International Engineering Management - KHS GmbH Relocation of the Production Plant - Case Study Example

The German company KHS GmbH Relocation of the Production Plant By student’s name Course code+ name Professor’s name University name City, state Date of submission Introduction KHS GmbH is a company located in Dortmund Germany where its history dated back in 1868. Spending over 145 years in the market, manufacturing filling, and packaging system to the beverages companies, food, and none-food industries have its dual market mainly in Germany. It local market in the recent days has been experiencing a drop in their profit due to production cost. The shareholders thereby have discovered that production cost could be lowered if the company would relocate it manufacturing country where factors such as cheap labor, customs would reduce the production cost of their product. The suggestion thereby have seen a place of interest to be Indonesia where relocation of the processing plan has, in turn, attracted more another cost elements evaluations that are yet to be valued whether will contribute to increasing the production cost to designated threshold. Therefore, for the company to relocate its processing plant the distance cost have been the current determined to gauge whether it will raise the production cost above the stranded threshold or not. Through examining the resultant factors of production in Indonesia such as transport cost and labor ought to be analyzed and related to the production cost in near market which is Germany. This essay will, therefore, assess whether relocation of the KHS GmbH production plant to Indonesia would reduce the production cost or the transport cost would undercut the cheap labor advantage in reducing the production cost. In a given country county, the countries government policies are directly determined by the country’s economy were also, in turn, dictates the labor minimum wage. While holding other factors at constant, this means that if a company A wants to establish a production plant in two given countries with different economy, it would be cheaper just looking at the big picture of both countries economy and therefore if two countries differ in their economy whereby country A has a high economy level than country B, it would be there cheaper to establish a processing plant ion country B than in country A. since the economy of a given country will be determined by the measuring factors such GDP growth, unemployment rate, DINI among other economic growth measuring elements, Germany is ranked fourth in the world with a GDP of USD 3.36 trillion while Indonesia has USD 862 billion which is ranked 16th in the world Patunru et al., 2009). Basing assumptions on the hypothetical model developed to determine the production cost in the countries A and B, and the brief indicators of the economic growth dictated by the GDP values of Germany and Indonesia in the year 2015, the KHS GmbH shareholders perception of reduction of cost production result would yield a positive result. However, in this hypothetical model, would be applicable only in substantial numbers of assumption while some of the vital prediction value would be held at constant. Thereby, in order to prove the presented suggestion by the stakeholders is true, some of the factors have to be considered. Reducing the levels of generalization and assumption will enable the analysis to know exactly the value that is likely to be reduced while relocation the production plant from Germany to Indonesia bearing in mind the fact that the targeted market is in Germany. Some factors to be considered in order to determine whether the hypothetical suggestion developed would achieve the desired result will include the transport cost, wherein transportation cost, the means of transport which will be fixed by the minimum transport cost, government policies which will include the tariffs and taxes and finally the availability of input resources. Indonesia economy status Indonesian is among the countries in southern Asia with the largest economy with a good rated emerging market economy. Its industrial development has recently risen making it being classified as newly industrial country in the socioeconomic classification. It has a growth rate of 4.7 where it’s GDP per capita being USD 11135. The Indonesia services GDP per is the leading one followed with the developing industrial sectors and finally the agriculture bearing a rate of 43.3%, 42.9% and finally 13.7% respectively. The following table shows the Indonesia trending economic growth and predictions Table 1: Indonesia – GDP in relation to its Population 1960–1967 1968–1982 1983–1996 1997–1999 2000–2010 Real GDP 2.0 7.5 7.2 –6.4 5.2 Real GDP per capita –0.5 4.9 5.3 –7.7 4.0 GDP deflator 291 25 8 34 12 Population 2.5 2.4 1.7 1.3 1.2 GDP 0.4 1.0 1.4 1.2 1.4 Population 3.2 3.4 3.5 3.5 3.5 Table 2: Indonesia economic forecast (Coordinating Ministry for Economic Affairs 2011) As the Indonesia economy trends are predicted to raise in the next two years, the Indonesian Government have targeted to improve its infrastructure which has been the common obstacle of development in the past thirty years. The economic growth of the country is predicted to rise gradually up to 5.5% in 2017. The dominant trends of safeguarding the domestic industries from the exploitation of the foreign investors have been discouraging foreign business investors hurting business confidentiality of the foreign investors. A normalization of the resultant policies has been suggested to encourage foreign investors to risen its economy levels. The service industries with 41% increase GDP have become the principal source of employment from the year 2014 to present which been predicted to rise to more than 51% in the next five years. The industrial sector have been ranked the second in creation of jobs which have contributed to 7.1 million jobs including 4.4 million in the manufacturing industries according to the OECD statistic in 2009 and it’s expected to increase gradually over the next decade passing the service industries especially if the transport infrastructure will be improved to reach the set standards. Import and export policies (trade customs) and transport infrastructure developed in Indonesia The evolution of the trade policies in Indonesia has occurred as a result of the countries level of development and the existing conflicts between protectionism and openness. Consecutively, external development such as rapid increase of global competitions, commodity boom and bust and struggle to attain international commitment have resulted in significant changes in the trade policies which have significantly limited the multinational companies from investing in the country. The protection measures that the government imposes with the aim to safeguard the internal industries is policies that hinder the development of the resultant country bearing in the mind that the world trade the Indonesia used to know earlier has undergone a remarkable transformation since 1965. Due to the resultant changes, Indonesia ought to shift its policies from protecting and favoring of the internal sectors to promoting industrial and trade policies that motivate the flow of goods and services (Goeltom, 2007). Cultural differences and Risks (Economic and Political) Some of the protective trade policies that Indonesia have to shed of include, increase of tariffs especially to those countries have not signed trading treaties with Indonesia. Another prevailing attention of the increased tariff relies mainly on the variation of the economic levels. For instance, in the year 2008 and 2011, Indonesia faced financial crises which resulted in increase of trade tariffs affecting the trade volumes to 5% according to World Bank, World Integrated Trade Solution (WITS) 2016. As Marks and Rahardja evaluated the levels of protection using nominal and effective rates of protection, they discovered that in two years which Indonesia have experienced major economic crises have resulted in increasing of nominal and effective rates of protection. for instance in the year 1995 and 2008, Indonesia levels of food crops rose from 11 to 17 and 16 to 24 percent respectively which means that tariffs grown in the resultant two years (Aswicahyono, Hill & Narjoko, 2010). Advantages of Moving the Production Plant to Indonesia Reduction of the labor cost While comparing the minimum wage in Indonesia and Germany, Indonesia has a relatively low monthly payment of 310USD per month while in Germany it's 8.50 USD. Considering the above fact, establishing a production plant in Indonesia will reduce the production cost rate. According to BusinessknowledgeSource.com, some of the companies which build production plants in Indonesia make up to 50% savings in the salaries cost more than their actual country. Discovering hidden markets Establishing a production plan in Indonesia may result in finding other markets for the company products which will extend the market are hence increasing the profit. In addition, if KHS GmbH establishes a treaty with the Indonesian government such as selling their product to the local market it may result in increased recognition of their brand in the Asia continent which in turn may spread in the china and the whole world at last. In addition, Germany is a member of the EU whereby in December 2015 the president of Indonesia Joko ‘Jokowi’ Widodo has announced his efforts to link Indonesia with the rest of the world including signing treaties with the existing trade union such as the EU and the Trans-Pacific Partnership (TPP) (Goh, Fealy & Supriyanto, 2015). According to The Jakarta Post Mon, December 14, 2015, the ministry of commerce through its head representative Trade Minister Thomas Lembong have also commented positively on increasing trading with European Countries encouraging more trade links between local industries and the international (Mietzner, 2015). Since KHS GmbH has an established market in Germany, it has an added advantages to evade some of the protective tariffs such as nominal rate of protection (NRP) since it will not interfere with the local market of the industries that produce the same products. The only charges that KHS GmbH will face is the import and export tariffs which will be in terms of tax. Disadvantages of Moving the Production Plant to Indonesia The major problem of establishing a production plant in Indonesia relies on the fluctuation of trading tariffs with respect to the prevailing political structure at hand and the country’s economic state. As noted before, in both year 2009 and 2011, the nominal rate of protection (NRP) percent risen where it affected most of the external investors. Consecutively, the recent non-tariff measures imposed by the government of Indonesia intend to restrict export and import and the domestic prices. In this case, therefore, it would be hard to establish a new local market in Indonesia. Transport cost Considering that Indonesia is quite far from Germany, a numerous number of transportation methods may be applied. Since there are three primary modes of carriage of good which include railway roads, water and air, selection of the appropriate channel would not be possible. Taking the account that air transport which would be faster will cost much due to the resultant weight of the containers. Discussion Shifting production plans to the developing countries have been an invented trend where the major aim of the resultant corporations is to reduce production cost since there is cheap labor force in developing countries. however, some of the challenges that KHS GmbH may face while location their production plan may raise the cost of production even more than the resultant production cost in Germany. For instance, as Indonesia is among the developing countries, it’s political stricter is prone to change with respect to the prevailing running system. In this case, establishing production cost in such country may thrive in the current form of government, but it may not be predictable whether the system will change in future. Being in the resultant scenario, the developed hypothetical model by the KHS GmbH shareholders ought to take the account of such uncertainty of the government structure. Another notable trend of the trading policies and laws that Indonesia have impose aims to safeguard the local industries from the exploitation of the world dominance multinational companies. In the resultant scenario, KHS GmbH will be limited to establish a local market of their producers in Indonesia as most of the firms would do. Nevertheless, KHS GmbH only aims to shift the production plant while the products will be shifted back to their original local market in Germany which rescue KHS GmbH from being imposed to this protective tariffs. Conclusion In conclusion, the developed model will only apply if the present government structure which in turn dictates the trade policies will remain the same even in future and also if the transport cost including the import and export of cargos customs will be less than running production plant in Germany. Reference list Coordinating Ministry for Economic Affairs (2011), ‘Masterplan for Acceleration and Expansion of Indonesia Economic Development 2011–2025’, May. Patunru, A.A., McCulloch, N. and Von Luebke, C., 2009. A Tale of Two Cities: The Political Economy of Local Investment Climate in Solo and Manado, Indonesia1. IDS Working Papers, 2009(338), pp.01-43. Aswicahyono, H., Hill, H. and Narjoko, D., 2010. Industrialisation after a deep economic crisis: Indonesia. The Journal of Development Studies, 46(6), pp.1084-1108. The World Bank Policy Note no. 3, http://siteresources.worldbank.org/EASTASIAPACIFICEXT/Resources/226300- 1349835451376/Full-PN3-Manufacturing.pdf. Mietzner, M., 2015. Indonesia in 2014: Jokowi and the Repolarization of Post-Soeharto Politics. Southeast Asian Affairs, 2015(1), pp.117-138. Goh, E., Fealy, G. and Supriyanto, R.A., 2015. A Strategy Towards Indonesia. Goeltom MS (2007), ‘Economic and Fiscal Reforms: The Experience of Indonesia, 1980–1996’, Essays in Macroeconomic Policy: The Indonesian Experience, PT Gramedia Pustaka, Jakarta, pp 489–506. Read More