Doing business in Indonesia: a case for Australia and New Zealand - Essay Example

? Table of contents Executive Summary 2 Introduction 3 Basic business cultures 3 Culture of Indonesia 4 Culture of Australia 5 Culture of New Zealand6 Institutional context 7 Australia – an overview 7 New Zealand - an overview 7 Indonesia – an overview 8 Characteristics in workplace 9 Level of industrialization 11 Entry strategies 12 Business opportunities in Indonesia 13 Strategic alliance 15 Conclusion 17 Annex 19 References 20 Antonio Arches Mgt. 8032 International Management Professor’s name University of Southern Queensland Towoomba, Australia July 3, 2011 Doing business in Indonesia A case for Australia and New Zealand Executive Summary This paper is descriptive summary of doing business with Indonesia in the perspectives of an Investor. Interested investors in this report are Australians and New Zealanders who recognize the importance of globalization. They find Indonesia interesting as this country has been reported to become one of the economic powers in the future. However, investment in this country will not be so easy as it has diverse culture from Australia and New Zealand. In this context, this study will provide an insight to the differences in culture and business strategies that consist of the external environment of the country. Findings of the report will guide investors in their decision and prepare the strategies they will need in entering this market. Method of research is exploratory and done through data collection from reliable sources of published statistics, reviews and country sites. A sample of an strategic alliance of foreign company in Indonesia has been provided to show how it survived doing business in Indonesia. Doing business with Indonesia A case for Australia and New Zealand Introduction Indonesia is considered as one of the fastest growing economy in Asia next to China, India and Vietnam. OECD has considered it as part of the BRICS group of countries that is expected to play an important role in the world economy. BRICS group is composed of Brazil, Russia, Indonesia, China and South Africa (OECD, 2011). In this concern, many countries have stated their interests in doing business with Indonesia and to take part in investments in this growing economy. Two countries, which will be the core of this study, are Australia and New Zealand. However there are many things to consider before any investments should be done, among which are the culture and the external environment that will determine the objectives and strategies in entering the Indonesian market. Basic business cultures First part of the study looks at the cultural differences of Indonesia, Australia and New Zealand to understand their diversity in business practices. Analysis in this context is guided by cultural models professed by Hofstede or Trompenaars that should be applied in the workplace. For purpose of inter-culture understanding, culture has been defined by several authors, but basically it is a shared pattern of behaviours and interactions, cognitive constructs affective understandings that are learned through a process of socialization. In essence, culture is how members of the group perceive, use and interpret them. It is the values, symbols and perspectives that distinguishes them from other groups (CARLA. n.d.., Banks & McGee 1989) Culture of Indonesia. Indonesia is basically an Islamic country. It is been considered as the world’s most populous Islamic country and also the world’s largest Islamic democracy (Indonesia country brief). However its culture in very much diversified as there are more than 300 languages used by different communities. According to Cullen and Parboteeah (2011) Islamic standards and norms are very much important to them and this should be carefully understood by for the foreign investors in entering the Indonesia market. The basic five pillars of the Islamic religion must be obeyed and respected. Previously the business culture in Indonesia was dominated by the small family businesses. Management theorist, Hofstede suggests that culture should have equality among people, however, the prevailing norms of Indonesian business structure is hierarchical with decision making controlled at the top by senior managers or senior members of the family. According to World Culture.com, nepotism is rife in Indonesia as promotions and selections are done according to relationships than on pure performance criteria. Business relations were mostly based on relationships rather than any stipulated rules. Thus, one needs connections in the government in order to do business. Management style in Indonesia shows extreme approach to respect to elders or superiors. So, the manager in Indonesia is the one making decisions, and then conveys it to subordinates to follow. Hofstede mentioned time orientation, and on this, Indonesians considered “time as inelastic”. To them, this means “rubber time”, time is not important and meetings start late or finish late, what matters to them is the relationship. In meetings, hierarchy is still observed, officers with highest position enters first in their delegation. Exchange of calling cards is needed and gifts are accepted, but should avoid alcoholic drink because it is a Muslim country. Indonesia has a reputation of large scale corruption from the highest levels of government office down to the lower ladder of the organization, and this is a matter to consider in negotiations. In communications, they are weak in English and a translator is needed. Culture of Australia. This country has a small market with highly educated and affluent people which realize the importance of international trade. Australian organizations are non-hierarchical patterned after US style of management. They do not pay attention to titles and rankings in the organization but is more concerned on achievements on the position. Australians runs counter to authoritarian style of Indonesia. In Australia, pragmatism is seen as key attribute and adopts consultative style of management. In doing this method, people try to strike a balance of making practical approach in solving problems in a situation. Structures of business ownerships in Australia is sole ownership, trust, a company, a joint venture, a partnership, a branch or a partnership of a foreign corporation. According to “Structures…” 2011, a foreign company may conduct business in Australia using any of these business structures. Most common choices however are establishing an Australian subsidiary by registering or acquiring an Australian company; acquiring an existing “shelf” company. A “shelf company” is a business that has been registered but has not traded yet. In the last instance, is by registering a new company which will be subject to the existing Corporations Law 2001 of Australia. A new company may fall into four categories: a company limited by shares, a company limited by guarantee, a company with unlimited liability and a no liability company (for mining purposes). The most common company is one that is limited by shares which may be a private company or a public one. Culture of New Zealand. New Zealanders are friendly people, outgoing, polite and enjoy extending hospitality. New Zealand prescribes the theory of equality posed by Hofstede because business structure is egalitarian, they call people on a first name basis and shun the use of titles. They are quite easy to know as they say hello to strangers and will offer assistance without being asked. In business and etiquette, they are quite reserved especially to people they do not know. Meetings should be done in advance at least one week and should be done by phone, fax or e-mail notice. Mostly, it is hard to set meetings with them in December and January because this is their prime vacation time. In presentations during meetings, they appreciate business cases with facts and figures and interested to know what negotiators cannot do rather on what they can do. As an etiquette procedure, New Zealanders appreciate maintaining a few feet of space during meetings, and exchange of calling cards. They appreciate honesty and directness in business dealings and looks for value for their money. Hotsefede refers to gender roles or masculinity as part of culture, but in this aspect, it is not mentioned or not important to the three countries and therefore “masculinity” does not come up as an issue. Heirarchy of positions and equality are more important to Indonesia, Australia and New Zealand. Individualism, as one of the theories of Hotsefede, are more prominent in egalitarian atmosphere present in Australia and New Zealand. Hotsefede’s cultural model includes the treatment of “uncertainty avoidance” as part of international business culture and is described in uncertainties wherein people tolerate ambiguities and need formal rules. Uncertainty refers to “the extent within which members of a culture fell threatened by unknown situations” (International Business Culture). In this context, New Zealand is more adaptable to this cultural model as they look for directness, preciseness in business deals. 2. Institutional context A comparison of the institutional context of Indonesia, Australia and New Zealand to show differences and uniqueness of each country is done in this part of study, and shown in Annex 1. First part shows an overview of Australia and New Zealand, and second part is the characterization of Indonesia. Australia – an overview From the CIA World Factbook, data about Australia has been lifted. Australia is headed by a chief of state, in this regard, the Queen of Australia, Elizabeth II. The head of the government is the prime minister who in turn appoints ministers in his cabinet. The seat of the throne is hereditary, while governor general is appointed by the monarch and members of the legislative branch are elected. The country stands as 55th in world ranking in terms of population and has a slow growth rate of 1.148%. It has high rate of literacy of 99% that is the same for both its male and female population. It is predominantly Christian, majority of whom are Catholics. In terms of GDP, Australia is ranked as 18th in comparison to world economy. Its GDP composition is gathered from the agriculture sector, 4%; industry 24.% and services, 71.2%. This GDP is being supported by a strong labour force which distributed to agriculture, 3.6%, industry, 21.1% and services 75%. Understanding of labor distribution is important factor in planning for investment as this represent the interests of the sector. Its unemployment level is low as compared to Indonesia and New Zealand, while poverty level has not been defined by CIA. New Zealand – an overview The form of government in this country is a combination of democratic and constitutional monarchy that is similar to Australia’s form of government. As compared to Australia and Indonesia, it has a smaller population that ranks it as 128 in country comparison in the world. Its population is a mixed of ethnic groups, languages and religion, but basically maintains Christianity and uses English as official language. People are 99% literate which is the same with Australia and higher than Indonesia. New Zealand maintains a free market economy that can compete globally. The composition of its labor force is divided to agriculture, 7% industry, 19% and services 74%. It has an unemployment rate that is higher than in Australia and is ranked as 66th place in world comparison. It exports dairy products, meat, wood and wood products, fish and machinery to trading partners like Australia, UK, US, China and Japan. New Zealand imports machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles and plastics from Australia, China, US, Japan, Germany and Singapore. Indonesia - An overview From CIA World Factbook, data about Indonesia has been reflected. Indonesia adopts a republic form of government wherein the president, vice president and members of the legislative branch are elected every five years. It has a big number of population that ranks it as the 4th most populated country in the world. As shown in the table, it has a high GDP that ranks it as 16th best economy in the world, and has been categorized as one of the emerging economies in the world. Indonesia has a large labor force that ranks it as 5th in the world and is distributed to agriculture, 38.3%, industry, 12.8% and to service, 48.9%. It has a high unemployment rate when compared with Australia and New Zealand, and because of this, about 13.3% of its population lives below poverty line. According to Reuters (2009), the poverty rate in Indonesia is the highest in Asia, however, it has shown improvement since it fell to 14.2 percent in 2010 from the previous 15.42 percent on 2009. Indonesia does trade and exports to Japan, Singapore, China, South Korea, India, Taiwan and Malaysia; it imports machinery and equipment, chemicals, fuels and food stuffs from the same countries that now include Thailand. It exports oil and gas, electrical appliances, plywood, textiles and rubber. Characteristics in the workplace One of the basic characteristics that investors look into in foreign investments is ease in doing business as a global practice. In the study done by the World Bank and International Bank for Reconstruction and Development in 2011, Indonesia is ranked 121 out of 183 economies, with Singapore topping the list. Figure below shows comparison among Asian countries. Source: IBRD/World Bank 2011 A A A Source: IBRD/World Bank 2011 Above chart summarizes the characteristics of Indonesians in the workplace that has been compared by the IBRD/World Bank with 183 economies in the world. These are external factors that otherwise affect operations of an investor. In Asia, Indonesia ranks as 121st country that investors would find difficult to do business with. Investors will find it hard to start a business, close a business, and enforce contracts. However, Indonesians protect their investors and find trading across borders more convenient. Level of industrialization The level of industrialization of Indonesia as compared to other Asian countries is low. The study of Kazuo Mishima about Indonesia’s industrial competitiveness done in June 2001 showed problems in the declining competitiveness of Indonesia’s manufactured exports, reliance on importation of heavy manufacturing and slow accumulation of technology. Kazuo suggests that Indonesia should move its technology to the level of advanced ASEAN economies if the country wishes to move to the regional economic integration. In 2011, CIA World Factbook shows the labor force in the industry sector is only 12.8% while a 48.8% is concentrated on service sector and 38.3% are engaged in agriculture. As part of its GDP, the manufacturing sector contributes 46.4% in its economy, while service provides 37.1% and agriculture 16.5%. Mishima forwards a statement that Indonesia is still inferior to China in a number of sectors that includes apparel, leather goods, furniture and electronic goods. The author also thinks Indonesia has fallen behind in terms of accumulated technology in machinery-related sectors, particularly the electrical and electronic goods. As such, it has been observed by Mishima that Indonesian products have lost their competitiveness in domestic markets because Chinese products now flood the Indonesian markets and deals with it as its fiercest competitor. w.c. 1011 3. Entry strategies There are several processes of entering the Indonesian market and this can be achieved in the following manner: thru sole proprietorship, partnership (general or limited) and company. Taken from Chapter 6, titled Business Law, Indonesian Legal System, these ownership structures are applicable to Indonesia’s commercial sector categories of business organizations. Sole proprietorship is generally used by the informal group sector and is not required to be registered with the Indonesian authorities. The second type of business ownership is thru partnership and is governed by the civil code laws and commercial code of Indonesia. The last type is the company which is covered by the Indonesian Company Law. There are three types of companies in Indonesia that allows foreign investments of different categories. First is the “PT Biasa” for local companies that allows only Indonesian shareholders, directors, and commissioners. It has also a fixed minimum capital. The second one is the “PT PMDN” company that allows foreign parties to acquire 95% of shares in the company. Such set up allows foreign counterparts to have foreign directors and commissioners to the company. This arrangement needs approval from the government for the line of business it is going to operate and requires a minimum of investment. The recent developments in Indonesian Investment laws in 1997 allowed foreign investors to Indonesia as long as there are two locals who will sit in as shareholders, and foreign company has an obligation to invest in the country in an unspecified amount within 15 years. Furthermore, foreign company must report regularly about their activities and income to the BKPM (the government). When PT is used by the company, according to Business Law, it means shareholders are not personally liable to the obligations of the company and that their liability is limited only up to the extent of their capital contribution. Business opportunities The vast resources of Indonesia include abundant natural resources, labor and high domestic demand as some of the factors that attract investors to Indonesia. As discussed earlier, it has developed its agricultural sector and is promoting trade for its commodities. Among its major domestic products are sea weed, sea cucumber, shrimp, lobster, pearl, coffee, cashew nut, handicraft like (bamboo, rattan, and wood), pottery, tenun ikat hand woven. According to Bali and Lombok Global Business Information Services Indonesia, investment opportunities that are open for investors in this country are agriculture, fisheries, mining, industry and tourism. Tourism has been given big importance by Indonesian government because of major contribution to the country’s economy which is expected to reach 120 trillion Rp. In 2010, tourism in Indonesia was expected to reach 7 million arrivals which is an upward estimate as compared to 2009 tourists arrivals. A little calculation: if these 7 million visitors spend an average of $1,000 a day, this would mean US$7 million contribution to Indonesian economy. In 2009, reports said that Indonesia received a total of 6.459 million tourists and had an average spending of US$966/visitor per stay (Tuti Sonario, 2010) To encourage tourism, service sector improvements were developed such that there is a substantial investment in tourism developments. In an effort to promote tourism, 15 regional tourism resorts located in different areas of the country have been developed (Bali & Lombok Global Business Information services. 2007) In agriculture, Indonesian government is working on policies to encourage foreign investments to agriculture and health sectors. Ismar (2010) in a report published in the Wall Street Journal, said that Indonesian has raised foreign ownership certain sectors of its economy. Indonesian government has raised the level of foreign ownership to 49 percent in individual companies in staple food plantation; whereas before, only domestic ownership is allowed. In the health sector, the ceiling for foreign ownership in hospitals has been raised to 67 percent aside for the policy of opening doors to facilities across the country. The opening of the door for hospital sector investors could pave way for some regional health-care providers to enter the world’s fourth most populated country. The said Wall Street Journal reports that Indonesian government still retains the ban on investment on telecommunication towers despite the interests of several inspectors in this area. This report also said that many interested investors have waned on their desire to invest in this country because of the reported bureaucratic red tape, corruption, and overlapping regulations. To illustrate, the actual foreign investment in Indonesia dropped by about 20 percent in 2009 to US$10bn, as compared to previous years’ investment. (Ismar, 2010). In another reported incident of this author, “The Bin Laden Group from the Middle East last year cancelled a plan to invest around $US1bn in a food estate project in Papua province because the government planned to cap its share of ownership in the project at 49 per cent” . As an example of bureaucratic red tape, the decree covering this policy has been ordered, but the promulgating rules have not yet been issued to make it operational. w.c. 824 4. Strategic alliance Organizational design. According to studies, organizational design is a formal process of integrating people, information and technology in an organization (Aubrey, 1996). It begins with the creation of a strategy – a set of decisions guidelines by which each member will choose appropriate action. The strategy is derived from the mission, vision and basic philosophy of the organization. Accordingly, the organizational design of Toyota in entering the Indonesian market is a strategic alliance thru subsidiary and partnerships. As to subsidiary as an organizational design, Toyota has shown to have alliances in South East Asia. For instance, Toyota in recent reviews (Tan, 2011) has showed that South East Asia is its territory. It is referred to as the world’s largest carmaker and is almost titled as “national carmaker in Thailand and Indonesia. As a leading vehicle sales company, it has captured 37 percent of the total Indonesian industry volume and have sold 762,000 cars in 2010. Toyota has targeted an estimated 800,000 TIV for 2011 for the Indonesian market. Toyota thinks this is a very slim and modest estimate, claiming that this is due to the increase in vehicle tax, the vehicle ownership transfer fee, other progressive motorised vehicle tax pus the rise of fuel prices (Tan, 2011). Meanwhile, Toyota is getting back to its normal operations after the massive earthquake in Japan. Towards this, Toyota plans to increase its manufacturing investment in Indonesia to put into shape its first manufacturing investment since the tragedy. This plan will increase the annual output capacity of its Karawang plant to 140,000 vehicles from its present capacity of 100,000 by year 2013. This will reinforce its presence in Indonesia and expects to have a combined share of more than 50% including sales of its subsidiary, the Daihatsu Motor Co. According to the Yoshio (2011) in an article of Market Watch, the decision to pour more investment to Indonesia as an auto market is because of is robust growth potential in line with its growing economy. The Indonesian subsidiary of Toyota is set up as a PT that means “Perseroan Terbuka” and registered as a Limited Liability Company. According to “The obligation of foreign”…2010, as PT registered company, foreign company must submit to several legal procedures of the government which are quite lengthy. For instance, reportorial as to the financial conditions of the company is needed every six months. Company once registered is authorized to operate for 30 years. They are also required to submit an environmental analysis of their operation to know if there is any adverse effect. They are also required to submit manpower report 6 months after initial operation and yearly thereafter. Toyota alliance in Australia. The organizational design of is thru partnership. Toyota started business in Australia in 2001 as it has piloted partnership with Hobsons City Bay Council; and subsequently established a manufacturing plant in the area. Other partnerships and alliances with other City Councils were formed in the ensuing years whose main concerns are focused on environmental and social responsibilities. For instance, their support services include mentoring support to build skills and capability, fostering festivities, arts and other community activities. (Toyota Motor Corp. Australia, Ltd.) Toyota alliance in New Zealand. Operations of Toyota in New Zealand are more on dealership engaged in the sales of brand new and used cars, sales of spare parts and services. It has no manufacturing plant in the area and relies from importation form their home company and subsidiaries abroad. Toyota in New Zealand is an importer of new and used Toyota cars sourced from subsidiaries in other countries like Japan, Australia, England and Thailand. The company imports new brand of Toyota and Lexus then sell in wholesale to dealers in New Zealand. The company also imports used Toyota brands, refurbished them to a specific class of standard, then remarketed and sold as a signature class brand. Conclusion On the basis of country perspectives comparison, result of study showed there is a definite possibility for investment in certain sectors of Indonesia. Particularly, there is government protection in areas of health and agriculture because of its large number of population that can guarantee domestic demand. Government encourages investment along these areas because of its need for development. However, they do not consider lifting the ban on telecommunications although many investors are interested on it. This explains why some analysts consider the country slow in technological advancement. There is also opportunity for investment in the industry and manufacturing sectors because improvement is needed along these needs. However, Indonesia must address its internal problems of bureaucratic red tape, corruptions and overlapping of taxes. It must look into these concerns before it can successfully integrate in the regional economy and world trade. As it is, the economy of Indonesia is promising, and investors are only waiting for clear signals before they enter the market. For the investors, Indonesia has potentials for investment in selected area like tourism, agriculture and health. But for New Zealand and Australia, they should study more deeply the restraints of diverse culture of Indonesia relative to theirs, in order to avoid the inconvenience in their business operations Annex 1. Institutional comparison of Australia, Indonesia, New Zealand   AUS Indonesia NZ Government style  Democracy and constitutional monarchy Republic   Democracy and constitutional monarchy Population  22,580,551 237,556,363  4,393,500 Current GDP per capita (US$)  $39,699 $4,379  $27,420 GDP (US$ billion)  $882.362 billion $1.027 trillion  $119.791 billion Growth rate &/or inflation  .7%/2.7% 6%/7%  .2%/4% Unemployment rate %  4 % 9%  6% Labour force  11,620,000 116,500,000  2,320,000 Literacy level  99% 92%  99% Languages spoken  English  English   English Religion  Christianity Islam  Christianity Source: CIA World Factbook References “About Toyota New Zealand “ 2011. Toyota. http://www.toyota.co.nz/AboutUs/Corporate+Profile/About+Toyota+NZ.htm Australian Trade Commission. 2011. “Structures for establishing a business in Australia” Feb. 2011. Australia Unlimited. 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Japan Research Institute. http://www.jri.co.jp/english/periodical/rim/2001/RIMe200106indonesia/ Reuters, Thomas. (2009). Indonesia’s poverty rate falls – statistics bureau. Forbes.com. http://www.forbes.com/feeds/afx/2009/07/01/afx6607212.html Tan, Danny. 31 Jan. 2011. Toyota leads Indonesia vehicles sale with 37% market share, best selling Avanza still going strong. Paul Tan’s automotive news. http://paultan.org/2011/01/31/toyota-leads-indonesia-vehicle-sales-with-37-market-share-best-selling-avanza-still-going-strong/ Tuti Sunario (2010) Indonesia targets 7 million tourists arrivals in 2010, up 8-20% compared to 2009. Tourism Indonesia. http://www.tourismindonesia.com/2010/02/indonesia-targets-7-million-tourist.html Toyota Motor Corporation N.D. Australia, Ltd. Hobsons Bay City Council. http://www.toyota.com.au/about/toyota-community-spirit/hobsons-bay-city-council “The obligation of Foreign Investment Company in Indonesia” 2010. New BKM Regulations on Guidelines and procedures for investment applications. http://missjc.wordpress.com/2010/03/16/the-obligation-of-foreign-investment-company-in-indonesia/ Read More