The Indonesian Market for Soybeans - Coursework Example

 THE INDONESIAN MARKET FOR SOYBEANS Introduction Indonesia is one of the world's most populous nations, with 238 million people, nearly half of which are concentrated on Java Island alone. It is also the world's largest Muslim country and a member of the Organization of the Islamic Conference despite being a secular state. The country is a republic with a president elected to five-year terms. It is a market-based economy which owns more than 150 state enterprises and administers the prices of some basic goods including fuel, price and electricity. The country has recovered well from the 1997 Asian financial crisis through debt restructuring, the sale of some state-owned assets, the recapitalization of the commercial banking sector, the improved supervision of the capital market, and increased investments in public infrastructure. The gross domestic product grew by 4.5 per cent in 2003, 5.1 per cent in 2004, 5.6 per cent in 2005, 6.0 per cent in 2006, and 6.3 per cent in 2007. In 2006 the Indonesian government announced a package of policy reforms to improve its investment climate by means of strengthening investment services, harmonizing regional and central government regulations, and improving customs, excise and taxation services, among others. With moderate economic growth in recent years, domestic consumption has continued to account for nearly 2/3 of the GDP, followed by investment for more than l/5 and exports for l/10. With the targeted GDP growth of 6.6 per year up till 2009, the government expects to push Indonesia to recover thereafter to its pre-crisis annual average growth rates of close to 10 per cent.. Indonesia has been chosen as target export market for US soybeans in view of several factors. It has a big population of low and middle-income consumers who have traditionally depended on cheap soybean protein side-dish for nutrition; the country's production of soybeans has accounted for less than 50 per cent of its consumption, and the price per ton of soybean imports from several producing countries have roughly doubled during the past several months. There is therefore an unfilled demand for this agricultural product which can be supplied through the produce from US farms, and even from partial sourcing from other South American countries to be subsequently exported. The Export Product The soybean (scientific name Glycine max) is a leguminous plant known for its nutritious seeds which contain 40 per cent protein and 21 per cent oil. It is an important source of vegetable protein and oil for human (and animal) consumption as well as for industrial use. While it is produced worldwide, the United States is the world's biggest producer, with farms in Arkansas, Indiana, Louisiana, Minnesota, Mississippi, Missouri, and Tennessee producing most of soybean seeds in the nation. When processed for food, soybean oil is made into shortening, margarine, cheeses and vegetarian meats; and soybean can also be processed into soybean milk, tofu, soy sauce, and salad sprouts. Soybean ranks only second to corn as the United States' major cash crop. Among the major producers and exporters of soybeans besides the United States are Brazil and Argentina. These South American countries supply the China market. The Target Market The Indonesian export market consists of importers which then distribute the product to processors and retailers. Small buyers process the product into soybean cake called tempe in Indonesian, eaten as a regular side dish by the poor and middle-income Indonesian consumers. The country's production of soybeans has been inadequate particularly in recent months, with local formers selling all their produce to the domestic market. A huge shortfall of more than a million metric tons has pushed demand to the highest level ever, and the price per ton of imported soybeans from foreign countries has recently doubled. There is a substantial demand gap for this agricultural crop that must be filled as soon as feasible. GDP and per capita income. Based on the purchasing power parity yardstick, the estimated 2007 GDP of Indonesia was $843 billion, which, ranking 18th in the world, is higher than that of Australia ($773 billion). Because of its huge population, fourth behind China, India, and the United States, the GDP per capita based on the purchasing power parity was only $3,700. This relatively low figure places Indonesia at 158th out of 229 countries worldwide, although a bit higher than the Philippines, India, and Viet Nam. Aggregate income of the population is large, and inasmuch as soybean foodstuffs are considered as a basic nutritional requirements of a large proportion of the population, its demand can be considered inelastic and less affected by inflation than most products.The inflation rate has been going at 6.4 per cent per year (2007 estimate). Indonesia's population of 238 million is growing at about 1.21 per cent annually, slightly lower than that of Singapore. Its adult population of the 15-64 ranges constitute roughly 2/3 of the total population; its young population of 0 to 14 compose slight above 1/4, with the 65-and-above constituting less than 6 per cent. Life expectancy at birth is 70.6 years. It is a huge market for soybeans and soybean products which are affordable in price because the main market consists of the low-income and middle-income groups of consumers. This significant majority of Indonesian consumers may be considered the market segment which any soybean marketing program must address. The demand for soybean and soybean products. Tempe, a native traditional food popular among the low income and common people, and sometimes the upper class, of Indonesia, is eaten along with rice-based meals throughout the archipelago. Also, for less than the equivalent of 10 US cents, one can buy two pieces of tempe or tofu from food stalls on Indonesian streets. Soybean milk is also produced and consumed locally. Indonesia has been importing 1.2 millions of soybean a year while its actual quantity demanded is 2 million tons. In the past several months, less soybean has been produced worldwide, including in the United States, attributed by Indonesian government officials to climate change and the trend towards foodstuff-based alternative sources of energy triggered by high crude oil prices in the world market. Because world output and domestic supply were not enough, prices went up by as much as 100 per cent to $600 per ton in Indonesia, causing consumers to "go hungry" and processors to take to the streets in protest and to ask for government help to stabilize soybean prices. The government for its part promised to reduce the 10 per cent import duty to 5 per cent or even to 0 in order to ensure that the product would be affordable to consumers. At the same time, the government resolved to provide some form of incentives to local farmers to plant soybeans or increase farm productivity. Exchange rate trends. Before the Asian financial crisis in 1997, the US dollar was trading at Rp250; however, during and after the crisis, the value of the Indonesian currency fell 75 per cent to Rp10,000, the worst hit among the Asian economies embroiled in that crisis. Thereafter, the exchange rate managed to fluctuate at or below that rate. The US dollar was averaging Rp8,600 in 2004, Rp9,810 in 2005, Rp9,166 in 2006, and Rp9,300 in 2007. After the subprime mortgage loan crisis caused world stock markets to plunge, the value of the Indonesian rupiah, like those of many other currencies affected by the recessionary contagion, fell to about Rp11,650. Shown below is the chart of the value of the Indonesian rupiah during the last several months. Fig. 1. The value of the US dollar in relation to the Indonesian rupiah, May-November 2008. It is noted that the depreciation of the rupiah is systemic, that is, caused by factors external to the economy, and is not due to any fundamentals within Indonesia itself. The post-crisis behavior of the currency can be described as relatively stable like most other currencies. Price Controls An incomes policy or price controls are generally not applied with the exception of some foodstuffs and utilities The price of soybean processed foodstuffs have not been subject to any price controls in the past and is not expected to be controlled in the future. Government and public attitude towards US products. Indonesian buyers and consumers generally have a high regard for the quality of US products. Trade between the United States and Indonesia has been a good one, with the Indonesia registering a trade surplus in the years being examined. In terms of total trade, Indonesian exports in 2007 is estimated to be $118 billion f.o.b. with trading partners Japan, Singapore, China, South Korea, Malaysia, and Taiwan. Its imports of $84.93 billion f.o.b. of the same year were transacted with Singapore, China, Japan, South Korea, Malaysia, Thailand and the United States. Indonesia's largest imports are oil and gas, base metals, machinery and equipment, chemicals , and foodstuffs and vegetable products. The largest export commodities are oil and gas, electrical appliances, textiles, minerals, and wood and paper products. For its bilateral trade with the United States, Indonesian exports amounted to $12.02 billion and its imports amounted only to $2.67 billion, indicating a trade surplus for Indonesia (and a deficit for the United States) in the amount of $8.14 billion. Clearly, the United States has some catching up to do in this two-way trade. Competition The threat of competition is almost nonexistent. If import substitution through intensified local production is successful, this would be the main threat, but it would take a long period of time before it can materialize in view of the huge shortfall. From foreign suppliers , competition would be based on pricing and reliability of supply. We will make sure that the supply line is robust and uninterrupted. We would monitor the competitive situation so that we can compete effectively both in price and in the quality of our service to buyers. The government could adversarial if it subsidizes the local soybean industry or otherwise imposes extremely prejudicial policies and laws against imports. Risks of doing business with Indonesia The World Bank ranks Indonesia low with regard to the criterion of “Ease in doing business = 123/178)” indicating difficulty as to business regulations and their enforcement, such as the protection of investors, property rights, employment issues and contract enforcement. Indonesia also did not do so well in respect of the Index of Economic Freedom (110/178) as derived by the Heritage Foundation as to trade barriers, corruption, and other restrictions on business. The Coface country risk rating likewise places Indonesia in B risk category in terms of short term default probability. The B rating indicates an “unsteady political and economic environment likely to affect further an already poor payment record.” However, Indonesia ranks sixth as a viable offshore destination for services based on financial attractiveness, people and skills availability, and business environment, as determined by the A.T. Kearney Global Services Location Index. India ranks first. Socio-cultural forces Indonesians tend to be very friendly and one should reciprocate this immediate friendliness. They are more likely to buy from people who treat them with deference and seem to genuinely like them. Meetings tend to be very formal: Indonesian participants enter the room based on their hierarchical position. The visitor is expected to remain standing until this ritual is over. The pace of business negotiations in Indonesia is slower than one may be accustomed to in the United States. There is little emphasis on efficiency, punctuality, and deadlines-- the popular concept of 'rubber time' exists in Indonesia as it does in a few other Southeast Asian countries such as Malaysia and the Philippines. Since punctuality is not closely observed, there is little sense of urgency about time, Indonesians dislike being hurried. Meetings can start one hour late. Politeness is also a necessary part of a successful business relationship in Indonesia. Politeness will not, however, mean that Indonesian businessmen cannot drive a hard bargain. The official language is Bahasa Indonesia (translated as “Indonesian language”), a Malay language that incorporates some words from Javanese, Dutch and a few vernaculars. The ethnic groups that compose the general population are as follows: Javanese 40.6 per cent, Sundanese 15 per cent, Madurese 3.3 per cent, Minangkabau 2.7 per cent, Betawi 2.4 per cent, Bugis 2.4 per cent, Banten 2 per cent, Banjar 1.7 per cent, and other or unspecified 29.9 per cent, based on the 2000 census. Some 86 per cent of the population are Muslim with the rest (less than 6 per cent each) accounted for by Protestants, Catholics, Hindus, and others. When making a presentation, one may have to make it in a bi-lingual format. However, all official correspondence with government officials must be in Bahasa Indonesia. Information materials and company literature should be translated into Bahasa Indonesia. Although many government officials may speak some English, they will normally would prefer to hold meetings in the national language. Use of the language is also required for many advertisements and publications. It would be a good idea to hire a bilingual to avoid potential difficulties and uncomfortable snags throughout the process of discussion and negotiation. There are other important things that one needs to know before dealing with our market and the regulatory authorities in Indonesia. Indonesian law requires that we employ a local agent who is also conversant with the government requirements as well as with the local culture. For another thing, Indonesia is high in the list of corrupt countries, and we should be able to deal with problem situations that can arise, considering the constraints imposed by our own laws regarding corrupt practices of American companies abroad. Bribery is common at most levels of society and is known as 'facilitating payments.' Indonesian workers observe Muslim practices such as making several worship breaks during office hours, and they have to leave their jobs at three o’clock every Friday afternoon for religious reasons. Their efficiency dips during the one-month observance of Ramadan when they are fasting. At the end of Ramadan period, they are entitled by law to a one-month bonus. To the Western businessperson with agents or other workers working for him, this can be a bit of a drawback. Education The literacy rate of the total population is 90.4 per cent. Bahasa Indonesia is the medium of instruction of the school system, although international schools (such as the Indian, British and American international schools) use English. Male literacy rate is 94 percent, and female 86.8 per cent. There is a resurgence in the popularity of the English language in the post-Soeharto era, as judged by the proliferation of English-language training centers or institutes in the urban areas. Export marketing strategy A sound marketing strategy requires correct and accurate knowledge of the true situation and the use of both qualitative and quantitative analysis in making assessments, decisions in order to enable us to formulate responses to whatever changes can pose a threat to the business and to take advantage of opportunities that may develop in the Indonesian market. We shall also use e-commerce as a means disseminating information and boosting exports. Travels to Indonesia and personal interaction with the buyers would be necessary. We shall avail ourselves of the assistance and opportunities that may be offered by the US government such as the US Export-Import Bank and other organizations that carry out export promotion programs for export businesses, covering education, data collection and dissemination, trade missions, market research, among others. We shall also consult with the chambers of commerce in Indonesia on specific issues or problems, as well as with the commercial counselor of our embassy there whenever necessary. We will take pains to develop solid, long-term personal relationships with Indonesian businessmen we will be doing business with. In Indonesian business culture, relationships are based on respect and trust. Consequently, we will have to take time to establish good will, and this implies that we will have to make several trips over a period of months, at least in the beginning. Conclusion It is our view that despite some negative evaluations of Indonesia by some respected rating bodies, the country is an attractive country with which to have a trading relationship. Indonesia has a good trading record with the United States; in fact we have imported more goods from that country that the volume that we exported. By increasing our trade transactions with that country we hope to improve commercial relationship on a long term basis to improve our volume of bilateral trade. A solid understanding of Indonesian culture would be important in doing business with our Indonesian counterparts. The hiring of an agent would be necessary, and facility in communicating with our buyers would be helped if we can hire a good bilingual person even on a temporary basis while we are still learning the language and the culture. Exporting soybeans to Indonesia involves generating more farm production in the United States at a time when the possibility of a recession is quite strong. We will be conducting a survey and inventory of soybean farms in the United States and contracting farmers to produce sufficient quantity of soybeans to meet demand in Indonesia. There is a great demand in Indonesia for soybeans as indicated by the reports about recent scarcity. It is precisely because of that likelihood of an economic downturn that traders should redouble efforts to help stimulate economic activity in all sectors including agriculture. We are confident that the trade in soybeans will not be affected by an economic downturn in the United States. REFERENCES Hill, C.W.L (2005). International business: Competing in the global marketplace. New York: McGraw-Hill __________ (2001). Global Business Today, 2nd ed. New York: Irwin/McGraw Hill Hill, C.W.L. & Jones, G.R. (2004). Strategic management: An integrated approach. (6th ed.). Boston: MA: Houghton Mifflin Co. Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (1999). Strategic Management: Concepts, Competition and Globalization, (3rd ed.) Cincinnati, OH: South Western Publishing Co https://www.cia.gov/library/publications/the-world-factbook/docs/rankorderguide.html https://www.cia.gov/search?NS-search-page=results http://www.geographyiq.com/countries/id/Indonesia_economy.htm http://globaledge.msu.edu/countryinsights/rankings.asp?countryID=20®ionID=3 http://www.exxun.com/aab_intl_org/ix_io_2.html http://www.exchange-rates.org/history/IDR/USD/G/180 http://www.heritage.org/research/tradeandeconomicfreedom/hl1084.cfm POWERPOINT PRESENTATION, WITH SUGGESTED CHANGES The Indonesian market for soybeans1 -- Demographics2 Institutional infrastructures and reforms Economic growth trends --- The target market3 Rationale for choosing soybean exports Traditional consumption of soybean dish --- Export product4 Description Suppliers Production, use, and consumption --- Target market5 Distribution of product Size of demand ---- Market screening 6 Demand for soybean and soybean products Aggregate purchasing power Market size Market segment ----- Market screening 7 Value of the Indonesian rupiah Exchange rate trends Currency stability/instability --- Market screening 8 Price controls Govt and public attitudes towards US products Market screening9 Threats of competition Supply problems Political and legal changes affecting market Trade relationship10 Total Indonesian trade US-Indonesia trade Potential expansion of bilateral trade. Risks11 Institutional Ratings of Indonesia Corruption and bribery Other issues Socio cultural forces12 National traits and characteristics Friendliness Disregard of punctuality Other characteristics Sociocultural forces13 Muslim practices Holidays and office hours Ramadan bonus --- Sociocultural forces14 Language and need for translator/interpreter Education and literacy --- Export marketing strategy15 Environmental scanning e-commerce Travels ----- Export assistance at home and abroad16 Import-Export Bank Chambers of industry and commerce US embassies and consulates --- Conclusion17 --- References18 Read More