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Essentials of Global Management

C AT EXH AU ST IN VEST S ABR O AD

School: Degree: Total Words:

School of Business Management and Economics MSc International Marketing 2051

1. COUNTRY ATTRACTIVENESS ANALYSIS AND ENTRY MODE FOR INVESTMENTS IN THAILAND

Catexhaust GMBH, for opening a new plant in Thailand in order to supply VAG (Volkswagen, Audi Group), has to take into consideration several factors. First, we examine Thailands attractiveness in order to evaluate whether the market has a high, moderate or low attractiveness level. After the evaluation, and if necessary, the appropriate entry mode is being suggested. As Thailand has enjoyed a special commercial relationship for 175 years under the Treaty of Amity and Commerce (BUYUSA.GOV, 2010), it can be concluded that the entry to automobile components suppliers is appealing but quite competitive. Catexhaust has already been supplying powerful automobile manufacturers in Germany, so one possible way of increasing sales is to acquire companies in foreign countries - especially those hosting Catexhausts clients - thus providing a major advantage to Catexhaust. More specific: When assessing market opportunities in Thailand, graph 1.1 shows that the macroeconomic indicators (GDP annual growth rate) reveal an emerging market attractive for investments, even though there is no steady fluctuation after January 2008. The automotive industry has become very competitive over the last years and evolved as being the number one manufacturing industry in Thailand (BUYUSA.GOV, 2010). This fact, in addition to Thailand s unsteady fluctuation rate of FDI (graph 1.2), makes it the last years a moderate attractive market to invest in (Tyndall, 2008). From the industry opportunities perspective, when assessing Thailand and looking at the intensity of rivalry, it can be concluded that there is a large number of automotive part and component manufacturers (there are already over 12 different car brands with plants in, and around, Bangkok ) (ConGlobo GmbH Wollerau, 2006:30). Catexhausts major advantage compared to its competitors in this context is that VAG is a retained customer in Europe.

There are also 4 main factors which can be taken into consideration when analysing Thailands industry opportunities. These are: geographical location, government policies, infrastructure and human resources. Thailand provides easy access to regional markets , due to its location. Furthermore being part of the free trade area ASEAN, 'auto parts exported to ASEAN nations are currently subject to a tariff of less than 5%, and the tariff will be eliminated entirely in 2010' (Business-in-Asia, 2009). The government of Thailand has been giving opportunities to foreign suppliers, interested in and willing to enter this market. But Thailands unstable political situation provides another agenda (Business-in-Asia, 2009). There is a continued political turmoil, which has lately leaded to an internal violence eruption (Business Monitor International, 2010). These risks might scratch Thailands attractiveness to foreign investors, who may decide to deposit their capital in more stable competing regions. Furthermore Thailand provides a well established infrastructure with modernized transportation facilities (BOI, 2010). Another important factor is human resources in Thailand. They are a low-cost labour, this referring to the labour out side Bangkok, where the cost is reduced by 25% when compared to Bangkok, although they are not the lowest around South Asia (BOI, 2010). But on the other hand the facility costs are very competitive as there are hundreds of plants (BOI, 2010). Taking into consideration all of the above, the attractiveness of an investment in Thailand is moderate (Tyndall, 2008). The most profitable entry mode for Catexhaust in Thailand market is to acquire an existing business. An acquisition has high potential to generate profit and it is the quickest way to obtain a mature business. There are a lot of advantages if entering this market this way, but there are also a few dr awbacks which will be also examined.

Speaking of advantages, an acquisition in Thailand has three ma jor points in its favor (Hill, 2009):    Lower risk Less management training Lower asset costs.

It is usually cheaper to acquire assets by buying an existing business than it is by building a new one. If Catexhaust bought another existing business then it would have immediate availability in resources. Acquiring already developed competencies is time and money saving. Another advantage of this entry mode is that Catexhaust would be able to build its presence in the foreign target market quicker and would a lso be able to pre-empt its competitors. For this to happen, Catexhaust needs a successful acquisition. For an acquisition to be successful four parameters should be taken into consideration. Firstly, the acquiring firm should check the known revenue and profit stream of the acquired. It should never overpay for the target. Second parameter to be checked is the incompatibility of the two firms culture. In this case, this is a critical parameter because of the distance between the German and Southern-Asian culture. A clash would seem highly possible. Thirdly, high level of management attrition should be avoided in any case and finally it is important that operations of the two firms integrate (Hill, 2009).

2.Indonesias attractiveness analysis as VAG also manufactures there.

As we have already collected the basic information and analys ed Thailands attractiveness, the Indonesian market must be examined and analysed as well, as VAG also manufactures there, in order to decide which location is more profitable for Catexhaust to invest in. While growing indicators make Thailand very attractive but quite competitive to foreign investors, Indonesia is Southeast Asias largest economy in total and has delivered consistent high annual growth, exceeding GDP growth of 5.2% in 2010, followed by an estimated growth of 5.3% in 201 1 (Business Monitor International, 2010; BUYUSA.GOV, 2010). It is the fourth biggest growing consumer market worldwide. According to the table 2.1 the GDP per person growth rate exceeds that of its ASEAN neighbors (BUYUSA.GOV, 2010). Also Indonesia is as signatory to the ASEAN Free Trade

Area agreement as Thailand (Business Monitor International, 2010). By examining the industry opportunities, Indonesias business environment is quite challenging. When we are looking at the intensity of rivalry , Indonesia has a large number of automotive part and component manufacturers which are hosted in the country and are supplying over than 17 auto manufacturers, including VAG (Budiman, 2008). According to the table 2.2 the cars production fluctuation in both countries is un stable; however Indonesias growth rate in car production is greater than in Thailands. Furthermore, Indonesias car production forecast is to rise 51% this year (AntaraNews, 2010) while Thailands is to rise by merely 10% (Global Intelligence Alliance , 2010). Given Indonesias economic growth and manufacturers ' production plans, both domestic sales and output are likely to reach 1 million vehicles in 2015 (Global Intelligence Alliance , 2010). Deals with major Indonesian-hosted players in the automotive industry could follow an aggressive entry in this competitive auto market. Widening the perspective, Indonesia could be the base for supplying other regional markets, such as Thailand.

There are also 4 positive main resources which enhance Catexhausts potential to open a plant in Indonesia;     Geography Labour-cost Democratically environment Devaluation of the rupiah

First of all, Indonesias geographical position outweighs Thailands. Indonesia is the world's largest archipelago ( BOI, 2010). It is located on the worlds major trade routes (BUYUSA.GOV, 2010). In the case of Catexhaust which strives to invest successfully and profitably in its new plant in order to supply Indonesias domestic market and to expand its presence to neighbour regions in the future, the geography of Indonesi a offers an excellent possibility. Indonesia also boasts of one of the lowest manufacturing wages in Asia. Indonesians are respected as being highly committed and well skilled workforce. Low wages should help Indonesias industrial recovery and rising employment, especially in the Greater Jakarta area, and is a key factor to sustain urbanization in the long term. (AdvisorAnalystViews, 2010). Catexhaust could seize this advantage and could profit in the long-term if investing near outside Jakarta. Furthermore, Indonesia is also the world's third largest democracy, with a thriving open economy. Automobile production in Indonesia is expected to grow rapidly in the next several years, as the government is preparing tax incentives and manufacturers are raising output capacity (Business Monitor International, 2010). The new tax measures will focus on the new low cost and fuel- efficient vehicles that will be placed in the market (Global Intelligence Alliance, 2010). Aside from the favourable geography position and the low labour -cost according to the graph 2.3 there is a significant depreciation of Indonesians Rupiah against Euro, making European exports relatively more expensive. As a consequence, this rate gives Germanys Catexhaust the advantage of 6

investing in a cheap market for providing the local Indonesian-hosted auto manufacture firms. Despite the benefits there are some important business environment risks in this country which have to be mentioned in order awareness to be raised. First of all, terrorism will remain a threat for Indonesia and the infrastructure is still quite poor. Furthermore, the effectiveness of state institutions is defected by demoralization and bureaucracy (Business Monitor International, 2010) Considering all the above and taking into consideration that Indonesia and Germany have traditionally good relations based on trust , Catexhaust should in my opinion invest in opening a plant in Indonesia .

3. Reconciling cultural differences for effective management.

It is a common belief that every global firm in order to be operated effectively, has to rely on its workforce. For that reason, we must take under serious consideration the factor of cultures differentiation between the employees, which can be proved really significant for the management of a firm like this. For instance, Catexhaust, which is willing to open a new plant in a different continent, should be aware of th e "new" national culture that is going to deal with. First of all, Catexhaust has to examine how all the previous leaderships had managed to resolve difficulties referring to cultures variation. Furthermore, a very important factor to be examined, is the silent languages differences (Lasserre, 2007). According to Hall, as cited in Lasserre (2007), cultures differ in the way they communicate through non -verbal means or silent languages. Specifically, there are six different silent languages: time, space, materials goods, friendships, agreements and context (Lasserre, 2007). For instance, the way that Germans define "time" is completely different than Indonesians: The first, follow all the deadline s and try always to be on time, whereas for Indonesian time is more fluid and the deadlines are more flexible. (Lasserre, 2007) Generally, Germans belong in a "high social distances culture", where you always have to keep a safe distance when you talk with someone and kissing (as a way of greeting) is not so common (Lasserre, 2007). Instead, Indonesia belongs in a low social dista nce culture, and it is common for them in conversations, to stay very close to you but touching is something you have to avoid as it is common only among friends (Lasserre, 2007). Indonesians are more friendly and love to share feelings, than Germans who are characterized as "cold" because it takes longer for them, to warm up to people they don't know. Moreover, we can spot one more difference in the "arguments" field. In Germany, when they agree or disagree with something, they usually do it in writing, but Indonesians have 12 different ways to say no and many times the word yes is for them another way to say NO. Mostly in Asian countries, the 8

way that people interact with each other depends on the character. On the other hand, in Western Europe and especially in German, people interact in a more straight and severe way. Nevertheless, a differentiation in a business environment, in terms of culture, most of the times is positive and brings creativity. In our case, Catexhaust is a perfect example of Germanys behavior to be competitive and in combination with Indonesians co -operate character, could bring great results in the effectiveness of the firm. According to Hofstedes survey, as cited in Hill (2009), Indonesians score higher than Germans in power and distance and very low in individualism, they usually integrate in groups but both score closely in masculinity and uncertainty avoidance. To sum up, to avoid any cultural clash, the German managers have to focus more on public relationships than on rules which in Indonesia can easily change. They have to use a collectivism behavior approach, as Indonesians interact mainly as groups. And most of all, they must keep in mind that bridging every gap inside their firm using any possible way, can help both sides collaborate and make profit, succeeding their primal goals. And then we can say that their firm is operated effectively.

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p 1.1

Grap 1.2

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Table 2.1 Thailand GDP - real growth rate Year GDP - real growth rate Rank Percent Change Date of Information

2003 2004 2005 2006 2007 2008 2009 2010

5.20 % 6.70 % 6.10 % 4.50 % 4.80 % 4.80 % 2.60 % -2.20 %

34 31 46 107 110 117 141 151 28.85 % -8.96 % -26.23 % 6.67 % 0.00 % -45.83 % -184.62 %

2002 est. 2003 est. 2004 est. 2005 est. 2006 est. 2007 est. 2008 est. 2009 est.

Source: IndexMundi (2010).


Indonesia GDP - real growth rate Year GDP - real growth rate Rank Percent Change Date of Information

2003 2004 2005 2006 2007 2008 2009 2010

3.50 % 4.10 % 4.90 % 5.60 % 5.50 % 6.30 % 6.10 % 4.50 %

83 75 87 77 82 71 58 36 17.14 % 19.51 % 14.29 % -1.79 % 14.55 % -3.17 % -26.23 %

2002 est. 2003 est. 2004 est. 2005 est. 2006 est. 2007 est. 2008 est. 2009 est.

Source: IndexMundi (2010).

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:I

abl 2.2

P ry ars

S A IS mm rcial icl s , , , , ,

I al

S % change . % . %

I il

, ,

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2007 PRODUCTION STATISTICS


Country Cars Commercial Vehicles Total % change

Indonesia 309,208 Thailand 315,444

102,430

411,638

38.6% 7.8%

971,902 1,287,346

2006 PRODUCTION STATISTICS


Country Cars Commercial Vehicles Total Total Change

Indonesia 256,285 Thailand 298,819

40,777

297,062 -40,7% 6,1%

895,607 1,194,426

2005 PRODUCTION STATISTICS


Country Cars Commercial Vehicles Total Total Change

Indonesia 233,492 Thailand 277,603

261,059

500,710

22.6% 21.0%

847,713 1,122,712

Source: OICA (2007).

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Gra h 2.3

Source: Exchange- Rates (2010).

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