Managerial Economics Assignment of

Syed Tasaduq
Q1. Find from the sources the demand and supply of housing accommodation in any one of
the emirates. Explain the factors that influence the demand and supply of housing
accommodation.

DEMAND & SUPPLY OF HOUSING

The determination of prices in local and regional housing markets is a classic example of
microeconomics in action!

We are seeing the interaction between buyer and seller with prices being offered and agreed
before a final transaction is made. Here I focus on the demand and supply side factors that
determine the value of properties in a market.

Each housing transaction in the UAE depends on:

(a) The price that the seller is willing to agree for their property with the prospective buyer

(b) The actual price that the buyer is willing and able to pay.

Buyers place offers for a property that the seller can either accept or reject

A Sellers Market

When the market demand for properties in a particular area is high and when there is a
shortage of good quality properties (i.e. supply is scarce) then the balance of power in the
market shifts towards the seller. This is because there is likely to be excess demand in the
market for good properties. Sellers can wait for offers on their property to reach (or exceed)
their minimum selling price.

A Buyers Market

Conversely when demand both for new and older housing is weak and when there is a glut
of properties available on the market, then the power switches to potential buyers. They
have a much wider choice of housing available and they should be able to negotiate a price
that is lower than the published price.
When the demand for houses in a particular area increases (perhaps because of an inflow of
population into the area, or a rise in incomes following a fall in unemployment), there is
upward pressure on market prices.

Often the supply of available housing in the market is relatively inelastic. This is because
there are time lags between a change in price and an increase in the supply of new
properties becoming available, or other homeowners deciding to put their properties onto
the market.

When demand shifts outwards and supply is inelastic the result is a large rise in market
price and a relatively small expansion of the quantity of houses traded. As supply becomes
more elastic over time, assuming the conditions of demand remain unchanged, we expect to
see downward pressure on prices and a further increase in the equilibrium quantity of
houses bought and sold. Below examples and real time data illustrates the abive theories
and concepts.
Even though around 30,000 residential units will come into the housing market over the
rest of the year as developers start delivering their projects to buyers, but this will not create
any downward pressure on rents or prices, say analysts. This is because "All the stock is
expected to be absorbed by the market as soon as it comes in. The appetite for housing is
still enormous in Dubai and demand will outstrip supply all the way to the end of the year,"
said Andrew Chambers, managing director of Asteco.

Data compiled by Asteco shows that the largest chunks of new housing stock are expected to
come from the Jumeirah Beach Residence, Dubai Marina and International City
developments. "The numbers may change if there are any major delivery delays." A lot of
inventory has already been delivered at Dubai Marina and International City, with more
expected to follow, starting in August. The 25,000 to 30,000 deliveries this year are,
however, not even close to the expected demand. Last year alone, Dubai Municipality
figures show, about 250,000 new residents moved into the emirate.

This translates into a demand for a minimum of 64,000 homes, taking into consideration
that the new residents include family members or that bachelors will share accommodation.
The current demand outstrips supply by a ratio of four to one.

"There are a lot of projects in the offing; and it is expected that the market will be a lot more
competitive.

"The end-consumer should be the winner in all this with developers being put under more
pressure to be more quality focused," said Better Homes sales manager Emma Cullen.
A look at the delivery graph for the next three years could provide some relief, as developers
have announced massive projects since the property registration law was codified on March
12. Among the master-planned projects, Sama Dubai launched The Lagoons, Dubai
Properties announced Culture Village, City of Arabia launched Wadi Residences and Al
Manal unveiled Crown City.
Relatively smaller projects involving a single structure include Burj Al Alam from the
Fortune Group, Regal Tower by Tameer, Peninsula Tower by Tulip and The Skyscraper from
Al Attar Properties.

Foreign developers also rolled into Dubai, with India's Sheth Group announcing the Iris
Blue tower and Korean company Bando Housing buying land for a multiple-use project.
Rents will, however, continue to increase over the next 18 months, analysts say, until
significant portions of this expected inventory come into the emirate's housing market.

"But more competitive offerings will be a natural consequence of greater choice," said
Cullen.

Largest rent increase

Residents of one bedroom flats in the Rigga and Muraqqabat areas of Dubai witnessed the
largest average increases in rent in the first quarter of 2006 compared to the amount they
were paying in the first quarter of 2005. An increase of 54.76 percent in Rigga and a similar
increase in Muraqqabat took annual rents of one bedroom apartments from an average
ofDh42,000 in the first quarter of 2005 to an average of Dh65,000 in the first three months
of 2006 the rent figures compiled by the Dubai based property services company reveal.

Indeed, the crux of the supply and demand equation in Dubai is that most building
programmes are running a long way behind schedule. Nakheel is promising a definitive
timetable for delivery 'within four weeks' but buyers in the Jumeirah Islands villa project
have been annoyed that their moving in date of this month has again been changed.

Delays on delivery are not new in Dubai, but waiting times are getting longer. The Meadows
3 and 4 came in two months late just over two years ago, now slippages of more than 1 year
are the norm.

This adds to the pressure on the existing housing stock. Last year some 250,000 new
residents moved into Dubai. Now even allowing for the fact that perhaps only a quarter
needed upscale housing, this still amounts to more than 60,000 people in need of a home.

Now if a new housing project is late those people still have to live somewhere. That adds to
the competition for the existing housing stock and allows landlords to jack up the rental
rates. Actually the market does this; landlords just pick up the cheques.

Higher rents mean that yields are better for existing home owners, and make property
investment more attractive therefore boosting demand for homes and house prices.
Meanwhile, those in rented accommodation get fed up with rising rents and go and buy
something.

This is the supply and demand dynamic of a rapidly growing population like Dubai.
Those who have hoped for a sudden oversupply of property have been very disappointed so
far, and the day of oversupply keeps on getting delayed, just like most of the actual projects.
This is no surprise as one is partly the cause of the other.

Under this kind of virtuous investment cycle house prices will continue to rise until the
market overheats, and residents can not afford to live in Dubai.
However, in Europe and other parts of the world people are used to living in much smaller
and crowded accommodation, and it could be some time before Dubai housing comes close
to a true crisis point; new supply will therefore relieve pressure rather than dampen the
market, and is certainly not about to crash it anytime soon.

Until that distant crisis point, the supply/demand equation will push rents and house prices
higher and higher.

FACTORS INFLUENCING THE DEMAND & SUPPLY

DEMAND

1) Price of a commodity.
2) Supply of the commodity.
3) Change in the status that results in high or low standard.
4) Economic conditions of that country.

SUPPLY

1) Price of a commodity.
2) Factors of production.
3) Prices of related commodities.
4) Change in the technology.

Factors that affect House Prices in UAE

House prices are affected by a combination of supply and demand factors.

Demand Side Factors:

1. Economic Growth / Real income.

Rising incomes enable people to spend more on buying a house. Traditionally, there was a
mortgage ratio of 3 times your salary. Basically if you earnt AED 20,000 the bank would
lend AED 60,000. Therefore rising incomes enable house prices to rise.

Now when the economy goes into a recession and unemployment rises, the demand for
buying houses would fall significantly.

2. Interest rates.
Interest rates affect the cost of paying for a loan. Interest rates are very important as loan
repayments are usually the biggest part of a homeowner's monthly spending.

 In the UAE, the majority of homeowners have variable loans which means an
increase in rates will cause the cost of loans to rise, deterring people to buy.

 People on fixed rate loans will be insulated from fluctuating rates for 2-10 years.
Therefore changes in interest rates can have a time lag of upto 18months before there
full effect is noted on demand for housing.

 It is also important to consider real interest rates (interest rates-inflation)

3. Consumer confidence

During times of high consumer confidence, people are more willing to take out risky loans to
be able to buy a house. For example, in the period 2001-07 100% loans and interest only
loans were quite common. People were optimistic about the housing market and so took out
loans with a higher debt to income ratio.

4. Availability of Mortgage Finance

In the 50s, 60s and 70s, there were stringent restrictions about the availability of finance.
However, with deregulation of the banking sector increased competition has seen a rise in
the number of mortgage products. Products such as interest only, self certification loans and
loans up to 6 times income have enabled people to get more loans, thereby increasing
demand for housing. However, during the credit crunch of 2008, the number of mortgage
products on offer fell due to a shortage of finance in the money markets.

5. Demographic factors

There has been a rising number of households in the UAE. The number of households can
rise faster than the population if the average family size decline and there are more single
people living alone.

Demand for housing in the UAE has been increasing for various reasons such as:

 an increase in divorce rates

 an increase in net immigration from Asia.

 Increase in life expectancy and more old single people

  Children leaving home early

 Less marriage

6. Speculation

Not everyone buys a house to live in it. An increasing number of property investors buy
houses to try and make both capital gains and income from renting. This buy to let investor
is typically more volatile, they will buy when house prices are rising and sell when the
market appears to turn. This makes house prices more volatile because speculators will buy
in a boom and sell in a bust. The number of buy to let investors in the UAE has risen in the
past decade.

However, there are quite high fixed costs in selling a house, such as stamp duty and estate
agent fees. It is not like dealing in shares where you can easily buy and sell. Many buy to let
investors claim they are in for the long term.

The price of rented accommodation

Although UAE house prices have increased faster than inflation, renting has also become
expensive which is the main substitute to buying a house.

7. Inherited wealth.

Many people use inherited wealth to buy houses. This might explain why there have been
rising ratios of house price to incomes. It is also becoming more common for parents to lend
children a deposit to help get their first house. In other words higher house prices are not
deterring people from buying a house - people are finding ways around it.

8. Unemployment

Low unemployment is often associated with rising demand for houses.

Supply side Factors

 In the short run Supply of housing is fixed because it takes time to build houses.
Therefore in the short run demand affects prices more than supply

 However if the supply of housing is inelastic then an increase in demand will lead to
a big increase in price.
Long Run Supply

In the long Run the supply of housing is affected by many factors:

 Availability of planning permission. This is difficult to obtain in rural areas

 Opportunity cost for builders e.g. are there better returns from other types of
investment

 Existing houses may be knocked down because they are deemed unfit to live in.

 An increase in the cost of building new houses will shift supply to the left

******
Q4. Explain the concept of scale of economies with examples from the airline and public
transport system or housing or any other case you can pick up.

Economies of scale, in microeconomics, are the cost advantages that a business obtains
due to expansion. They are factors that cause a producer’s average cost per unit to fall as
scale is increased. An economy of scale is a long run concept and refers to reductions in unit
cost as the size of a facility, or scale, increases. Economies of scale may be utilized by any
size firm expanding its scale of operation. The common ones are purchasing (bulk buying of
materials through long-term contracts), managerial (increasing the specialization of
managers), financial (obtaining lower-interest charges when borrowing from banks and
having access to a greater range of financial instruments), and marketing (spreading the
cost of advertising over a greater range of output in media markets). Each of these factors
reduces the long run average costs (LRAC) of production by shifting the short-run average
total cost (SRATC) curve down and to the right.

Economies of scale is a practical concept that is important for explaining real world
phenomena such as patterns of international trade, the number of firms in a market, and
how firms get "too big to fail". Economies of scale are related to and can easily be confused
with the theoretical economic notion of returns to scale. Where economies of scale refer to a
firm's costs, returns to scale describe the relationship between inputs and outputs in a long-
run (all inputs variable) production function. A production function has constant returns to
scale if increasing all inputs by some proportion results in output increasing by that same
proportion. Returns are decreasing if, say, doubling inputs results in less than double the
output, and increasing if more than double the output. If a mathematical function is used to
represent the production function, returns to scale are represented by the degree of
homogeneity of the function. Production functions with constant returns to scale are first
degree homogeneous; increasing returns to scale are represented by degrees of homogeneity
greater than one, and decreasing returns to scale by degrees of homogeneity less than one.

The confusion between the practical concept of economies of scale and the theoretical
notion of returns to scale arises from the fact that large fixed costs, such as occur from
investment in a factory or from research and development, are an important source of real
world economies of scale. In conventional microeconomic theory there can be no increasing
returns to scale when there are fixed costs, since this implies at least one input that cannot
be increased.

Economies of scale refers to the decreased per unit cost as output increases. More clearly,
the initial investment of capital is diffused (spread) over an increasing number of units of
output, and therefore, the marginal cost of producing a good or service is less than the
average total cost per unit (note that this is only in an industry that is experiencing
economies of scale).

An example will clarify. AFC is average fixed cost.

If a company is currently in a situation with economies of scale, for instance, electricity,

then as their initial investment of $1000 is spread over 100 customers, their AFC is

If that same utility now has 200 customers, their AFC becomes ... their
fixed cost is now spread over 200 units of output. In economies of scale this results in a
lower average total cost.

The advantage is that "buying bulk is cheaper on a per-unit basis." Hence, there is economy
(in the sense of "efficiency") to be gained on a larger scale.

Another example of this can be found in the telecommunication industry. To service a single
phone in a town costs a huge amount of money. Lines must be laid, towers constructed, and
other infrastructure purchased to hook the phone up to local and long-distance lines. When
the company is servicing a hundred phones, however, the cost per phone of the entire
infrastructure is significantly lowered.

Because the infrastructure is so costly for a small company, it may be most efficient for the
entire town to be served by a single phone company. This company would then be known as
a natural monopoly. In fact, a natural monopoly as a result of economies of scale is exactly
the contention made about AT&T prior to the 1974 United States Department of Justice
antitrust suit against the company.

Economies of scale are also present in businesses like software that have high fixed costs for
marketing and development but a very low marginal cost for distribution. Naturally these
lead to questions of monopoly.

Corporations incur fixed costs when buying heavy machinery, buildings, or other large
purchases. A fixed cost is called 'fixed' because when production increases in the short run,
new buildings and machines are not immediately needed. Because fixed costs are not tied to
production, firms have an incentive to produce as much as possible (assuming they can sell
their product). Intuitively, a large factory should produce a large number of units to
minimize its fixed cost per unit. Say that an automobile factory costs 1 million dollars. If it
only produces 1000 cars, then its Fixed Cost Per Unit is 1 million dollars divided by 1000
cars, or $1000/Car.

If the factory produces 8000 cars, however, its Fixed Cost Per Unit is 1 million dollars
divided by 8000 cars, or $125 per car. By producing 7000 more cars, the firm gets an 88%
fixed cost reduction per car.

This graph illustrates that increased production reduces fixed costs per unit.

With fewer fixed costs per unit, firms can afford to lower per unit prices. If fixed costs are
very significant to a particular firm's industry, then firms who mass produce efficiently can
cut costs, extract revenues, lower prices, and therefore capture market share. Higher market
share and higher revenues mean more money to spend on machinery, and expand the firm.
This in turn allows further cost cutting, higher production, and the development of better
products. In the long run, firms which effectively mass produce take over industries
dominated by high fixed costs.

This is known as an economy of scale.

The following graph shows that success in an industry with high fixed costs is self-
compounding.
Where Are Economies of Scale?

In addition to specialization and the division of labor, within any company there are various
inputs that may result in the production of a good and/or service.

 Lower input costs: When a company buys inputs in bulk - for example, potatoes
used to make French fries at a fast food chain - it can take advantage of volume
discounts. (In turn, the farmer who sold the potatoes could also be achieving ES if
the farm has lowered its average input costs through, for example, buying fertilizer in
bulk at a volume discount.)

 Costly inputs: Some inputs, such as research and development, advertising,
managerial expertise and skilled labor are expensive, but because of the possibility of
increased efficiency with such inputs, they can lead to a decrease in the average cost
of production and selling. If a company is able to spread the cost of such inputs over
an increase in its production units, ES can be realized. Thus, if the fast food chain
chooses to spend more money on technology to eventually increase efficiency by
lowering the average cost of hamburger assembly, it would also have to increase the
number of hamburgers it produces a year in order to cover the increased technology
expenditure.

 Specialized inputs: As the scale of production of a company increases, a company

can employ the use of specialized labor and machinery resulting in greater efficiency.
This is because workers would be better qualified for a specific job - for example,
someone who only makes French fries - and would no longer be spending extra time
learning to do work not within their specialization (making hamburgers or taking a
customer's order). Machinery, such as a dedicated French fry maker, would also have
a longer life as it would not have to be over and/or improperly used.

 Techniques and Organizational inputs: With a larger scale of production, a

company may also apply better organizational skills to its resources, such as a clear-
cut chain of command, while improving its techniques for production and
distribution. Thus, behind the counter employees at the fast food chain may be
organized according to those taking in-house orders and those dedicated to drive-
through customers.

 Learning inputs: Similar to improved organization and technique, with time, the
learning processes related to production, selling and distribution can result in
improved efficiency - practice makes perfect!

External economies of scale can also be realized from the above-mentioned inputs as a
result of the company's geographical location. Thus all fast food chains located in the same
area of a certain city could benefit from lower transportation costs and a skilled labor force.
Moreover, support industries may then begin to develop, such as dedicated fast food potato
and/or cattle breeding farms.
External economies of scale can also be reaped if the industry lessens the burdens of costly
inputs, by sharing technology or managerial expertise, for example. This spillover effect can
lead to the creation of standards within an industry.

But Diseconomies Can Also Occur…

Diseconomies may also occur. They could stem from inefficient managerial or labor policies,
over-hiring or deteriorating transportation networks (external DS). Furthermore, as a
company's scope increases, it may have to distribute its goods and services in progressively
more dispersed areas. This can actually increase average costs resulting in diseconomies of
scale.

Some efficiencies and inefficiencies are more location specific, while others are not affected
by area. If a company has many plants throughout the country, they can all benefit from
costly inputs such as advertising. However, efficiencies and inefficiencies can alternatively
stem from a particular location, such as a good or bad climate for farming. When ES or DS
are location specific, trade is used in order to gain access to the efficiencies.

Conclusion

The key to understanding ES and DS is that the sources vary. A company needs to
determine the net effect of its decisions affecting its efficiency, and not just focus on one
particular source. Thus, while a decision to increase its scale of operations may result in
decreasing the average cost of inputs (volume discounts), it could also give rise to
diseconomies of scale if its subsequently widened distribution network is inefficient because
not enough transport trucks were invested in as well. Thus, when making a strategic
decision to expand, companies need to balance the effects of different sources of ES and DS
so that the average cost of all decisions made is lower, resulting in greater efficiency all
around.

**************
Q5. Explain the competitive environment available in the telecommunication,
retail, and public transport markets UAE, from your learning.

In 2006 the UAE's telecom market was still a monopoly, with government owned operator
Etisalat the lone choice. But the entrance of telecom operator du in February marked a vital
shift.

In less than a year du has managed to grab a 15 per cent of the mobile telecom market and
analysts predict that it will continue to grow in the years to come. 'Du is a start-up in a
mature market, but because of the commercially driven management, we expect du's market
share to reach 30 per cent in 2010,' said a telecom analyst.

For now, Etisalat will continue to dominate the market, having both a strong foundation
and infrastructure which dates back to 1976. 'One of the biggest challenges was competing
with a company that already had infrastructure set up for more than a decade,' admits
Osman Sultan, CEO of du. Another challenge du faced is not having a sister company in the
market to guide the way. 'Unlike other telecom companies in the region we didn't have a
back to rely on, like Mobinil in Egypt had Orascom and Vodafone Egypt had Vodafone
International,' he added. Being a 'stand alone' company du had to rely entirely on finding its
own niche in the market and to attract both existing and new subscribers.

There were initial reports of unhappy customers struggling to get a connection when they
wanted to make calls. Sultan told AME Info that 'bad connection' problems are no longer an
issue for customers.

Du currently claims it has more than one million mobile subscribers, while Etisalat
registered 6.3 million subscriptions, which put the rate of penetration at an all time high of
150 per cent, telecom officials said. Sultan expects further growth by year end.

According to government statistics in 2006, the UAE's population is 4.6 million, which
means that there are about 178 mobile numbers in circulation per 100 people, or about two
sim cards per person. 'With [this] penetration rate, the UAE is among the world's most
technologically advanced countries in the world,' Mohammad Hasan Omran, Etisalat
chairman told a telecom conference last month.

But few analysts believe that these rates are 'over inflated' by the companies, as no
definition was set by the country's Telecommunications Regulatory Authority (TRA).
Analysts believe that due to the lack of an active subscriber definition, about 25 per cent or
less of du's reported mobile subscribers are non-active.

Sultan admitted that du counts both active and non-active subscribers in its numbers. 'We
do follow the international definition of an active subscriber, which is basically an individual
who makes at least one call over a period of 90 days,' he said.

But he was not prepared to reveal the true active users figure unless competing telecom
giant Etisalat does the same. 'Both companies have to reveal these numbers together so
people would be able to compare apples with apples,' he said.
Analysts suggest that going forward operators should abide with what the three months
rule. 'This means that if subscribers don't use their lines for three months they would be
considered non-active’.

It seems UAE has a relatively high standard of living in comparison to other Middle Eastern
countries; so many people could afford to have more than one mobile line. As a result of the
public's sheer curiosity and desire for added benefits about 300,000 customers subscribed
to du on the day it launched. 'There is no magic recipe for success…people just want more
value for money and that's were we came in by introducing per second billing, mobile TV, e-
shopping and other services,' said Sultan.

But it is not expected to turn a profit until 2009. 'You have to understand that profits don't
happen over months, it takes time and I believe that in 2009 we will start acquiring profit,'
said Sultan.

Forced to du

Earlier this year the World Economic Forum ranked the UAE the most competitive economy
in the Middle East and North Africa, based on IT resources. But many analysts today are
becoming more skeptical about the TRA's intension towards liberalising the telecom sector.
'The government owns about 40 per cent in the stakes of both operators so there is a vested
interest in both as they are not independent companies,’.

So this 'muzzled' competition still leaves the UAE a few steps back from being WTO
compliant. 'I think that there is room in the market for added competition, in other words
du should yield positive results for everyone,' said EFG's Ananian.

Sultan said he welcomes competition, even if at the moment the TRA faces a few obstacles
in terms of distributing telecom towers in the country. 'It's true that in some areas users are
forced to use one of the operators without having any other choice, but this is because of
technical issues with regards to sharing infrastructure which the TRA is working on,' said
Sultan.

'At the end of the day, we want people to have a choice in what operator to use and I have
confidence that the regulator's regime will give full competition to the nation,' he added.

In the meantime, full liberalisation of the telecom sector remains a mirage. 'Liberalising the
telecom market at this point is difficult and will take time,' said Sultan. Analysts have there
own doubts about the real intension of the TRA. 'The government knows that this a strong
revenue generating sector so that's why they will find it hard to let go,' say the analysts.

Last year alone, Etisalat revenues hit Dhs16.2m ($4.4m) versus Dhs12.8m last year 'So
maybe in 2013 we will start to see a more liberal telecom sector in the UAE,' say the
analysts.

Moving across borders

While competition is sizzling at home, Etisalat has already moved across the borders by
operating in 14 countries in Africa and Asia with a total of 28 million international
subscribers. It's most recent licence win was in Egypt in July 2006, costing LE16.7bn
($3bn), plus six per cent of annual revenues paid to the government as licence fees.

'I think that we will be seeing a slowdown in EBITDA for Etisalat next year, due to losses at
the level of the Egyptian start-up,' said Ananian.

Overall forecasts for the coming five years are positive and indicate that the UAE will still
remain ahead of the game as further growth in population and number of expats moving in
will boost telecom profits. And in terms of mobile tele-density, the UEA still tops MENA
charts. 'This is a time for growth and making a difference,' said Sultan.

The rapid growth in the retail space has triggered a surge in retail spending. Gross Leasable
Area (GLA) in the UAE is estimated to reach 7.4 Million Sq Meter by 2010 end. In 2007,
UAE’s GLA accounted for an estimated 17% of the GCC total, and this share is forecasted to
reach 34% by 2010. This rapid growth in retail space shows great potential in the UAE retail
sector.

The UAE enjoys the status of a major tourism destination in the Middle East. In fact, it is
the top country in Middle East in terms of the contribution of travel and tourism to the GDP
(tourism contributes about 23% in GPD of the country). The UAE government is also
fostering the sector by investing more in it than any other country in the region. It is
expected that approximately 18 Million tourists will visit the country by 2016; and Abu
Dhabi alone has plans of investing nearly US$ 140 Billion in the sector to realize the three
million tourist goal by 2015. As tourism has a big impact on retail industry, booming
tourism market will definitely boost the retail sector of the country.

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Comprising five sections, it’s Food & Drink chapter provides analysis of each market’s Food
& Drink industry, culminating in a 5-year forecast for the sector. The chapter includes the
following elements: Regional Overview, Market Overview, Industry Developments,
Company Developments and a 5-Year Forecast. This section contains a historic data series
and forecasts to end- 2011 for key indicators including food consumption (US$mn), food
expenditure (% household spending), canned food sales (‘000 tonnes); canned food sales,
value (US$mn); confectionery sales (‘000 tonnes); confectionery sales, value (US$mn);
coffee sales (US$mn); tea sales (US$mn); alcoholic drinks sales (US$mn); and soft drinks
sales (US$mn).
5-Year Tobacco Forecast

Overview and analysis of structure, industry developments and forecasts for the tobacco
market.

SWOT Analysis

At-a-glance perspective on the strengths, weaknesses, opportunities and threats facing each
market’s Food & Drink industry. It also provides similar economic and business
environment studies.

Competitive Landscape & Profiles

Illustration of the industry via rankings tables comparing revenues, number of outlets,
number of employees and registration dates. It analyses each company’s performance,
market position, strategy and investment potential.

The United Arab Emirates' (UAE) food and drink industry continues to demonstrate signs
of a rapidlymaturing market, as discussed in It’s recently-published UAE Food & Drink
Report for Q207. Many trends that have had a major impact on the global level can now also
be seen in the UAE, such the increasing concern with environmental values. In April leading
retailer Carrefour introduced reusable bags as an alternative to disposable plastic bags at 10
of it UAE outlets. According to the company, Carrefour alone is currently responsible for
100 tonnes’ worth of plastic bag waste a month. Through this initiative, the company hopes
to first cut consumption by 5%, with the long-term target of phasing out the bags
completely. Carrefour will charge AED2 (US$0.50) for the bags, which, if damaged, can be
replaced at any of the outlets free of charge. The company says that this will not actually cut
operating costs at all, but is purely aimed at environmental protection.

Rival retailer Spinneys has also been quick to jump on the environmental cause and has
announced that it is developing more durable reusable bags, which will soon be available in
its UAE outlets, and has also launched recycling centres in three of its Dubai stores. Masafi,
the leader in the bottled water industry has also launched an environmental initiative,
partnering with a local non-profit environmental organisation to promote civic awareness
and recycling initiatives. Masafi will help provide recycling stations in ten schools in the
pilot phase, and will eventually roll out the project in 30 schools across the country.

Although environmental concerns have not traditionally had a major impact on consumer
purchasing decisions in the Middle East, this could soon change, particularly if such major
retailers and drink companies take the lead. Another 'greening' example is the government's
support of organic farming.

Although such efforts can only take place on a very limited scale due to environmental
constraints that the government even makes an effort to promote these projects as 'organic'
reflects a growing awareness across UAE society. Another reason why the government is
supporting such efforts is not only concern for the environment, but also for the health of
their citizens. Obesity rates are soaring in the country, fuelled by excess consumption and
sedentary lifestyles, with diabetes now affecting up to a quarter of the adult population, four
times the global average. Given these alarming figures, the government is looking for ways
to encourage healthy eating, which will also provide opportunities for food and drink
companies who will see growing opportunities to introduce 'light' versions of food and drink
products.

In fact, it is not that surprising that the UAE market is being affected by the same trend that
can be observed in the markets of the West, given the large number of expatriate residents
in the country. With expatriates making up close to 80% of the population, and tourism
levels booming, the food and drink landscape is becoming increasingly globalised and
westernised, which, along with the country's phenomenal economic development, is a major
driving force behind the growth of the industry.

Abu Dhabi: Abu Dhabi Department of Transport (DoT) on Wednesday launched a two-year
programme designed to gradually overhaul the emirate’s public transportation system.

The DoT plans to introduce 1,360 world-class buses by the end of 2010 and has already
designed Abu Dhabi’s future bus route, which will provide comprehensive coverage within
cities.

"This programme aims to provide Abu Dhabi residents with the necessary public transport
system and infrastructure in accordance with international standards

As the emirate’s population will increase to 1.5 million people by 2010, the DoT is today
sowing the seeds for a safe, sustainable, economically viable, efficient and lifestyle-
enhancing transportation system that shall be the preferred mode of transport for the
public," said Abdullah Rashid Al Otaiba, Chairman of the Department of Transport.

Bus

Introduced on 30th June 2008, there is a network of air-conditioned buses operated by the
Department of Transport that cross the island of of Abu Dhabi including: Grand (Sheikh
Zayed) Mosque, Abu Dhabi Mall, Marina Mall, Al Wahda Mall, Al Mina Shopping Centre
and Carrefour (on Street 2, aka Airport Rd).

The buses around the city are priced at 1 AED per trip (or buy a one day pass for 3 AED or a
monthly pass for 40 AED). Clear bus maps are found at all bus stops. The number of routes
can be expected to increase in future, to include the International Airport, Mussafah and
Khalifa city which are currently outside the bus network.

The buses are an excellent way to get round the city and are excellent value for money.
Routes start at about 6:30 am and finish around midnight. The buses are popular with all
nationalities. The section for women is immediately behind the driver and men at the back.

Bus to Dubai

Buses to Dubai cost 15 Dhs each way (or 20 Dhs for new luxury bus). These buses leave from
the central bus station in both cities and take about 2 hours.

Taxi

There are nearly 10,000 taxis in Abu Dhabi and this is the most common form of 'public'
transport. You can flag down a taxi anywhere so long as it is safe for the driver to stop. Most
taxis are cheap, but fares vary. The older taxis are white and gold (being phased out) which
start at 2 Dhs per trip and usually 5 Dhs for a typical trip inside the city centre area; slightly
more expensive and newer are the silver taxis (starting at 3 Dhs per trip and the
same typical trip will cost around 10 Dhs ). Taxi companies that operate limousines from
hotels (usually black in colour) are more expensive and most meters start from 20 Dhs. It is
also possible to phone a taxi company (e.g. Al Ghazal or NTC) and those will generally have
plain white cars that do longer trips (such as to Dubai, Al Ain or to the airport) - either
metered or an agreed fixed price.

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Q3. Estimate the number of commuters who will use public bus and Dubai metro services by
2010.

Dubai Metro will make Dubai even more vibrant city through boosting the economic and
tourist business, and bringing about a lot of changes to people's lifestyles. Metro lines will
also give rise to more and new opportunities in retail business. Statistics reveal that retail
business is one of fastest growing sectors in Dubai, and the total retail spending will be
reaching a new height of Dhs27.9bn.

The Dubai Metro project, the world's first and longest fully automated rail system
extending 75km, will soon become part of our life in Dubai when it opens next year. With
the opening of the project, people will be moving around the city with ease, convenience and
comfort. Dubai city is a fast growing city with swell in commercial activities, increase in
population and the growing tourism. Estimates point that the city will attract 15 million
visitors by 2010, and its population will reach 3 million by 2017.

Dubai Metro will come to ease the increasing demand for public transport. As an estimate,
the Red and Green Lines will serve 1.2 million passengers on an average day, that is, 27,000
passengers per hour for each line, and 355 million passengers per year when both lines are
fully operational. And it will comprise 12% of the total trips in Dubai. Bus routes and stops
will be organized around the backbone of the metro system. Taxi stations and park-and-ride
facilities and services will be provided in the key metro stations.

Like all leading metros in the world, Dubai Metro will focus on the enrichment of passenger
journey through value-added customer services - that passengers can enjoy various
conveniences to meet their needs during the journey, and ultimately, making travelling on
Dubai Metro a pleasant and enjoyable experience. As a flagship project of Dubai
government, Dubai Metro will present a dynamic and powerful network that links retail
business to the everyday life of everyone, for residents and tourists alike.

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Q8. Outsourcing is the most widely used production system by firms, why is it beneficial to
the firms.

Outsourcing refers to a company that contracts with another company to provide services
that might otherwise be performed by in-house employees. Many large companies now
outsource jobs such as call center services, e-mail services, and payroll. These jobs are
handled by separate companies that specialize in each service, and are often located
overseas.

There are many reasons that companies outsource various jobs, but the most prominent
advantage seems to be the fact that it often saves money. Many of the companies that
provide outsourcing services are able to do the work for considerably less money, as they
don't have to provide benefits to their workers, and have fewer overhead expenses to worry
about.

Outsourcing also allows companies to focus on other business issues while having the
details taken care of by outside experts. This means that a large amount of resources and
attention, that might fall on the shoulders of management professionals, can be used for
more important, broader issues within the company. The specialized company that handles
the outsourced work is often streamlined and often has world-class capabilities and access
to new technology that a company couldn't afford to buy on their own. Plus, if a company is
looking to expand, outsourcing is a cost-effective way to start building foundations in other
countries.

Types of Outsourcing

Offshore outsourcing services can be mainly divided into Technology services outsourcing
and business process outsourcing.

Technology Services Outsourcing

Companies that utilize technology require sophisticated, quick-responding computer

systems and software that are flexible enough to respond to the increasing capabilities of
technology and the rapid changes in business models. Selecting the right technology partner
is an integral part of many successful ventures. Following are the specific types of
technology services.

 Electronic Commerce ("eCommerce")

 Infrastructure ("Networks")
 Software ("Applications")
 Telecommunications
 Website Development & Hosting

Business Process Outsourcing

With globalization, enterprises have been challenged to find the niches where they add the
greatest economic value to the world's economy. As a result, enterprises have looked for
ways to avoid making investments in employees and infrastructures that do not have a high
yield. As service providers witnessed this development, they began to create whole
enterprises based on narrow business processes. The term "BPO" (Business Process
Outsourcing") was coined in about 1995 and became popular a few years later, accelerated
by the explosion of Internet business.

 Customer Contact (Customer Relations Management)

 Equipment
 Finance / Accounting
 Human Resources
 Logistics
 Procurement / Supply Chain Management
 Security

Human Resources, is becoming another sought after outsourcing area. Other areas of who
and what is being outsourced is Document, Utility, Insurance, Secretarial, Consulting,
Healthcare, Manufacturing, News and Media outsourcing.

Advantages of Outsourcing

Proponents of outsourcing cite a variety of reasons for "letting others do it. " Here are some
of the most important

Cost savings - By outsourcing functions that were previously performed in house,

companies are often able to reduce their employee levels and related costs, such as
recruitment, supervision, salary and benefits. By outsourcing a capital intensive function,
you can also reduce the costs of equipment obsolescence and depreciation. A portion of your
cost savings will go to the outsourcer, but outsourcing vendors have a tighter control of
fringe benefits and run leaner overhead structures. They also know how to deal with
vendors serving the function they are providing and therefore, are able to pass on to your
company the benefits derived from bulk purchasing and effective leasing.

Quality of service - Because your company is the outsourcer's customer, you will likely
experience a "can-do attitude," which may not always be exhibited by an in-house staff.

More capital funds - Outsourcing reduces the need to invest capital in non-core business
functions, thereby freeing capital to invest in profit-making aspects of the business.

State-of-the-art technology - Outsourcers have to spend time and money on the most
current equipment and on employee training to remain competitive. By outsourcing certain
areas, you are assured of receiving the most efficient services and the latest technological
advances within that particular function.

Price stability - By signing a contract to outsource, you will likely be able to obtain stable
pricing, eliminating the future need to shop around. Stable pricing allows the company to
budget operating expenses and capital purchases more accurately, while potentially
preventing the likelihood of surprise expenses.

New business partners - Outsourcers clearly wish to be viewed as your business partner.
And as a business partner, they share in the desire to keep your company operating at its
maximum potential. Through this business partner arrangement, outsourcers are eager to
introduce you to other outsourcers to assist in that goal.

More time to focus on core business activities - You cannot overlook this intangible benefit
of outsourcing. If a company is to be successful and profitable, management is needed to
spend time planning and directing the company's business strategies and not wasting time
worrying about managing certain administrative or ancillary functions.

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