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Key Topics
- Requirement
- Q.) Give a brief description of the political conditions in Indonesia over the span of 5periods.
- Q.) Mention the reasons for Astra International being successful under such unstable economic and political systems of Indonesia.
- Q.3) what are the risks of doing business in emerging markets like Indonesia and what should be done in order to reduce them?
- Q.4) how did Astra limited the impact of international firms operating in Indonesia?
- Q.5) if you had your own international business then would you do business in Indonesia? Give reasons.
- References
Requirement
Q.) Give a brief description of the political conditions in Indonesia over the span of 5periods.
Answer)
Indonesia got its independence in the year 195 after a rule of almost of 340 years by the Dutch East Indies and a short tenure of 3 years by the Imperial Japan. The Dutch were overthrown and Dutch East Indies’ fate was sealed by Japan’s Imperial navy and after that Indonesia was controlled by the Imperial Japan through the course of World-War 1 and they established their own imperial rules and structures.
Even after achieving its Independence and having no interference from the external sources, Indonesia had to pass through the six decades from Independence because of the constant changes in political leaderships and this affected the foreign business and trading plans consistently (Vidal, 2014).
The first stage from the year 1945-1966 was the period of re-establishment for Indonesia and the then president (also the first president) Soekarno provided the country with democracy which tried to nullify and adjust all the major influential groups of Indonesia namely the army, religious and communists groups. During this period, the main focus of all the political leaderships and policies was centered on collaborating the interests of the Dutch/Japanese and the national interests of Indonesia into one single objective for the betterment of the country.
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The Second i.e. 1966-1974 saw an end to the leadership of Soekarno’s government and its implementation of the anti- foreign policy was scrutinized and deemed as a failure. On the contrary, the next president, Soeharto implemented an open door policy for trade and amidst all the political turmoil from the election of a Japanese Prime Minister in the year 1974 till anti-Japanese protests and riots. The local inhabitants demanded inclusion of local market and workers into the trade policies and foreign organizations which were settling in Indonesia for manufacturing and other things. Equal and transparent opportunities were demanded and the political powers were pressurized constantly.
Third stage from the year 1974 till 1998 saw improvements in the policies which were earlier regulated by the government which did not focus a lot on the local markets or workers. The changes were introduced in two set of blocks from 1974-1985. These changes made the political conditions of Indonesia a little better and some stability started to pour in the system as the local distributors and workers were now a part of the entire foreign market system.
Fourth stage from the year 1998 till 2004 was again a period of turmoil for the country, Indonesia. Due to the rising financial crisis, political centres of power started shifting and after 7 terms of presidential control, Soeharto was displaced by his own vice president, Dr. Habibe. This led to a major change in the control systems which transformed from centralized control system into a decentralized system. Hence, shifting the control of budgets and planning department from the central government to the local and as the regional governments. The period from 1998-2004 proved to be very unstable for the country and the people of Indonesia and companies had to face 4elections in this period of time making political conditions complex and uncertain and the presidencies kept on changing from time to time.
Fifth stage (2004-2013) was the period in which Indonesia finally experienced a stable government and political systems. This was mainly because of the peace agreement signed between the government and the Free Aceh Movement separatists wherein the government promised the removal of soldiers from the province and the separatists agreed for disarmament.
Q.) Mention the reasons for Astra International being successful under such unstable economic and political systems of Indonesia.
Answer)
Astra International was once a very small company which developed its self under uncertain economic and political conditions to be an international giant in today’s business world. The company was established in the year 1957 by William Soeryajaya a Chinese-Indonesian. The company had its branches in various sectors such as manufacturing, automotive, mining financial sector, agricultural business, IT and logistics also. The company initially was a distributor of motorbikes and cars for Honda & Toyota and Daihatsu respectively.
In the early stages of the democratic Indonesian government, the country faced acute problem for the economy as there was the absence of basic infrastructure and assets required for manufacturing and production purposes. Moreover, the only assets which were available did not fulfil the requirements. This was the time when the founder of Astra International took the initiative to support the falling economy by opening up Astra International and did his part for the country by opening up trade & distributing company in Jakarta. One of the reasons for having success amidst such economic and political conditions was the disintegration of company’s assets into several fields and the company was never dependent on one single asset for it development. In the mid-1960s, the company could advance itself even further due to the new policies by the then president Soeharto (Logue, no date).
Soeharto introduced open door policies which emphasised on the economic development. Astra International took benefit from these policies and when the government introduced its plan for producing agricultural machinery and also manufacturing of products in order to substitute import that Astra International grabbed this opportunity in order to expand its business internationally.
Astra International kept its self-connected with several alliances such as in 1969 it made the commitment of delivering components for Chevrolet trucks and used a warehouse of the government as its storehouse. Hence, it can be said that Astral International was and still is a really opportunistic company which grabs any opportunity that comes in front of it with both hands. After the riots of 1974 and after their Toyota outlet for car distribution was burnt down, they learned few important lessons and the most important was to include the local market and workers in any future plan hence making them locally and internationally more acceptable as a company. Astral international developed integrated and used policies which could involve the local partners into their foreign ventures.
After the Indonesian government had reviewed its policies under which support to local firms especially the (SME’s) small to medium sized entrepreneurs were to give more support as they held the majority of employment in Indonesia which was around 87%.
These policy changes helped Astral International to join hands with bigger organizations from around the world and form joint ventures. Joint ventures are of a lot of benefit for both the local and as well as the international partner. The international companies with the help of joint ventures get help in investment risk and understanding the market adoption rates for the local market without investing a lot of time on understanding and adapting to the local tastes and rates on its own whereas the local firms get the benefit of using top most managements and technical machines which otherwise would have proved costly for their budget and they also get the opportunity for exploring the vast international markets. That is why Astra international connected itself with Toyota and Daihatsu motors and gained advantages from both the ventures but more than that it also created space for employing the local inhabitants. This aligned with the Governments policy for reducing the socio-eco gaps between the larger firms and the small companies. By the end of 19th century, Astra international was able to place itself deep into the business market of Indonesia in as many as six sectors compromising of automotive, IT, agribusiness and infrastructure.
The foundation of Dharma Bhakti Astra Foundation helped Astra International to focus itself on creating SME’s partners mainly in the three sectors of mining, agribusiness and automotive. The foundation helped the company to establish customer who could be trusted, suppliers and supporting networks for its core businesses in Indonesia.
Q.3) what are the risks of doing business in emerging markets like Indonesia and what should be done in order to reduce them?
Answer)
In an economy such as Indonesia, where there are multiple political and financial instabilities, it becomes really problematic for any company to function smoothly and progress in the right direction.
This is why it becomes all the more important to analyse what special is Astra International has been doing till now in Indonesia that it has earned several awards in the field of finance, management, corporate and investment namely FINANCE ASIA AWARDS (2010), BEST MANAGED COMPANY, BEST CORPORATE GOVERNANCE and BEST INVESTOR RELATIONS. All these awards to the company had been awarded to it because of its business in the Asia region. If this is not enough to satisfy the expectations level then in 2011 it was awarded the title of Indonesia’s Best Employer (Batavianet, 2015).
Yes, it is true that the emerging markets provide the investors with new opportunities for investing namely elevated rates of economic growth, abundant expected returns and benefits of diversification. But then this comes with risks for both the local and as well as the foreign investors.
One of the recent examples can be quoted of the turmoil going on in Turkey due to the rumours that Russia will invade its neighbouring country, Syria.
Similar was the condition of Astra International when Indonesia was facing a political & economic crisis. Some of the major steps they took for maintaining its income and position was creating a link between the local and the foreign market and aligning them on the same path for the benefit of international firms, local inhabitants and obviously for themselves. Secondly setting up the Dharma Bhakti Astra Foundation which helped SME’s to progress and other foundations also and one of them was for informal and formal education which helped them in solidifying their position in the academic front also. Then after this, Astra was creative enough to utilize the places such as warehouse and other wasteland areas which cut off their expenditure on setting up plants and give faster results. The works in severa/l bra+++++++++++++nches at the same time helped them in taking further risks in one of the sectors and increasing its business by several folds (Investments, 2015).
Issues like taxation of executive compensation, international M&A, the proper scope of financial regulations are some of the problems along with the biggest difference in the opinions and policies of these emerging governments who allow very few flexible benefits to the foreign business.
Now, after discussing the risks of investing in the emerging economies it is of more importance to analyse the ways in which it can be reduced.
These can be reduced by (Malhotra, 2010):-
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Making proper strategies keeping a long term benefit rather than short term profits
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Formation of joint ventures with local firms will definitely reduce the risks of investing in these markets
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Involving the local people and firm for production and management of several parts of the company and taking benefit from their experience
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Aligning the benefits and objectives f the company with those of the local governments and promoting their basic propaganda. It will keep both the government as well as the local people in the favour of the company.
Q.4) how did Astra limited the impact of international firms operating in Indonesia?
Answer)
Astra International used several direct and indirect methods for hanging the impact of international firms in the Indonesian market. The biggest advantage for Astra was its foundation in the six major sectors such as mining, IT, agriculture, automobiles, finance and logistics.
Astra International created joint ventures with various companies and then later on converted them into sole distributorships lie for eg. It was in a joint venture with Japanese companies like Honda, Honda and Daihatsu and later on gained sole rights for distributing it.
Astra opened foundations for supporting the SME’s which compromised of around 87% of the manufacturing in Indonesia hence making them happy for further benefits.
Astra, after its distributing plant was burnt down in 1974, re-established new policies which were no not only focussed on the profit making of the company but included the local inhabitants and their benefits too by giving them jobs and money for earning a living.
It provided memorandums to the SME’s for understanding the banks of Indonesia in a better way, so that they can invest in a better way.
It created a strong bond with PERTAMINA which was a local state-owned mining company. It then created several training centres across Indonesia and in a short period of time they had ample of customers who were reliable, suppliers and support groups.
Hence working on the guidelines of the government’s reformed policies it created an entire system which supported the inhabitants, government and kept everyone happy hence the need of investing in the international market was shifted and people could rely on Astra for jobs, products, education and works in various other fields.
Q.5) if you had your own international business then would you do business in Indonesia? Give reasons.
Answer)
No, I feel I would not be highly in the favour of investing money, time or assists in such an area which is economically and financially so unstable. Firstly, Astra International was a local company and it had local connections hence it became somewhat easier for them to analyse the market and one of the most important step of analysing the market was already check listed whereas it will be highly unlikely for a new firm to settle in such a market with local inhabitants continuously wanting the removal of international brands so that they can prosper, a banking system which do not adhere by international financing systems and lacks fluidity (Feldstein, 1999).
For some, it would be easy to say that it is an opportunity in disguise but after having established a good business firm on an international basis, it is of no use in investing money where you know it is highly risky (Henisz and Zelner, 2010).
Some of the other reasons for my disapproval are (Pinkasovitch, 2011):-
The major fear for investors while investing is the risk of Foreign Exchange Rate.
Most of the governments assure the corporations of having strict laws and rules for limiting the inside trade, but none of them have been extremely true except the United States Of America and hence, such systems prove to be highly biased in the favour of limited big companies.
The emerging markets cannot be checked using a stable analysis of mean-variance.
The emerging markets have lesser liquidity which increases the rates of broker money and the price levels become uncertain.
Such countries or markets have poor banking systems which will further limit the access of financing required by the companies for increasing and growing their business and they will face difficulty in raising capital.
Emerging markets have weaker governance systems in corporate sectors hence, management and as well as the government has greater control than the shareholders.
Weaker accounting audit procedures and poor management of checks and balances increase the chances of bankruptcy.
In developed nations, a free market discipline is followed which has very few interventions of government whereas it the opposite scenario in an emerging market, business is privatized according to the demand.
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Batavianet (2015) Astra International | Beranda. Available at: http://www.astra.co.id/ (Accessed: 17 October 2015).
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Feldstein, M. (1999) Self-Protection for Emerging Market Economies. Available at: http://www.nber.org/papers/w6907 (Accessed: 17 October 2015).
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Henisz, W. J. and Zelner, B. A. (2010) The Hidden Risks in Emerging Markets. Available at: https://hbr.org/2010/04/the-hidden-risks-in-emerging-markets (Accessed: 17 October 2015).
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Investments, I. (2015) Home. Available at: http://www.indonesia-investments.com/business/indonesian-companies/astra-international/item192 (Accessed: 17 October 2015).
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Pinkasovitch, A. (2011) ‘The Risks Of Investing In Emerging Markets’, in Available at: http://www.investopedia.com/articles/basics/11/risks-investing-in-emerging-markets.asp (Accessed: 17 October 2015).
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Vidal, J. (2014) ‘Indonesia is seeing a new corporate colonialism’.Available at: http://www.theguardian.com/world/2013/may/25/indonesia-new-corporate-colonialism (Accessed: 17 October 2015).
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(no date) Available at: http://english.kompas.com/read/2011/12/13/07152322/Astra.Otoparts.Builds.Factory.in.China (Accessed: 17 October 2015).
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CHOWDHURY, A. (1983) “Corporate Leader of the Year: William Takes Astra Back to Grassroots,”
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Asian Finance (Hong Kong). (1983). Vol. 9, No. 11. 2.
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Daulay, A. H., et al. William Soeryadjaya: Kejayaan dan Kejatuhannya [William Soeryadjaya: His glory and downfall] (Jakarta: Bina Rena Pariwara, 1993).
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Indonesia, Ministry of Justice. Tambahan Berita Negara [Official gazette supplement], Jakarta. 4. PT Astra International Inc., Annual Report, Jakarta.
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Memorandum Relating to the Public Offer in Indonesia, Jakarta.1990.
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“Wawancara: William Soeryadjaya” Eksekutif (Jakarta) (1980)
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Bigfix (no date) PT Astra International Tbk: No PC is an Island. Available at: http://www.ruthvictor.com/pdf/Patch%20Management/CaseStudy/Astra_Intl_CS1.11.08.pdf (Accessed: 17 October 2015).
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CIA (1976) The World Factbook. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/id.html (Accessed: 17 October 2015).
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Investments, I. (2015) Home. Available at: http://www.indonesia-investments.com/about-us/who-we-are/item113 (Accessed: 17 October 2015).
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Investments, I. (2015) Home. Available at: http://www.indonesia-investments.com/culture/politics/item65 (Accessed: 17 October 2015).
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Investments, I. (2015) Home. Available at: http://www.indonesia-investments.com/about-us/writers-team/item23 (Accessed: 17 October 2015).
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Malhotra, R. (2010) Astra International Is Indonesia’s Most-Admired. Available at: http://www.wsj.com/articles/SB10001424052702304173704575577651763492526#articleTabs%3Dinteractive (Accessed: 17 October 2015).
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