International Engineering Management - Case Study Example

International Engineering Management Name: Course: Instructor: Institution: Date of Submission: TABLE OF CONTENTS Title Page …………………………………………………………………………….. 1 Table of Contents ……………………………………………………………………. 2 Introduction ……………………………………………………………………………… 3 Indonesian Economy ………………………………………………………………. …… 3-5 Production Operation Advantages and Disadvantages in Indonesia …………………. 5 Risks KHS would face in Indonesia ……………………………………………………… 6 Importance of Cultural differences between Indonesia and Germany ………………… 6 -7 Risks KHS faces in Indonesia due to Cultural Differences ……………………………… 7 - 8 Conclusion …………………………………………………………………………………… 8 References ……………………………………………………………………………………. 9 Introduction Investing in any country or business is risky. However, investing also has its benefits, as the research will present. Indonesia is a country that offers many benefits for foreign countries, though it has presents major threats. The KHS GmbH from Germany would benefit much by investing in Indonesia due to the available market. More importantly, in Indonesia the business will have the opportunity of meeting one of its key objective. That is; it will have the opportunity of reducing the production costs linked to the cheap labor available in Indonesia. Thus, it is highly possible that investing in Indonesia will increase the profit margin of KHS GmbH. 1. Indonesian Economy The economy of Indonesia in Southeast Asia is the largest, and an emerging market in the world. Indonesia is a member of the G-20 countries. That is; the country’s economy is part of the newly industrialized country. Indonesia’s economy is reliant on the domestic market; it has state-owned enterprises, as the government owns about 141 companies in the country. More essentially, the government directs budget spending. However, private and foreign companies control about 80 percent of Indonesia’s economy. Indonesia has a fast growing economy, behind China. The economic performance of Indonesia is currently weak, though a boost is anticipated in the year 2017 or late 2016s. As presented below, the GDP growth has slowed down, the inflation level has abated gradually to an average of 6.9%, and the current account insufficiencies are smaller than projected (ADB, 2015). (ADB, 2015) The population of Indonesia is at 251.5 million. GDP (PPP), is at $2.7 trillion, 5.0% growth. 5.8% of a 5-year compound annual growth and $10,641 per capita (Heritage.org, 2016). The unemployment level stands at 6.2% while the inflation level is at 6.4%. Regulations on termination and employment of individuals are rigid as it undermines the dynamic labor market law. In the 2014 financial crisis, the government reacted by lowering fuel subsidies, eliminating distortions in the market and maintaining an elevated inflation consumer price (Heritage.org, 2016). The FDI inflow into the country is at $22.6 billion. The currency used in the country is Rupiah. The graph below presents the strength of the Rupiah in the last one and a half years, and annual GDP of the country. (Heritage.org, 2016) The chart stipulates that growth is expected to accelerate in the year 2017 by at least 5.5%. Regulatory uncertainty will linger to grow, holding back private investments such as KHS GmbH because of the low prices of goods. The chart stipulates there is room for fiscal support, the normalization of the monetary policy is affected by the strength of the currency and inflation (OECD.org, 2015). 2. Production Operation Advantages and Disadvantages in Indonesia Some of the most significant recompenses of starting production operations in Indonesia include the availability of numerous natural resources. There is also a large population, which creates a ready market for its foreign products. Indonesia stands as the fourth populous country in the world. Thus, the domestic market available is high and open for profitable investments. The high population leads to high unemployment levels. Thus, it stipulates the demand for jobs leads to cheap labors supplied. Additionally, both foreign/domestic investors receive equal treatment though, in some national interest matters, investment limitations are considered (Budiardjo & Reksodiputro, 2015, 24). The country is reflected second after China for been the largest and most industrialized emerging market. Thus, its location concerning and emerging character makes it strategically positioned to boost businesses in the country. The labor costs are relatively low since the company undermines the dynamic labor market law. The economy of Indonesia has numerous state-owned enterprises influence the market, private and foreign business also play a significant part. Thus, with the private initiatives playing an important role in the market, there is room for substantial economic development in the years to come. One of the most consistent disadvantages of Indonesia is the economic challenges the country faces. That is; though the country is developing greatly, a huge number of the population is under the poverty line. Over the years, the state has presented a disadvantage of labor unrest as many laborers engage in numerous strikes. The primary cause of the attacks derives from foreign-owned enterprises that are unsatisfied with the strict labor laws that demand the employees be perceived as contract workers. Thus, the cheap labor experienced due to the undermining of labor law in the market may diminish. Therefore, it is clear that labor unrest will continue for a while in the country. Another main disadvantage is the inequality in the country. The flow of natural resources in the country promotes an economic disparity where some regions receive few resources leading to the development of poor and rich areas in the country. Eight percent makes up for the poorest regions in the country while 45% percent makes up for the richest expanses. As provided in the graphs above inflation lingers as a problem in Indonesia. That is due to obstacles such as political havoc, hyperinflation practiced in 1964-67, and hunger/poverty. 3. Risks KHS would Face in Indonesia Investing in Indonesia presents more risks than when compared to investing in developed countries. One of the main risks perceived is the demonstrations/ strikes that frequently occur in the country. Issues that lead to these demonstrations range from political issues, economic and social issues among others. The demonstrations are directed to businesses or the government. Thus, the illustrations present that there is a high level of dissatisfaction in the country, which has the potential of harming the business (I-I, 2016). Another significant risk the country faces is corruption. Indonesia is positioned number 118 among 176 countries in the level of political corruption. Though the performance of the country is improving steadily, there is a high standard of corruption. Thus, KHS in Indonesia may be forced to engage in crime, which could later lead to substantial consequences for the country (Budiardjo & Reksodiputro, 2015, 24). More importantly, governing around 240 million people with different religions is challenging and has the potential of frustrating the economy, which may affect the business negatively (Budiardjo & Reksodiputro, 2015, 32). Infrastructure is also a substantial risk in the country since there is the lack of sufficient infrastructure regarding quality and quantity. The poor infrastructure affects the economic and social development in the country negatively (I-I, 2016). The growth that is anticipated in the country may prove to be a burden to the infrastructure, presenting how it may become an obstacle to growth for KHS or the country. Additionally, natural disasters may influence the growth of the business as issues such as floods, tsunamis and others regularly occur in the country. Thus, the country been vulnerable to such disasters is a critical risk for any business. 4. Importance of Cultural differences between Indonesia and Germany The cultural differences between Germany and Indonesia vital. International trade is vital for businesses around the world. The growth of a country such as Indonesia stipulates an increase in contact with foreigners such as Germany. However, when people from either of the countries present good relationships and maintain sensitivity making business deals becomes easier. It is vital to appreciate the dissimilarities to comprehend how to conduct business and the management styles in the host countries. The differences assist in understanding the values of other members. Leaders from diverse republics have dissimilar expectations concerning the administration and landscape of the organization. The importance of the differences is that they influence the attitudes of the people to work with in another country. Thus, understanding the differences leads to better understanding of the nation, the target market and consequently, increases the chances of success in the host country. Understanding the differences creates the possibilities of succeeding at a global level of doing business while engaging diversity. The differences are important since they are present in making strategic decisions and business interactions, where the differences increase the productivity of the corporate. Understanding the differences leads to efficient in setting and attaining the objectives of the business and effective globalization among others. 5. Risks KHS faces in Indonesia due to Cultural Differences According to Geert Hofstede cultural differences, six issues are presented. Within the six issues, differences between Germany and Indonesia are perceived as below. (Itim International, 2016) The two countries are entirely diverse as they only relate on indulgence. Thus, the differences pose a huge danger to KHS of Germany in conducting business in Indonesia. Indonesia accepts greater unequal power distribution, unlike Germany. Thus, the risk may be perceived in that, in Germany low power cultures prefer when their inputs in businesses are considered while in Indonesia the low power distance people prefer when the bosses make all decisions, and they follow without asking. Such situations may pose risks to KHS since, in Indonesia, the management will be responsible for handling all decision making without considering what the workers may want or prefer (Lange, 2010, 36). Given that workers respond by strikes and demonstrations, the company may face several, which will harm the image and financial performance of the business. Additionally, when one compares individualism versus collectivism, it stipulates that in Indonesia people are not motivated by incentives such as job title, performance pay or employee of the month. Thus, KHS will have to research on other ways to motivate the employees. The ways that may appear to motivate continuously the employees such as pay rises may be too expensive to employ regularly. Thus, the difference poses a risk. Regarding masculinity versus femininity, Germany scores high while Indonesia scores low (Stehle & Erwee, 2007, 38). The low masculinity implies that Germans are aggressive on meeting objectives. On the other hand, Indonesian’s prefer avoiding the issue. Avoiding an issue may harm the business. Thus, KHS would have to face the risk of losing employees due to handling issues, as Germans prefer the lack of any direct approach to issues. Similarly, to the problem of uncertainty and avoidance where Indonesia prefer avoidance. Long-term orientation is also high in Germany and low in Indonesia (Stehle & Erwee, 2007, 39). This stipulates that the countries will have challenges in meeting the KHS objectives since their long-term goals do not link with those of the business. Conclusion Indonesia is a country that has the potential of offering KHS GmbH the potential of meeting the objectives they present. The objectives include meeting low production costs and increasing the profit margin due to cheap labor and lower production costs. However, the risks that investing in Indonesia possess for KHS from Germany are extensive. They range from regulation challenges, labor laws unrests, demonstrations, natural disasters, corruption and cultural differences. Thus, they stipulate that investing in Indonesia is not the right move for the KHS GmbH from Germany. References ADB, 2015. Asian Development Bank: Asian Development Outlook 2015 Update: Enabling Women, Energizing Asia. Asian Development Outlook 2015: Financing Asia'a Future Growth. [Online] Available at: http://www.adb.org/publications/asian-development-outlook-2015-update-enabling-women-energizing-asia http://www.adb.org/publications/asian-development-outlook-2015-financing-asias-future-growth [Accessed 4 4 2016]. Budiardjo, A. & Reksodiputro, N., 2015. Giude to Doing Business: Indonesia. Lex Mundi World Ready, pp. 1-41. Heritage.org, 2016. 2016 Index of Economic Freedom: Indonesia. [Online] Available at: http://www.heritage.org/index/country/indonesia [Accessed 4 4 2016]. I-I, 2016. Indonesian Investments: Risks of Investing in Indonesia. [Online] Available at: http://www.indonesia-investments.com/business/risks/item76 [Accessed 4 4 2016]. Itim International, 2016. The Hofstede center: Strategy - culture - change. 1. Indonesia; 2. Germany. [Online] Available at: https://geert-hofstede.com/indonesia.html https://geert-hofstede.com/germany.html [Accessed 5 4 2016]. Lange, S. J., 2010. HRM Issues for German Companies Establishing a Subsidiary in Indonesia. New York: diplom. de. OECD.org, 2015. OECD: Indonesia - Economic Forecast Summary (November 2015). [Online] Available at: http://www.oecd.org/eco/outlook/indonesia-economic-forecast-summary.htm [Accessed 4 4 2016]. Stehle, W. & Erwee, R., 2007. Cultural Differences Influencing German HR Policies in Asia. Journal of Asian Business Studies, pp. 34-47. Read More