007
                      CEM520 Construction Contracting & Administration



     Research Methodology




May 22, 2007
                                   CEM520 Construction Contracting & Administration



     Results & Discussion
         • The aim of this part of the thesis is to assesses the
           internal factors (strengths/weaknesses) of the Saudi
           construction firms
         • A survey and quantitative method were used
         • Frequency distribution of the responses was used to
           determine both the level of the status of the internal
           factor in Saudi construction firms and what does it
           represent
         • A matrix of two dimensions has been used that result in
           9 possible cells




May 22, 2007
                         CEM520 Construction Contracting & Administration



     Analysis Criteria




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May 22, 2007
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     Survey Results




May 22, 2007
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     Survey Results
        • On the other hand there was a low level of agreement
               among the respondents about the other internal factors.
               This has two main implications
               • It indicates a high level of uncertainty of the Saudi construction
                  business in working under the WTO environment

               • It curtails the development of a comprehensive strategic plan for
                  the Saudi construction industry in the WTO business
                  environment



May 22, 2007
                                    CEM520 Construction Contracting & Administration



     The Proposed Strategies Outline


         – The SWOT Strategies Matrix of Saudi Construction
           Firms.

         – The general strategies and the proposed strategies.

         – Applying the proposed strategies to major weakness
           factors in Saudi construction firms.




May 22, 2007
                      CEM520 Construction Contracting & Administration



     SWOT Strategies Matrix




May 22, 2007
                                           CEM520 Construction Contracting & Administration



     Proposed Strategies

         – Proactive Strategies: Strengthening the weakness to reap the benefits of
           Saudi Arabia joining the WTO.

         – Defensive Strategies: To defend locally in the post- WTO scenarios by
           minimizing the exposure to weaknesses.


    • The proactive & defensive strategies are generated by
      combining two or more from the following strategies:




May 22, 2007
                                               CEM520 Construction Contracting & Administration


   General Strategies
  1) Concentrated Growth (specialization in and targeting on selected markets & product /
         services).
  2) Market Development (adding new markets for the range of services).
  3) Product and Services (modification or improvement in existing product / services)
  4) Innovation (offering new alternative for existing product / services).
  5) Horizontal Integration (acquisition of firms with the same product / services).
  6) Vertical Integration (acquisition of suppliers and / or users organization).
  7) Joint ventures.
  8) Concentric Diversification (acquisition of business with specific intention to improve
         weakness or exploiting contemporary strengths).
  9) Conglomerate Diversification (acquisition discrete firms).
  10) Retrenchment (reducing assets or scale of activities).
  11) Divestiture (closing or selling parts of the firm).
  12) Liquidation (step-by- step closure of the business).
  13) Monopolization (protection of present markets).
  14) Cost leadership (cost reduction of product / services).
  15) Differentiation (offering special value to the customer through distinguished quality and
         performance).
May 22, 2007
                                                             CEM520 Construction Contracting & Administration


    Proposed Strategies to Overcome Weakness Factors
       Weaknesses Factor              Proactive Strategies                  Defensive Strategies
          1) Innovation in Services   Making joint venture, product &       Concentrating growth, Product or Service
                                          service development.                  Development


       2) Global Operation            Market development.                   Concentrating growth, Retrenchment, cost
                                                                                leadership or Divestiture,


       3) R&D Activities              Making joint venture, Concentric      Concentrating growth, Market development.
                                          diversification and support
                                          construction research in Saudi
                                          universities.


       4) Strategic Planning          Concentrating growth                  Strategic Planning is unavoidable which mean
                                                                                  there is no defensive strategy.

       5) Training / Retraining       Some important areas where            Defensive strategies are no applicable.
             Activities.                   construction personnel must be
                                           trained:
                                      a) Problems solving & decision
                                           making.
                                      b) Job management
                                      c) Performance analysis
                                      d) TQM & continuous improving.
                                      e) Business/Engineering
                                           Economics.
                                      Beside the on job training



May 22, 2007
                                                                  CEM520 Construction Contracting & Administration


   Proposed Strategies to Overcome Weakness Factors
     Weaknesses Factor     Proactive Strategies                                      Defensive Strategies
     6) Joint Venture      Making joint ventures wherein technology/                 Concentrated growth, Products/services
                                organizational capability can diffuse gradually          development, Retrenchment, and
                                over time to move over ultimately to a time              defending locally by making strategic
                                bound plan into a stand alone accomplished               alliance with local firms.
                                entity.
                           Saudi construction firms need to obtain ISO 9000 or
                                equivalent certification to attract the potential
                                joint venture partners, minimize the operational
                                difference through possession of similar
                                processes & systems.
     7) IT Utilization     using IT models such as 3D during conceptual design       Retrenchment, Divestiture, and Concentrated
                                phase, web-based information system for                   growth.
                                construction project management to facilitate
                                data exchange among concerned project
                                members during different phases of construction,
                                online construction negotiation
     8) Information Sys.   IT infrastructure in term of computing facilities,        Retrenchment, Divestiture, and Concentrated
           & Knowledge           internet, and intranet. Using an e-business model        growth.
           Acquisition           to sustain supply chain dealing in construction.
                                 Common database.
                           Making joint venture agreements with local and global
                                 giants. Acquisition information by utilizing:
                           a) Electronic catalogs.
                           b) Online learning.
                           c) Online tendering.
                           d) Virtual marketing.




May 22, 2007
                                    CEM520 Construction Contracting & Administration



     Conclusion

    • GFOL is a double-edged sword for the large Saudi construction
      firms.

    • Kingdoms’ entry into the WTO endow the large Saudi
      construction firms with the overseas opportunities in the 150
      member countries,

    • The large Saudi construction firms are not prepared enough to
      compete with the potential international competitors in the
      WTO.




May 22, 2007
                                            CEM520 Construction Contracting & Administration



        Recommendations
    Based on what has been presented in this study, the following are recommended:

    •      Saudi construction firms need to develop and adopt a culture of strategic
           planning/thinking.

    •      Saudi construction firms need to assess themselves with respect to all the
           twenty-six factors discussed and surveyed in this study.

    •      Saudi construction firms must address the issues raised in this study
           properly so as either to improve or avoid being exposed to their obvious
           weaknesses such as innovation in services, global operations and so.




May 22, 2007
                                          CEM520 Construction Contracting & Administration



     Recommendations
    • Saudi construction industry and hence the professionals involved therein
      must develop a clear understanding of the WTO and GATS rules and
      obligations.

    • More interactions through meetings/seminars/conferences among
      construction and related engineering professionals.

    • Provide an initial medium for assessing the contemporary status of the large
      Saudi construction firms as compared to those of global giants.

    • Saudi construction firms must be flexible and in accordance with their
      mission, objectives, aligned suitably with contemporary internal and external
      environment as indicated in this study.




May 22, 2007
                            CEM520 Construction Contracting & Administration



     Thesis Critique
    • Sample size was small
    • Purposive sampling
    • Relationship among factors was ignored
    • Each Internal factor was treated independently
      when proposing strategies
    • Some strategies proposed to one internal factor
      are contradicting with others proposed for other
      internal factors



May 22, 2007
                   CEM520 Construction Contracting & Administration




               Questions

May 22, 2007

								
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