The German Company KHS GmbHs Plan to Relocate Its Business to Indonesia - Case Study Example

KHS GmbH “Student’s Name” “Institution Affiliation” “Course” “Date” “Instructor” The German company "KHS GmbH” is thinking of relocating their business to Indonesia Introduction One of the main goals that every company or business in the world would like to attain is lower cost of production and maximum utilization of the available economic resource in order to have a high profit margin. Most organizations throughout the world use metric profitability as a measure of success (Cleverley & Song, 2011). The strategic plan of a business organization should aim at achieving a competitive advantage, that is, the net margin of the company should exceed the industry’s average. In the face of global competition, business organizations like KHS GmbH should come up with effective strategies in order to remain competitive and maximize the wealth of the shareholders. Therefore, KHS GmbH should adopt either one of the following two strategies, namely: reduce business expenses or increase sales volume. The German company KHS GmbH that supplies filling and packaging systems intends to look for a better environment or business opportunity to invest in. This descriptive report analyses the economic level of the Indonesian, advantage, and disadvantages of investing in the country, risks that are involved and any cultural difference significance between the two countries. Indonesian economy summary Currently, Indonesia is the 18th largest economy worldwide, and it has been undergoing an outstanding economic growth. In the late 1990s, the Asian Financial Crisis portrayed a disastrous impact upon the country; but thereafter, there was an incidence of a booming economy where the macroeconomic indicators of the Indonesian commenced to pull back to its track around 2000s. Since then, the financial system that was infested with lack of transparency and supervision was overpowered by adopting a system of better fiscal policies in conjunction with the standards of economic internationally. This fostered global market integration and liberalization of the economy. Table 1.0 Indonesia Annual GDP growth rate. The table above indicates that the GDP of the country has been declining over the years since 2011. These is due to increase in the inflation for instance in taxes. In the year 2013and 2014 the annual inflation was twice more as compared to the inflation experineced in the previous years. The budget of 2016 indicates an immense increase in expenditure in public and private health, thus, forcing the Indonesian government to make plan to mandate a threshold of 5 percent of GDP spending on the health sector as compared to the revised 3.7% in the former budget (Worldbank.org, 2016). The Indonesian economy has advanced in the last quarter of the year 2015 such that in, December alone, it recorded a growth rate of 5.04 percent. This has been a comparable expansion increase from 4.74 percent as reported in the former quarter and its GDP has hit the market consensus with a growth of 4.80 percent. In regards to the government expenditure and investment, there has been an offset slowdown and decline in exports and private consumption. In the last year 2015, the Growth Domestic Product grew to 4.79 percent by the end of the year, and this was slightly above the expectation in expansion of 4.75 percent. The economy contracted by 1.83 percent because of a revision of 3.36 % growth at the end of the third quarter. The Gross Domestic output Annual growth percentage was averaged to 5.36 from the year 2000 until 2015 having reached a higher percent of 7.16 in 2004 in the last quarter (Tradingeconomics.com, 2016). Fig 1.0 Indonesia GDP Annual Growth Rate from 2013 to 2016 Source: Tradingeconomics.com, (2016) The largest economy in the South East Asia is the Indonesian economy, and accounts for the highest share in the industrial sector at 46.5 percent GDP. The primary unit in the industrial sector is the manufacturing with a total output of 24 percent, followed by the mining and quarrying fields accounting for 12 percent of the total GDP. Construction industry amounted to 10 percent, while the electricity, water, and gas supply accounted to 0.75 percent of the total output. The second sector is the services that constituted to 38 percent of the total output. In the services sector, primary unit was the hotel and restaurant, trade that had about 14 percent of the total output, transport sector in conjunction with the communication had 7 percent of total output, real estates and finance had 7 percent of the total output; whereas, government services accounted for 6% of the GDP. Agriculture sector amounted to 15 percent of the GDP (Tradingeconomics.com, 2016). Fig 2.0 showing the economic structure of Indonesia Source: Tradingeconomics.com, (2016) A report released by the World Bank stated that out of the 252 million populations in Indonesia, 28.6 million people are currently living beyond the poverty level and this account for approximately 40 percent of the total population. It indicates the people living below the poverty level; each person could afford in a month a total 330,776 rupiah ($22.6). The Indonesian economy is planning a development plan of twenty years with 5-year term plans. This strategic planning ranges from 2005-2025. The third term plan that is the current focuses on infrastructure development and improvement programs of social assistance such as the health care and education programs. This shift in public spending will immensely reform a lasting energy subsidy; thus, allowing opportunities for more investment in the programs that majorly target the poor (Worldbank.org, 2016). Establishing Production Operations in Indonesia i). advantages KHS GmbH establishing a production operation in Indonesia has vast advantages. The company is primarily focused on increasing its profit margin by reducing the production cost. Thus, the company will strive at incurring lower labour costs that will reduce the operating costs. In reference to BusinessKnowledgeSource.com, companies have distinctively reported to have a high saving of up to 50 percent in payment of salary. Thus, overseas relocation to Indonesia will improve the company’s profit margin, making a substantial difference (Smallbusiness.chron.com, 2016). In addition, KHS GmbH products and services in the new location will attract high demand, as the initial competition of the goods produced is minimal. This will immensely help elevate the company’s brand recognition in the country. In global economies that are increasing, it is necessary to have brand awareness of the products for expansion purposes (2012books.lardbucket.org, 2016). The Indonesian Company Laws and Regulations stipulate that any Company can be 100 percent fully controlled and owned by a foreigner. This, therefore, gives entrepreneurs access to double taxation pacts with countries such as Germany, Singapore, South Africa, France, Australia, the UK and the US. In addition, a foreigner is able to buy property in Indonesia (Indonesia company laws and regulations handbook, 2010). ii). Disadvantages There are several of disadvantages associated with relocating business operations to Indonesia. One of the main disadvantages of relocating the company in Indonesia is the likelihood of increase in transportation cost, as the company will be transporting its finished and well-branded products to Germany. In addition, the country has imposed trade sanctions, a barrier, and a limiting factor to foreign investors who would like to set their companies in the country. The exports ban in Indonesia has led to creeping growth in business (Smallbusiness.chron.com, 2016). Formation of a company in Indonesia is hindered by the intermittent law enforcement, restrictions to foreign investment, deficiency of controlling transparency and uncertain costs induced by the government. According to 2008 Doing Business Survey conducted by the World Bank, the country has been rated at 123rd in ease of undertaking a business. Income sourced in Indonesia attracts a corporation tax of 30% and the Capital gains are taxed up to 30 % (Indonesia company laws and regulations handbook, 2010). Risks that KHS Face A business risk is defined as the likelihood that an organization will not attain its set objectives. If KHS GmbH were dependent on the country, then a major negative event occurring in the country would affect or ruin the company. Despite the fact that establishing business operations in a new international market has potential benefits, including business risk diversification, availability of new clients and lower cost operation, there is a daunting challenge. Political risks, such as government policies of taxation and legislation will be a challenge of establishing the business in Indonesia. This makes it extremely hard for KHs GmbH to plan for the future due to uprisings in the country. The country’s infrastructure underdeveloped, thus, barring social and economic growth. Incidences of bad weather phenomenon experienced in the country such as the heavy rainfall and frequent earthquakes also poses major challenge in a steady flow of good produced, and services offered. The above catastrophes cause a collateral damage to the Indonesian infrastructure. The country is still lacking behind in providing social infrastructure to its citizens such as the health care, education system and even social welfare. Therefore, the country has to harness and nurture a society that is innovative driven in order to deliver skilled and healthy workforce (Investments, 2016). Importance of Cultural differences between Indonesia and Germany Cultural difference is a core issue that directly affects the growth of business enterprise; and therefore, its impact on the business should be harnessed to positively affect the overall performance of the business. One of its relevance is that it fosters effective communication which is a key tool to the success of every business. This will enable the clients to negotiate well with the business owners; thereby, setting up a good customer relation. It also helps in advertisement and creation of awareness of the goods produced by the company. The knowledge of differences in culture between the countries enables the investors to attain competitive advantage and build up international competencies. Therefore, it is importance that different strategies should be devised in order to increase the business performance internationally. In addition, it also facilitates conveyance of information through the gestures or the body language. Germans often speak in a loud voice while the Indonesians speak softly, thus, the KHS managers or service providers will have to engage their customer in a soft tonal voice as they interact. The effectiveness of Companies communication to their client determines the output of the company as it directly affects the company’s performance (2012books.lardbucket.org, 2016). Company risk due to cultural differences Cultural risks can pose great impact negatively to the productivity of the companies due to lack of management policies and expertise to operate in a country with different cultural background. If the manager fails to consider the social norms, work ethics and labour practices, then this will influence the company’s productivity. Packaging products should be designed well to fit the customer preference and desire and the branding might differ between the Indonesian culture and the Germany culture. Thus, they will be a likelihood of unacceptability within the German clients as the company packages the products. There is reluctant of the employees in the Indonesian country to work in the companies of foreigners; thus, posing a great challenge to the company’s performance (2012books.lardbucket.org, 2016). Conclusion The large population provides a new market opportunity in the country that is a great chance for KHS to enlarge its productivity and foster greater success. Although, there are challenges to KHS GmbH while carrying out its operations in Indonesia, effective strategies to counter these challenges as well as feasibility analysis of the company’s effectiveness and success have been detailed. From the above analysis, KHS GmbH has a real chance of maximizing the wealth of the shareholders in Indonesia. The hospitality of the Indonesians also provides KHS Gmbh Company with a business opportunity to exploit. When the company maximizes its productivity, brand according to the preference of the market, and have a clientele attitude then the company has an assurance of a successful business with higher profits gain and minimal production costs. Reference List "What Are The Best Ways For A Company To Improve Its Net Margin? | Investopedia". Investopedia. N.p., 2015. Web. 1 Apr. 2016. 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