Introduction
International business relations are characterized by the complexity of processes and phenomena that determine the market shares of various companies in the respective market segments. The market of petrochemicals also displays this complexity, and Saudi Basic Industries Company (SABIC), experienced this in its business activities. Dumping was the controversial point SABIC was accused of while trying to win the larger market share in international trade, especially in Egypt, China, and India. While being a state owned company in Saudi Arabia, with the local Government controlling over 70% of the company’s shares, SABIC actually failed to stand the competition in the international arena and resorted to selling goods at lower prices than the ones established in Egyptian, Chinese, and Indian markets. This fact caused considerable international controversy and demanded SABIC to take measures to solve the dumping issues.
Background
The background to this issue might be traced from the very time of SABIC establishment. During the 33 years of its existence, since the company’s establishment in 1976, SABIC Company has managed to become one of the world’s leaders in the markets for petrochemicals, fertilizers, plastics, and other chemical goods. The vast majority of shares of SABIC are owned by the government of Saudi Arabia. There is also a share of private property in SABIC as the remaining 30% of the company’s shares are controlled by domestic and foreign investors, even though their performance as SABIC officials is under the strict governmental control (SABIC, 2009). The products that have allowed SABIC to become one of the leaders of the market for petrochemicals include the range of industrial goods beginning from ethylene, ethylene glycol, and methanol to MTBE and polyethylene. The growth prospects of the company are also rather optimistic, and the official web site of the company reports the expected considerable growth of the production capacities as soon as the year 2020 (SABIC, 2009). The financial performance of the Saudi company is rather positive, as 2008 brought $5.86 billion to SABIC as a net profit, and $72.5 billion as the total assets.
The fact that SABIC is a government-owned and supported company provides SABIC with easy and cheap access to raw materials and commodities inside Saudi Arabia. However, when the SABIC tries to enter an international market, it faces challenges for which the company is not prepared. Strong competition, greater opportunities and resources accessible to SABIC’s competitors, and absence of governmental support create the environment in which SABIC needs to protect its market share by all means. Obviously, selling goods at Egyptian, Chinese, and Indian markets at the dumping prices was seen by SABIC as one of those means.
Marketing Theory
Dumping and Anti-Dumping
On the whole, marketing theory applies to opposite phenomena for the study of international business relations, i. e. dumping and anti-dumping. Dumping, as defined by the World Trade Organization (2009), is a variety of the so called predatory pricing observed in an activity of a company, which exports its goods to another country at prices that are lower than the production costs for this kind of goods or lower than the actually charged prices in the domestic market of this company (WTO, 2009). Thus, dumping is viewed as a predatory pricing policy because it might injure the interests of the domestic manufacturers of the goods that are exported at dumping prices.
Respectively, anti-dumping is the process of fighting the dumping practices. The essence of anti-dumping is also formulated by the World Trade Organization as mainly the set of financial policies aimed at protecting the country’s economy from the attempts of foreign companies to benefit at the expense of their domestic industry players (Prusa, 2009, p. 593; WTO, 2009). The anti-dumping policies might include placing embargos on the potentially dumped goods or for the goods of companies whose dumping was proved. However, the most widely used anti-dumping technique is putting the special fee for the dumped goods (Prusa, 2009, p. 601; WTO, 2009)
Dumping and Anti-Dumping Use in Marketing
The major reasons for using the dumping policies in the business and marketing activities of any company or country include the desire to develop its market share, widen its business scope and customer base, stand the competition in the industry, and increase the demand for its goods (WTO, 2009). According to Prusa (2009), the major users of dumping policies are the developing countries/ companies, whose resources are not sufficient enough to stand the competition with the developed countries/ companies. At the same time, the developing countries/ companies are also the most frequent users of anti-dumping policies, which is explained by the fact that developing countries/companies want to have protection from the potential dumping policies from the side of the developed countries/companies (Prusa, 2009, p. 594). The following graphs can illustrate the use of dumping and anti-dumping policies in marketing and business (Graph 1 and Graph 2 respectively):
Thus, anti-dumping fees, in theory, are aimed at making the dumped and non-dumped prices more or less equal and reducing the potential demand for the dumped goods that might injure the domestic non-dumping manufacturers if no anti-dumping policies are carried out (Prusa, 2009, p. 611).
Specific Issues of SABIC
Dumping and WTO
Thus, it is obvious that SABIC’s main strategic goal in the case under consideration was to establish its presence in the international market and develop its market share through introducing petrochemicals to Egyptian, Chinese, and Indian markets. However, being unable to compete with other international petrochemicals manufacturers, SABIC had to resort to concession techniques and sell its products at considerably lower prices. According to the standards promoted by the World Trade Organization (WTO), such a policy is called dumping and is forbidden for international business activities (WTO, 2009). Moreover, Article IV of the WTO Anti-Dumping Agreement entitles the countries in which dumping policies are implemented by the goods exporters to apply anti-dumping measures to dumping initiators:
Article VI of the GATT provides for the right of contracting parties to apply anti-dumping measures, i.e. measures against imports of a product at an export price below its “normal value” (usually the price of the product in the domestic market of the exporting country) if such dumped imports cause injury to a domestic industry in the territory of the importing contracting party (WTO, 2009).
Drawing from this, dumping is considered to be a serious violation of the international business rules, and can be severely punished. After SABIC resorted to dumping in the petrochemicals markets of Egypt, China, and India, these countries also announced their plans to apply anti-dumping policies towards SABIC.
SABIC Dumping
The essence of calling the trading policies that SABIC implemented dealing in the Egyptian, Chinese, and Indian markets lies in the fact that facing the sales rates, SABIC tried to find the way to restore the high sales rates and reduced the prices for petrochemicals offered. This allowed SABIC to increase its sales rates and sell considerable amounts of petrochemicals, but injured the interests of domestic petrochemical industries in Egypt, China, and India. As a result of these dumping activities, the countries that suffered from them imposed anti-dumping policies and fees upon SABIC products sold in their markets (Arabic News Daily, 2009).
For example, Egypt implemented the anti-dumping fees for SABIC products in 2003, but lifted those fees after SABIC agreed on participation in investment projects aimed at reviving Egyptian fertilizer-manufacturing industry (Arabic News Daily, 2009). According to Mubasher (2009), India, China, and other countries are firm in their commitment to continue applying anti-dumping policies towards SABIC, and expect that the Saudi Government will not limit the diplomatic and business relations with the countries. Further on, Customs (2001) present an account on the specific system of anti-dumping fees that India developed, in accordance with the Customs Tariff Act, to deal with potential dumping activities of SABIC or any other player in the petrochemicals market based on the amount of import to India any of these companies can afford (Table 3):
Table 3: SABIC Comparative Characteristics in Indian Market
Accordingly, nowadays SABIC still faces the consequences of its dumping activities implemented in the markets of Egypt, China, and India. The reason for lifting the anti-dumping fees from SABIC products in Egypt is the fact that SABIC has managed to demonstrate the potential benefit of its investment projects for Egyptian industry. Other countries, particularly China and India, are still exercising their anti-dumping rights, and even the potential oil supply cuts cannot stop these countries from it. According to Mubasher (2009), India and China understand their importance as strategic partners for Saudi Arabia, and rightfully expect that SABIC controversy would not damage the business relations between the countries.
Conclusions
Thus, the research reported above allows making the following conclusions. SABIC is a dominant player in the Saudi Arabia and Middle East petrochemicals market. However, the company turned out to be not ready for the competition in the international market because the Saudi government support could not be exercised in transactions in Egyptian, Chinese, or Indian markets. As the market analysis evidenced, to stand the competition, SABIC resorted to dumping activities and started selling its products at the reduced prices by which SABIC injured the interests of the petrochemicals industries of Egypt, India, and China. These countries implemented anti-dumping policies against SABIC and imposed anti-dumping fees on SABIC products. SABIC managed to reach an agreement with the Egyptian government, which lifted its anti-dumping fees. Other countries still implement the anti-dumping fees against SABIC, and only further negotiations can solve this problem in future.
Proposed Solutions
As a result of the present case study research, it is now possible to offer a set of recommendations that SABIC might implement in order to overcome its dumping controversy and the international business issues connected with it. As well, the following recommendations might allow SABIC to avoid the dumping issues in future on the basis of the company’s experience and marketing theory. The recommendations for SABIC can be based on the experience of its major competitors ExxonMobil and Saudi International Petrochemicals Co. (SPICHEM) in dumping cases.
ExxonMobil in 2009 found itself in the situation when the Indian government implemented anti-dumping fees on all petrochemicals threatened by the Saudi dumping practices of SABIC. As a result, ExxonMobil was to suffer losses due to other companies faults, and to deal with this challenge ExxonMobil chose to open its financial operations to the Indian government to ensure it that the company rejects dumping and would not take it up in any case. At the same time, SIPCHEM chose to simply relocate its market to other regions when faced by anti-dumping fees by China in 2008. This step seems to be an improper solution in the situation as over 60% of the company’s sales were annually retrieved from China and other Asian countries.
Thus, on the basis of SABIC’s competitors’ experiences, it is recommended that to overcome the anti-dumping sanctions of China and India and reestablish the partnership relations with the industries of these countries, SABIC can resort to:
- Eliminating dumping practices from the set of its business methods and proclaiming its anti-dumping position in public;
- Refunding the estimated losses that India and China have suffered from SABIC’s dumping;
- Participating in the investment projects aimed at developing the domestic petrochemicals industries of China and India.
Each of the proposed solutions can be effective if it is properly implemented. The first solution is the least credible because it is based on abstract promises that are not supported by anti-dumping guarantees. So, using this solution, SABIC can only hope for understanding of India and China. The second and the third ways recommended are far more credible as the readiness of SABIC to reject dumping is supported by financial guarantees and actual help to the industries SABIC’s dumping might have damaged.
Reference
Arabic News Daily. (2003) Ghali’s talks in Arabia touch on investment in petrochemicals. [online] Saudi Arabia – Egypt, Economics. 2009. Web.
Customs. (2001) Anti-Dumping Duty on Sodium Hydroxide from Saudi Arabia / Iran / Japn / USA / France imposed w.I.f from importation of Provisional duty I.e. on 26.12.2000. [online] Exim, Indiamart. 2009. Web.
Mubasher. (2009) SABIC talks with India over anti-dumping ruling failed. [online] English, Mubasher Info. 2009. Web.
Prusa, T. (2009) On the Spread and Impact of Anti-Dumping. Department of Economics, Rutgers University, pp. 591 – 611.
SABIC. (2009) Our Company. [online] Welcome to SABIC, Web.
WTO. (2009) Agreement on Implementation of Article VI (Anti-dumping). [online] WTO Online, Web.