INTRODUCTION
Rio Tinto is a combination of predecessor companies formed by investors in 1873 and 1905. Due to such an extensive knowledge and experience in the mining industry, the organization is regarded as one of the finest and leading global mining and metal company. Being a global mining and metal company, the organization focuses highly on the exploration and processing of Earth’s finest mineral resources with an aim to maximize the shareholder’s value. In order to do so, the organization has the right people for the job and resources to provide the world with minerals and metals. Some of the most prominent industries that relies highly on minerals and metals provided by Rio Tinto include construction, communication, recreation, transport, healthcare and renewable energy (Rio Tinto, a).
Being a leading international mining organization, Rio Tinto delivers its customers with diverse portfolio. Some of the major products offered by the organization include aluminum, copper, diamonds, thermal and metallurgical coal, uranium, gold, industrial minerals (borax, titanium dioxide and salt) and iron ore (Rio Tinto, 2012). In addition, it has also been indicated that the organization has high level of global presence. In the year 2012, the company reported 71,000 employees working for the organization. In order to protect the market share and to deliver its diverse customers with variety of products, the company operates in more than 40 countries (Rio Tinto, 2012).
Being the world’s third largest mining company has its own benefits but the challenges in the near term for such organizations are daunting. Some of the most pertinent and prominent challenges that Rio Tinto would have to face in its external environment includes (1) uncertainty in commodity prices and global demand for the products offered by the company (2) future developments in countries (3) fluctuations in exchange rates (4) the increasing regulations related to green house emissions could adversely affect the processes and operations of the organization to great extent. Each of the mentioned issues has significant impact on the performance and operations of the business.
RIO TINTO
Rio Tinto; best known for its involvement in every stage of metal and mineral product, is the leading international business listed on London Stock Exchange as well as on the Australian Securities Exchange (Rio Tinto, b). With 140 years of heritage, the organization has established its diversified portfolio into the hearts of its customers in the international market. To supply the finest metals and minerals extracted from the Earth to its customers is the priority of the organization. With such a priority, the organization has been provided with significant opportunities to grow and expand the business in the international world. The company currently operates in more than 40 countries across 6 of the continents (Rio Tinto, c). Some of the major products that have allowed the organization such rapid expansion in the international markets include aluminum, copper, diamonds, thermal and metallurgical coal, uranium, gold, industrial minerals (titanium dioxide, borax as well as salt) and iron ore. With such extensive and diverse portfolio, the organization is strongly and well represented in Australia and North America. In addition, it has been found that there is significant level of presence in Asia, Africa,, and South America phr rehna parega. Africa.
The vision of the company is to enhance its global presence through extensive reliance on its experts in technology and marketing which will eventually help the organization to enhance its market share by supplying the customers with right products at the right time and at the right place (Rio Tinto, c). This will evidently help the organization to enhance its market share in metal and mineral mining and extraction industry. In addition, it has also been observed that the processes and practices, taken under consideration by the organization, are consistent on sustainable development. With sustainable development integrated into everything the organization does provides Rio Tinto with numerous opportunities to enhance the values provided to the communities, regions and countries in which the organization operates. The enhanced communication between the operational, technical and sustainable development expertise at the global level, the organization is known to deliver benefits and extra added values at the local level.
COMPETITIVE ADVANTAGE
Threats to Competitive Environment of Rio Tinto
The mining industry in Australia was once regarded as goldmine in terms of natural resources but with the increased competition in the mining industry, it has been indicated that the mining industry in Australia has lost its competitive edge. Furthermore, the high cost associated with the mining and exploration of metals and minerals in Australia is driving away significant level of companies to Brazil and Africa. The costly bureaucracy have risen the frustrations of companies in the mining industry to head elsewhere as the projects in Australia are up to 75 percent more expensive than other countries around the globe (ABC, 2013).
While the competitive advantage of the company is slowly eroding away (ANDEV, 2012), the government has played a keen role in making it tougher for the organizations in the mining industry. The government of Australia is constantly introducing new laws and regulations which not only create barriers for organizations involved in mining but also reduces their chance to enhance their performance and sales. Mining and carbon taxes are some of the few newly introduced laws and regulations that have played an essential role in driving away companies to other parts of the world.
Rio Tinto’s Competitive Advantages
The organization firmly believes that its approach to sustainable development and business integrity are some of the most prominent sources to its competitive advantage. With sustainable development and business integrity at work, Rio Tinto is provided with several opportunities including access to high-quality resources along with growth and business development opportunities. Furthermore, it has also been indicated that with such an approach at work Rio Tinto is able to acquire talented and energetic individuals in the market. In addition, the organization is provided with several opportunities to engage with the communities while decreasing its environmental impact which eventually helps the organization to reduce its operational cost as well. Such an approach provides the organization with an ability to be confident all the time within the industry. The result of such an approach is higher level of returns to variety of shareholders of the company (Rio Tinto, 2012).
On the other hand, it has also been indicated that Rio Tinto’s competitive advantage comes from its framework that supports and enables the organization to deliver industry leading performance along with the ability to tackle and mitigate the risk effectively and efficiently. Furthermore, as indicated in the yearly report, the organization protects its output with an aim to enhance its competitive advantage. In order to do so, the organization has developed intellectual property protection strategies that could help the organization to enhance its performance along with sales in the market (Rio Tinto, 2012).
Michael Porter’s Diamond Model
The Michael Porter’s Diamond model indicates that how can a nation gain competitive position in global competition. To gain competitive position in the global environment is the priority of this model (Kaufman, Gittell, Merenda, Naumes, & Wood, 1994). The 4 determinants of national advantage that are considered priority in this model are listed and explained separately below (Dunning, 1993):
- Factor Conditions
Australia is known for its finest quality of metals and minerals resources. In addition, it has also been observed that the country has highly skilled workforce that are dedicated and committed to their work in mining industry. Similarly, the rich amount of natural resources put the country in a strong and competitive position in the international market (Cho & Mun, 2001).
- Demand Conditions
The rich quantity of metals and minerals mined and extracted from the mines in Australia have high demands in the international market due to which companies are constantly considering their options to expand their mining business in Australia. Most of the extracted metals and minerals are exported to the international market where the metals and minerals are highly in demand. Construction, transportation and other related industries are constantly in need of high quality mineral resources and to find the best quality products, companies tend to purchase from Australia leading to high exports than import.
- Related and Supporting Industries
The local supporting industries and suppliers in the Australian mining industry are quite competitive. But with the passage of time, it has been indicated that the organization is losing its ground in terms of competitiveness in the international market due to rising cost of metals and minerals extraction. It has been indicated that an organization would have to bear 75 percent of additional expenses if it aims to establish mining business in Australia whereas; the cost to do so in Brazil and Africa is comparably less.
- Firm Strategy, Structure and Rivalry
Rio Tinto is one of the leading mining companies in the international market. In Australia, Rio Tinto highly focuses on metal and mineral extraction from mines that are exported to international market at high prices. With variety of products offered by the company, the demand for the products is quite high with puts the organization at highly competitive position. On the other hand, the organization faces high level of competition from competitors in Australia within the mining industry as well as from new entrants as the entry barriers in mining industries are quite low. One of the most prominent rivals of Rio Tinto includes BHP Billiton.
COMPARATIVE ADVANTAGE
Australia’s Competitive Advantage in Mining
Australia, best known for abundant mineral resources along with technology and service industry has made the country one of the world leading nation in terms of mining with an investment pipeline of $430 billion. It has also been indicated that the country’s energy and mineral export rose to $190 billion in 2011 which was evidently 15 percent increase as compared to earlier years. Being positioned with Asian-Pacific i.e. the fastest growing region in the world, Australia witnessed unprecedented demand for minerals and metals leading to high level of investment in mineral exploration and development projects (High Commission of India, n.d.).
Moreover, it has been indicated that Australia’s competitive advantages are well established in the mining industry as the country is regarded as hub of finest natural resources. Australia’s mining industry is supported and backed significantly by its highly developed infrastructure along with skilled workforce and strong focus on research and development which evidently makes the country a perfect opportunity for organizations seeking to expand their mining and exploration business (High Commission of India, n.d.).
Being known for its mining services industry, Australia’s performance could be regarded as highly dependent on the trends in the mining industry. Australia has witnessed rising demand and high prices for minerals for consecutive 5 years which eventually plays an influencing role in increasing the demand for such mining services. Australia’s mining industry has witnessed unexpected level of revenues due to which the mining industry in Australia was predicted to grow at an annual rate of 6.8 percent (High Commission of India, n.d.).
Rio Tinto as well as Location-Specific Advantages
Rio Tinto is one of the leading mining firms in the mining industry. The company was established around 25 years age. Well established mining organizations in Australia. With over 25 locations in Australia, the organization enjoys variety of metals and minerals from all over the Australia. With such significant locations, the organization is provided with numerous and significant opportunities to gain competitive advantage over other rivals in the mining industry (Rio Tinto, e).
The large number of locations of Rio Tinto in Australia provides it with variety of minerals and metals at low cost. Some of the most prominent minerals and metals mined and extracted through such sites include aluminum, copper and gold, nickel, diamonds, salt, talc, coal, uranium and iron ores. These extracted minerals and metals are then exported to the international market. This means that with variety of locations in Australia, the company owns and controls scarce minerals resources which cannot be found easily in the rest of the world. This eventually provides the organization with superiority over other companies in the mining industry.
ENTRY MODES IN INTERNATIONAL MARKETS
For an organization looking to expand in the international market, franchising and licensing are some of the most prominent model used by the organizations. In a franchising model, it has been observed that the franchisee selects and uses the most successful business model as well as brand name to operate in the international market. With such a model at work, it has been observed that the franchiser has greater control over the management as well as the operations used by the franchisee. In addition, the franchiser provides the franchisee with relevant help in terms of marketing and branding in the market (Barkema & Drogendijk, 2007). In such a model, it is ensured that the concept of cannibalization is at its least level so that the revenue of a particular brand is not taken over by another. On the other hand, it has been observed that in a licensing model the organization gives its property rights to be used by other organization in the international market. The intellectual property consists of brand, design as well as processes involved in the business. Under the licensing model, the organization can use non-exclusive license which means that the organization can sell its license to variety of competing organizations in the same market (Gwiazda, 2007). In addition, it has been indicated that with licensing model at work, the organization can control the way the intellectual property is being used in the market but the company does not have the power or authority to control the processes involved in the business (Ekeledo & Sivakumar, 2004; Bertrand, 2010).
This report analyses the model implemented by Rio Tinto.
With several strategies to enter international markets, it has been observed that the company highly focuses on joint venture as an entry mode in the international market (Hill & Jain, 2007; Johnson & Turner, 2010). One of the most prominent examples of joint venture was between Rio Tinto (68 percent), Marubeni Corporation (22 percent) and Sojitz (10 percent). With such joint venture, Rio Tinto and others were able to establish Dampier Salt in Western Australia (Rio Tinto, d).
It has been observed that Rio Tinto highly focuses on joint venture (Griffin,Pustay, & Liu, 2010). In addition, it has been recorded that the organization is firmly aware of its management know-how which eventually helps the organization to reduce the risks of losing management control. Furthermore, with joint venture at work Rio Tinto is provided with an opportunity to be politically acceptable within the country is operates along with high level of local knowledge in terms of the country as well as the best locations to mine and explore minerals and metals from earth.
On the other hand, Rio Tinto also focuses on limited ownership of facilities in the international markets. An example of such limited ownership could be witnessed in Brazil as well as other parts of the world (Rio Tinto, d). In Brazil, Rio Tinto has 12 percent ownership of The Porto Trombetas while the other 88 percent of the ownership is divided among Vale, BHP Billiton, CBA, Alcoa and Norsk Hydro (Rio Tinto, d). This eventually indicates that Rio Tinto not only uses joint venture to enter international market but also focuses highly on limited ownership as well.
Similarly, it has been indicated that the organization is constantly working to export the finest level of minerals and metals extracted to Mongolia. In order to eliminate the challenges and issues that is of concern for the organization in terms of rising cost and expenditure in Australia, Rio Tinto is working to gain approval to ship copper from one of its mine i.e. Oyu Tolgoi mine, which will help the organization to enhance its revenues and sales along with reduction in pressures due to costs (Diniz, 2013).
The project to export copper to Mongolia is one of the most prominent decisions made by the organization. To move further with the project, the organization is working day and night to gain the approval by the government. In addition, the decisions regarding the transportation of copper to Mongolia is still under consideration which will be provided to the organization in forthcoming days or weeks by the Mongolian government.
The strategic decision taken by the organization is quite important for the organization for its revenues and survival due to which the organization is working consistently to resolve issues with the government which will help the organization to move forward with the project in forthcoming days (Reuters, 2013).
Exporting and Countertrade
It has been indicated that the organization being SME focuses highly on exports. Rio Tinto’s energy product group is one of the leading producers and exporters of coal and uranium which eventually are the two most important sources to generate energy. It has also been indicated that the organization exported coal is used in power houses for the generation of electricity. In addition, the company is also known for its export of uranium which is used for the generation of nuclear energy. In order to protect the precious uranium extracted, the company follows strict safeguard along with non-proliferation conditions to ensure that the exported uranium by the company is being used for peaceful purpose within the industry. The company is known for its two types of coal i.e. thermal coal and coking coal. The thermal coal is used for the generation of electricity whereas; the coking coal is mainly used for making steel.
Direct exporting is used by the organization to export the finest quality of metals and minerals extracted and mined. An example of such direct exporting could be the export of diamonds to the international market. In addition, it has also been indicated that the organization is expected to export copper to Mongolia via direct exporting (Rio Tinto, f).
Pros and Cons of Licensing and Franchising
Franchising is one of the most common types of management approach through which an organization aims to enter international market. One of the most prominent advantages of this approach is higher level of authority over the management through which the organization has the ultimate power to make changes in the organization. In addition, franchising helps the newly established organization with higher level of brand awareness along with equipment and supplies which is quite difficult in other forms of business. On the other hand, it has also been observed that with such high level of advantages the organization also faces certain difficulties due to franchising. Initial and continuing fees are one of the cons of franchising. In addition, it has also been indicated that the organization tends to work the way it wants to which eventually leads to ignorance of the way other works. Such an approach creates higher level of job dissatisfaction.
Licensing is another most crucial approach to enter the international market. By selling the intellectual property rights to one or several organizations in the competing market is concept behind licensing. It has been indicated that through licensing, the organization is provided with an opportunity to use the proven technology to enhance the performance of the organization for a certain licensing fee. On the other hand, it has been indicated that the disadvantages associated with licensing are quite high in number. With licensing at work, it has been indicated that the licensee become highly dependent on licensor due to which this model is being discouraged in today’s corporate world. In addition, it has been observed that the higher power lies with the licensor who eventually uses its excessive power to negotiate terms and conditions.
The other contractual strategy that Rio Tinto has used to enter in the market is contracts of the management. By focusing on this aspect, the organization gives an image.
The Build-operate-transfer model indicates that the organization focuses highly on establishing infrastructure of the organization with an aim to mine finest quality of minerals and metals from the earth. After the development of the infrastructure, the organization focuses highly on operations and identifies the best location for mining. Once the business is established, the organization shifts all the mined metals and minerals to its site to be transferred to the international market where the demand of the metals and minerals is quite high.
MINING REGULATIONS IN AUSTRALIA
Even though, Australia’s mining industry is ahead of others in the international mining industry but the mining companies engaged in Australia still faces significant challenges due to the changes in the mining regulations. In addition, it has also been identified that Australia’s mining industry is already influenced by the escalating costs associated with mining which eventually leads to increase in energy costs as well as unprecedented demand of labor and supplies.
Although, the country has not yet fully recovered from its daunting situation it has been noticed that Australia would be undergoing major regulatory changes which will include mineral resources rent tax as well as the introduction of carbon-pricing regime. Such regulation changes will eventually impact the planning and potential cost of compliance. In addition, new taxes that have been imposed in mining industry would influence the performance in the industry drastically. Therefore it is critical for the firm to get involved in mining industry in order to analyse the existing investment portfolio (Moolman, 2012).
On the other hand, it has been observed that the Australian government would discourage investment in mining which could lead to increased challenges for organizations involved in mining. With such discouragement of investment policy is being taken under consideration, it was indicated that such regulations will make the mining industry in Australia uncompetitive as the investors would find it difficult to invest in mining and gas projects due to which the investors will go somewhere else with their huge amount to be invested. Furthermore, it has been indicated that such new regulations being taken into consideration by the government, it will eventually impact the performance of the organizations in mining industry as it will evidently drive up the cost associated with mining. The results of such new laws might hurt the projects that are already in their last stage of completion.
FOREIGN DIRECT INVESTMENT
FDI in Australia
The mining industry in Australia could be regarded as one of the industries that brought in the largest level of foreign direct investment in the year 2010. In addition, it has also been indicated that the level of foreign direct investment have increased by 60 percent as compared to last five years in which the largest contribution was made by the mining industry with about $88 billion or simply 138 percent of total foreign direct investment growth (NSW, 2013) as shown in the image below:
(NSW, 2013)
On the other hand, it has been indicated that the foreign direct investment have reduced significantly as compared to last years. In the year 2011, the foreign direction investment in Australia was 65.3 (USD billion) whereas; the amount reduced significantly to 56.7 in 2012 (OECD, 2013) as shown in the image below:
(OECD, 2013)
Chinalco-Rio Tinto Deal
Rio Tinto is one of the leading international mining organizations with an aim to explore and mine new mineral resources that could provide the organization with superiority in the mining industry. Both the organizations have teamed up to form Chinalco Rio Tinto Exploration which will entirely focus its operations to explore copper (Tovey, 2011).
China being the fastest growing economy provides the organization with several opportunities as the country has become the world’s largest consumer of copper. With the collaboration of both the companies, the organization would be able to supply the commodities required by the country which will eventually help the organization with increased performance along with high level of sales.
Benefits to Rio Tinto through FDI
Rio Tinto consistently focuses to pursue greater value for shareholders which in turns provide the organization with high level of foreign investment. Such foreign investment not only helps the organization to expand its operations in foreign counties but also provide the organization with an opportunity to enhance its productivity to significant levels. With such high level of foreign direct investment, the organization has provided itself with the capability and ability to keep its price lower as well as higher focus on price volatility across many commodities offered by the organization (Rio Tinto, 2013).
On the other hand, it has also been indicated that the organization enjoys strong cash flow due to high level of investments made in the business which eventually provides the organization with an ability to tackle challenging market situations as well as operating conditions in the Australian mining industry. Similarly, protecting and focusing on new investment would mean prosperity and enhanced status for the organization due to which the organization is constantly seeking options to focus highly on new investments by introducing projects and programs that could attract high level of foreign direct investment in the business (Rio Tinto, 2013).
CONCLUSION
In order to conclude, it could be said that Rio Tinto is constantly growing along with the number of competitors in the mining industry. Due to such factor, it has become essential for the organization to enhance its reach in the market by expanding the business in the international market. In order to do so, the company is provided with several opportunities to expand in the international market.
In such disastrous economic situation along with the increasing governmental laws and regulations, globalization would be the most feasible and viable option for the organization in the mining industry. With higher focus on globalization, the organization would be able to reduce its mining cost along with other cost associated with mining industry. The best feasible option for the organization at this moment would be Brazil and Africa where the cost to develop mining is 75 percent less as compared to Australia.
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