International Engineering Management
Table of Contents
7Cultural differences and Risks (Economical and Political)
9The risks would the company (KHS) face
Multinational firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in. Ultimately, we are interested in whether sensible economic policies are likely to be pursued because countries adopting such policies will generally have good business environments in which enterprise can flourish. Such interactions occur on a continuous basis and affect not just monetary and fiscal policies but also a host of other policies that impact the business environment, such as currency or trade controls, changes in labour laws, regulatory restrictions, and requirements for additional local production. The purpose of paper is to scan Indonesia to provide a framework that can facilitate KHS GmbH relocation that is if infrastructure and economy is favourable and its implications for on-time delivery and transportation costs.
KHS GmbH is a Germany company owned by Salzgitter Klöckner-Werke GmbH that supplies filling and packaging systems based in Dortmund, Germany. It deals with filling lines for glass and PET bottles, kegs, and cans for the beverage, food, and non-food industries. The company is experiencing high production costs in Germany leading to minimised the profit margin. This has led to the management to make s strategic decision of off-shore production based on the request of the firm’s shareholders as way of reducing cost.
Indonesia is a Southeast Asian with a population of 249.9 million and consists of different ethnic groups. The following looks into status of Indonesian economy, economic projects, available infrastructure to support multinational and trade policy.
Status of economy
Indonesia has strong linkages with the economy of Asian countries. Indeed, they need to boost the productivity of their economy as they have to deal with continued weaknesses of their trading partners. This time, Indonesia could still claim that their economy is performing relatively well unlike the other countries. At the moment, Indonesia can tell that they are prepared and well positioned in handling all the risks on their economy. Despite this stance, Indonesia did not want to underestimate the risks and they give emphasis on strategic issues like how they could overcome and further compete in global economy. With the growing financial difficulties in neighbouring countries, Indonesia needs to pay closer attention on their financial flexibility and stability to keep their inflation manageable. This time, the Bank of Indonesia is aiming to achieve annual price gains of 2 per cent for the period of five years. In fact, Indonesia is also aware that good economic times sometimes could cause financial imbalances since people become more complacent and risk takers.
Indonesia implemented strong supervisory and regulatory approaches. Somehow, monetary policy of Indonesia contributes to the stability of their financial standing. This shown by inflation trend below;
Figure 1: Inflation in Indonesia : 2009-2016. Source: (Amianti, 2015)
In 2014, the GDP of Indonesia was $1188.0 billion. The major contributors were manufacturing industry which accounts 40 precent of GDP; services which account for 35 precent and agriculture which account for 25 precent. According to the reports by the Indonesia Central bank the last five years, 2010 to 2015, represents the best economic and financial era in Indonesia.
The study by World Bank revealed that during 2010 to 2015, the annual economic growth of Indonesia averaged 5 precent. Thus, the economic growth of Indonesia is not purely attributed to one source, though oil revenue and manufacturing account for two thirds of the economic growth. Figure below shows a graph of the GDP of Indonesia in the last decade. It could be noted that the GDP indeed had continued an upward trend although it slightly went won in 2015. Nevertheless, the graph showed an impressive economic growth, notably during 2012 and 2013 when recession hit most economies of the world. In contrast, the graph indicates that the economy of Indonesia was seemingly unaffected by the recession.
Trading Economics.Figure 2 : GDP of Indonesia in billions of US dollars in the last decade. Source:
The growth rate of the Indonesia economy fell to 4.14 per cent in 2008 compared to 6.2 per cent growth rate in 2008. The real effect of the economic upturn was felt in 2011. Indeed, as shown in the graph, the 2011 GDP of Indonesia grew significantly to 6.8%..
It was expected, that the Indonesia economy will take a slow growth immediately. The IMF estimated that in 2016, the GDP growth of the country will be 5.5%. From the figure 1 it is forecasted that the inflation rate for 2016 will 5.0%.
. Figure 3: the GDP growth in the past 7 years. Source: BNP Paribas Asset Management
Development, in terms of infrastructure, in any country is a hot topic and the Indonesia government was hard pressed to continue its development projects during this hard times. It is notable that the country has developed infrastructure given that the country has been enjoying a budget surplus in recent times. However, the government had to use its sovereign fund to ensure that government operations like the Stock Exchange were not shut down due to lack of liquidity. The country has fairly good road networks in owns as well defined airports. It has access seaports that will support bulk export of goods and services.
Indonesia has enacted rules on anti-dumping, export, countervailing and safeguard measures. Export and import goods are stamped with clearance slips carrying the seal of the quarantine and inspection authorities who conduct entry and exit inspections. Indonesia has also been implementing quality certification on export and import goods under a new system of compulsory product certification. Indonesia has entered into a free-trade agreement with the Association of Southeast Asian Nations (ASEAN).. The trade policy of Indonesia had been greatly liberalized with its entry into the Trade-Related Aspects on Intellectual Property rights.
Cultural differences and Risks
The axes of culture include religious, social, economical, geographical, political, and linguistic background a person carries with himself. These all collectively formulate values and norms of a person. From businesses management perspectives, dealing with the contrast in social and linguistic cultures of people, are considered to be the most significant. The companies eyeing on the global market, are researching more on the cross-cultural management, for their business growth (Moran et al., 2011).
Political Risk: The term political risk refers to all those factors which could impede a company’s business operations such as negative publicity created within the top government. This type of risk increases barriers for a company to operate effectively and efficiently within a geographical territory. Under such conditions, a company may find itself operating in a hostile environment in which the local government may impose additional constraints; such as higher tariffs, low expatriation limits, etc. In this regard, KHS GmbH enjoys a privileged position in its industry. KHS GmbH has gained this position by portraying itself as a partner to foreign nations.
Economic Risk: The term economic risk refers to the inability of a national government to meet its financial commitments. These inabilities will eventually cripple the foreign exchange rates and interest rates. In this regard KHS GmbH ’s risk is already minimized because its sales are often backed by national governments and/or state backed institutions.
Advantages of Moving the Production Plant to Indonesia
Labour costs will be lowered as well as new market will be opened. It is always recommended to adopt a unique strategy when making entry into new markets rather than duplicating the strategies of the competitors and using the same. The justification for stating so is the company’s sustenance and long-term growth can be hindered if duplicate strategies are used. Instead, if a company prefers to devise and implement a unique strategy, it can offer a certain amount of value preposition to the consumers and also mark a great impression in the minds of the consumers which will motivate them in opting for the product or brand more often. Therefore the company will have an advantage of having a new strategy.
Disadvantages of Moving the Production Plant to Indonesia
The cost of transport will higher as will as it will face a challenge in securing raw materials on a day to day basis in Indonesia. The raw materials is under great strain in catering to the increasing demand, since there are inadequate source of raw materials
KHS GmbH is operating in an international environment. In this regard it must understand that there are numerous risks associated with its business operations. It is quite needless to say that KHS GmbH is not just expanding company operations into new geographic regions. In essence, it is identifying such opportunities in which the company could gain a competitive advantage over its competitors. But for this to happen, KHS GmbH must first realize that there are a multitude of risks which it will have to take into consideration regarding its operations in Indonesia. Some of these risks can be mitigated by careful selection and matching. On the other hand the company will have no control over a number of variables. If the company does not remain careful whilst developing a comprehensive road map for conducting its business, then it would prove to be disastrous for the company. Therefore it is of vital for KHS GmbH to understand which types of risks the company would be facing and how to analyze these risks. Without completing this laborious task KHS GmbH cannot hope for success. In this regard KHS GmbH must realize that every country is different from each other in terms of its population, size, culture, law, customs, traditions, etc. and these differences are virtually infinite. Consequently there are numerous risks which the company must face in its Indonesian operations. However, each country may provide different set of benefits and risk. For KHS GmbH , some of the rogue nations might possess all the natural resources, but the risk of operating in these geographical territories might be exceptionally high. In this regard KHS GmbH should mitigate the following risks to ensure that the effectiveness and efficiency of its operations remain optimum.
We can, say that if KHS GmbH has both an Indonesian and a Germany employee, than the management strategies have to be modified. In such a scenario, the management has to think of strategies and work plan, which suits both the employee, to ensure a smooth work flow, without work dissatisfaction and cultural clash (Mazzarol et al., 1999).
KHS GmbH needs to be aware of the cultural differences so they can plan the utilization of company’s resources. Spending massive, company capital or resources on employees, who looks at the company as a step to move forward, would certainly be a waste of company’s capital. With the growing competition and recession in the business world, this practice is becoming more common. This augments the need of realization of cultural difference for the managers, as well as the owners and the entrepreneurs (Hooker, 2008).
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BNP Paribas Asset Management, 2015. Indonesia GDP Growth: watch for a rebound for 2015. [Online] available at <http://investors-corner.bnpparibas-ip.com/investment-themes/indonesia-gdp-growth-watch-for-a-rebound-for-2015/>[Accessed 08 August 2016]
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Bar Charts, Graphs, Tables (Be sure that you write proper capture below Figures, and at the top of tables) are useful way to present information.