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Market Expansion Opportunity Of Rio Tinto

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Question:

Discuss about the strategic management and market expansion opportunity of Rio Tinto.
 
 

Answer:

Introduction

In this report, detailed strategic management of Rio Tinto Group is presented. Rio Tinto Group is one of the major organisations in Australia and this report has explained the chance of market entry in a specific market of European and Asian contexts. The macro-environment analysis, geopolitical risks and opportunities, business policies and trade and overall market attractiveness are presented. In this report, secondary data has been used.

Overview of Rio Tinto

Rio Tinto Group is a public company that is operating in mining and metals industry. Rio Tinto is an Australian-British multinational organisation and it has its share in both Australian and British market. It was established in the year 1873 by a multinational consortium as this group of investors purchased my complex on Rio Tinto in Spain from the Spanish government (Riotinto.com 2017). It has it headquarter in London and on Melbourne. This organisation followed a number of mergers and acquisitions to make itself a bigger organisation. It produces the commodities like uranium, coal, diamonds, copper and iron ore. The primary objective of the organisation is to extract the minerals from Iron Ore and Bauxite. Revenue of the organisation was USD33.78 billion and profit were USD4.76 billion in 2016.

Identification of two countries selected for market entry

It is serving in worldwide basis and it has operation teams in six continents and it is focusing mainly in Australia and Canada right now. In this report, in the Asian market, Saudi Arabia is selected and in the European market, Germany is selected.

 

Current macro-environment and geopolitical forces

Macro-environment analysis of Saudi Arabia

The political condition of UAE is stable and it can attract the multinational organisations to enter the market, however, corruption is present in the government sector. In addition, Saudi Government is trying to improve the employment condition by attracting the foreign companies. The economic condition in the Saudi Arabia touched all-time high with 865.35 USD billion in 2016 (Salem 2016). 60% of the population of the Saudi Arabia are in the workforce and financial institutions provide help in opening of business. Monetary and banking systems are helpful in Saudi Arabia and this country is a member of WTO and World Bank. Moreover, the mining businesses in Saudi Arabia are related to the natural gas, coal, crude oil, copper, gold, zinc and silver. Social factors of Saudi Arabia are related to people's preferences, lifestyle and improvement of financial conditions among people. In Saudi, the western lifestyle is missing and Islamic influences are high, the people do recreational activities and companies in Saudi Arabia allow the foreign people to be in well-paid positions. Purchasing Power Parity of the customers based on GDP was estimated to USD 55158 (Wright 2016). In Saudi Arabia, technological factors are related to the young professionals who have good knowledge in information technologies and the companies have been using software, IT, satellite and mobile technologies. In mining and metal industry, all equipment is present.

Geopolitical forces:

The policy of Saudi Arabia is mainly focused on the cooperation with Gulf-states and the country mainly believes in the unity of Arab world. Saudi Arabia is a part of the Non-Aligned Movement and it has made a Pro-western camp with making a partnership with the US, Jordan, Egypt and other Arabian Gulf (Dickson 2015). Natural resources of Saudi Arabia are Petroleum, copper, gold, natural gas and iron-ore. These partnerships with the other countries and rich natural resources provide opportunities to open up the international relations and business opportunities. On the other side, the main concern of Saudi Arabia in recent time is the relation with the US, an effect of oil price and using the oil wealth to improve the impact of Islam. A growth rate of population in Saudi Arabia is 1.49% and life expectancy is also high. 

Macro-environment analysis of Germany

In political factor, Germany is a federal parliamentary republic and it is situated in western-central Europe. The capital city of Germany is Berlin and in Government, it has three levels where responsibilities, roles and power are vested perfectly. Germany follows the laws of EU as it was the founder member of EU (Cecil 2015). The political situation of the country is stable and a major political power in Europe. In economic factor, Germany is the fourth largest economy in the world according to GDP and it is fifth largest in purchasing power parity. The country is the large exporter and the industries like healthcare, automotive, beer and IT are world class. Many large multinational companies have headquarters in Germany, like Adidas, Siemens, SAP, Porsche, Volkswagen and many others. Current GDP of Germany is growing strong and it represents 5.60% of world economy. In social factors, Germany is a developed country and the people experience the high standard of living and it has power in global and regional affairs. The disposable income of the people is high and estimated $53,000 annually (Cortizo and Keyt 2013). In technology, Germany plays an important role in the international market as most of the world leaders in technology are from German. Germany's participation in the EU has a major impact on other EU based countries to have help in technology. Moreover, in mining and metals-related technologies, it is equipped with geological, mineralogical and natural science technologies.

 

Geopolitical forces:

Germany is also a member of NATO, OECD, G4, G8 and UN Secretary Council. Germany maintains a good relation of 229 diplomatic missions with more than 188 countries. It is one of the major powers in global affairs and European regions. Federal departments play a major role in making foreign policies and Bundestag acts in a notable manner in a supervisory capacity (En.portal.santandertrade.com 2017). Peaceful collaboration is Germany's major aim and it has always been in the forefront in political achievement in a European context (Export.gov 2017). Natural resources of Germany are mainly coal (Bituminous, ignite coal, natural gas, copper, nickel, iron ore, uranium and potash. Germany’s population growth rate is 1.2% and life expectancy in this country is high 81 years. These forces can help an organisation like Rio Tinto to feel safe to enter the German market and expand in the European section.

Development of each country’s trade and business policy

Saudi Arabia

Saudi Arabia has made a development strategy to diversify its economy through natural gas, crude oil and mining industry. This mining and crude oil industry provide almost 23% of real GDP and the development strategy of the Saudi Arabia is based on the liberal trade regime and it has been going through structural reforms to make it more business-friendly environment. Saudi Arabia aligned the tariff to GCC (Gulf Cooperation Council) external tariff and the transition period is three years and it was there until 2011. Saudi Arabia has simple MFN (Most Favoured Nation) tariff that has 19 tariffs has mixed rates (En.portal.santandertrade.com 2017). However, there are some products that are prohibited due to religious reasons like swine and alcoholic beverages. Saudi Arabia does not impose excise duty, VAT and any other internal tax on produced or imported products. Average MFN is applied on tariff is 5.2% in Saudi Arabia and it is predefined as WTO.  The development strategy provided good economic benefit from the perspective of the country as GDP grew almost 3.2% in annual average and inflation is increased average 4.5%. A report published by UNCTAD, Saudi Arabia is the third largest recipient of FDI in Asia and it is estimated to 7.43 billion (Doingbusiness.org 2017). FDI inflows in Saudi Arabia in the mining industry were 2.4% in 2015.

 

Germany

Germany has bureaucratic procedures and it is a little bit difficult to handle for the organisations that wish to enter the German market. The German trade policy has complex safety standards and it makes a complicated access for most of the US based products. Germany follows mainly EU based rules for export and import and TARIC is the governing body to determine the license for a particular product. German advocates FEP (Foreign Direct Policies) that can force to limit the market forces (Export.gov 2017). German has made a liberal camp with Netherland, Denmark, Finland and Sweden in trading and in international level, Germany is considered as competence for FDI and according to UNCTAD, Germany is considered as a 10th preferred country to do the business. As a member of OECD, Germany adheres to the capital movement and invisible operation (Cortizo and Keyt 2014). In the previous system, Germany had a boundary in foreign investment and it was used inbound investment. There is a restriction on private direct investment and trading to Germany. In transport, waterways, airport and maritime transport, German policy states that foreign-owned company must be registered in the Federal Republic of Germany.

Identification of potential dangers, risks and opportunities

Risk and dangers in current policies of Saudi Arabia

  1. a) In recent time, Saudi Arabia is observing a downward trend in FDI flows as FDI inflows fell by 8.6% compared to 2015 (Dickson 2015). The reasons behind the investment slowed down are the social and political tensions and reduced accessed of credit, moreover, the policy of Sauditisation is another reason in lower FDI. Foreigners cannot invest directly in some of the sectors.
  2. b) Saudi Arabia has undertaken the reformation policy of foreign investment, however, a legal framework is disturbing in order to solve the commercial disputes. In applying the intellectual property, the companies are having issue and Government has applied a percentage to employ Saudi people in the companies. Government is making delay in signing the contract and making payment. It takes time For Saudi Arabia to establish legal entities to get the licences.
  3. c) Conservative culture of Saudi Arabia is another issue for expatriates and in the workplace, enforced segregation of sexes (Vassiliev 2013). The investors face hardship in identifying the suitable sponsors in the initial stage to enter the market and it is needed to find an appropriate Saudi partner.

Opportunities

  1. a) Saudi Arabia provides strengths in business policy as it does not need taxation on personal income and it has proximity in gulf markets.
  2. b) Saudi Arabia is key members of the Gulf Cooperation Council and it is the largest economy as well as the population in the Gulf region (Salem 2016). Once, Saudi Arabia entered into WTO, FDI climate has been improved and this country's strong side is economic stability, large local market, mines, the high spending power of companies and customers and banking system.
  3. c) Investors and multinational companies are observing rapid diversification in investment in Saudi economy and government are making a massive investment in infrastructure, transport, education, energy and healthcare. In business, Saudi companies use English as a mode of communication.
 

Risk and dangers in current police of Germany

  1. a) In the year 2015, the FDI reached to USD33 billion, however, the inflows decreased to USD 9.5 billion in 2016 (Export.gov 2017). However, the tax rate in the Germany is high because the Germany tries to control the export from the US.
  2. b) In Germany, public financial institutions are structurally high in deficit and Eastern part of the Germany is not so developed economically and it is trying to catch up the Western part. However, ageing population is another problem in the growth of the workforce.
  3. c) Germany has been facing the issue of financing by the EU and with German Federal entities and the German government does not help in the initial investment phase.

Opportunities

  1. a) Germany has an opportunity in the powerful industrial network and the Germany has skilled labours equipped with technologies. Germany has the reliable infrastructure in doing the business economic and politically. The legal framework is helpful and it is situated in heart of the Europe.
  2. b) Germany has the largest population in EU and it has competitive taxation (Cecil 2015).
  3. c) Germany provides favourable incentives for investment to multinational companies to Research & Development and to enter the market.

Conclusions 

Between these two countries, Saudi Arabia would be more appropriate to enter for Rio Tinto. In recent time, Saudi Arabia has projected a growth rate of 9% in the mining industry and it is the third pillar of the economy. Saudi Arabia has Arabian Shield where rocks had core minerals of iron ore, bauxite, copper, gold and silver, however, the non-metallic minerals are abundant. Saudi Arabia government has given greater access to the foreign companies in the mining industry and it is estimated to provide $26 billion by the end of 2020 adding 25,000 employment. The Government of Saudi started to invest in infrastructure and government wants large privatisation programme to train the national workforce, enhance raw materials and foster economic development and stable exchange rate. In case of first-stage processed products, the tariff has 4.2% and fully-processed products, the tariff rate is 5.5%. The tariff escalation is observed from first to the final stage and mixed protection of tariff is seen in the metallic and non-metallic mineral products. Rio Tinto will get assistance to expand the business in Gulf countries and these countries have mines and Saudi Arabia is one of the world's 25 largest economies with aiming the top in the Middle East. Saudi Arabia is providing substantial cost advantage with low domestic cost in industrial land and cost of energy. Rio Tinto could get free access to other MENA economies and GCC countries and enjoy good transport and infrastructure.

 

Reference List

Cecil, L., 2015. Albert Ballin: business and politics in imperial Germany, 1888-1918. Princeton University Press.

Cortizo, F.R. and Keyt, B., 2013. Climate Change and Flood Protection in Germany: Business Opportunities. Proceedings of the Water Environment Federation, 2013(6), pp.7319-7321.

Dickson, H.R.P., 2015. The Arab of the Desert (RLE Saudi Arabia): A Glimpse Into Badawin Life in Kuwait and Saudi Arabia (Vol. 1). Abingdon: Routledge.

Doingbusiness.org. 2017. Doing Business in Saudi Arabia - World Bank Group. Available at: https://www.doingbusiness.org/data/exploreeconomies/saudi-arabia [Accessed on 11 Dec. 2017].

En.portal.santandertrade.com. 2017. Business practices in Saudi Arabia - Santandertrade.com. Available at: https://en.portal.santandertrade.com/establish-overseas/saudi-arabia/business-practices [Accessed on 11 Dec. 2017].

En.portal.santandertrade.com. 2017. Operating a business in Germany - Santandertrade.com. Available at: https://en.portal.santandertrade.com/establish-overseas/germany/operating-a-business [Accessed on 11 Dec. 2017].

Export.gov. 2017. Germany - 1-Openness to & Restrictions upon Foreign Investment | export.gov. Available at: https://www.export.gov/article?id=Germany-Openness-to-and-Restrictions-upon-Foreign-Investment [Accessed on 11 Dec. 2017].

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. London: Cengage Learning.

Peppard, J. and Ward, J., 2016. The strategic management of information systems: Building a digital strategy. New Jersey: John Wiley & Sons.

Riotinto.com. 2017. About Rio Tinto. Available at: https://www.riotinto.com/about-us-108.aspx [Accessed on 11 Dec. 2017].

Salem, M.I., 2016. The role of business incubators in the economic development of Saudi Arabia. The International Business & Economics Research Journal (Online), 13(4), p.853.

Vassiliev, A., 2013. The History of Saudi Arabia. London: Saqi.

Wright Jr, J.W. ed., 2016. Business and economic development in Saudi Arabia. Berlin: Springer.

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