A Pestle Analysis of Mining Industry

1. Executive summary

This report has analysed the investment environment of mining industry in Mongolia. The PESTLE analysis is considered first as a basic narration of the situation, and then the evaluations based on this PESTLE analysis are given to show the quality of the Mongolian investment environment. From the former analysis it can be seen that the overall investment atmosphere is good for the Chinese company. And considering the particularity of the local investment environment, it is better that the Chinese mining company forms a joint venture company with the local government.

And in the initial stage of the company’s operation, a strategy with high FSA and low CSA are recommended in order to build the brand awareness and to be localised. Furthermore, the future environment and the potential risks are considered to be able to overcome and approved. Therefore, it is a good decision that to expand the mining business in Mongolia.

2. Introduction

With the development of the global economies, the current demands for the energy resources are becoming more and more difficult to meet.

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It can be seen in the world that the conflicts of resources have involved more and more countries in recent years. The Mongolia, however, possesses a rich amount of undeveloped mineral resources, which attracted plenty investors, especially countries like the U.S and China, who are intending to get benefits from the co-operations on resources mining industry.

Therefore, an analysis based on the relationship between Mongolia and China is vital to the Chinese companies which are planning to expand their businesses in Mongolia.

This report is going to do a PESTLE analysis based on the literature review of the previous introduction reports of Mongolia. Then further discussions about the future entry options and risks will be briefly considered to present the recommendations and strategic options about the investment in Mongolia.

3. PESTLE Analysis

Mongolia used to been known for its herding and agriculture export products. Since 1980’s, over 80 mineral reserves have been proven and that made the minerals and ore concentrates become one of the major export products. However, because of Mongolia’s remote geographical position and the less-development of the transport methods, large amount of the resources are not being exploited yet. (SKhouri, 2008). It can be seen that there is large potential profitability of the Mongolian mining industry.

3.1 Political

* Mongolia used to be a part of Qing dynasty before the early 20th century, being considered as an important military area between Bolshevik Russia and Qing dynasty. And then with the help of Bolshevik Russia, the Outer Mongolia has separated from a province of Qing dynasty and become a Soviet system modelled country. Before the collapse of the U.S.S.R., Mongolia has no significant popular unrest during the one-party communist system period. And with the reformation of the state system, which is changing from communist rule to the parliamentary system with a multi-parties’ congress, Mongolia has reverted to the stabilisation of its political environment.( U.S. Department of State Background Note of Mongolia, 2007)

* Since the Outer Mongolia was separated from China in 1946 and became an independent country, its domestic political environment is constant until the disintegration of the U.S.S.R. happened in early 1990s (Mongolia, 2010). Because of the disappearance of the Soviet assistance, Mongolia has felt into a very deep recession, which leading to the reformation on state system (U.S. Department of State Background Note of Mongolia, 2007). Then with the stabilisation of the political environment, Mongolian government introduced the free-market economics and broad privatization of the formerly centrally determined economy, which lead to a steady economic growth return in the first decade of 21st century (U.S. Department of State Background Note of Mongolia, 2007).

* In mid-2006, the Mongolian Parliament has passed a profile about taxes on the windfall profits of copper and gold. Meanwhile, main amendments to the minerals law which legalised the activities that government can take an equity share in major new mines (U.S. Department of State Background Note of Mongolia, 2007). And the influences of these laws are not showing up currently (U.S. Department of State Background Note of Mongolia, 2007).

* However, in comparison of the middle-east countries, there is no data base which shows that Mongolia is affected by any terrorism.

4.2 Economic
* The economic pattern of Mongolia is mixed economies. With the influence of the U.S.S.R, Mongolia has been through a period of state-run economy; and with the collapse of the U.S.S.R and the following deep recession, Mongolia has embraced the free-market style economics and enlarged the privatisation of the previous economy (U.S. Department of State Background Note of Mongolia, 2007).

* The World Country Profiles showed that traditionally, Mongolian economic growth pattern is majored in the herding and agriculture primary products exported to the neighbour countries. But in recent years, with the discovery of the various minerals existence and the mining industry’s rise, the secondary industry especially the mining industry has become one of the engines for economic growth. In addition, because of the remoteness and unpolluted natural beauty, the tourism and service industry has become another reason of the economic growth boom (U.S. Department of State Background Note of Mongolia, 2007).

* In 2006, the Mongolian Parliament passed the corporate income tax law, aiming at cutting the tax burden and encouraging the growth of economy (U.S. Department of State Background Note of Mongolia, 2007). The series of activities which may be a benefit for the foreign company to join the mining industry and have a corporation with the local government.

4.3 Social

* The data base of Central Intelligence Agency indicates that the labour force of Mongolia is 1.068 million in 2008; the occupation of the secondary industry sector is only 5% of total. Furthermore, the data base in 2009 also shows that the median age of the whole population of Mongolia is 25.3 years, in which male are 24.9 years, while the unemployment rate in 2008 is 2.8% (CIA, 2010). It can be concluded that the major labour force for the mining industry are plenteous, setting up a mining company in Mongolia can help the local government solve the unemployment problem.

* By the end of 2004, the population below poverty line in Mongolia is 36.1% (CIA, 2010). Large population are relying the traditional agriculture and herding industry and cannot support the family. And because of the influence of the communist belief, Mongolian people’s social values are relatively simple, and may have big thoughts and huge motives to earn more money and built their home, their attitude towards working must be positive.

* However, there might be a discrimination trends among the Mongolian people towards Chinese businessmen, even though the central government has a relatively good relationship with China. That may be concluded as a historical reason. And because of the local Chinese’s manner are not acceptable by the Mongolian people and have a bad influence among the local custom. (The strong anti-China mood of Mongolia, 2009)

4.4 Technological

* There is few literature resources about the technical terms in Mongolia can be found, but the only factor that can be sure is that Mongolian government spend about 5% of GDP on its education expenditures and the school life expectancy is 13 years on average, according to the database of the World Factbook (CIA, 2010). 4.5 Legal

* There are established laws of Mongolia on Legal Status of foreign Citizens, which was enacted in December 1993, and the most recent amendments were executed in December 2000, aiming to protect the rights of the foreign citizens (Lynch & Mahoney, n.d.).

* The Company Law of Mongolia is enacted in August 1999, setting up the basic concepts from the company’s foundation to operation and many other factors in Mongolia (Lynch & Mahoney, n.d.).

4.6 Ecological

* Recent years, with the economic growths increased, Mongolia’s environment has been deteriorating. It is said that “burning of soft coal by individual home or ‘ger’ owners, power plants, and factories in Ulaanbaatar has resulted in severely polluted air; and also deforestation, overgrazed pastures, and efforts to increase grain and hay production by plowing up more virgin land have increased soil erosion from wind and rain” (U.S. Department of State Background Note of Mongolia, 2007).

* Furthermore, there is a heat debate in domestic Mongolia that concerned the non-transparency in the authorisation progress from the local government to the foreign mining companies, which mainly belongs to China, Japan and other neighbour countries. It is considered that the current dramatic and relatively unregulated growth in mining sector for minerals (gold, coal, etc.) may bring hidden troubles in future (U.S. Department of State Background Note of Mongolia, 2007). 4. Analysis of the future environment

From the former PESTLE analysis, it can be seen that the whole economic environment of Mongolia is not be well developed yet. There are huge potential of the economic growth in Mongolia, and the profitability of the mining industry are large. The local government need a media to transform its economic growth pattern from the pattern of primary industry as major to the pattern of secondary industry as major as tertiary-industry, and to develop itself to go to the world as well.

Therefore, a foreign investment from the neighbour country is firmly welcomed by the government, in order to benefit the both countries’ interests. In addition, the cross-border trade contracts between China and Mongolia is the cornerstone of the two countries’ relationship and provides the safety of the trade (U.S. Department of State Background Note of Mongolia, 2007). Hence the future official investment atmosphere between Mongolia and China are going to be stable and attractive. And with the awake of the Chinese people’s manner aspect, the non-governmental relationship between Chinese and Mongolian will be much closer, which would make the environment more perfect than ever.

5. Entry mode options

* WFOE—to become a wholly foreign-owned enterprise

One of the entry mode options is to become a WFOE, in Mongolia which is not that doable. Because of the local government has established some policies that require sharing an equity stake in major new mines (U.S. Department of State Background Note of Mongolia, 2007). Otherwise, the WFOE may meet lot of troubles in its regular productions from either the local government or the work force because of the culture barriers. Google in China is a good example that shows the different culture can make a large amount of loss. Therefore, this entry mode option is not recommended.

* Mongolian-China Joint venture enterprise

This is considered one of methods to attract the foreign investment in China, and most of the foreign companies choose this entry mode to get the benefit from the local government. In comparison, this is the better way for Chinese companies find a cooperation relationship with Mongolia than do the WFOEs. Thus, from the way that local government provide the licences and hardware facilities, and Chinese companies provide the technical support and operations, both country sides can achieve the largest interests. Furthermore, that kind of joint venture can solve the local unemployment problems and can bring the resources to China. Hence this kind of enterprise is strongly recommended.

6. Potential risks

However, the potential risks still exist. Because of the global shortage of energy resources, there are a lot of strong competitors waiting for taking share of this profit. And because of the historical reasons, Mongolia has to evaluate the cooperation with China carefully, considering the unpleasant history of cooperation. The potential risks may affect the future operation of the Chinese mining industry and all the aspects of the hidden risks should be reconsidered seriously.

7. Recommendations and strategic option

7.1 Strategic options

According to Dr. A.M.Rugman (2009)’s FSA-CSA matrix, there are four strategic options that the company can choose, both low FSA and CSA; high FSA with low CSA; low FSA with high CSA; both high FSA and CSA (A.M.Rugman, p.g.51, 2009). Regarding the characteristics of the Chinese mining company, two strategic options are recommended, which are high FSA with low CSA, and both high FSA and CSA. By possessing a high FSA, the company has its own proprietary technology that can establish a leading competitive advantage which is difficult to exceed.

Moreover, it would be better that the company possess the high CSA, which can take advantage of the natural resources and the labour forces, contributed to a stabilization of the company in local environment, and thus being helpful to the localisation of the company. Hence the both high FSA and CSA strategy are highly recommended. However, at the first stage of the company’s operation, it is difficult to establish such strongly competitive advantages, hence a high FSA with Low CSA strategy are recommended as well in the initial period.

8.7 Recommendations

From the former analysis, it can be seen that a competitive advantages of Mongolian mining industry are not established yet; there is strong potential profitability of doing the mining business. With the eager of being open to the world and develop the domestic economic, the Mongolian government are firmly welcomed the foreign investments and it is a good opportunity for mining companies to extend their global business. Thus despite the mining business in Mongolia is high recommended.

8. Conclusion

In conclusion, this report has analysed the investment environment of mining industry in Mongolia. The PESTLE analysis is considered first as a basic narration of the situation, and then the evaluations based on this PESTLE analysis are given to show the quality of the Mongolian investment environment. From the former analysis it can be seen that the overall investment atmosphere is good for the Chinese company.

And considering the particularity of the local investment environment, it is better that the Chinese mining company forms a joint venture company with the local government. And in the initial stage of the company’s operation, a strategy with high FSA and low CSA are recommended in order to build the brand awareness and to be localised. Furthermore, the future environment and the potential risks are considered to be able to overcome and approved. Therefore, it is a good decision that to expand the mining business in Mongolia.

9. Bibliography

* 1. Skhouri 2008, Mongolian Mining Industry, International Business Wiki, accessed 04 April 2010, < http://www.wikia.com/Wikia>

* 2. Wikipedia 2010, Mongolia, The United States, accessed 05 April 2010, <http://zh.wikipedia.org/wiki/%E8%92%99%E5%8F%A4%E5%9B%BD#.E6.94.BF.E6.B2.BB >

* 3. U.S. Department of State Background Note 2007, Mongolia, The United States, accessed 08 April 2010, <http://www.infoplease.com/country/profiles/mongolia.html >

* 4. CIA 2010, East & Southeast Asia: Mongolia, accessed 08 April 2010, < https://www.cia.gov/library/publications/the-world-factbook/geos/mg.html >

* 5. The Strong anti-China Mood 2009, Blog, accessed 08 April 2010, < http://blog.huanqiu.com/?uid-388-action-viewspace-itemid-348202 >

* 6. Lynch & Mahoney, n.d., Mongolia Laws and Commentaries