WesternRefining Inc.: Macroeconomic Trends and Offshoring
Thefollowing is a macro economic study to inform the relocation ofwestern Refining Inc. production facilities from the United States ofAmerica to the United Arab Emirates. Western Refining Inc. is a crudeoil refinery company located in Texas. In the strategic plan, thecompany aspires to build a new refinery plant in the United ArabsEmirates. The investment requires land, buildings facilitiesequipment, and human capital (About Western Refining, n.d.).
Thesisstatement: Acompany’s relocation program to the UAE isbound to face multiple challenges in form of labor shortages and aslow recovering economy.
Statisticson Economic and social policies in the UAE
Inthe past ten years, the United Arab Emirates (UAE) has experienced aconsistent 6% growth in its real GDP due to the surpluses from oilexportation invested in the non-oil economy. The country has managedto develop the financial and real estate sectors, as well as,thetravel sector through international airline hubs and sports tourism.However, the growth rate of the economy has experienced a slightdecline due to the plummeting prices of oil. Although the economy hasmanaged to maintain a growth rate of 4.6% in the year 2014, thegrowth rate in 2015 declined further to 3.4%. The development ratefor the year 2016 is expected to decline further to 2.0 (Sangeetha,2014).
Regardingfiscal policies, the country reacted to the drop in the revenues byexpanding its economic policies that resulted in a reduction in thefiscal balance from 10.4% in 2013 to only 5% in 2014. Between theyears 2016 and 2018, UAE is expected to experience a slow recovery of2.5%. It is projected to continue tightening the fiscal policies tocut spending, develop new streams of government revenue, and manageeconomic risks. The UAE government is expected to introduce VAT andcorporate tax at latest, by 2018 to enhance the fiscal balance(Karthikeyan, 2014).
UAE’sFinancial System and Economy
Sincethe year 2013, the banking industry in the United Arab Emirates hasfacilitated a sustainable economic recovery process. The provision ofa robust flow of capital triggered a significant expansion in netforeign assets and growth in the central bank’s reserve holdings.The increase in money supply has contributed to the relatively lowlevel of interest rates despite the rising housingcosts. Thecountry’s tightened monetary policies have resulted into reducedliquidity in the banking sector after the central bank raised theinterest rates on certificate deposits by 25 basis points in December2015(Sangeetha, 2014).
Thefirst risk is associated with relocating to the country is laborshortage. In the UAE, there is a significant demand for workforce inexcess of the supply from the educational sector. Consequently, mostof the companies offshore their skilled labor from Europe, America,and Arabic countries while unskilled laborers are offshored fromIndia and Pakistan. The company should strategize on how to obtainboth the skilled and unskilled labor as a strategy to manage the risk(El-Sayegh, 2012).
Thesecond risk is interest exposure. The current deflationary monetarypolicies adopted by the central bank of the United Emirates are aimedat reducing consumption. Consequently, the interest rates areexpected to rise with time, creating seasons of variability. Thecompany should enter into interest swaps to ensure that the changesin the rates do not affect its revenue streams (Khattaba, Anchorb, &Davies, 2007).
Thethird risk is currency variability. The policies within the UAE areexpected to create variability in the country’s legal tenderagainst other currencies. It is imperative for the organization toenter into currency exchange contracts to hedge against exposure(Khattaba, Anchorb, & Davies, 2007).
Thefourth risk is material shortage. The United Arab Emirates importsmost of its material implying that the company needs to enter intocontracts with its suppliers to ensure importation of supplies intothe country (Khattaba, Anchorb, & Davies, 2007).
Fifthis the cultural risk associated with overseas development projects.The company should clearly know the culture of Emiratis to avoidmisunderstandings and inefficient production. Besides, the company’slabor team will be composed of foreign nationals with differentcultures and languages that may hinder communication between the keyteam players. The company’s management should appreciate theculture and practices of Emiratis to manage the risk. Besides, thecompany should require its labor force to adopt a flexible andpatient approach when dealing with the local Emiratis to win theirconfidence (Khattaba, Anchorb, & Davies, 2007).
Availabilityof Human Capital
Thehuman capital in UAE began to deteriorate in the year 2006.Specifically, there was a decline in the non-oil industrial sectorthat experienced a growth rate of 6.3% while the labor force grew ata faster rate of 7%. The growth led to a heavy importation ofunskilled laborers. The current population of the United ArabEmirates is 9 million with an unemployment rate of 4.2%. A majorityof the human capital labor in the country is employed in thegovernment and the private sector (Sangeetha, 2012).
Amajority of the population, 72%, is composed of foreign nationals whorelocate to the country in search of employment opportunities. Thepopulation of laborers mainly consists of South Asians, at 25%, whoperform menial jobs in the service and construction industries. Thereare expatriate Arabs (with a composition of 15%) and a smallproportion of Europeans (8%). Besides, the country has a high numberof inexperienced laborers from Africa, Pakistan, and India (Khattaba,Anchorb, & Davies, 2007).
Inconclusion, the building of a new facility in the United ArabEmirates is bound to face multiple challenges in form of laborshortages and a slow recovering economy. Besides, the UAE economy ischaracterized by various risks such as interest risks, currency risk,material shortage and cultural risks. All the above factors requirefurther assessment and preparation by the WesternRefining Inc.
AboutWestern Refining, (n.d.).WesternRefining.Retrievedfromhttp://www.wnr.com/about-us
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Karthikeyan,L. (2014). PL on the performance of the trading and logisticscompanies in UAE.PrimaxInternational Journal of Commerce and Management,2(1),321-3604
Khattaba,A. A., Anchorb, J. &Daviesb, E. (2007).Managerial perceptions ofpolitical risk in international projects.InternationalJournal of Project Management,25(7),215-411.
Sangeetha,V., (2014).Talent management among UAE.NationalWomen Journal of Emerging Trends in Economics and ManagementSciences,5(5),474-479.