SOE11440 | Marketing With Global Economy | Market Structure of Shell

A. Project question

A major multinational corporation has appointed you as an economic advisor. You are requested to compile a report regarding the macroeconomic environment in two countries where the firm operates and explain how it might affect the company’s economic activity.

B. Project specifications

1. You may choose to focus your analysis on any existing firm with international activity that can be of different types in the two countries.

2. The two countries must be chosen from section C below as follows: one country from List 1 and one country from List 2.

3. Your report must include:

a. A brief description of the company and the product/market it operates in for both countries.

b. An analysis of the market structure in which your company operates for the two countries.

c. A comparative analysis of all major macroeconomic indicators (see section D below, excluding 5 and 8) for the two countries and their overall impact on firm’s economic activity.

d. An analysis of the monetary and fiscal policy (instruments) for the two countries and their impact on the firm’s economic activity. You must include here an analysis of the interest rates (Section D, indicator 5).

e. An analysis of the foreign trade policy instruments (international trade agreements) for the two countries and their impact on firm’s economic activity. You should include here an analysis of the exchange rates (Section D, indicator 8).

C. Country Lists

List 1	List 2
Germany	China
France	India
United Kingdom	Brazil
United States	Russia
Japan	Mexico

D. Macroeconomic indicators1 to be analysed (the last available 10 years):

1. GDP growth rate

2. GDP per capita at constant prices

3. Inflation rate (CPI)

4. Unemployment rate (ILO measure)

5. Interest rate (Monetary Policy Rate)2

6. General government balances (% of GDP)

7. Balance of Payments (% of GDP)

8. Exchange rates (National Currency/USD OR National Currency/Euro)3

Answer:

Introduction

Over the decades, the global economic and commercial scenario, has experienced considerable dynamics and development, owing to the changes occurring in the international framework. International phenomena like that of Globalization, Industrial Revolutions in different countries across the globe, trade liberalisations as well as technological and infrastructural innovations have contributed considerably in making the global business environment increasingly integrated, inclusive and internationally inter-connected (Beck, 2018).

Keeping this into consideration, the concerned report tries to discuss the operations of the Shell company, one of the globally dominant oil and gas companies, in two of the major global economies in the contemporary period, India and the United Kingdom. The report tries to discuss and compare the macroeconomic environments prevailing in the two concerned countries, thereby discussing the impacts of the same on the operations and performance of the concerned company in these two countries, India and the United Kingdom.

Shell: Company Overview

As discussed in the above section, the Royal Dutch Shell plc., commonly referred to as Shell is one of the most eminent public limited company, having its origin in the United Kingdom, with its headquarters in Netherland. The oil and gas company is one of the immensely powerful six oil and gas “Supermajors” in the globe and also ranks internationally sixth, in terms of revenues generated (as per the statistics of 2016). The company, listed in the Fortune Global companies, earn revenues equivalent to nearly 80% of the GDP of Netherlands (Shell.in, 2018).

Founded in 1907, Shell operates in different arenas of oil and gas industry, including production, exploration, refining, transport, distribution, marketing of oil and gas, along with that of petrochemicals and power generation. The company also ventures in the areas of renewable energy production, including that of biofuels, hydrogen and wind. The company presently in 70 countries across the globe and also produces nearly 3.7 million barrels of oil per day, with 44,000 service stations across the globe.

Figu

re 1: Ranks of the global oil and gas companies in terms of net income (USD billion)
(Source: Statista, 2018)

Listed in the London Stock Exchange and being a component of the FTSE 100 Index, the company has an operation income of approximately 15.48 billion USD, generates revenue of nearly 305.1 billion USD and also has a market capitalisation of 185 billion pounds (2016). The company also is one of the major employment generating multinational business organization, employing nearly 119,000 people across the globe (Ibef.org, 2018).

Shell in India and the United Kingdom: Market Structures

Operations in India

Of the 70 major countries in which the concerned company operates, one of the major markets of the company is India, the seventh largest economy in the world, in terms of Nominal GDP. Shell India Markets Private Limited ventures in the domain of refining and marketing crude materials, liquefied natural gas, lubricants, chemicals, bitumen and related product and services in the geographical domain of the country. Apart from these products, the company also provides retail services of fuel across the country. The company operates in India as a subsidiary of the Royal Dutch Shell plc and has its headquarters in Gurgaon. With nearly 75 years of presence in the country, Shell currently aims to venture in the fields of natural gas (LNG), lubricants and solar energy in India (Ibef.org, 2018). The company is also the only international company which has been approved by the Government of India for doing retail fuel business in the country till now. The company also acts as one of the major sources of Foreign Direct Investment and oil infrastructural development in the country.

Oligopolistic Market in India

In India, there are several prominent supply side providers in the petroleum industry which primarily include Indian Oil, Hindustan Petroleum, Bharat Petroleum and Reliance Petroleum. The share of Shell, is much lower as compared to these companies in India. In lubricants also, the market share of Shell is comparatively small in India than that of other companies, which can be seen as follows:

Figure 2: Market share of Shell in Lubricants in India
(Source: Pathak, 2018)

Thus, Shell operates in a highly competitive oligopolistic market in the concerned country but it still has a long way to go to become one of the major players in the concerned industry.

Shell in the UK

As discussed above, the concerned company has its origin in the United Kingdom and its primary headquarter in Netherlands. Like that of India, in the UK also operates in different business areas in the oil and gas industry, the five core ones being:

Exploration and Production
Downstream Gas and Power
Oil Products
Chemicals
Renewables

The company is one of the primary and evidently as well as one of the most significant one in the domain of the domestic oil and gas industry of the United Kingdom and also acts as one of the major contributors to the economy of the country as well as a primary generator of employment in the concerned country (Ibef.org, 2018).

Oligopolistic Market Structure in the UK

Shell is one of the six major fuel suppliers in the UK, the other five being Morrisons, Esso, Tesco, BP and Sainsbury. The market shares of these companies in the concerned industry in the UK can be seen to be as follows:

Figure 3: Market shares of different companies in fuel retail industry of the UK
(Source: Statista, 2018)

Thus, although in both the countries in consideration, the company operates in the oligopolistic markets, however, Shell enjoys a predominant position in the market of the UK although in the India, it faces immense competition from the other companies, enjoying much larger market share and clientele in the country (Dunne et al., 2013).

Macroeconomic Indicators of UK and India: Implications on the company

Much of a company’s success, profitability and long-term sustainability in the business framework of a country depends on the different macroeconomic indicators existing in the country and their dynamics over time.

a. GDP Growth Rate

One of the major macroeconomic indicators of economic progress of a country is that of the growth rate of the Gross Domestic Product of the country over the years. The GDP of a country being a measurement of the total value of all the final services and commodities produced in the geographical domain of the same, within a particular period, the growth rate of the same shows the rate of growth of the economic productivity of the concerned country with time.

Figure 4: GDP growth rate of the UK and India (2008-2018)
(Source: Tradingeconomics.com, 2018)

As is evident from the above figure, the growth rate of GDP for both the UK and India, can be seen to have experienced considerable fluctuations till 2012. However, post 2012, both the rates can be seen to have stabilised to a considerable extent, with the rates in UK being visibly above that of India. The stability in the GDP growth rates of that of India and UK, tend to have positive implications for Shell as increase in GDP implies increase in economic productivity, the effects of which can be reaped by the concerned company (Coyle, 2014).

b. GDP per capita at constant prices

The distributional aspects of the economic benefits among the population of the country, to some extent is seen by the per capita GDP of the country, which measures the total GDP by the total population of the country. When measured at constant price levels, this indicator shows the growth of the average economic well-being of majority of the population of a country.

Figure 5: GDP per-capita of India at constant prices (In Rupees)
(Source: Tradingeconomics.com, 2018)

Over the years, the GDP per-capita of India (at constant prices) can be seen to be steadily increasing over the last decade, with the rate of increase maintaining a more or less linear trend for the last ten years. The per-capita GDP of the country in 2015, can be seen to be more than 46723.21 Rupees for the country.

Figure 6: GDP Per-Capita of the UK at constant prices (In British Pound)
(Source: Tradingeconomics.com, 2018)

The GDP per-capita of the UK, can be seen to be drastically decreased from 2008 to 2009, post which the same can be seen to be slowly gaining back its pace of growth. The current per-capita GDP of the UK can be seen to be 22,746.71 British Pounds (2015) (Coyle, 2014).

Thus, from the above discussion it is evident that the economic well-being of India as well as UK has been consistently increasing over the years, for the majority of the population. Although in absolute terms the per-capita GDP of India is much higher than that of the UK, when measured in terms of US Dollars, the per-capita income of the UK is found to be much higher than that of India. However, the consistently positive trends of economic well-being of the population can have positive implications on the economic activities of Shell, as this can be directly linked with an increase in demand for their products and services.

c. Inflation Rate

Another macroeconomic indicator of immense significance for measuring the economic well-being of a country and its population is that of the rate of inflation prevailing in the country and its movements, which measures the growth of the levels of the average prices of the goods and services with time.

Figure 7: CPI of India and the UK (2008-2018)
(Source: Tradingeconomics.com, 2018)

As is evident from the above figure, the CPI of both the UK and India have increased considerably over the last ten years. However, the value of CPI for India, started much below that of the UK (In 2010), with the values fast catching up with that of the UK and surpassing the same in 2015. In the last couple of years, the CPI of India can be seen to be higher than that of the UK, which in turn indicates towards the fact that the average price levels of India have been growing at a higher rate than of the UK, which in turn is expected to negatively influence the real purchasing power of the consumers of India (D DK NL, 2016).

The growth of CPI being less prominent in the UK than that of India indicates towards the fact that the concerned company, Shell, can operate at a lower cost in the former than that in the latter and also that the demands experienced by the company is expected to be comparatively lesser in India than that in the United Kingdom.

d. Unemployment Rate

The economic well-being of the population of a country and the demand supply conditions in the markets of the same also depend considerably on the level of employment in the concerned country as higher the level of employment, higher is the economic abundance for the population, which in turn increases the demand for products and services, thereby increasing the overall productivity of the concerned economy.

Figure 8: Unemployment Rates in India and the UK (2008-2018)
(Source: Tradingeconomics.com, 2018)

The rate of unemployment in the UK, over the last decade, can be seen to be falling consistently, while that in India can be seen to be falling (with the rates below that of the UK) till 2015, after which the same can be seen to be increasing prominently, surpassing the rate of unemployment of the UK to a considerable extent. The rate of unemployment for India can be seen to be attaining stability (within 3.5%-3.6%) in the recent period (Hasan et al., 2012).

This in turn indicates that the concerned company is expected to experience much higher demands for their products and bigger as well as increasing clientele in the UK due to the increase in economic well-being of the population of the country. On the other hand, due to a higher rate of unemployment in India, the demands for Shell’s products and services are expected to remain comparatively lower in the concerned country. Different industries also being a part of the clientele of this oil and gas company, higher economic activities of the UK, compared to that of India, is expected to contribute to the higher demand for Shell’s products in the UK than that in India.

e. General Government Balance

The government balance or the debt-to GDP ratio of a government shows the comparison between the amount the country owes to what it can produce, that is the ability to pay their debt back.

Figure 9: Government Balance of the UK and India (2008-2018)
(Source: Tradingeconomics.com, 2018)

The public debt of India can be seen to be increasing considerably from 2008 to 2016. However, post 2016, the same can be seen to have decreased to a considerable extent. Conversely, the public debt of UK, as part of the GDP, can be seen to be increasing over the years, which in turn indicates that the UK is comparatively at a riskier position than that of India with lesser ability to pay the debt. This in turn makes it riskier for Shell to expand their operations in UK than that in India (Hasan et al., 2012).

f. Balance of Payments

The volume of all the international transactions (outward or inward) done by the residents of a country, within a period of time, is known as the balance of payments of the country.

Figure 10: Current Account to GDP for India and the UK (2008-2018)
(Source: Tradingeconomics.com, 2018)

The current account balance to GDP of both the UK and India can be seen to be negative and considerably fluctuating, which in turn indicates that both the countries have been experiencing substantial capital outflow than capital inflow, in the last few years, which makes it important for the concerned company to take into account these aspects before making any investments or further expansion of their activities.

Fiscal and Monetary Policies

Fiscal Policies

The main objectives of the fiscal policy framework of India are:

Full employment
Price stability
Stable economic growth
Stable balance of payment
Promotion of overall industrial development (Sims, 2016, August)

On the other hand, UK’s fiscal policies aim to:

Maintain economic prosperity
Promote industries
Increase employment
Stabilise trade and price levels

Figure 11: Corporate tax rates of India and the UK
(Source: Tradingeconomics.com, 2018)

The corporate tax rate of UK can be seen to be declining over the last few years, while that of India can be seen to have increased from 2012 till 2015, thereby maintaining a steady rate (34.6%) which is much higher than UK. This in turn, implies that for Shell, it is much more profitable to do business in the UK than in India, as the tax structure of the former is much lenient than the latter.

Monetary Policies

The monetary policy frameworks of both the concerned countries claim to be pro-business and industrial development. However, the monetary policy of UK is seen to be much more business oriented than that of India, as can be seen from the interest rare dynamics in the two countries, which in turn indicates towards the borrowing activities and volumes in the countries:

Figure 12: Interest Rates of the UK and India
(Source: Tradingeconomics.com, 2018)

The rate of interest can be seen to be much higher in India than that of the UK, with the gap between the two reducing in the last few years. This in turn, indicates towards the fact that borrowing and investing is much easier in the UK than in India for the concerned company, thereby indicating towards more possibilities of economic activities for Shell in the UK, than in India (Sims, 2016, August).

Foreign Trade Policies

The foreign trade policies of India, primarily targets towards export promotion for which the country can be seen to be devaluating its national currency over the last few years, which can be seen from the following figure:

Figure 13: Indian Rupee per US Dollar (2008-2018)
(Source: Tradingeconomics.com, 2018)

The value of Indian Rupee per USD can be seen to be falling over the years, with the current value being nearly 68.5 rupee per USD. This in turn promotes exports of the country and also makes it easier for Shell to operate in the country as its operational costs are much lower (Rugman & Verbeke, 2017). UK, on the other hand, can also be seen to be devaluating its currency over the years, as can be seen from the following figure:

Figure 14: Value of USD per unit GBP
(Source: Tradingeconomics.com, 2018)

In 2008, the value of one pound used to be nearly 2.1 USD, which in the recent period, can be seen to be 1.31 USD (2018). This again can be an export promotional strategy and also makes it helpful for Shell, as its exports to other countries are expected to increase to a considerable extent.

Also, in terms of free trade agreements and alliances, both the countries have built up long-term and robust relationships with other significant economies across the globe. However, the recent declaration of Brexit, which refer to the walkout decision of Britain from the European Union, can have negative implications on the businesses, demands and profitability of Shell, operating in the UK. In India, on the other hand, with the growing trade alliances with other countries, the company is expected to be benefitted (Rugman & Verbeke, 2017).

Conclusion

From the above discussion, it can be asserted that the economic activities of Shell, both in India as well as in its home country, the UK, are expected to be affected (both positively as well as negatively) by different macroeconomic parameters as well as the different policy frameworks of the countries. However, in an overall basis, the economic environment as well as policy and government strategic framework and also the market structure, share of market of Shell in the oil and gas industry of UK can be seen to be more favourable than that in India, for the concerned company, in terms of their implications on the overall economic activities of Shell and in terms of performance, profitability, prosperity as well as long-term sustainability of the concerned company in the coming years.

References

Beck, U. (2018). What is globalization?. John Wiley & Sons.

Coyle, D. (2014). GDP: A brief but affectionate history. Economics Books.

D DK NL, I. R. L. (2016). Consumer price index.

Dunne, T., Klimek, S. D., Roberts, M. J., & Xu, D. Y. (2013). Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), 462-487.

Hasan, R., Mitra, D., Ranjan, P., & Ahsan, R. N. (2012). Trade liberalization and unemployment: Theory and evidence from India. Journal of Development Economics, 97(2), 269-280.

Ibef.org. (2018). Shell India. Retrieved from https://www.ibef.org/download/SHELL.pdf

Pathak, K. (2018). Boom in lubricants segment attracts foreign players. Retrieved from https://www.business-standard.com/article/companies/competition-in-lubricant-segment-hots-up-115122400380_1.html

Rugman, A., & Verbeke, A. (2017). Global corporate strategy and trade policy. Routledge.

Shell.in. (2018). Shell in India. Retrieved from https://www.shell.in/?gclid=CjwKCAjwsdfZBRAkEiwAh2z65oMohrETnTLqFIxffl2Yit4RlVgbbfvCflaUb_DbTeryl-asGpgtmhoCWIUQAvD_BwE

Sims, C. A. (2016, August). Fiscal policy, monetary policy and central bank independence. In Kansas Citi Fed Jackson Hole Conference.

Statista. (2018). Motor fuel market share by brand in the UK 2017 | Statistic. Retrieved from https://www.statista.com/statistics/312071/motor-fuel-market-share-by-brand-in-the-united-kingdom-uk/

Statista. (2018). Top gas companies and oil companies based on net income 2018 Statistic. Retrieved from https://www.statista.com/statistics/272711/top-global-oil-and-gas-companies-based-on-net-income/

Tradingeconomics.com. (2018). Current account balance (BoP - US dollar) in India. Retrieved from https://tradingeconomics.com/india/current-account-balance-bop-us-dollar-wb-data.html

Tradingeconomics.com. (2018). India Consumer Price Index (CPI) | 2011-2018 | Data | Chart | Calendar. Retrieved from https://tradingeconomics.com/india/consumer-price-index-cpi

Tradingeconomics.com. (2018). India Government Debt to GDP | 1991-2018 | Data | Chart | Calendar. Retrieved from https://tradingeconomics.com/india/government-debt-to-gdp

Tradingeconomics.com. (2018). United Kingdom Current Account to GDP | 1948-2018 | Data | Chart | Calendar. Retrieved from https://tradingeconomics.com/united-kingdom/current-account-to-gdp

Tradingeconomics.com. (2018). UNITED KINGDOM GDP PER CAPITA AT CONSTANT PRICES. Retrieved from https://tradingeconomics.com/united-kingdom/gdp-per-capita-at-constant-prices-imf-data.html

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