International Engineering Management of KHS GmbH - Coursework Example

International Engineering Management Assignment Name: Institution: Tutor: Date: Contents INTRODUCTION 3 COMPANY OVERVIEW 3 GENERAL INFORMATION ABOUT INDONESIA 3 Country’s Overview 3 The State of Indonesian Economy 4 Economy Forecast 5 Infrastructure 6 Trade Policy 6 CULTURAL DIFFERENCES AND RISKS (ECONOMICAL AND POLITICAL) 8 ADVANTAGES AND DISADVANTAGES OF MOVING THE PRODUCTION PLANT TO INDONESIA 8 Advantages 8 Disadvantages 9 DISCUSSION 9 REFERENCES 11 INTRODUCTION KHS GmbH is a company based in Dortmund, Germany, that supplies filling and packaging systems. Due to high production cost, the company considers to start an international production plant in Indonesia. This paper is an analysis of movement of the company in to the Indonesian economy, the significance of cultural differences that exist between Indonesia and Germany, as well as the advantages and disadvantages of relocation of production from Germany to Indonesia. COMPANY OVERVIEW KHS GmbH is one of the world’s greatest supplier of packaging systems; providing innovative solutions for packaging and filling in the food, beverage and other non-food markets. The company is wholly owned by Salzgitter Klöckner-Werke GmbH, Germany, with other sites in USA, Mexico, Brazil and India. It supplies state-of-the-art, highly efficient and reliable individual machines, turnkey lines, and conversions for filling and packaging in PET bottles, glass, cans, pouches and kegs. The company is driven by its international focus and satisfaction of their customer demands, both local and internationally (KHS, 2016). However, the high production cost in the German economy has reduced the profit margin of the company site in Dortmund. As a result of this, the company considers to move its production to Indonesia, where labor costs are lower, with promise as possibilities. GENERAL INFORMATION ABOUT INDONESIA Country’s Overview Indonesia is located in the Southeast of Asia, between the Pacific and the Indian Oceans. It is composed of thirteen thousand islands, making it the largest island country in the world. Its population is estimated to be 258 million people, the 4th most populous country with majority of people being Muslim. The country is made of distinct linguistic and native ethnic groups. Since the 7th century, Indonesia has been an important region of trade with India and China. Since its independence during the World War II, the country has been facing challenges like natural disasters, democratization, corruption, and periodical economic changes. The State of Indonesian Economy Both government and private sector play a significant role in Indonesia’s mixed economy, making it the largest economy in the Southeast Asia region. As of 2015, the nominal GDP of Indonesia was estimated at USD 887 billion, while in PPP (purchasing power parity) terms, the GDP was USD 2.685 trillion (Focus Economics, 2016). In 2015, the nominal GDP was USD 862 billion. Under global ranks, Indonesia is 16th largest economy by nominal GDP, and 8th largest in terms of PPP. In 2014, the per capita GDP was USD 10,651 in terms of PPP, while the nominal per capita GDP was USD 3,518. As of 2015, the per capita GDP was USD 3,379. Below is a chart showing the GDP growth rate of Indonesia (July 2013 - July 2016). Figure 1: GDP growth rate of Indonesia (Source: www.tradingeconomics.com Statistics Indonesia The ratio of debt to GDP is 0.26. The largest sector of the economy is the industrial sector, which accounted for up to 46.4% of the total GDP in 2012, followed by services at 38.6%, then agriculture at 14.4%. The service sector has employed many people in the labor force (47.9%) since 2012 compared to other sectors, followed by agriculture (38.9%), and industrial sector (13.2%). In 2010, Indonesia was ranked number 27 in world exports. Its main export markets are Japan, Singapore, United States, and China. Major imports in to the country come from Japan, China and Singapore. The country experienced a trade deficit in 2014, having exports at USD 176 billion and imports at USD 178.2 billion (Trading Economics, 2016). The country has extensive natural resources, including natural gas, crude oil, copper, tin, and gold. Its main imports include chemicals, machinery and equipment, foodstuffs and fuels. It exports commodities such as oil and gas, plywood, electrical appliances, textiles and rubber. Indonesia provides about 50% of the world’s palm oil demand. In 2012, Indonesia alone produced 35% of the global certified sustainable palm oil. Plans to expand the palm oil plantation have been put in place to boost the use of the commodity in the production of biofuel. Economy Forecast According to Statistics Indonesia, the country’s growth is expected to pick up gradually and move up to 5.5% in 2017 (OECD, 2016). The recent strengthening of the rupiah since 2014, and also reduction in public spending is expected to be an economical boost. Lower commodity prices and regulatory uncertainty will hold back investment in the private sector. The government has shifted its focus to removing obstacles to its plans to invest in infrastructure, while ample space for fiscal support remains. Turbulent signals regarding the protection of Indonesia’s domestic industry, free trade and foreign investment are hurting the country’s business confidence (OECD, 2016). The government made a positive step in removing fuel subsidiaries in early 2015. However, this fuel price-setting regime is still complicated. The charts below show the depreciation graph of the Indonesian currency against the USD, and growth in investments. Figure 2: (a) Depreciation of the Rupiah over the last 18 months. (b) Growth in investment and exports remains weak. (Source: Statistics Indonesia (BPS); OECD Economic Outlook 98 database; and Bank Indonesia.) Infrastructure Indonesia lacks quality and quantity infrastructure, a factor that has been hampering the country’s social and economic development. Both ‘hard’ infrastructure (electricity supply, roads, airports etc.) and ‘soft’ infrastructure seem to lack efficient development. According to the most recent World Economic Forum edition on global competitiveness index (GCI, 2013-2014), Indonesia was ranked number 61 out of 148 countries with regard to its current state of infrastructure (Indonesia Investments, 2016). The pace of expanding infrastructure is unable to meet the robust macroeconomic growth since the late 1990s when the country was hit by the Asian Financial Crisis. As a result of this, the country is unable to utilize its full economic potential. When the country would have adequate infrastructure, it is estimated that its GDP could grow up to 7.0 – 9.0% annually, compared to the current growth rate of 6.0 – 6.5%. Trade Policy Foreign Investment Regime A new law on foreign investment in Indonesia was enacted in 2007 (Law No. 25), and ever since, there have been significant institutional and legal changes. The law has eliminated the timeframes permitted for foreign investment in trade, industry and other sectors. It provides for national treatment to investors, irrespective of their country of origin. Foreign investors can repatriate funds using a foreign currency. Under the law, it is specified that the Government of Indonesia will not carry out any nationalization activities, except by law, and has provisions on compensation of market price and recourse to arbitration in case of such circumstances (World Trade Organization, 2013). The law provides greater transparency, reduction in administrative burdens by creating an integrated service facility and extended work permits for main personnel, and extensive rights over land use. CULTURAL DIFFERENCES AND RISKS (ECONOMICAL AND POLITICAL) The large population of Indonesia implies a rich diversity of culture, ethnic groups, religion and languages. This means that there will be barriers to communication between the foreign workers and the local workers. Communication barrier can lead to miscommunication or confusion about production deadlines, costs and quantities. The difference in time zones between Germany and Indonesia can make it difficult to schedule meetings, or may create a communication lag with electronic communications. Islam is the largest religion in Indonesia. During Muslim celebrations such as the Ramadan, business activities are usually slower and reach the peak on the Idul Fitri holiday (Indonesia Investments, 2016). This means that workers contracted from within the country will not have much output during such religious cultures. Starting a production company abroad may also have a risk of damaging the company and brand reputation if the local people view it as offering domestic employment to foreign workers. This may create a negative public image and public relations, which may subsequently affect the sales in the local market. Indonesia has a relatively stable government. Sometimes, it may be unpredictable or hard to tell how and when government policies may change, or how an incoming government will act. This will make it hard for KHS management team to take the necessary countermeasures. The political risks can range from raising utility costs or imposing new regulations on foreign investment, to increasing taxes towards nationalization of production facilities. Even political developments in other countries can impact on the production costs. For instance, a sudden crisis in the supply of oil is likely to inflate the costs incurred in shipping. ADVANTAGES AND DISADVANTAGES OF MOVING THE PRODUCTION PLANT TO INDONESIA Advantages There will be low labor costs which will lower the overall production cost. Indonesia is strategically located in relation to the giant economies of India, China, and Singapore. This will make it easier for the company to penetrate these markets. A relatively stable political and economic environment. Political and economic stability are essential for the thriving of any business. Prudent fiscal management which is supporting the economy. This makes a favorable environment for both foreign and domestic investments. Abundant natural resources available. It will increase the global coverage of the company and diversify business risk. Disadvantages High transportation costs to the German and European markets will pose logistical challenges. Cultural and economic risks. The economic policies, currency exchange rates, and property rights protections may affect the production. Cultural preferences are also likely to affect the new company (Edwards, 2013). Dependence on other suppliers for other materials may fall during hard times, making it hard to complete customer orders on time. DISCUSSION Indonesia is in itself a complex country, with certain country-specific investment risks, and sometimes, the country experiences turbulence within the framework of its context and unique dynamics. All businesses face risks, whether domestic or foreign. These are common challenges that will be in other economy of a developing country. They include political corruption, underdeveloped infrastructure, and performance of governance, radicalization, religious and ethnic violence, and natural disasters. Despite all these risks, the economy is projected to grow by 5.5% in 2017. This growth rate is estimated to increase with development of adequate infrastructure. Relocation of KHS GmbH from Germany to Indonesia is a move that promises to come with economic benefits both to the company itself and to the Indonesian economy. It will cut down the labor costs as the labor that will be provided in Indonesia will be cheaper as opposed to the labor cost in Germany. As far as there may be cultural differences and risks, the possibility of having greater benefits is higher. In addition, the move will open access to large economies of China, India and Singapore, where the company products can find an expanded market. Another important recognition regarding the economy of Indonesia is the upgrades by global financial services companies such as Fitch Ratings, Standard and Poor’s, and Moody’s of Indonesia’s credit ratings. This is attributed to resilient economic growth, prudent fiscal management, and low government debt, which have attracted financial inflows into the economy of Indonesia. This subsequently creates a favorable environment for foreign investment. REFERENCES Read More