Clean drinking water is among the most prominent natural resources in the world. Its value is dictated by the laws of supply and demand, which are effected by geographic location, economic and social well being. After much research and development the Wilson Corporation has decided to undertake a direct foreign investment in Saudi Arabia. This project will pursue the lucrative opportunities in developing and implementing a desalination plant in Saudi Arabia?s Eastern Sea Port of Jubail, which is located next to the Red Sea.
The plant will be called Myraj desalination plant and will provide the highest quality bottled drinking water to the Eastern and Central Province?s. In order to avoid difficulties in implementing the Myraj project the Wilson Corporation will enter into a joint venture with Aramex Distributing Company. In entering into a joint venture, Wilson Corporation agrees to give up 25% share ownership in the Myraj project.
The decision to enter into a direct foreign investment was made on the basis that the Wilson Corporation wanted to maintain controlling interest over operations, avoid transport costs and trade restrictions.
This also allowed for a long-term investment that would acquire fixed assets such as land, equipment and buildings. Labor is also considered to be a key aspect because labor costs are substantially lower than in the United States. This is especially important considering Saudi Law requires that Saudi nationals make up 75% of a foreign company?s workforce (U.S. Department of Commerce 5). In the event a shortage of supply of skilled labors occurs, only 5% need be employed.
Most importantly, current water supplies are not meeting consumer demands (U.S. Saudi Arabian Business 1). This is crucial because Saudi Arabia consumers have strong buying power and are considered as being a young thriving population with 60 %of its population under the age of 25 (US Bureau 1-2). Another important aspect of Saudi Arabia is that it has a modern infrastructure and has been a secure and stable market for the last 15 years. (U.S. Saudi Arabian Business Council 3).
In order to accomplish this task with approved Saudi Arabian government support, a joint venture with Aramex was inevitably the best avenue. Saudi government tends to favorably look upon a joint venture with Saudi companies because it creates jobs and lures additional foreign investment. Some of the incentives include: tax holidays for ten years, custom tax exemption, low price electricity and natural resources, duty free capital equipment and most importantly government assistance in obtaining information and statistical data needed for this project (Dept. of Commerce 1-8). In addition to preferential treatment, Saudi government under a joint Venture readily supports a no tariff policy and low cost financing. Another key aspect was there were no personal income tax or restrictions on movement of funds, which is crucial in converting payment currencies to US dollars (Dept. of Commerce 1-4). Although Wilson Corporation gave up 25% share interest in the Myraj project it gains the support of the Saudi Government and incentives that are crucial for a swift beginning.
In researching which corporation to establish a joint venture, Wilson Corp. decided that Aramex Distribution Co. was the ideal choice because of its established reputation for superior distribution. It also was the first Arabian Corporation to be on the NASDAQ and has been established for 18 years. Aramex distribution Co. has a solid management staff, which helped generate over $100 million in sales in 2000. A joint venture is critical for Wilson Corporation because it not only alleviates the burden of distribution cost and concerns but also gains the knowledge and expertise in host country business practices. The knowledge and expertise shall prove invaluable in developing and maintaining market shares.
Wilson Corp and Aramex marketing department have decided that initial target market will be the Eastern and Central Regions, which make up half of Saudi Arabia?s major city populations (Council of Saudi Chambers 1-5). Cities in Eastern Province are centrally located near the Red Sea where the Myraj desalination plant will be built. The Eastern Province has an established modern infrastructure capable of handling the demands of the Myraj project (1-5). Also, over 45% of industrialized business are centrally located and many railroads are being built that will further enhance our distribution networks (Dept. of Commerce 11).
The Central Region contains high level of retailers, restaurants, and hotels and has a continually high growth rate (U.S. Saudi Arabian Business 1-6). Furthermore this region contains the capital of Riyadh which attracts many international investors. Lastly, this region is densely populated with high household incomes, which tend to have enormous purchasing power (1-6).
Wilson Marketing team has decided to packaged water in sizes of 16oz, 20oz, and 1 gallon plastic bottles. Saudi Arabia marketing research has shown that the public is very receptive to bright labels and Arab and English language (Dept. of Commerce 12-14). Our bottles will contain desalinated water and will display our mission statement, brand name and nutritional data. Wilson plastic bottles will have a bluish tint with a sky blue label. Wilson marketing team has assured the Wilson brothers that this is the most appealing color to Saudi consumers.
Marketing bottled water in Saudi Arabia will consist of using newspapers, magazines, television, billboards, and business exhibit centers. The majority of advertising will be in newspapers since Saudi businesses spent about 64% of advertising last year through this form of promotion (U.S. Saudi Arabian Business 1-6). The most popular newspapers are Al Hajat and Al Shark, which have circulations of about 70,000 to 100,000 (4). We will also advertise in magazines such as Al Wasat, Al Majallah and Al Yammah, which are all very popular. Television advertising is becoming popular and is mostly done on CNN, the Middle East Broadcasting Corporation (MBC), and Orbit Communications, which is a Saudi owned satellite company (U.S. Saudi Arabian Business 15-16). Advertising through billboards and exhibit centers is another way to successfully advertise. Saudi marketers have been successful advertising this way since it arouses the interests of people since they are very receptive to American products. We will also use personalized selling, word-of-mouth, and have promotional events. We will also have a website, www.myrajwater.com, which can be used by anyone to learn more about our water.
When deciding the prices of our water, we had to come up with a price that will attract the price sensitive Saudi consumers. To do this, we will offer an introductory price of 10% less than that of the average price of our competitors. We will offer vendor discounts to companies, which will encourage stores to carry our bottled water. Coupons will also be made available which will encourage consumers to save money. Price raises will also occur by 5% semiannually. This will be a gradual increase, which will not scare our customers. Saudi consumers are very price sensitive and not brand loyal, so gradual changes in price have to be made.
Our partner, Aramex, will handle all distribution of bottled water. Bottles will be packaged in quantities of 50 and 100 according to size. The Aramex fleet consists of trucks, trains, and boats that will deliver our water to various cities. We will also work with Aramex to offer individual customers door to door delivery of gallons of bottled water.
When it comes to the legal terms of this joint venture there are several issues that need to be addressed. The labor force in Saudi Arabia have strict guidelines to follow including the percentage of employees that our company must have in order to break ground there. 75% of our employment must be Saudi Nationals or if 75% is unavailable, then we must meet the minimum of 5%(U.S. Department of Commerce 5). The Saudi Government must also license our company for twenty-five years. Our trademark is protected for up to 10 years.
Going back to the labor force, Islamic law is the overall rule when it comes to the hiring and length of time of employment. As for being sued, that can and will happen in Saudi courts and the Saudi council is the law, the United States laws do not apply there. If an employee is fired for a wrongful reason, that employee has the opportunity to sue our company (5).
Social concerns are a very big issue in Saudi Arabia, and being American, there are many traditional ways that need to be corrected if we are to do business in Saudi Arabia. If you work in a big firm and there is a meeting, you will walk in and normally either sit down or greet a few people and then sit down. In Saudi custom, it is normal for a Saudi to walk into a room and individually greet and shake hands with every person. The way a Saudi addresses another is by their title and first name. Some Americans also may feel uncomfortable since Saudis tend to have much closer ?comfort zone? and stand much closer to each other than Americans do. Also many Saudi business executives are well known for being prepared for a meeting, they study very extensively before the meeting and rely mostly on memory rather than notes or papers (U.S. Saudi Arabian Business 12).
If Saudi Arabia were in the United States it would probably be located in Texas. Texas is known for its hospitality, and that is exactly what a Saudi does very well. Arab people hold respect very high, and this shows both in business and social settings. Arabs traditionally use their right hand for all public functions, shaking hands, eating, drinking, and passing objects to another person. Another thing that Americans need to remember is not to point the sole of our shoe to the individual we are speaking to. It is considered very impolite and disrespectful. Instead of asking about a man?s wife and daughters, one should ask about their family and children. When tea and coffee are served, it could be considered impolite not to take at least one cup. When one is finished, simply oscillate the cup to signal that a refill is not needed. Today?s businesswoman would have a tough time dealing with the Saudis; there is gender separation in the Kingdom. Women are to dress very conservatively; long skirts, sleeves at elbow length or longer, and necklines that are unrevealing are just the bare minimum there. It is very uncommon for a Muslim to shake hands or engage in a conversation with a woman, although many Saudis who have experience with Americans have been inclined to do so (U.S. Saudi Arabian Business 15-16).
In order to figure out the cost of the bottled water various aspects must be taken into consideration. Certain parts taken into consideration were the initial start up cost, labor materials, taxes, and competition. The startup cost in Saudi Arabia is going to be 2.6 million or 9,750,000 SR (See Appendix B). The Blue Myraj Company has also shopped around tremendously in order to keep down the cost of plastic and water. The company has three different types of packaging for the distribution of water. The cost associated with the packaging is not high. For example, if you notice on Appendix A the small bottle cost 63.75 SR per 100 units of plastic bottles. The water of the 100 units of bottles cost 116.25 SR giving the Myraj Company a total cost of 180 SR or 1.8 SR (equal to $.13) per bottle.
The Blue Myraj Company expects production to be at maximum capacity for the production of bottle water. Since the company is expected to be at maximum capacity we are able to forecast are sales. The forecast income turns out to be 2,978,984 SR or $794,396, which is expected for the first year of sales. In the forecast the 25% partnership is deducted along with the 19% advertising fee. Now after startup cost we will not begin to make profit until the third year. The company has decided to go ahead with this project anyway because our partner of 25% exempts us from taxes for 10 years. Another major factor to notice in the cost analysis is how the foreign exchange rate is fixed at $1 = 3.75 SR. Since a fixed foreign exchange rate exists, the Myraj cost of certainty will be extremely low. As a result of the low cost of certainty the company will not need to hedge against the Foreign Exchange Risk.
Since we will be running at maximum capacity we will be able to lower the price of water. The Saudi Arabian people are very careful shoppers and will easily switch name brands as long as it is cheaper. Our goal is to price every item 10% below the competition in order to find our niche in a market which a huge demand for water.