Setting Up Production Facility in Indonesia by KHS GmbH - Report Example

Setting Up Production Facility in Indonesia by KHS GmbH By: Professor: Class: University: City: State: Date of submission: Table of Contents Table of Contents 2 Introduction 3 Company Overview 3 Countries Overview 3 Economy 3 Economy Forecast 6 Infrastructure 7 Trade Policies 8 Cultural Differences and Risks 9 Advantages of Moving the Production Plant to Indonesia 10 Disadvantages of Moving the Production Plant to Indonesia 11 Discussion 11 References 13 Setting Up Production Facility in Indonesia by KHS GmbH Introduction The report aims at analysis the German company, KHS GmbH; performance in the German market, and the move to venture in the Indonesian economy. Moreover, the report would also discuss the advantages and disadvantages linked to investment in Indonesia. Other important areas of study include analysis of Indonesian current economy, forecasting on the economy, and infrastructure. Company Overview KHS GmbH is German company manufacturing and supplying the filing and packaging systems meant for various industries including food, beverages, and non-food industries. In addition, organizational products and solutions involve process engineering, PET processing, palletizing, keg systems, aseptic filing, inspection, thermal container treatment, conveying, and packaging systems (KHS, 2016). The major organizational target includes Asia, Europe, and America. Before changing its name to KHS GmbH in 2005, the company was KHS Maschinen-UND Anlagenbau AG. The company undertook a survey and found that it had 4,178 employees globally with annual sales totalling to 1008 million Euros in similar year. The company aims to increase the number of its market segments through investing in Indonesia as such would help meet it global coverage and wider customer base. Countries Overview Economy The economy of German rank at the fifth position globally and largest in Europe. The country majorly exports machinery, chemicals, vehicles, household equipment, and enjoys the benefits associated with the huge and skilled labour force. German’s manufacturing sector is diverse and comprises of an array of various industries, activities, and technologies. Besides the establishment of the food and drink, electronics automotive, aerospace, and pharmaceuticals, numerous industries are beginning to emerge due to the increasing level of technology, which in turn makes competition very stiff. These industries include industrial biotechnology, digital and improved materials like composites, and nanotechnology (Di, Kruse, & Tandon, 2011, 122). In terms of the share of the United Kingdom GDP, the industrial sector was ranked the third largest within the UK economy after business and retail sectors in 2009. Additionally, the industry generated £140bn in gross value added which equates more than 11% of the UK economy. The sectors also employees more than 2.6 million people which represent 8% of the total number of employed people. Figure 1; Indonesian GDP (Indonesia Update Conference, & Reid, A., 2012) The German’s economy follows free market principles, which requires significant level of government regulations, protection, and social welfare programmes. The government plays critical role within the economy through provision of subsidies in some sectors by retaining the ownership of certain economic segments through promotion of competition and free enterprise (Indonesia Update Conference, & Reid, 2012). The manufacturing division is significant to the Economy of Indonesian, with the largest contribution to the country’s GDP (27.2%). Even though the Indonesian manufacturing sector has been experiencing growth since 2003, other industries have been experiencing negative growth including textile, leather, food, beverage, and tobacco (Islam, Chowdhury, & International Labour Office, 2009, 214). Currently, Indonesia is the 18th largest economy globally and experiences remarkable growth. Initially, Indonesian economy depended on agriculture, but it shifted to a balanced economy with the manufacturing sector surpassing the agriculture’s GDP. Such shifts indicate that the country lessened traditional dependency on the primary exports; however, the trend continues to remain the same. Figure 2: Germany GDP (Federal statistical Office, 2015) Economy Forecast With people migrating to the cities, increments in the middle class, and an array of natural resources, Indonesia could one of the 10 largest economies globally in 2020. Additionally, in 2030, it could be among the top six global economies. Indonesia, with a total population estimate of 240 million people, is the biggest Southeast Asian economy. it is projected that the country’s current economy ($708 billion) to increase to $9 trillion by 2030 that could make it the largest economy after China, India, Brazil, Japan, and the United States (Vestring, Rouse, Reinert & Varma, 2005). Moreover, the Indonesian economy would be greater than that of Britain, France, Mexico, and Germany. In 2020, the total size of the Indonesian middle class could rise to 171 million indicating 63% of the population; however, in 2030, the level could reach 244 million. German is currently trending towards the unspectacular increment in business activities. Moreover, the country’s GDP is growing at similar rate with the potential output and estimated disparity between the two measures has been converging to zero simultaneously. Hence, most institutions are already attaining the limits of the production capacities. Infrastructure Numerous infrastructures are beginning to emerge in Indonesia, which attracts international investors across the country. Such development gives the observers hope that the country’s economy is taking the right course. With the inauguration of important industrial infrastructures critical for KHS GmbH such energy and mineral related projects, the manufacturing sector is likely attract many investors. The country is spending numerous resources on energy related projects, which the economists stipulate to lift the confidence of the investors. Sectors investing in food manufacturing, palm oil plantation, and rice milling expect multiplier effect due to the undergoing infrastructural projects inaugurated within the country as they affect the country’s economy. The existence of $1.2 billion Central Processing Plant and $830 million ammonia plant of chemical manufacturer are important infrastructural elements likely to attract KHS GmbH. For the company, transport infrastructure is critical. The Indonesian government spent £276 billion in delivering important infrastructural plans within the transportation sector. The infrastructures include Surabaya Mass Rapid Transit, Jakarta Mass Rapid Transit, Soekarno-Hatta International Airport Rail Link (SHIARL), Bandung Light Rail Transit, Kulonprogo (Jogjakarta) Airport, and Kertajati (West Java) Airport, which could make it easy to connect with other international markets. Trade Policies Indonesia is inactive in making trade deals with the partners; it only has two bilateral trade agreements and one implemented. Moreover, the country has several stalled bilateral talks with the trading partners some of which are proposed agreements with the European Union. Most trade agreements are negotiated regionally, which is part of the ASEAN initiatives including the Regional Comprehensive Economic Partnership (RCEP), which was recently launched as a trade agreement between ASEAN and other six major trade partners within the East Asia. From such context, the Indonesia’s position towards the Trans-Pacific Partnership (TPP) is clear that it comes from the recent general attitude towards issues related to openness and integration. Throughout the history, the country has never been in favour of the preferential trade liberalization; however, it prefers unilateral and multilateral initiatives. Since 1980s, the unilateral efforts of Indonesia maintained a relative openness to trade regimes. Currently, there are negative sentiments associated with liberalization while openness seems to be prevalent. In Indonesia, there are measures restricting imports, especially for agriculture and food products. There are subtle manufacturing regulations influencing the manufacturing industries. The obsessive drive of increasing value added and determination of improving industrialization contributed to the reinstatement of the interventionist policies, including restriction on asset and exports of the unprocessed goods. The current existing trade agreements in Indonesia are considered unsuccessful the deliverance of the desired aims. The agreement between ASEAN and China gave rise to the increment in Indonesia’s imports while serving hunger in China for the raw materials and energy. Cultural Differences and Risks Concerning political and economic cultures of both Indonesia and Germany, the countries have cultural differences, which could affect negatively the performance of the company. Political environment is critical for every business operations and include laws, government agencies, and various lobbying groups controlling organizations within the economy. Through the EU, the German government controls various trade agreements. Entering the Indonesian market is difficult considering that it only focuses on regional agreements, which is likely to affect the performance of the company within the Indonesian economy. In both states, the governments have controls, restrict the operations of the companies through encouraging and offering support, to some extent discourage, and ban certain activities considered inappropriate for economic development. The international laws recognize the right of nations to grant or deny the permissions of doing business with the political borders. With focus on economic environment, Germany has a better and properly developed economy compared to Indonesia. The German economy performs better though the competition is higher than Indonesia’s, which makes more internationally companies focus on Indonesia as the emerging market. The factors determining the economic environment are salary levels, pricing patterns, and credit trends affecting the level of consumer spending and their purchasing powers. Cultural differences associated with political and economic environments between the countries create gaps that allow international companies to view Indonesia as an emerging market. However, the differences could result in losses considering the limited infrastructural development, limited international trade policies, and poor market structures. Figure 3: Indonesian Manufacturing Sector (Shakil, 2013) Advantages of Moving the Production Plant to Indonesia One of the major benefits of operating in Indonesia is the reduction in the cost of operation especially the cost of labour. In less developed countries such as Indonesia, the population is high with directly proportional rates of unemployment. As a result, the company would enjoy huge pool of labour at low cost making the company save as high as 50% of its salary. For the companies experiencing shrinkage in the market and losses due to influx in the number of competitors, relocation to countries such as Indonesia could assist in making substantial difference in its bottom line and to some extent prevent the falling together of the business. In Indonesia, there are several untapped manufacturing sectors (Edwards, 2015). The company could benefit such gaps in a bid to increase its market base. Opening up the production facility assist the company in reaching the brand new market considered to have high demand for the manufactured products and enjoys minimal level of competition. Moreover, such investment would also assist in increasing the recognition of organizational brand globally. With the rising level of the global economy, greater level of brand awareness could be necessary for the company to continue with the expansion especially with the current saturation point of the German market. Disadvantages of Moving the Production Plant to Indonesia On the downwards, there are several disadvantages associated with opening production facilities in Indonesia including the elements associated with uncertainty. In Germany, the company is used to relatively stable government. Choosing to operate in Indonesia could be a rude awakening of the operating in a country experiencing frequent changes in the political leadership. The sudden change in the regime could contribute to economic upheaval leading to jeopardy of the long-term success of the business (Shakil, 2013). A booming economy in a single day could collapse if the government makes radical changes. When opening the facility in Indonesia, it is never a popular decision within the home country as the company could choose to eliminate other jobs in a bid to take advantage of the cheaper labour cost. Such factors could damage public relations standpoint. Discussion With the focus on integration and modernization of the Eastern German economy whose unemployment rates exceeded 20% in some areas, the process remained costly with the annual transfer to the east amounting to $12 billion. The government introduced changes to govern the habitually high level of unemployment and the marginal growth, which resulted in strong growth, reduction in unemployment rates, and reduction in the working hour scheme. However, the greatest challenge is fighting with recession. Investing in Indoneciasia would result n lower labour rates. In addition, the temporary incentive subsidies might be available through abatement on the taxes, training, and permits. Although the labour cost is low, Indonesia lacks professionals, but the country enjoys low cost of education. Productivity within the developing countries such as Indonesia is low compared to that of Germany, which raises the overall cost of labour relative to the straight wage rate disparities (Shakil, 2013). The firms owned by international companies could be more productive compared to the locally owned firms; however, there is scanty evidence on such. Moreover, cultural differences present numerous challenges for the institutionalization of the modern high productivity manufacturing plants. References Di, G. E., Kruse, A., & Tandon, P. (2011). Skills for the labor market in Indonesia: Trends in demand, gaps, and supply. Washington, DC: World Bank. Edwards, J. (2015). Advantages and Disadvantages of Competing in International Markets | Mastering Strategic Management- 1st Canadian Edition. Retrieved August 4, 2016, from https://opentextbc.ca/strategicmanagement/chapter/advantages-and-disadvantages-of-competing-in-international-markets/ Islam, I., Chowdhury, A., & International Labour Office. (2009). Growth, employment and poverty reduction in Indonesia. Geneva: International Labour Office. Indonesia Update Conference, & Reid, A. (2012). Indonesia rising: the repositioning of Asia's third giant. Singapore, Institute of Southeast Asian Studies. KHS. (2016). KHS – Filling and Packaging worldwide. Retrieved August 4, 2016, from http://www.khs.com/en/ Shakil, Z. I. (2013). Entry Strategies to Indonesian Market. Retrieved August 4, 2016, from https://publications.theseus.fi/bitstream/handle/10024/64630/Zahedul_Islam_Thesis.pdf?sequence=1 Vestring, T., Rouse, T., Reinert, U., & Varma, S. (2005). Making the move to low cost countries. Retrieved August 4, 2016, from http://bain.com/Images/BB_Making_move_low-cost_countries.pdf Read More