German KS GMB Expansion to Indonesia - Analysis of the Suitability of the Country - Example

KНS GMBН Expansion to Indonesia: Analysis of the Suitability of the Country Name Institution Course Date Table of Contents Table of Contents 2 Introduction 4 KHS GmbH: Company Background 4 Indonesia 5 Country Overview 5 Status of Indonesian Economy 6 Forecast of Indonesian Economy 8 State of Infrastructure in Indonesia 8 Trade policy 9 Indonesian and German Cultural Differences 10 Advantages of Relocating Production Operations to Indonesia 11 Availability of Abundant Labor 11 Growing Market Opportunity 11 Availability of Abundant Natural Resources 11 Disadvantages of Relocating Production Operations to Indonesia 11 Discussion 12 Conclusion 13 References 14 Introduction Globalization is one of the most significant phenomena that have occurred in the recent times. Although globalization has brought with it some share of challenges, the integration of world economies has opened up the business opportunities for big companies that are currently exploiting opportunities in foreign countries. KНS GmbН is one of the companies that intend to take advantage of globalization by relocating its production facilities to Indonesia. In Germany, high cost of production has been a major issue for KНS GmbН as it lowers the company’s profitability. As such, the German filling and packaging system manufacturer (KHS 2016) is considering relocating its manufacturing facilities to Indonesia with the hope of taking advantage of the low labor cost in the country. This report investigates the suitability of Indonesia for KНS GMBН’s business expansion. The report begins by analyzing the Indonesian economy and the available resources and proceeds to discuss the advantages and disadvantages of KНS GmbН moving its production operations in Indonesia. The final part of the report details the importance of Germany and Indonesia and analyzes the risks that are associated with the cultural differences. KHS GmbH: Company Background KНS GmbН is a German leading manufacturer of packaging systems and filling supplies for both food and non-foot items. The company was founded in 1868 In Dortmund Germany where its headquarters are based and has grown to become one of the world’s leading manufacturer of packaging and filling equipments for food and non-food items (KHS 2016). Its major areas of operations include PET development, packaging systems, aseptic filling, process engineering, thermal container treatment, keg system development, labeling, inspection and conveying among others (KHS 2016). The company operates as Salzgitter Klöckner-Werke GmbH’s subsidiary. Although Germany remains its chief market, KHS GmbH has customers in most parts of the world, including Europe, America and Asia. For close to one and a half centuries now, KHS GmbH’s production facilities have been based in Dortmund Germany. However, because of the high cost of labor in Germany, the company has been incurring high production cost that affects its performance. Therefore, to reduce the production cost, KHS GmbH is considering relating its production operations to Indonesia, which is one of the low labor cost countries in Asia. The management of KHS GmbH believes that by taking advantage of the cheap labor cost in Indonesia, it would be able to significantly reduce its production cost, which would also result in increased profitability. Despite the promising opportunity, relocating the production facilities to Indonesia brings the challenge of increased transportation cost considering that Germany remains the major targeted market for KHS GmbH. Indonesia Country Overview Indonesia is A Southeast Asian country located between Pacific and Indian Oceans. Indonesia is the largest island nation in the world as it is has more than 13,000 islands (IBP, Inc. 2015, p. 2). It is also the world’s fourth most populated country with about 258 million people as at the end of 2013 (The Economist Intelligence Unit 2016). Indonesia is also the most populous Muslim majority nations in the world and shares borders with a number of countries, including Malaysia, Papua New Guinea and East Timor (fig. 1). The country’s capital city is Jakarta. Fig. 1: Geographical Location of Indonesia Source: The Economist Intelligence Unit (2016) Status of Indonesian Economy Indonesia is one of the emerging economies in the world with a GDP of $895.677 billion in 2015. Currently the country is ranked the 16th largest economy in the world in terms of nominal GDP and 8th in terms of GDP per capita that is estimated at $895.677 billion (Jakarta Globe 2016). This also makes Indonesia the largest economy in Southeast Asia and has been grouped under newly industrialized nation. Indonesia is also G-20 major economies member and was able to overtake India as the second fastest growing economies among the G-20 economies though India has since regained its position. In 2015, the country’s inflation rates stood at 6.4, which is very high compared to other major G-20 economies (The Economist Intelligence Unit 2016). However, unemployment and poverty remain a big concern for Indonesian government considering that the unemployment rates stood at 5.9% in 2014 with about 11.3% of the country’s population living below the poverty line (Jakarta Globe 2016). Fig. 2: Indonesia’s GDP Growth from 2000-2015 Fig. 3: Indonesia’s Real GDP Forecast of Indonesian Economy Indonesia’s economic growth is expected to remain solid in the future because of the reforms that the Indonesian government has initiated to spur growth. In 2015, the Indonesian economy grew by 4.8% and is expected to increase to about 5% in 2016 (Dieng 2016). From 2016 to 20120, the Indonesian economy is projected to grow at an average of 5.1% a year (fig. 3) (Focus Economic 2016). The projected growth in the country’s economy is expected to be driven mainly by the strengthening of the Indonesian Rupiah and increased investment activities, especially public sector spending. At the same time, the high inflation rates and unemployment are expected to decline in the coming years as the economy of Indonesia continues to expand. Fig.4: Projected GDP Growth 2013-2017 State of Infrastructure in Indonesia Lack of adequate infrastructure is cited as one of the stumbling blocks to Indonesia’s economic growth and development. The country lacks adequate and quality hard infrastructures, such as roads, rail, airports and electricity supply and the same applies to soft infrastructures, such as health care and social infrastructure. The GCI 2014 report ranked Indonesia at position 61 out of 148 economies in terms of the state of infrastructure (The World Bank Group 2016). The IBP Inc. (2015, p. 5) report indicate that the poor state of infrastructure in Indonesia is steepening the logistic costs, which in turn reduces the country’s attractiveness to investment and competiveness. The Indonesian Chamber of Commerce and Industry report indicates that about 17% of total expenditures incurred by companies in Indonesia are taken up by logistics costs (Chaudhuri, 2011). This is quiet high considering that logistics costs in other regional peers fall below 10%. Transport cost is high both for sea and land. In fact, despite the country’s archipelagic geography, Indonesia still lacks a substantial sea transport system. At present, sea transport is even more expensive than land transport (Indonesia-Investments 2016). The high cost of transport in Indonesia explains why domestically produced products in Indonesia are more expensive compared to imports. In addition, blackouts are always the order of the day in Indonesia due to inadequate electricity supply. Moreover, the state of education system, social welfare and health care remains poor and underdeveloped, which makes the country less attractive to foreign direct investment investments. Trade policy Indonesia is one of the most attractive nations in Southeast Asia to foreign investment. This is because of the trade policies that the government has enacted to promote foreign direct investments by increasing the ease of doing business. Such measures include the passage of a law that gives foreign firms the opportunity to have 100% ownership in the country (IBP, Inc. 2015, p. 14). However, the president must authorize such investments first through BKPM, which is the body mandated to approve and lice businesses. Currently, Indonesia is ranked at position 109 by the World Bank in terms of the ease of doing business (World Trade Organization 2013). Indonesian and German Cultural Differences Culture has a huge influence on the business operations. As such, before a company relocate its business operations in a foreign land, it is always important that managers understand the cultural issues that might affect business success in the foreign country. Germany and Indonesia are economic giants in Europe and Southeast Asia respectively. However, the two countries have certain cultural differences that affect business operations. First, Dieng (2016) noted that Germany is a universalism country, where rules are very crucial in business. On the other hand, Indonesia is a particularism nation where what matters most in business is relationship. Second, Germany is an individualistic country, where an individual is viewed more important than group. By contrast, Indonesia is a collectivism society, where more value is placed on groups than individuals (Stehle and Erwee 2005). Third, Germany is a specific nation, where people are not expected to mix business with personal life. On the other hand, Indonesia is a diffuse nation, where business and private life goes together. Fourth, whereas Germans stress on people controlling their emotions, Indonesians believe in expression of emotions. Additionally, whereas Germans place value thorough planning, punctuality and working on one thing at a time to ensure perfection, Indonesians believes on synchronization, where several projects are executed at the same time. Moreover, whereas the majority of Germans speak German, Indonesians speak mainly Indonesian (Stehle and Erwee 2005). Advantages of Relocating Production Operations to Indonesia Availability of Abundant Labor KHS GmbH stands to benefit from the availability of a large pool of cheap labor in Indonesia. Indonesia is the fourth most populous country in the world with about 258 million people. This provides a large number of labor forces for the German company. In fact, in 2015, unemployment rate in Indonesia stood at 5.9%. This translates to a huge number of people looking for jobs that KHS GmbH will capitalize on coupled with the fact that cost of labor in Indonesia is cheaper compared to Germany (The Economist Intelligence Unit 2016). Growing Market Opportunity As the economy of Indonesia continues to grow, this results in increased industrialization in the country. The growth in industries means that KHS GmbH will be able to get a huge ready market for its products right in Indonesia, thus not needing to transport the finished products to Germany. Availability of Abundant Natural Resources Indonesia has abundant natural resources, especially geothermal energy that KHS GmbH can consider exploiting should it decide to diversify into this area (Dieng 2016). Using the energy produced from its geothermal facilities to operate its plants, this would help not only reduce production cost, but also revenue sources for the German company. Disadvantages of Relocating Production Operations to Indonesia Despite the advantages associated with relocating production facilities to Indonesia, making such a move also pose certain risks that KHS GmbH must understand. First, the political instability witnessed in Indonesia presents a risk to KHS GmbH in the country. The Southeast Asian country is prone to political unrest and has many extremists and religious groups that present a threat to businesses in the country (The Economist Intelligence Unit 2016). Insecurity characterized by robberies and theft is also high meaning that KHS GmbH will have to prepare for anything should the shareholders approve the relocation of the manufacturing operations to Indonesia. Second, although Indonesia is open to FDI, the government promotes domestic industries than foreign manufacturers and this pose a serious challenge for the German manufacturer. Additionally, KHS GmbH will also experience high logistics costs considering that the state of hard and soft infrastructure is still poor. This implies that the German firm will incur high cost of transportation both within and from Indonesia to Germany, thus increasing its production cost (Dieng 2016). This pose a threat as high transportation cost might eat into the gains made from the cheap labor cost. Moreover, because Indonesia is a Muslim dominated country, cultural issues, such as the fact that Muslims do not drink will result in some products, such as the cage cans lacking market in Indonesia. Discussion KHS GmbH is popular brand in Germany, Europe and parts of Asia, having been in operation for about one and half centuries. Although the company has recorded good performance over the years KHS GmbH has been facing the challenge of increasing cost of production and the shareholders are currently feels the need to relocate the production facilities to a different country. Indonesia that has been chosen by KHS GmbH appears to provide KHS GmbH with the opportunity to realize production cost reduction and profitability due to the favorable business environment. As indicated in the report, lack of adequate infrastructure has been a major impediment to investment in the country. However, in recent years, the Indonesian government has realized the importance of putting up quality and adequate infrastructural facilities to promote investment and has invested heavily on infrastructural development (The Economist Intelligence Unit 2016). This makes the country a good business location for KHS GmbH. The Indonesian government has also introduced a law that gives foreign firms 100% ownership, which favors KHS GmbH. The country also has a large pool of cheap labor that KHS GmbH can exploit should it move its facilities to Indonesia. Besides, Indonesia is blessed with abundant natural resources, such as geothermal energy that KHS GmbH can decide to diversify into and exploit. However, as the company seeks to relocate production facilities to Indonesia, it should approach the market with caution as it would incur high transportation cost for its products to Germany and this can significantly eat the gains made from low production cost (Basri and Van der Eng 2004, p. 142). To deal with this risk, KHS GmbH should ensure that it chooses the cheapest mode of transport. At the same time, KHS GmbH should ensure that the business culture of Indonesia is well understood before relocating operations. Conclusion KHS GmbH stands a huge chance to achieve its production cost target by relocating its manufacturing operations to Indonesia. However, KHS GmbH will have to ensure that it adheres to the Indonesian business culture, as well as choose the cheapest mode of transport for its products from Indonesia to Germany to ensure success. References Basri, M. C., & Van der Eng, P 2004, Business in Indonesia: New challenges, old problems. Institute of Southeast Asian Studies, Sidney. Chaudhuri, S 2011, Indonesia economic quarterly current challenges, future potential, viewed 9 August 2016 http://siteresources.worldbank.org/INTINDONESIA/Resources/Publication/280016-1309148084759/IEQ_june-2011_en.pdf Dieng, I 2016, IMF survey: Indonesia navigates safely through uncertain times, viewed 9 August 2016 https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar031416a Focus Economic 2016, Indonesia economic outlook, viewed 9 August 2016 http://www.focus-economics.com/countries/indonesia IBP, Inc. 2015, Indonesia business success guide - Basic practical information and contacts. Lulu.com, London. Indonesia-Investments 2016, Infrastructure in Indonesia, viewed 9 August 2016 http://www.indonesia-investments.com/business/risks/infrastructure/item381 Jakarta Globe 2016, IMF: Indonesia outlook for 2016 solid, thanks to economic reform measures, viewed 9 August 2016 http://jakartaglobe.beritasatu.com/business/imf-indonesia-outlook-2016-solid-thanks-economic-reform-measures/ KHS 2016, Company profile, viewed 9 August 2016 http://www.khs.com/en/press/publications/company-profile.html Stehle, W., & Erwee, R 2005, Cultural, legal and societal differences between Germany, Singapore, Thailand and Indonesia that influence the transfer of HR policies. In: 2005 Australia and New Zealand International Business Academy Conference (ANZIBA 2005), 10-11 Nov 2005, Melbourne, Australia. The Economist Intelligence Unit 2016, Indonesia, viewed 9 August 2016 http://country.eiu.com/indonesia The World Bank Group 2016, Indonesia, viewed 9 August 2016 http://www.doingbusiness.org/data/exploreeconomies/indonesia/ World Trade Organization 2013, Trade policy review: Report by the secretariat Indonesia, viewed 9 August 2016 https://www.wto.org/english/tratop_e/tpr_e/s278_e.pdf Read More