Saudi Basic Industries Corporation: Overview and Analysis
Saudi Basic Industries Corporation (SABIC) is a significant company operating across several areas of business. According to the SABIC (2021), it comprises four major business branches, which are Petrochemicals, Specialties, Agri-Nutrients, and Metals. These areas of expertise allow SABIC to develop new solutions that can be applied in medicine, construction, electronics, packaging, transportation, and clean energy production. Therefore, such a diversified business portfolio makes SABIC’s influence considerable in Saudi Arabia and internationally. The history of the company is equally long, encompassing several decades since 1976 when SABIC (2021) was founded in accordance with a royal decree. The subsequent stages of its development extended the corporation’s experience in petrochemicals, leading to its recognition on the highest levels.
The quality of SABIC’s products, combined with the company’s commitment to the growth of the industry, attracted the attention of large investors. Today, SABIC is a public company with headquarters in Riyadh. 70% of the company’s shares now belong to the local giant Saudi Aramco after a critical acquisition. The other 30% of SABIC’s shares are traded in the Saudi exchange market. This company remains an essential element of Saudi Arabia’s economy, as enabled by the critical status of petrochemicals for the country. Today, SABIC employs over 32,000 loyal workers who develop their talents in one of the largest companies of its type.
SABIC Business Model and Strategy
The case of SABIC is representative of the industry, thus enhancing the value of the structural analysis. It is important to note that SABIC operates across several significant areas of business, but this analysis is to emphasize the core one, which is petrochemicals. In this context, the analysis is to be based on the Porter’s Five Forces paradigm, as it appears instrumental in describing the key challenges and features of Saudi Arabian petrochemical companies in the current landscape. Within the past decade, the kingdom emerged as one of the leading producers of petrochemicals in the world. The fact that the country possesses around 25% of the world’s oil and gas reserves has contributed to this process to a significant degree. SABIC plays a role of paramount importance in the development of the industry, has become one of the world’s 25 largest petrochemical corporations. Thus, the industry and the company are inseparable, calling for an in-depth examination within the Five Forces framework.
The first key aspect of Porter’s paradigm is the new entrant threat, which is rather considerable for the petrochemical industry. This area of business processes crude oil and gas into an array of products that are widely used across the globe. Furthermore, petrochemicals are usually associated with significant revenues, thus becoming attractive for new players. Saudi Arabia is characterized by relatively low expenses in terms of raw material extraction due to favorable geophysical characteristics and climate. Thus, the entry threshold is lower in the kingdom, which explains the rise in the new entrant threat at the age of globalization. Nevertheless, this threshold is not to be diminished, as petrochemical production remains demanding in terms of equipment, facilities, and costs. Overall, the new entrant threat is increased but not critical at the moment.
Second, the Five Forces framework views a threat of substitute development as an essential industry aspect. This element is alarming for petrochemical products, considering the current surge in sustainability policies. The world has come to recognize the environmental impact of oil extraction and petrochemical production. For example, petroleum vehicles that have always formed the core of the automobile industry now face heavy criticism. The production and interest in electric vehicles have been on a significant increase, and entire nations plan to ban combustion engines by the next decade. Under these circumstances, the demand for oil and petrochemical products is bound to decrease eventually, as prompted by the development of cleaner substitutes. Automobiles are just one example of a more significant movement that will eventually lead to a reduced role of SABIC’s products in the global economy in the long term.
Third, the Five Forces paradigm deals with the consumers’ power to bargain. This parameter has seen a significant increase in the 21st century, following the emerging globalization patterns. The world’s markets today experience a surge in supply, as the development of communication and transportation means helps the industries’ leaders attain a global level. Therefore, end consumers acquire an opportunity to choose between multitudes of offers in pursuit of the best acceptable conditions. Accordingly, their bargaining power has been promoted by the direction in which most industries have been developing in the 21st century, posing additional challenges for SABIC.
Fourth, the suppliers’ bargaining power has seen a different pattern in recent years. More specifically, most of the world’s industries have been shaken to the core by a crisis of an unprecedented magnitude, which the novel coronavirus pandemic. At some point, COVID-19 virtually paralyzed the global economy, undermining consumers’ purchasing power and disrupting supply chains (Hanieh, 2020). Amid the decrease in raw material prices, many petrochemical companies did not have enough storage space to purchase more. Therefore, suppliers remain on a path to recovery in the post-COVID environment, which compromises their bargaining power and prompts all parties to seek mutually beneficial solutions.
Finally, the competitor rivalry factor is another critical component of Porter’s framework. This aspect has become a significant area of concern for the petrochemical companies of the world, as instigated by globalization. Today, prominent players find it easier to expand their business operations to the foreign market, posing a threat to each other and especially to local companies. For consumers, this tendency implies a better selection of products and reasonable pricing policies, and a lack of monopoly. However, for the industry’s representatives, the rivalry factor places additional stress on the development of business strategies. In its further operations, SABIC is to devote increased attention to the potential impact of global petrochemical leaders who may conquer specific market segments.
Strategic Resources and Core Competencies
In spite of the emerging threats within the petrochemical industry, SABIC continues to demonstrate stable development patterns. In this regard, it appears relevant to investigate the company’s resources and core competencies using the Value, Rareness, Imitability, Organization framework (VRIO). It is envisaged that SABIC should be viewed from two essential resources perspectives: material and human ones. From the Value point of view, petrochemical production utilizes natural gas and oil, which are abundant in Saudi Arabia and easy to extract. At the same time, it enhances the value of the product in international markets, as other producers sustain additional expenses at the raw material purchasing stage. Therefore, the value of the critical material resource is a significant component of SABIC’s competitive advantage. However, raw petrochemical materials can hardly be deemed rare, as the market sees a number of prominent suppliers, from Russia to the Middle East and South America. The Rareness aspect is, in fact, embedded in the human resource side of the discussion. For Saudi Arabia, SABIC is the key petrochemical player, thus attracting the best specialists from all over the kingdom.
Next, on the Imitability level, the competitive advantage cannot be ensured by petrochemical products alone. The technology is not unique to SABIC, as the global petrochemical market sees many offers from different countries. Accordingly, the key to the core competencies lies in a different domain. More specifically, it appears to be connected to the immense governmental support that SABIC sees in the domestic environment. 70% of its shares are controlled by the state-owned company Saudia Aramco, meaning that the kingdom’s government is heavily invested in the commercial success of the enterprise. In this regard, the cooperation procedures between Aramco and SABIC wield the power to ensure the latter’s competitive advantage in the global petrochemical market. However, such an outcome requires a more potent synergy between the two entities, meaning that the current competitive advantage is temporary. In order to make it solid and sustained, the synergy must be present on all levels, especially in terms of human resources training, development, and retention.
Environmental, Social, and Governance Pressures
Each organization of the contemporary business landscape cannot function in a vacuum. This idea implies that the operations of any company, including SABIC, are heavily influenced by the external context. Therefore, it is vital to consider the contextual pressures experienced by the company in the current environment. More specifically, this section explores the environmental, social, and governance pressures on SABIC. In the first case, the petrochemical business environment is highly competitive. As discussed above, the globalization patterns have promoted worldwide operations executed by the prominent companies of the industry. Under these circumstances, organizations are pressured into an international presence to remain relevant and sustain the development pace. This process entails additional difficulties in terms of logistics and business model adaptation. More specifically, SABIC may find it challenging to operate with the same level of efficiency in the markets where it does not have the local government’s support.
In terms of the societal pressure, the primary challenge for SABIC and the petrochemical industry, in general, consists of the environmental protection liabilities. Amid the pursuit of sustainability, this business area sees additional pressure, being urged to reduce the environmental impact of its activities. Failure to comply with modern values harms the brand’s image, making it subject to criticism and even boycotting on an international level. SABIC responds to this pressure by declaring its allegiance with green initiatives, investing in sustainable practices that will keep the industry-relevant with a reduced environmental impact.
Finally, as for the governance pressure, the current situation is favorable for SABIC, at least on the domestic level. As introduced earlier, the company benefits from the support of the Saudi government, being a subsidiary of the state-owned Saudi Aramco corporation. The main avenues of international pressure exist on the international pressure, as other governments may seek to protect local players. Furthermore, SABIC has seen dumping accusations from China and India. The situation continues to progress as, for example, the European Union has imposed anti-dumping duties on Saudi Arabian petrochemical imports (Arab News, 2021). In this regard, the response by SABIC is yet to be observed and evaluated.
SABIC’s Financial Performance
Table 1 serves to represent the critical dynamics of SABIC’s financial performance in the years 2018, 2019, and 2020. The conclusions were made based on such indicators as Net Income, Shareholder equity, and Return on Equity.
Table 1. SABIC’s Financial Performance in 2018-2020
|Return on Equity||0.14399347262||0.04006051143||0.00646750202|
This table shows the rapid decline due to the pandemic and the oil war between Saudi and Russia. The price of global petroleum decreased for many decades, and producers eased for the land and sea storage for their petroleum instead of selling it at a loss.
Organization’s Performance at the Segment Level
SABIC collaborates closely with its customers to continually enhance SABIC’s products performance to fulfill client requirements and expectations. For specialized applications, technical specialists from SABIC are ready to advise. Global partnerships with industry and academic experts from technology to process allow SABIC to deliver sustainable and resilient solutions to clients’ innovative problems that help them to secure long-term success.
The increase in available advanced biofuels helps the manufacturers of gasoline achieve their objectives and leads to high-efficiency fuels. This year, we began producing bio-MTBE (methyl tert-butyl ether) in the Netherlands, Geleen, through a cooperation with the BioMCN. Bio-MTBE is a renewable fuel addition mixed with petrol for a product that results in a CO2 emission reduction of over 50 percent over its pure fossil-fuel counterpart, generated from second-generation bio-methanol. The “Growing Only” strategy of specialties, focused on innovation and personalization and designed to achieve the leading position of global peers, continues to gather momentum in 2019. As an autonomous organization, specialties with their finances and assets are critical to this strategy and future organic and inorganic expansion. Significant progress is expected to be made in 2020 to offer financial transparency, improved agility, and an ever deeper emphasis on customers.
The globe has continued to face increasing problems for feeding the planet. To overcome these problems, SABIC has continued to expand its capabilities. Their objective is to retain a customer-oriented approach, including expanding the footprint of the worldwide asset of essential fertilizers, downstream integration, and distribution to 20% of the overall product line. The goal is to produce highly effective products in diverse climatic and soil circumstances and offer agricultural solutions for different agrarian crops.
Improvements in manufacturing continue to improve efficiency and productivity while enhancing the sustainability commitment of SABIC. New formulas offer customers more excellent performance and flexibility, helping them to generate new products and services in all industries, from transport to manufacturing to medical equipment; the advantages of mutually beneficial business relationships in providing solutions that sincerely meet consumers’ needs are evident from innovative technologies that emerge from cooperation.
SABIC can be compared to big companies like Shell and BP. SABIC (Saudi Basic Industries Corporation) is a manufacturing company that specializes in diversified chemicals. British Petroleum (BP) is an oil and petrochemical company that operates upstream, downstream, and renewables businesses. Royal Dutch Shell is a group of energy and petrochemicals companies. SABIC specializes in manufacturing & Industrial, agritech, chemicals, food additives, metal products, polymers. SHELL specializes in energy & utilities, exploration & development, natural gas, oil & gas, petroleum, refinery. BP specializes in energy & utilities, chemicals, exploration & development, oil & gas, petroleum, renewables. The revenue of SABIC is 45 billion dollars in 2020, while SHELL’s is 180.5 billion dollars and BP’s is 183.5 billion dollars.
This table shows comparable data with other companies.
Table 2. Comparable companies’ data
|Company||TEV/Total Revenues LTM – Latest||TEV/EBITDA LTM – Latest|
|Dow Chemical (DOW)||1,3x||8,5x|
|Lyondell Bassell (LYB)||1,3x||8,0x|
|Selected Comps (Highlighted)|
SABIC Business Model and Strategy
With the acquisition being finalized, Aramco is improving its position in the global petrochemicals sector, which is anticipated to expand the quickest oil demand in the coming years. According to SABIC, “combined, in 2019 Aramco and SABIC recorded petrochemicals production volume of nearly 90 million tonnes, including agri-nutrient and specialty products” (2021). H E Yasir Othman Al-Rumayyan, Governor, Public Investment Fund (PIF), stated that this was an essential milestone for three of the major institutions of Saudi Arabia, said Yasir Othman Al-Rumayyan, governor of the PIF. It provides capital for PIF’s long-term investment strategy, as it drives Saudi Arabia’s economic transformation and growth and benefits our people; supports Aramco’s continued downstream growth and enhances its international footprint; and provides SABIC with the ability to support growth projects as a new, strategic energy industry-focused shareholder.
SABIC’s connection with PIF and Aramco stretches back to its creation in 1976, said Yousef A. Al-Benyan, vice-president and CEO (SABIC, 2021). SABIC would like to thank His Excellency Yasir Al-Rumayyan for his solid and continuous support. Aramco is tremendously enhanced by the worldwide scale and presence of SABIC, one of the essential chemical businesses in the world. As the development platform for chemicals, SABIC anticipates that it will benefit from Aramco’s extra size, technology, prospective investment, and growth prospects to produce integrated energy and chemicals.
As the new largest stakeholder in SABIC, Aramco has the capacity to choose SABIC’s primary managers. As SABIC became an integral component of the Aramco Group, the SABIC Board will guarantee a strategy alignment and supervise the ongoing development of value for SABIC and all its shareholders. A cooperation and integration committee has also been formed to suggest issues of collaboration and integration expected to produce value, particularly for SABIC and the Aramco group. The SABIC CEO will head the Committee and will comprise two SABIC members and three Aramco members.
SABIC Value and Synergy with Aramco
The purchase of SABIC is in line with the long-term downstream approach by Aramco to increase its capabilities to combine refining and petrochemicals and produce added value along the whole hydrocarbon chain. Aramco explicitly enhances its chemical strategies through the transformation of Aramco into one of the world’s major petrochemical players; integrate upstream production with the feedstock SABIC; expand its supply chain, manufacturing, commercializing, and sales capacity; complement geographic presence, projects, and partners; and increase the resilience of cash flow generation with the synergistic opportunities. SABIC is also anticipating that it will profit from Aramco’s output and capacity to develop and execute large-scale expansion projects.
Although a COVID-19 epidemic forced several firms to reconsider or review their long-term objectives, they have been able to conclude this historic deal with their long-term focus, financial strength, and resilience. It is the start of a new chapter in both organizations’ histories and an essential landmark for the implementation of a long-term downstream strategy. Worldwide, the COVID-19 epidemic is quickly spreading, a significant shock to the general oil and fossil fuel markets. According to Hanieh, “with demand for energy in free-fall due to the pandemic, world oil markets were simultaneously hit “Oil Price War” between Russia and Saudi Arabia, which promised to increase global supplies significantly” (2021). Consequently, the price of global petroleum decreased for many decades, and producers eased for the land and sea storage for their petroleum instead of selling it at a loss. Remarkably, West Texas Intermediate (WTI) price decreased to negative in mid-April 2020 when merchants in physical supply contracts had to pay for others to remove petroleum from their hands due to the absence of storage.
Saudi Basic Industries Corporation (SABIC) is a leading enterprise in several business categories. Attracted the interest of big investors by the quality of goods from the SABIC and the firm’s dedication to growing in the industry. SABIC nowadays is a Riyadh-based government enterprise. The firm remains a crucial part of the economy in Saudi Arabia, which is enabled by crucial petrochemical conditions in the nation.
The SABIC example is representative of the industry and hence increases the usefulness of the structural study. The fact that SABIC works in numerous major business fields is essential to highlight, although our study focuses on the core of petrochemicals. The research should thus be based on the concept of Porter’s Five Forces. It is essential to describe the significant problems and peculiarities of Saudi Arabia’s petrochemical firms in today’s scenery. The kingdom became one of the world’s significant petrochemicals manufacturers in the last decade. SABIC can be compared to big companies like Shell and BP.
Each modern enterprise organization cannot operate in a vacuum. This notion involves a robust external environment for the functioning of any enterprise, including SABIC. The contextual stresses the firm has faced in the present climate are therefore essential to examine. SABIC collaborates closely with its customers to continually enhance SABIC’s products performance to fulfill client requirements and expectations. With the acquisition being finalized, Aramco is improving its position in the global petrochemicals sector, which is anticipated to expand the quickest oil demand in the coming years. Although a COVID-19 epidemic forced several firms to reconsider or review their long-term objectives, they have been able to conclude this historic deal with their long-term focus, financial strength, and resilience. It is the start of a new chapter in both organizations’ histories and an essential landmark for the implementation of a long-term downstream strategy.
Arab News. (2021). Europe slaps anti-dumping duties on MEG Saudi petchems product. Arabnews.Com. Web.
Hanieh, A. (2021). COVID-19 and global oil markets. Canadian Journal of Development Studies/Revue canadienne d’études du développement, 42(1-2), 101-108. Web.
SABIC. (2021). About. Sabic.Com. Web.
SABIC. (2021). Homepage. Sabic.Com. Web.
SABIC. (2021). Saudi Aramco completes share acquisition. Sabic.Com. Web.