PRODUCTION FACILITY IN INDONESIA 1
KHS GmnH Opening Production Facility in Indonesia
Table of Contents
32.0 Company Overview
33.0 Indonesia Country Overview
33.1 Economy (Status of Economy)
43.2 Economy Forecast
63.4 Trade Policy and Investment
73.5 Cultural Analysis
84.0 Advantages of Moving the Production Plant to Indonesia
85.0 Disadvantages of Moving the Production Plant to Indonesia
96.0 Risks Analysis: KHS Susceptible Risks
Table of Figures
4Figure 1: Indonesia Economy Data Source (Focus Economics, 2016)
4Figure 2: GDP Growth: Indonesia Source (Asian Development Bank, 2016)
5Figure 3: Indonesia GDP Forecast Source (Knoema, 2016)
5Figure 4: Indonesia Inflation Forecast (% Change) Source (Knoema, 2016)
The aim of the report is to analyze the viability of establishing a production plant in Indonesia by a Germany company called KHS GmnH. The Indonesian economy, culture, and political situation are analyzed and discussed. The advantages and disadvantages including risks of establishing the production line in Indonesia are discussed.
KHS GmbH is a German company that deals with supplying packaging and filing systems. KHS GmnH offers filling lines for PET and glass bottles, cans, and kegs for the non-food industries, food and beverage sectors. The demand of KHS GmbH is high but the problem is the high production costs, and the company thinks of transferring the production line to local market that has minimal production costs. Indonesia is a proposed country, but the problem is the targeted market of the final products and complications that may be associated with internationalization of the business. For example, logistic problems and negative perceptions from the home market may affect the continuous production of the company since most customers expect on-time delivery.
Indonesia Country Overview
Economy (Status of Economy)
The following charts present a summary of Indonesia economic activity for the periods 2011 and 2015:
Source (Focus Economics, 2016)Figure 1: Indonesia Economy Data
Source (Asian Development Bank, 2016)Figure 2: GDP Growth: Indonesia
According to Focus Economics (2016) and Asian Development Bank (2016), the Indonesian (Gross Domestic Product) GDP is slowing each year: from 6.2% in 2011 to 4.8 in 2015. GDP is the monetary value attached to all finished services and goods, which are produced within a specific period. All the periods illustrate the economy is facing challenges, while also the investment is also slow. Nevertheless, the population is growing from 241 million in 2011 to 255 million in 2015. The growth in population expands the market for KHS GmnH, and KHS GmnH can access cheap labor.
The following charts present a summary of GDP forecast for Indonesia:
Source (Knoema, 2016)Figure 3: Indonesia GDP Forecast
The data illustrates the GDP of Indonesia will start improving from 2016. Comparison of forecasts from World Bank and International Monetary Fund shares similar estimates (Knoema, 2016). The common variable on both estimates is the 4.7% which rises considerably throughout to 2019 when the GDP stabilizes at 6.0% (Knoema, 2016).
The following chart present a summary of inflation:
Source (Knoema, 2016)Figure 4: Indonesia Inflation Forecast (% Change)
Inflation is the sustained increase the prices of the services and goods within a specified period. When the inflation rises, the amount of services and goods bought are fewer (Knoema, 2016). The data indicated in the chart (above) indicates the inflation will rise to around 4.5% in 2017 from the current 4.3% in 2016. However, from 2017, the inflation starts dropping to around 4.0% in 2021 (Knoema, 2016).
The social and economic developments in Indonesia suffers because of challenges associated with quantity and quality of its infrastructure. Infrastructure such as electricity supply, airports, and roads and ‘soft’ infrastructure such as health care and social welfare has not developed in Indonesia (World Economic Forum, 2013). Based on the 2013-2014 edition of the World Economic Forum, the Indonesian competitiveness is ranked as 61st out of 148 economies studied regarding infrastructural developments. The challenge of the social and economic development is linked to the Asian Financial Crisis that occurred in the later 1990s even though the macroeconomic sector is developing well. The development of the infrastructure would lift the economy of Indonesia in terms of GDP, but the poor nature of the infrastructure continues to negate the development of Indonesia as an important sector. Nevertheless, KHS GmnH may utilize the sea ports and the developing road networks to accomplish the requirements of logistics. Furthermore, the developing energy sector including the telecommunication platforms ensures the company accomplishes the logistic and production requirements.
Trade Policy and Investment
Indonesia provides most favored nation treatment to all WTO members. With the aim of improving investment and trade policies, Indonesia continues to implement numerous laws targeting investment, and export financing (International Trade Centre, 2016). The government has also created special economic zones in addition to tourism, coal mining, mineral mining, shipping, fisheries and agriculture. It is also a member of Association of Southeast Asian Nations, which indicates the extensive markets Indonesia has.
Indonesia also upholds international regulations and investments platform such as the WTO, International Labor Organization, and the numerous arbitration organizations aimed at resolving conflicts. Based on these numerous economic and social developments, Indonesian investment platform attracts foreign direct investments similar to the approach that KHS GmnH aims to undertake (International Trade Centre, 2016). Hence, the trade and investment policy is appropriate in advancing the requirements and expectations of KHS GmnH.
The culture of the two regions is completely different. The Germany culture borrows heavily from Western culture while the Indonesia is premised on the Asian cultural orientation. The Indonesian culture encourages collectivism rather than the Germany culture of individualism (International Trade Centre, 2016). The reward and operational systems are also different because the human resource is Germany based on the reward system and factors such as promotion and acknowledgments drive the human resource sector (Ministry of Trade, 2016). However, the Indonesian culture does not rely mostly on rewards and promotions but the requirements and expectations of the society.
The political system and legal frameworks are improving, and it is secular in nature but does not rely on a specific religious dispensation (International Trade Centre, 2016). However, religion is important and nationals are encouraged to adhere to one of the numerous religious dispensation such as Confucianism, Buddhism, Hinduism, Catholicism, Christianity and Islam (Ministry of Trade, 2016). The legal framework is based on the internal frameworks with attachments of respect to religious dispensation. The country is also stable in political dispensation, and the environment is appropriate for economic and social developments.
Advantages of Moving the Production Plant to Indonesia
KHS GmnH decision to open a production plant in Indonesia has numerous advantages and the advantages include:
Cheap labor and lowering costs of operation – the cost of labor in the developing countries is cheaper compared with labor costs in Germany (Rosengard & Prasetyantoko, 2011). The entire costs of operations are lower in Indonesia compared with operational costs in Germany because of benefits of economic zones in Indonesia and the minimal taxation costs and advantages of foreign direct investments (Aswicahyono, Hill & Narjoko, 2010). The high population in Indonesia also reduces the costs because of the numerous people available to complete the production and logistic requirements.
Reduces economic exposure such as inflation and interest rates. Basing the entire operations in Germany creates complications associated with interest rates and inflation (Aswicahyono, Hill & Narjoko, 2010). It is possible for KHS GmnH to balance the inflation and interest rates between the countries (Tan & Amri, 2013). Therefore, the entire cost of production is cheaper compared with operating from Germany.
Disadvantages of Moving the Production Plant to Indonesia
The following are some of the disadvantages of moving the production plant to Indonesia include:
Transportation costs — KHS GmnH will be forced to transport the produced products to Germany. The infrastructural problems and the timing requirements may affect the delivery requirements (Aswicahyono, Hill & Narjoko, 2010). Through these complications, it becomes a challenge to streamline the logistical requirements and may create a negative image about the company.
Political instability – Indonesia sometimes faces numerous political instability problems, and these problems can affect KHS GmnH (Tan & Amri, 2013). The legal and regulatory frameworks may create additional problems, which KHS GmnH has to address, and sometimes it becomes a challenge when the government changes after political requirements such as an election.
Possible backlash — KHS GmnH may face a backlash from the public in Germany (Lipsey & Sjöholm, 2011). The companies and customers in Germany may not appreciate the decision of transferring the production plant to Indonesia because of loss of employment and other economic multiplier effects (Tan & Amri, 2013). These backlashes may affect the operations of KHS GmnH, and reduce the operational efficiency.
Risks Analysis: KHS Susceptible Risks
The decision to set the production lines in Indonesia raises numerous risks. The following are some of the risks that KHS GmnH has to address:
Logistical reliability — KHS GmnH will need to move the products to Germany bit the infrastructural development in Indonesia is still poor (Lipsey & Sjöholm, 2011). In addition, the customers in Germany may require the products within a short deadline raising problems on on-time delivery requirements (Tan & Amri, 2013). KHS GmnH loses its credibility on on-time delivery, and mitigation measures should be formulated and implemented to address the problem.
Quality and availability of raw materials – the development of the products and associated services requires different raw materials (Tan & Amri, 2013). The raw materials may be available, or the raw materials may be of poor quality (Rosengard & Prasetyantoko, 2011). The assurances attached to quality may be broken meaning the expectations and satisfaction of the customers would be additional problems to address.
Political and legal challenges – Indonesia is a sovereign country meaning it can adjust the political and legal depending on the internal (country) processes (Lipsey & Sjöholm, 2011). These adjustments may affect the business operation climate, and since these adjustments are not predictable, challenges may occur.
Reliability and quality of human resource – the population may be high, and the labor force may be available. However, the reliability and quality of human resource is another problem (Lipsey & Sjöholm, 2011). KHS GmnH may be forced to export human resource to Indonesia, which also raises the cost of operations and production (Tan & Amri, 2013).
Operational in the international markets offers numerous opportunities to a company. KHS GmnH aims to transfer its production requirements to Indonesia from Germany. However, most KHS GmnH customers are in Germany, which creates numerous advantages and disadvantages. Indonesia is currently facing numerous economic and social developmental requirements, but the growing population, and the changing economic dispensation based on forecasted data indicate the economy will grow appropriately. The advantages of operating in Indonesia include the cheap labor and operational costs. The disadvantages include political instability, possible backlash, and transportation costs. The risks and threats include reliability and quality of human resource, political and legal challenges, and quality and availability of raw materials.
Asian Development Bank. (2016). Indonesia Economy. Retrieved from http://www.adb.org/countries/indonesia/economy
Aswicahyono, H., Hill, H., & Narjoko, D. (2010). Industrialization after a deep economic crisis: Indonesia. The Journal of Development Studies, 46(6), 1084-1108.
Focus Economics. (2016). Indonesia Economic Outlook. Retrieved from http://www.focus-economics.com/countries/indonesia
International Trade Centre. (2016). BB WTO Trade Policy Review: Indonesia. Retrieved from http://www.intracen.org/BB-WTO-Trade-Policy-Review-Indonesia/
Knoema. (2016). Indonesia Economics. Retrieved from https://knoema.com/xojswsd/indonesia-inflation-forecast-2013-2015-and-up-to-2060-data-and-charts
Lipsey, R. E., & Sjöholm, F. (2011). Foreign direct investment and growth in East Asia: Lessons for Indonesia. Bulletin of Indonesian Economic Studies, 47(1), 35-63.
Ministry of Trade. (2016). Homepage. Retrieved from http://www.kemendag.go.id/en
Rosengard, J. K., & Prasetyantoko, A. (2011). If the banks are doing so well, why can’t I get a loan? Regulatory constraints to financial inclusion in Indonesia. Asian Economic Policy Review, 6(2), 273-296.
Tan, K. G., & Amri, M. (2013). Subnational Competitiveness and National Performance: Analysis and Simulation for Indonesia. Journal of Centrum Cathedra: The Business and Economics Research Journal, 6(2), 173-192.
World Economic Forum. (2013). The Global Competitiveness Report 2013–2014. Retrieved from http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf