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Political economic social technological environmental and legal analysis

The country of Pakistan is one which is very volatile in terms of political stability. The current government is a democracy which was elected into parliament in February 2008, after its leading political person Benazir Bhutto was assassinated in December 2007. The last government was headed by Mr. Pervez Musharraf who resigned as chief of army staff and president of Pakistan, thereby ending the military rule in Pakistan which lasted almost 8 years. The current government has been in power for 3 years now and is expected to remain until the 2013 elections. Historically, the administrative agencies of the government have been noted to be highly corrupt and ineffective which has not changed with the new democratic government.

One of the major political factors in Pakistan is the continuing war on terror. Ever since the September 11 attacks on the World trade center in New York, Pakistan has been facing terrorism issues. Between 2002 and 2010, Pakistan has incurred a total cost of 43 billion dollars. The number of terrorist attacks since 2002 total 8,141 incidents incurring total casualties of 8,875 with more than 20,000 injured. This has caused negative publicity of Pakistan to the global world and has affected Pakistan in many ways. These include:

Damage to infrastructure, such as roads and railways

Loss of Foreign investments

Diversion of budgets to fund this war on terror

Loss of the already deteriorating tourism industry

Loss of lives of the people of Pakistan as well as foreigners

(Economic Survey of Pakistan 2009-2010)

Any individual or organization considering investing in Pakistan will have to weigh the benefits versus the risks of investing in such an unsafe political environment. Unilever and a number of multinational companies have to deal with the risks of such a hostile environment. The higher risk leads to hesitant approach on conducting major investments on improving business prospects or developing new business opportunities.

Smuggling of tea through Afghan Transit Trade Agreement

The ATTA (Afghan Transit Trade Agreement) was signed in 1965. This agreement was for the advancement of Afghanistan but this provided opportunities to smuggle items under it, such as tyres and black tea.

(Tea news direct: Kenya seeks reduction….., Tribune: Govt. ignores tea smuggling…..)

Afghan people (25 million) are mostly green tea drinkers (daily times: proposal to exempt…..) But it imports black tea more than its annual consumption and this tea is then sold in Pakistani market before it reaches Afghanistan. This malpractice is not only causing damage to national exchequer, through lost income, but also to the legal importers of tea, of which one is Unilever Pakistan.

In 2007-08: legal imports were 103,230,355kg while illegal imports were 68,001,625kg

In 2008-09: legal imports were 102,021,150kg while illegal imports were 90,991,848kg

In 2009-10: legal imports were 88,627,724kg while illegal imports were 93,089,436kg

(daily times :proposal to exempt…..)

Over the three fiscal years, legal tea imports are decreasing whereas smuggled tea is increasing. In 2009-2010, it is seen that the level of smuggled tea has surpassed the legal imports.

The situation has worsened because the government, instead of taking any bold steps to stop this abuse of agreement, it has further increased its taxes and duties on imports. Depreciation of rupee against dollar and increasing input costs has further intensified the problem for legal importers like Unilever.

Legal importers have to pay 33.7% tax (10% customs duty, 17% sales tax, 5% advance income tax and 1% Special Excise Duty) while cost to smugglers is approx. 16.7%

(daily times: proposal to exempt….)

In 2009, The Pakistan Tea Association (PTA) and the Federation of the Pakistan Chambers of Commerce and Industry (FPCCI) suggested that tea should be removed from ATT list. Later, in 2010, PTA has recommended reducing general sales tax to 7.5% and exempting custom duty to eradicate the incentive for smuggling.

Unilever maker of two of the most famous tea brands of Pakistan i-e Lipton and Brook Bond. It has closed its Lipton plant at Karachi in 2008 because of the sharp decline in beverages segment.

Other issues to consider

Another issue is the counterfeit products available in the market. This is causing problems for bonafide players like Unilever. When the CEO of Unilever Global, Paul Polman, visited the Pakistan market, he had similar remarks.

According to South Asian news agency, 2010, “On the subject of counterfeit products found in the country he said he would like the government to do much more to curb this very dangerous practice. Unilever products like Supreme Tea, Rafhan custard, Fair and Lovely cream and Sunsilk shampoo are amongst the most to suffer from this practice. “Counterfeit in Food products can be very dangerous,” said Polman.”

The government of Pakistan is not taking any rigorous steps to discourage this practice.

The Pakistan energy crisis has been in existence for a long time now, but due to the ever increasing population and need for more energy, the Pakistan government has yet to bridge the gap between energy supply and demand. This situation has worsened in the latest years leading to massive power cuts to industries leading to downtime. Unilever Pakistan’s brand Walls Ice cream has also been affected by this situation at its ice cream factory. Other industries have reverted to self-electrical generation to meet their energy needs; Unilever Pakistan may need to consider this option as well.

In addition to normal import duty, 25% regulatory duty was imposed in 2008 on many items, including laundry detergent, to encourage local investment and manufacturing. However, this regulatory duty on detergent was removed in the budget of 2009-10 which negatively impacted the revenues of local manufactures as a result of increased imports. The laundry detergent sector is growing at a rate of 10% per year and competition in this sector is intense. Unilever is leading in value through its brand SURF after gaining market share from P&G’s ARIEL. While Colgate Palmolive is leading it in volume through its brand BONUS. (daily times: detergent powder industry demands..)

ECONOMIC

Local investment creates jobs contributes to economy FDI above issue can be related

Wealth creation, poverty reduction

The economy of Pakistan, although facing many challenges, is steadily growing. Gross domestic Product (GDP) has been growing steadily, although in 2008-2009, it saw the lowest slump in history due to many factors described below. The consumer price index, i.e. inflation has reached double digits in the last 3 fiscal years due to the global effect of commodity prices, among other things. Income per capita has been increasing at an average rate of 16% in rupee terms and at an average rate of 9% in USD terms.

The economy of Pakistan in the year 2007-2008 faced numerous challenges, not only from domestic issues, but also the international influences caused by the global financial crisis. Due to the global economic downturn faced by the USA and Europe countries, Pakistan’s exports were affected with lower demand for its main prized export: textiles, in the USA. Also, the surging costs of food and oil prices and other commodities in the in global market caused the high levels of inflation that hit the economy in 2008. Coupled with the domestic issues of political instability, extreme power shortages and foul security environment, the Pakistan economy faced several challenges.

In 2008-2009, Pakistan saw its lowest GDP growth, with only a 1.2% increase in GDP for the year. This year was rattled by political uncertainty, due to the new democratic government, after 8 years of military rule by the previous president. However, the worsening global financial crisis also caused a large decline in the exports of Pakistan. Pakistani Rupee is deteriorating in value, in 2008-2009 exchange rates jumped from 60 PKR/USD to 78 PKR/USD. This along with the shortage of electricity and high inflation in Pakistan were the highlights of lower GDP.

Another major factor is the continuing war on terror in the northwest tribal regions of Pakistan. The cumulative impact on Pakistan, of this war on terror, has been $43 billion for the years 2005-2010. This war causes severe complications to the economy of Pakistan, including lower GDP growth, reduced foreign direct investments, loss of jobs, and not to mention, the diversion of resources to fund the war on terror.

In 2009-2010, the economy of Pakistan stabilized with a GDP growth of 4.1% Although Pakistan still faces numerous issues such as the offensive of the war on terror, energy and water shortages, and the internal security situation; it still has recovered due to growing exports and lower inflation as compared with prior years. Pakistan also received a loan from the IMF which it has used to build up its foreign reserves and get its economy back on track.

Another concern is some policies adopted by the government do not support local manufacturing and development activities. As noted above, the government of Pakistan had imposed a high import duty on laundry detergent powder (LDP) in its Budget of 2008, but revoked this duty in 2009-2010 budget. Doing so, importing is now the cheaper source for LDP, instead of manufacturing it locally. This has had consequences on the local manufacturers. A total of 3 manufacturing units exist in Pakistan, employing approx. 1,000 workers. The local manufacturers were planning on increasing production capacity by investing in further plants and providing additional jobs. With the higher duties being revoked, plans have been delayed by manufacturers, thereby damaging the economy of Pakistan.

(daily times: detergent powder industry demands..)

Unilever Global and Unilever Pakistan use Palm oil as a major input into many of their products. It is directly used in ice cream and soap bars, whereas its by-product is used in laundry detergent and also the personal care segment. The global financial crisis paired with rising inflation saw unprecedented high levels of prices of Palm oil. These high raw material input costs affect the operations of Unilever Pakistan. Below is a graph showing the fluctuations of Palm oil prices:

The price of palm oil has never surged as much as it has in the last couple years. The higher price in early 2008 was due to high consumption and demand, however, this fell abruptly in late 2008 due to fears of recession. A similar pattern can be observed with other commodities such as rubber and oil. The price of palm oil remained above the $600 mark in 2009 and has now surged once again in Q4 of 2010 due to increased global demand. Being one of the key inputs to its segments, Unilever Pakistan needs to consider other alternate strategies to hedge this risk of volatile palm oil prices.

SOCIO-CULTURAL

Global brands are customized according to the needs/culture of Pakistani people

Business Partner Code includes 10 principles which relates to the responsibility towards the employees, environment and the environment. (suppliers are required to raise their standards to Business Partner Code)

Health/nutrition

Pakistan is one of the prominent developing countries of South Asia. Originally its population was concentrated in the rural areas, but recent trends have shown growing urbanization. Pakistan’s total population is 173.51 million, out of with 63.05 million represent urban populations and 110.46 million live in rural areas. Population pyramids show that Pakistan’s population is mainly increasing in the lower age groups of age 15-29 years old. This category has substantially increased over the years. With higher population and higher income per person, consumer lifestyles are changing and people have higher disposable income to spend on products available in the market. Still, Unilever does not target only one class of consumers. Its product packaging and costs are designed in a way to appeal to all the people of society. For high priced products, Unilever Pakistan has introduced mini sachet packaging with lower volume of the product, so that even the lower class consumers can purchase and use them.

Economic survey of Pakistan

Social and environmental Report of Unilever

Pakistan’s majority population are Muslims, due to this all products need to be halal, in accordance with Islamic teachings. Halal means allowed or permitted, in accordance with Islamic teachings. Any companies operating in Pakistan, specifically those who have any link with consumers need to ensure that all their operations, ingredients, and methods are in accordance with Islam; otherwise, their products will be labeled as un-Islamic and will not survive in the market.

Unilever faced negative publicity from not just the local public, but also from the International public and International Union of Food (IUF) due to its practice of hiring a massive labor force for production of its products, on a temporary basis, without providing any employee benefits. In 2007, Unilever is acclaimed to have only 509 permanent employees out of some 8,000 total employees. The campaign for employee rights lasted for a period of 2 years from 2007 to 2009, after which Unilever reached an agreement with the IUF awarding monetary cash payments to employees as well as the promise of providing additional permanent jobs.

Numerous Tea Articles

Unilever also hosted a reality show through its brand of “Clear shampoo” in which contestants were given numerous challenges to overcome to win a major prize. However, due to lack of proper safety measures, a contestant, Saad Khan, drowned in a swimming challenge on the show. This incident proved to be very damaging to the repute Unilever for not having proper safety arrangements which led to this tragic incident. Unilever Pakistan denied all liability for the incident, which further aggravated this issue.

Media ITE – Reality show kills contestant

Times online UK – Pakistan reality TV contestant, Saad Khan, drowns performing challenge

Corporate Social Responsibility

Unilever Pakistan actively engages itself in its Corporate Social Responsibility (CSR) activities. It focuses on the following social factors: health, well-being, hygiene, nutrition, healthcare, education, and empowerment. Instead of using its own corporate name Unilever, it focuses on a process called ‘Brand Imprinting’ whereas it advertises its main brands through its CSR initiatives. Its CSR activities and brands are:

Surf Excel – Laundry detergent Powder

Unilever has related this brand to its initiative of influencing “healthy & physical growth as well as intellectual development in children.” Unilever Pakistan, in conjunction with Idara-e-Taleem-o-Aagahi (ITA), helps bring awareness to parents about the importance of physical activity to promote mental and physical growth among children. The partnership also worked towards training numerous teachers and providing curriculums to promote activity based learning. Unilever Pakistan also organized an Art competition supporting this theme and built numerous playgrounds for children in rural areas.

Lifebuoy – Soap and shampoo

This brand relates to the need for a healthy and hygiene environment in any home. Unilever partners with United States Agency for International Development (USAID) and Pakistan Poverty

Alleviation Funds (PPAF) in raising awareness among different districts across Pakistan about the importance of basic hygiene. It also helps sponsor the Global hand washing day in Pakistan.

Blue band – Margarine spread

Blue band promotes the awareness and need of healthy nutrition. Unilever helps promote nutrition by developing its product in such ways that they become healthy. Whether it be cutting trans-fat from its margarines or adding calcium to its ice cream, Unilever aims to be a healthy product manufacturer. Unilever also helps provide free meals by contributing to them itself, as well as operate an employee program whereas each employee has a choice of feeding a child for a very nominal amount of Rs. 375 per month. In 2009, more than 500 employees opted for this and helped reduce child hunger in Pakistan.

Other initiatives

Unilever Pakistan provides funding and grants to numerous institutions in Pakistan. These include:

Supporting eye care, kidney, and general hospitals and patients.

Supporting a range of Educational institutions such as arts, business, fashion, science, and engineering students.

Supporting different organizations and institutions every year by offering grants after they satisfy the requirements.

Social and Environmental report – Unilever

Unilever Pakistan also contributes to natural disasters and other unforeseen events in Pakistan. The most recent contribution of this nature was of 1 million Euros as well many necessity items of soap, toothpaste, and shampoo in August 2010 after the flood had destroyed homes of thousands of people.

Daily times – Unilever to help flood affectees

Unilever Pakistan also supports its employees in many ways. It introduced a program of ‘flexi-hours’ in which eligible employees could choose the work shifts that they want to come to the office in, whether morning, noon, or night. The latest addition is the pilot programme of ‘Agile working’. In this, certain eligible employees may choose to work from their homes instead of coming to the office every day. The main focus is to make ‘work – an activity, not a place’

Due to this and many other benefits, Unilever Pakistan has won the Pakistan Society for Human Resource Management’s (PSHRM) “Most Preferred Graduate Employer Award 2008” and is at the top of the list of many MBA, engineering, and IT students choice of the place to work after graduation.

Unilever’s success illustrates the promise…

Unilever website http://www.unilever.pk/aboutus/newsandmedia/news/unileverpakistanwinstwoawards.aspx

The Express Tribune – Unilever tries out ‘Agile working ‘

TECHNOLOGICAL

Due to the nature of operations of the FMCG industry, it is not operating in a fact paced technological environment, such as mobile phones or laptops. Rather, its main technological factors come into view in its manufacturing capability using state of the art manufacturing methods and also, its supply and distribution methods.

Unilever Pakistan is a subsidiary of Unilever Global. Unilever Global has over 6,000 Research and development staff employed worldwide, and just in 2009, it spent 891 million Euros on Research and Development expenditure. Unilever Pakistan, with its ultimate global parent, can take advantage of the innovative potential of Unilever global and use its competences using state of the art technology to gain a competitive advantage in its local Pakistan market.

http://www.unilever.pk/innovation/

Unilever Pakistan uses the internet to access Unilever Global online E-learning module to train its employees and keep them up to date on new happenings in Unilever. This technological improvement has helped Unilever conduct trainings of many of its employees without having to incur massive costs for travelling and lodging. Use of this module ensures that all trainings given to employees globally are identical.

Social and Environmental report Unilever

ENVIRONMENTAL

Business Partner Code includes 10 principles which relates to the responsibility towards the employees, environment and the environment. (suppliers are required to raise their standards to Business Partner Code)

Climate change water scarcity

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