Pestel analysis of Morocco

Strategic Management Assignment

By Sreenesh L Bhat-u112113 3/18/2013

The report gives a brief snapshot of the country Morocco and its PESTEL analysis. The industry chosen is the Tyre manufacturing industry. Porter’s Five Forces analysis is carried out for the tire manufacturing industries in The United States of America and India.

The Country: Morocco Morocco, known officially as the Kingdom of Morocco, is the most westerly of the North African countries. It has Atlantic and Mediterranean coastlines, and a rugged mountain interior. The main religion is Islam. The official language is Literary Arabic. Moroccan Arabic, Berber and French are also spoken. Morocco has a population of over 32 million and an area of 446,550 sq. km. The political capital is Rabat, although the largest city is Casablanca. Morocco has a history of independence not shared by its neighbours. Its rich culture is a blend of Arab, Berber (indigenous African) and also other African and European influences. On the west, Morocco has a coast on the Atlantic Ocean that reaches past the Strait of Gibraltar into the Mediterranean Sea. It is bordered by Spain to the north, Algeria to the east, and Western Sahara to the south. Since Morocco controls most of Western Sahara, its de facto southern boundary is with Mauritania.

PESTEL Analysis of Morocco Political: Morocco is a parliamentary constitutional monarchy, whereby the Prime Minister of Morocco is the head of government, and of a multi-party system. Executive power is exercised by the government. Legislative power is vested in both the government and the two chambers of parliament, the Assembly of Representatives of Morocco and the Assembly of Councilors. The current government is headed by Abdelilah Benkirane. The Moroccan Constitution provides for a monarchy with a Parliament and an independent judiciary. With the 2011 constitutional reforms, the King of Morocco still retains few executive powers whereas those of the prime minister have been enlarged. The constitution grants the king honorific powers; he presides over the Council of Ministers; appoints the Prime Minister from the political party that has won the most seats in the parliamentary elections, and on recommendations from the latter, appoints the members of the government. The King is formally the chief of the military. Some of the facts and figures are: 

Total tax rate (% of commercial profits) Rounded 2010: 49%

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Taxes on goods and services (% of revenue) Rounded 2010: 36%

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Taxes on income, profits and capital gains (% of revenue) Rounded 2010: 25%

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Taxes on international trade (% of revenue) Rounded 2010: 5%

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Tax revenue (% of GDP) Rounded 2010: 23%

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Military expenditure (% of central government expenditure) Rounded 2010: 11%

Economic: Morocco's economy is considered a relatively liberal economy governed by the law of supply and demand. Since 1993, the country has followed a policy of privatization of certain economic sectors which used to be in the hands of the government. Government reforms and steady yearly growth in the region of 4–5% from 2000 to 2007 helped the Moroccan economy to become much more robust compared to a few years ago. The World Bank forecasts a rate of 4.2% growth for 2013. The services sector accounts for just over half of GDP. Agriculture accounts for only around 14% of GDP but employs 40–45% of the Moroccan working population. Morocco’s economy depends heavily on the weather, a typical characteristic of thirdworld countries. The major resources of the Moroccan economy are agriculture, phosphates, and tourism. Sales of fish and seafood are important as well. Industry and mining contribute about one-third of the annual GDP. Although Morocco runs a structural trade deficit, this is typically offset by substantial services earnings from tourism and large remittance inflows from the diaspora, and the country normally runs a small current-account surplus. Some of the facts and figures are: 

GDP 2011: $ 100.2 billion

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GDP growth (annual %) 2011: 4%

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GDP per capita 2011: $ 3053

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Unemployment rate: 9.6% (in 2008)

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Ease of doing business index (1=most business-friendly regulations) 2011: 93

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Cash surplus/deficit (% of GDP) 2010: -2%

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Central government debt, total (% of GDP) 2010: 50%

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Current account balance (BoP, current US$) 2011: -7999606285

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Exports of goods and services (% of GDP) 2011: 34%

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Imports of goods and services (% of GDP) 2011: 48%

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Foreign direct investment, net inflows (BoP, current US$) 2011: 2521364644

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Inflation, consumer prices (annual %) 2011: 0%

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Inflation, GDP deflator (annual %) 2011: 1%

Social: According to the United States government, Morocco has inadequate numbers of men physicians (0.5 per 1,000 people) and hospital beds (1.0 per 1,000 people) and poor access to water (82 percent of the population) and sanitation (75 percent of the population). The health care system includes 122 hospitals, 2,400 health centers, and 4 university clinics, but they are poorly maintained and lack adequate capacity to meet the demand for medical care. Only 24,000 beds are available for 6 million patients seeking care each year, including 3 million emergency cases. The health budget corresponds to 1.1 percent of gross domestic product and 5.5 percent of the central government budget. In 2011, Life expectancy at birth of female and male was 74 years and 69 years respectively. Morocco has one of the lowest rankings in the world in terms of Education. Education in Morocco is free and compulsory through primary school. The estimated illiteracy rate for the country in 2004 was 30.8% for males and 54.7% for females and the ratio of female to male primary enrolment (%) in 2011 was 94%. Morocco has more than four dozen universities, institutes of higher learning, and polytechnics dispersed at urban centres throughout the country. Technical: Science and technology in Morocco has significantly developed in recent years. The Moroccan government has been implementing reforms to encourage scientific research in the Kingdom. While research has yet to acquire the status of a national priority in Morocco, the country does have major assets that could transform its R&D sector into a key vehicle for development. The industry remains dominated by the public sector, with the universities employing 58% of researchers. Morocco’s own evaluation of its national research system – carried out in 2003 – revealed that the country has a good supply of well-trained high quality human resources and that some laboratories are of very high quality. Some of the facts related to the technical environment of Morocco are as follows. Number of internet users increased from 15.6 million in 2010 to 16.4 million in 2011 and the number of secure internet servers to 4 from 2. Patent applications in 2010 were 882 and high-technology exports as a percentage of manufactured exports were 7% in 2010. Environmental: In 2008, about 56% of the electricity source of Morocco came from coal. However, as forecasts indicate that energy requirements in Morocco will rise 6% per year between 2012 and 2050, a new law passed encouraging Moroccans to look for ways to diversify the energy supply, including more renewable resources. The Moroccan government has launched a project to build a solar thermal energy power plant and is also in looking into the use of Natural Gas as a potential source of revenue for Morocco’s government. Morocco has embarked upon the construction of large solar energy farms to lessen dependence on fossil fuels, and to eventually export electricity to Europe. Some of the facts and figures are as follows. Sreenesh Bhat

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Forest area as a percentage of land area in 2010 was 11%

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Alternative and nuclear energy as a percentage of total energy use in 2010 was 2%

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Combustible renewables and waste as a percentage of total energy in 2010 was 2%

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Energy imports, net as a percentage of energy use in 2010 was 94%

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Methane emissions (kt of CO2 equivalent) Rounded 2010: 11777

Legal: Morocco's legal system is a mixture of several from around the world. Morocco's legal system is a combination of both Muslim Law and Civil Law. Civil Law originates from Continental Europe and it consists of an actual written code. It is a rational (based on reason) code that is universal (applies to everyone). The dual legal system consists of secular courts based on French legal tradition and courts based on Jewish and Islamic traditions. The secular system includes communal and district courts, courts of first instance, appellate courts and a supreme court. The Supreme Court is divided into five chambers: criminal, correctional (civil) appeals, social, administrative, and constitutional.

The Industry: Tyre Manufacturing With over 1 billion tires manufactured worldwide annually, the tire industry is the major consumer of natural rubber. Tire factories start with bulk raw materials such as rubber, carbon black, and chemicals and produce numerous specialized components that are assembled and cured. This article describes the components assembled to make a tire, the various materials used, the manufacturing processes and machinery, and the overall business model. In 2004, $80 billion of tires were sold worldwide; in 2010 it was $140 billion. It is estimated that by 2015, 1.72 billion tires are expected to be sold globally. The top five tire manufacturing companies by revenue are Bridgestone (Japan), Michelin (France), Goodyear (US), Continental (Germany), and Pirelli (Italy).

Porter’s Five Forces Model Porter five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. Sreenesh Bhat

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It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. Three of Porter's five forces refer to competition from external sources. The remainder are internal threats.

Tyre Manufacturing Industry: India MRF is a market leader in the Indian Tyre Industry with a market share of 30%. It has total turnover of Rs. 8589.68 Cr. with average margin of 3.37% which is lower than industry average of 4%. Its Net Sales has grown strongly with a 5 year CAGR of close to 18%. It also has one of the highest Net Profit growth rates with a growth of 68.3% CAGR over the last 5 years. However, in terms of net sales growth and highest profit margins, Balkrishna Industries Ltd. is far ahead from other industry players. Its Net Sales has grown strongly with a 5 year CAGR of 27.87%. It also has highest profit margin of 10.55% (5 year average) in the industry. This is because it operates in Offthe-Road tyres, a niche segment. Other major players are Apollo Tyre, JK Tyre & Industry, CEAT and Goodyear India.

Porter’s Five Force Analysis 1) Bargaining power of supplier Bargaining power of suppliers can be segregated in two parts according to the demand of industry.

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Rubber: There are two reasons behind this being low first one is most of the tyre firms get150 days credit for buying the rubber from international market which is not the case if they buy it from domestic rubber growers. And the second reason is, this credit is being offered at LIBOR, which is the London Inter-bank Offered Rate. It is the rate of interest at which banks borrow funds from other banks. Other Petro chemical based material (Carbon black, Nylon tyre cord etc.): The power of suppliers is high in this category as India is limping back in case of Petro based raw materials like carbon black and chemicals which account low in quantity terms but are high cost generators. Also the price of NTC fluctuates in line with the prices of Caprolactam (a petroleum derivative), its main raw material. The prices of these materials are beyond control of tyre industry. 2) Bargaining power of buyers This can be segregated into two parts as follows according to the customers of tyres. OEM's: The OEMs are always in strong position when the bargaining power of buyers is concerned. The reason behind this is most of them are having contract with their relative tyre manufacturer under which the prices of tyre remains stable for this OEM irrespective of market price. The benefits are given to them as they are buying in bulk and the relation gives the tyre firms something called brand association. Replacement: The scene in replacement segment is quite reverse as the bargaining power for the replacement segment is moderate due to the fact that the buyers are not that strong as compared to OEMs. The demand in buses and truck segment is always high because of Indian poor road conditions apart from this the purchase is made in small units. 3) Threat of substitutes It is moderate or as the industry is facing opposition from re-treading sector all over the globe. This cheaper option, around 20-25% of the original tyre cost, is present in developed countries since some decade back. And this is heading towards strong position here in India too. 4) Threat of new entrants The threat of new entrant is moderate or can be described as low because the industry is highly capital intensive and the level of technological expertise required is also highly specific. But if we see from domestic (Indian) industry's point of view, this better can be defined as high. The reason being, global tyre industry is already seeing mergers and acquisitions in order to restructure. And as of now India and China going to be the hub of activities as far as tyre industry is concerned due to low production cost as

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well as other relevant benefits. So for any of the global big shot Indian company will be a good option to go for. 5) Industry rivalry High, because gradually the overseas players are expanding their wings over Indian tyre industry and also a limited and every player is moving towards automated technology, like ERP and SCM. Apart from the aforementioned reason, the industry is seeing high competitive scenario at present because of various reasons like rising input costs, low realizations from growing OEM segment where the vehicle manufacturers are not ready to share the burden of tyre firms, the portion of replacement pie continuously taken away by the re-treading sector which is slowly but firmly rising its head and that to in high realization segment of Bus-Truck tyres and last but not the least the unorganized sector is always there to give head ache to these established players like CEAT, JK, Apollo and MRF etc.

Bargaining power of Supplier - High

Threat of new entrants High

Industry Rivalry - High

Threat of substitutes Low

Bargaining power of Buyer - High

Tyre Manufacturing Industry: The Unites States of America The US tire manufacturing industry consists of about 100 companies with combined annual revenue of about $15 billion. Major companies include Goodyear, Bridgestone, Michelin, and Cooper. The industry is concentrated: the top four companies generate more than 70 percent of revenue. Demand is driven by sales of new vehicles and the need for replacement tires. Because tires are largely a commodity, Sreenesh Bhat

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profitability depends on cost-efficient operations. Large companies can afford the research to develop tires from new, technologically advanced materials and can invest in improving production efficiency. Small companies can compete by producing tires or tire-related products for niche markets, such as bicycles or farm equipment. The industry is capital-intensive: average annual revenue per employee is about $315,000.

Porter’s Five Force Analysis 1) Supplier power The bargaining power of the suppliers is high. Tires are a necessity. Raw material suppliers can exercise high pressure on the prices for their input materials in tire manufacturing due to strong competition in a rather commoditized market. 2) Buyer power It refers to the bargaining power of the customer. According to Porter, if the bargaining power of the buyers' is strong, then the attractiveness of the industry goes down. Buyer concentration: Buyer concentration is very high in the U.S. tire industry in US and the market is quite huge. Switching cost: As there are quite a number of players in the tire industry and the prices between two or more brands differ less, it is easy for the customers to switch brands without incurring much loss. Thus buyers can exercise high power which keeps prices low. 3) Threat of substitutes Tire as a product is hard to differentiate. Still there are some variations under different brand names. And companies have to spend in huge number to make their products identifiable to the customers. Moreover they not only want to keep their existing customers but also want to acquire their competitors' customers. Threat of substitutes is low which is favorable for the existing players. That said, each of the major players differentiates itself from its competitors in unique ways relating to diversification (Continental), footprint (Bridgestone), premium brand (Michelin) and overall reputation and reputation for new product development (Goodyear). 4) Barriers to entry Requirement of high investment is an essential component in entering the industry as well as to convert factories to produce different type of tires as radials. Threat of new entry is medium since new entrants are rather not attracted due to the commodity nature of the environment. Also initial costs of entry (creating a manufacturing capability) are medium-high. However, new competition is seen in growing markets such as China, which already has impacted the threat of the new entrants-pressure structure.

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5) Competitive Pressure According to Porter, if the number of players in an industry is large, then attractiveness of that industry goes down. The Tire Industry in the United States was dominated by five major companies: Goodyear, Firestone, Uniroyal, BF Goodrich and General Tire. Again, foreign competition and import of passenger tires made the industry quite competitive. Tire is almost a necessary product but not quite frequently bought. In such an industry, five is quite a good number. From the perspective of number of players, the tire industry seems to be quite unattractive. As huge amount of investment is required to set up a manufacturing plant and to shift to new business, it is extremely difficult to exit from the tire industry. Companies like Uniroyal, Goodrich had to merge due to high exit barriers.

Supplier Power - High

Barriers to entry Medium

Competitive pressure High

Threat of substitutes Low

Buyer Power - High

Bibliography     

http://www.maroc.ma/PortailInst/An/ http://www.atmaindia.org/ http://www.tireindustry.org/ http://www.us-tra.org/ http://www.wikipedia.org/

Sreenesh Bhat

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