OPTIMAL MODES OF

ENTRY FOR INDONESIAN

AUTOMOTIVE INDUSTRY
:Case of JT Group.

MAY 12, 2014

Park, Tae Sung
Lee, Ja Young
1. Introduction ___________________________________________________________________ 3

2. JT group ______________________________________________________________________ 4

3. Core competencies to gain competitive advantage _________________________ 5

3.1. Core Competiencies ______________________________________________________________ 5

3.2. Competitive advantage ___________________________________________________________ 5

4. SWOT analysis _______________________________________________________________ 7

4.1. Strengths __________________________________________________________________________ 7

4.2. Weakness _________________________________________________________________________ 8

4.3. Opportunities _____________________________________________________________________ 8

4.4. Threats ____________________________________________________________________________ 9

5. market analysis ______________________________________________________________ 10

5.1. Macro Environment ______________________________________________________________10

5.1.1. Political and Legal ___________________________________________________________________ 10
5.1.2. Economic ____________________________________________________________________________ 13

5.1.3. Socio-Cultural _______________________________________________________________________ 16

5.1.4. Technological ________________________________________________________________________ 18
5.1.5. Environmental _______________________________________________________________________ 19

6. Micro Environment __________________________________________________________ 21

6.1. Competition ______________________________________________________________________21

6.1.1. Poter’s Five forces analysis ________________________________________________________ 21

6.1.1.1. Threat of new entrance ________________________________________________________ 21

6.1.1.2. Rivalry __________________________________________________________________________ 22
6.1.1.3. Bargaining power of buyers ___________________________________________________ 23
6.1.1.4. Bargaining power of suppliers ________________________________________________ 23
6.1.1.5. Substitute _______________________________________________________________________ 24

6.1.2. Consumers ___________________________________________________________________________ 24

7. Mode of entry ________________________________________________________________ 30

1
 7.1. Exporting _________________________________________________________________________30

7.2. Licensing & Franchising ________________________________________________________31

7.3. Strategic Alliance ________________________________________________________________32

7.3.1. Joint-Ventures _______________________________________________________________________ 32
7.3.2. Contractual agreements ____________________________________________________________ 32

7.4. Wholly Owned Subsidiaries _____________________________________________________33

7.5. Risk of foriegn operation – First school ________________________________________34

7.6. Internalization and Transaction Cost Theory – Second school _______________34

7.7. Dunning’s OLI (Eleclectic Paradigm) – Third school___________________________35

7.8. Optimal Entry Mode______________________________________________________________36

8. Operational strategies for internationalising _______________________________ 38

Reference ________________________________________________________________________ 41

Appendix 1 _______________________________________________________________________ 50

2
1. Introduction

Indonesia is forth populous nation with the 16th largest Gross Domestic Product (GDP)

in the world as of 2012 (World Bank, 2014). It is emerging drastically recently in terms

of economy in where many MNCs are watching for a chance to expand their market

across Indonesia. It is experiencing increased consumer and business confidences,

net FDI inflow, purchasing power. JT group as well are planning to implement setting

up business in Indonesia market. In this report, JT group and its competencies are

identified, and optimal mode of entry and operational strategies for entering Indonesia

will be analyzed and recommended through precise analysis of up-to-date market

condition, the characteristics of the firm.

3
2. JT group

The Jay & Tes (JT) group is the German based automobile company which was

established in 1960. The JT group itself is considered as one of the most successful

companies in the world among the automobile competitors. The company markets its

vehicles through company-owned showrooms, subsidiaries, independent dealers and

importers. JT, the luxury automobiles, is keep growing with the luxury brand image all

over the world with average 1,000,000 units of sales in a year. There are 20 production

facilities in 10 countries and a global sales network spanning more than 120 countries.

JT is well positioned as the worldwide automobile that market share of the company

is about 11% which continues to improve year by year. The JT groups are currently

looking for the market with great potential as they recently have won the great profits

from Chinese automobile market, which considered as emerging market, in 2012. The

JT group company’s value is long term thinking and responsible action, the mission is

to be the world's leading provider of premium products and premium services for

individual mobility and the vision is to become even better.

4
3. Core competencies to gain competitive advantage

3.1. Core Competiencies

According to Prahalad and Hamel (1990, p. 79), a core competency is defined as “an

area of specialized expertise that is the result of harmonizing complex streams of

technology and work activity”. Followed by Prahalad and Hamel’s (1990) study, core

competencies include special qualities that they exemplify excellence and provide

competitive advantage, which is difficult to imitate by competitors and is extendable to

new markets. The core competence of JT Motor Corporation is its ability to produce

automobiles of great quality with the best service, thereby providing a value for money

to the customers. This core competence of premium quality can be attributed to its

heavy investment in R&D. Innovative and improve in quality reliability are cornerstone

of the long term stability strategy that the company pursues

3.2. Competitive advantage

“A competitive advantage is an advantage gained over competitors by offering

customers greater value, either through lower prices or by providing additional benefits

and service that justify similar, or possibly higher, prices” (Ehmke, 2011, p. 5). JT’s

competitive advantage is based on the strong branding as a premium luxury car by

cutting edge technologies with R&D capabilities which are considered as distinctive

competencies that is hard to imitate and high performance corporate culture based on

strong value system promoting creativity and entrepreneurship while maintaining

5
accountability and keeping customer benefit in mind. With the competitive advantages

that JT possesses has given JT a sustainable brand name and a market leader

position in luxury car and the small car.

6
4. SWOT analysis

SWOT analysis will be applied to conduct the situation analysis of JT. Using SWOT

the strengths, weakness, opportunities and threats of the company will be identified.

Stacey (1993, p. 52) defines SWOT analysis as a “list of an organization's strengths

and weaknesses as indicated by an analysis of its resources and capabilities, plus a

list of the threats and opportunities that an analysis of its environment identities.”

4.1. Strengths

JT has a strong market position across all regions. JT has a market share of 9.2% in

U.S.A. Furthermore, the company holds a 7% share of the Chinese market and a

significant market share in South and Central America, Africa and the Middle East

regions. The company's strong market position gives it significant competitive

advantage and helps it to register higher sales growth in domestic and international

markets.

JT has a heavy investment on R&D to improve the quality; safety and environmental

compatibility of its products and expand the product lines. JT operates the R&D

departments at 10 different regions worldwide. The company's R&D is focused in

improving the capabilities of existing products and developing new products. Strong

focus on R&D has helped the company in incorporating newer features to its existing

products and also in bringing out latest technologies. The heavy investment on R&D

leads the company to maintain their mission and vision to be the world's leading

7
provider of premium products and premium services for individual mobility.

4.2. Weakness

As the core competencies are based on providing premium luxury car with best service

that comes from heavy R&D investment, it is inevitable to avoid the high cost structure

with labor-intensive producing process compared to competitors. Furthermore, the

image of luxury brand for JT has made a general perception towards customers as

expensive car which possibly influence the reluctance in customers’ consumption. The

current company acquisition power and partnerships are relatively weak as they have

been pursuing to protect their own organizational culture which forms the employees’

organizational commitment to sustainable competitive advantage.

4.3. Opportunities

As fuel prices and the concerns of carbon emissions are increasing year by year, the

JT faces the opportunity with the electronic car models which are intensively built with

carbon fiber than steel plate. The combination with the electronic car engine and

carbon fiber materials made the car 60% lighter with zero carbon emission rate (Suzuki

&Takahashi, 2005).

8
 4.4. Threats

The current car industries are considered in the mature stage of industry lifecycle

(Klepper, 1997). Fierce competition among large companies with high economic of

scales, the high cost structure and rising raw material prices are giving the pressure

to transform the JT’s strategies from the present. To reduce their production cost while

maintaining the quality, which is one of their core competencies, is not a simple task

as it is said but has to aim both strategy differentiation and cost leadership which is

known as broad differentiation (Hambric, 1983).

9
5. market analysis

5.1. Macro Environment

Kotter and Schlesinger (2008) emphasize that organizations must have “a systematic

way to select a strategy and set of specific approaches for implementing an

organizational change effort” (p. 130). In order to analyze strategic issues, one can

use PESTEL (Political, Economic, Social, Technological, Environmental and Legal

factors) analysis.

5.1.1. Political and Legal

Indonesia is considered as Republic country. It declared its independence in 1945

from Japan. Indonesia’s legal rules and regulations are based on civil

law. Their constitution has abrogated by Federal Constitution in 1949 and Provisional

Constitution abrogated in 1950 which restored on 5 July 1959 (Vickers, 2013).

Political stability

In Indonesia, for every five years, there is an election for president and vice president

by the direct vote from citizenry. Last time it was held on July 2009 and Susilo

Bambang Yudhoyono has elected as president and Muhammad Yusuf Kallaisthe Vice-

President (Vickers, 2013). For coming election on July 2014, seems nothing is going

to affect the political stability either as the continuance of GDP growth and increase in

the level of HDI indicates the minimum conflicts between the political parties through

10
the last 5 years from former president with the government. Furthermore, the well

going political stability with new coming elections indicates another chance of 5 years

stable in policy. Indonesia does not face any significant military threats from another

sovereign country, which is fortunate since the country’s military capabilities are limited

due to its scarce financial resources (Vickers, 2013). The country’s biggest institution

is the military, but its strength as a fighting force is not as formidable as its reputation

for protecting its political and business interests (Vickers, 2013). However, Indonesia

is lack confidence in the judicial system and their ability to defend their interests when

disputes arise which gives a reluctant to foreign investor. Therefore, JT should find out

the way to protect their rights and properties to survive on as a foreign firm.

Laws for labor and company

As Indonesia is the fourth most populous nation in the world, it has one of the largest

labor forces in the world (OECD, 2012). With the huge labor forces, the labor laws

exist to protect the rights of employees (Agrawal, 1995). The law may mainly emphasis

for JT group to follow the 6 workdays in a week, 7 hour per a day with 30 minute rest

period for every 4 hours and 40 hour workweeks and the legal minimum working age

is 14 years (Lindsey & Masduki, 2002).

Indonesia enacted a new Company Law on August 2007 which is the most important

framework for the current legislation on corporate governance in Indonesia (Kamal,

2009). Under the Company Law, a company is a separate legal entity in which

Directors and Commissioners represent the company. A company obtains its legal

entity status as of the date that the MOLHR approval is issued. (Kamal, 2009)

11
Environmental law

Currently carbon taxes do not exist in Indonesia, and indeed the large energy

subsidies are equivalent to taxes applied at negative rates (OECD, 2012).

Business system

Many tax exemptions have given towards international firms since Indonesia’s GDP

increase and the technology spill over were relied upon the foreign government and

the Multinational firms (Tambunan, 2011). Following public consultations with a

number of industries, the government announced a set of temporary corporate income

tax holidays in 1996 over five to ten years for large investment projects including base

metals, textile machinery, oil refining and equipment for renewable energy and

telecommunications (Nehru, 2013). In terms of trade barrier, despite Indonesia’s

reforming towards free trade, several tariff measures have been erected. The number

of new trade-restricting measures is lower than in China and India but notably higher

than in regional peers (Bora, Lloyd & Pengestu, 2000). In specific, Indonesia

automotive industry was identified as a target for government to support and protect

with the high tariff in complete built up auto mobile (CBU) (Okamoto & Sjoholm, 2000).

It is known that 200% of heavy tariff is laid on CBU generally which is considered

highly over taxed when compares to neighbor region (WTO, 1998).

12
 5.1.2. Economic

The international economic downturn slowed Indonesia's GDP growth to 4.6% in 2009

as shown in Figure 5.1.1. In particular, the major export commodities are oil and gas,

electrical appliances, plywood, textiles and rubber (Pratik, Shweta, Sarfras, Zarna,

Darshita, & Priyanka, 2010).

GDP growth (annual %)

15.0

8.7 8.1 8.4 9.19.0 8.9 8.4 7.6

10.0 7.2 7.27.3 7.5
6.0 5.3 6.4 5.7 5.5 6.3 6.0 6.2 6.5 6.2
4.7 4.9 4.5 4.8 5.0 4.6
3.5 3.6
5.0
1.1 0.8

0.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-5.0

-10.0 -13.1

-15.0

Figure 5.1.1. GDP growth annual rate of Indonesia. By World Bank.

In terms of economic growth prospects, Indonesia is rated highest (most prospective)

among Malaysia, Philippines, Thailand and Vietnam by Political & Economic

Consultancy LTD with grade 5 1 (2011). Also, Indonesia has the largest GDP

(approximately $706 billion in 2010) and the largest population (approximately 234

1Appendix 1

13
millions in 2010) among Malaysia, Philippines, Thailand and Vietnam 2 (Political &

Economic Consultancy LTD, 2011).

Inflation, consumer prices (annual %)

70.0
58.4
60.0

50.0

40.0

30.0
20.5
18.0
20.0 12.2 11.810.5 13.1
11.511.9 10.5 9.8
9.5 9.3 8.0 7.8 9.4 7.5 9.7 8.5 9.4 8.0
4.7 5.8 6.4 6.2 6.6 6.2 6.4 4.8 5.15.4
10.0 3.7 4.3

0.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Figure 5.1.2. Consumer price inflation of indonesia (annual). By World Bank.

Nevertheless of prospective GDP and population of Indonesia, the consumer price

inflation rate is observed to be unstable relative to other ASEAN countries. In particular,

Indonesia experienced rise in inflation recently in 2013 due to the decrease in oil

subsidy by government (Economist, 2013).

2Appendix 1

14
 Foreign direct investment, net inflows (BoP, current
US$)
25
Billions

20

15

10

0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
-5

-10

Figure 5.1.3. Foreign Direct Investment (Net inflows) of Indonesia. By World Bank.

Figure 5.1.3 shows that the net inflows (Inflow direct investment minus outflow direct

investment) of FDI in Indonesia substantially increased since 2002. This possibly

indicates that the environmental factors of Indonesia are being stable that a lot of

foriegn investments are flowing into Indonesia.

Furthermore, according to BPS (2013) imports of vehicles other than railway is fourth

largest category among Non-oil importing commodity groups in 2013, and the volumn

of imports increased about 23.23% for a year, from $634 million in 2012 to $782 million

in 2013 3 . It shows that the automobile market has been substantially growing in

Indonesia.

3Appendix 1

15
 5.1.3. Socio-Cultural

There are over 300 ethnic groups in Indonesia, 95% of those are of native

Indonesian ancestry (Suryadinata, Arifin, & Ananta, 2003). Javanese is the biggest

one with 84 million people which is accountable for 42%, followed by Sundanese who

amounts to nearly 31 million which is accountable for 15% of total (Suryadinata et al.,

2003).

Population of Indonesia by Province in 2010

50000000
45000000
40000000
35000000
30000000
25000000
20000000
15000000
10000000
5000000
0
Sumatera Utara

Kepulauan Bangka Belitung

Maluku Utara
Kepulauan Riau

Banten
Riau

Bengkulu

Bali

Kalimantan Timur

Sulawesi Tenggara
Gorontalo
Aceh

Jawa Barat
DKI Jakarta

Nusa Tenggara Barat

Papua
Jawa Timur

Sulawesi Tengah
Sumatera Barat

Jambi
Sumatera Selatan

Lampung

Kalimantan Tengah
DI Yogyakarta

Kalimantan Selatan

Sulawesi Selatan

Sulawesi Barat
Maluku

Papua Barat
Nusa Tenggara Timur
Kalimantan Barat

Sulawesi Utara
Jawa Tengah

Figure 5.1.4. Population of Indonesia by Province in 2010. By BPS.

The total population of Indonesia is about 250,585,668 which is fourth largest in the

world and accountable for 3.49% of in 2014 (World Population Review, 2014).

According to BPS (2014), the most populuous province was found to be Jawa Barat,

followed by Jawa Timur and Jawa Tengah accordingly as shown in Figure 5.1.4.

16
 Figure 5.1.5. Age / Gender Structure of Indonesia in 2013. By CIA World Factbook.

Shape of age structure in Figure5.1.5 shows the typical developing country’s age

structure (Higgins & Williamson, 1997), which has relatively large numbers of youngst

and less numbers of elderly. Indonesia, as of 2013, age group of 5-19 is accountable

for the majority of populations. In order for the majority age groups to be JT’s target

market, a variety of variances need to be analyzed further.

Cultures and society among labour forces may affect the business operation. Most

employers have been complaining about labour issues and the labour laws used to be

vague as the interpretation of it was opened and inconsistent over time (Indonesia

Labor law, 2014). However, the law has been revised and the situation is not as bad

as it was before. According to Political & Economy Risk Consultancy (2011), despite

17
over 180 labour unions are registered in Indonesia, they seem not to be legally

enforceable. However, JT needs to establish reasonable and sufficient welfare for

local personnel to prevent potential labour conflicts.

In addition, religious activism is a source of unrest not only between Islamic and non-

Islamic groups but also between Islamic groups with different views. So far the

government has not handled these conflicts well at all (Gaduh, 2012). The problem of

basic crime against persons and property as well as terrorism by islamic extremists

also remains moderately high in some parts of the country (Political & Economy Risk

Consultancy, 2011). Hence, JT should monitor up-to-date news regarding to religious

activism in order to reduce physical risks for the firm.

5.1.4. Technological

As Indonesia honored the World Trade Organization’s (WTO) Trade Related aspects

of Investment Measures (TRIM) and liberalized its trade in 2000, there are no

automotive company owned by Indonesia but has several assemble factory attributed

to inward FDI (Rasiah, 2009). Indonesia has effective system with 139 airports,

railways with 8,529 km and water ways covering 21,579 km and major ports are

Banjarmasin, Belawan, Ciwandan, Kota Baru, Krueg Geukueh, Palembang, Panjang,

Sungai Pakning, Tanjung Perak, Tanjung Priok (Hook & Replogle, 1996). Indonesia,

however, is lack of infrastructure and, as the archipelago, the goods are hard to be

distributed to thousands of islands (Hook & Replogle, 1996). Hence, JT should seek

to establish efficient distribution channel to effectively reach potential customers.

18
 5.1.5. Environmental

Indonesia has implemented energy labelling since 1999, however, it only covered

electrical appliance especially for refrigerator (Silitonga, Atabani, & Mahlia, 2012).

Although emission standard is equivalent to Euro II which is began since 2006,

currently, Indonesia does not have fuel economy labels. However, it is expected that

fuel economy labels will be implemented in the near future due to the growth of

passenger cars and the increasing demand for oil (Silitonga, Atabani, Mahlia, &

Sebayang, 2011). Moreover, about US$ 34,221 million and 2,564,691 tons of CO2 are

expected to be saved between 2015 and 2024 if fuel economy labels are implemented

(Silitonga et al, 2011). Therefore, there will be potential rising market for JT as the

future demand for so-called ‘green car’ is expected to rise.

Furthermore, environmental factor includes its geographic location. Indonesia has

faced many natural disasters such as 9.0 earthquake. According to Pratik et al (2010)

the government is preparing the necessary plans for environmental protection and

environmental development project.Many areas of Indonesia are at high risk for

natural disasters due to its geographic location and topography. Earthquakes, volcano

eruptions, tsunamis and massive forest fires are the examples of types of disasters.

The Indian Ocean earthquake and tsunami in December 2004 killed more than

130,000 people and left over 37,000 missing in Aceh and North Sumatra. Flooding

and landslides frequently follow heavy rains. The government’s track record in dealing

with emergencies is not currently working well (Political & Economy Risk Consultancy

19
LTD, 2011). JT may need to sign up for insurance such as commercial insurance to

prevent physical risks to become financial harms.

20
6. Micro Environment

6.1. Competition

6.1.1. Poter’s Five forces analysis

The auto manufacturing industry is considered to be requiring high capital and labor

intensive. The major costs for producing and selling automobiles include labor,

materials and advertising. The Poter’s five forces will be used as the micro economic

indicator in the Indonesia car industry market. Porter’s five forces of competition

include three sources of “horizontal” competition: competition from substitutes,

competition from entrants, and competition from established rivals; and two sources

of “vertical” competition: the power of suppliers and power of buyers” (Grant, 2010).

6.1.1.1. Threat of new entrance

The car industry threat of new entrants was found to be low in Indonesia as it is

generally low in the world market as well. Economies of scale with auto mobile

company found to be high in the Indonesia as the Japan’s company Toyota and U.S.

based company G.M was pursuing cost reductions strategy through mass production

(Aswicahyono, 2000). It has been found that market share is mostly dominated by

Japan’s company Toyota by pursuing cost reductions strategy through mass

production with less product proliferation (Aswicahyono, 2000; Hook & Replogle,

21
1996). Brand loyalty of customers found to be high as well especially for few certain

companies’ products from Japan, which reflects that it would be hard for new company

to survive without brand equity (Hook & Replogle, 1996). The Indonesian based

company’s failure in entrance to car industry in 1990s’, which were mainly operated

by Soeharto family, with the product name ‘Mobnas’, indicates the infant company’s

failure due to the lack of brand equity (Aswicahyono, 2000). Absolute Cost advantages

are found to be high to current industries in Indonesia as they have already passed

through the experience curve which reflects the accumulated experience and

technological development with management know-how (Wernerfelt, 1984). The legal

barrier was found to be low as there is not explicit law with the automobile standard

(OECD, 2012).

6.1.1.2. Rivalry

Rivalry Among Established Companies seemed to be in high level that industry

competitive structure is high with the large number of distribution and existing

companies (Okamoto & Sjoholm, 2000). Despite demand Conditions are found to be

growing with GDP and income growth (OECD, 2012; World Bank, 2014), the rivalry in

the market still considered high due to the market dominators (Hook & Replogle, 1996).

Cost Conditions are with the high fixed costs that automobile industry includes

intensive labor, expensive materials and high advertising cost. Height of exit barrier

seemed to be high as an industry itself as the building up cost is considered

high(Morris, Willman & Wood, 1985).

22
 6.1.1.3. Bargaining power of buyers

Bargaining power of buyers found to be relatively mild that the main consumers are

not with the business buyers with bulk buying behavior but with the individual

consumers in Indonesia (Morris, Willman & Wood, 1985). However, still the profits are

relied on the buyers’ consumption in their cars and switching costs of buyers are low,

the company is required to consider the buyers’ taste and the bargaining power from

consumer.

6.1.1.4. Bargaining power of suppliers

Indonesia car industry are mostly focused on assembly manufacturing due to

restriction in exporting complete built up auto mobiles (CBU) (Satto, 1998). It reflects

Indonesia is fully involved in car industry as suppliers but not car makers. Bargaining

power of suppliers is relatively weak especially in the car industry itself since

fragmented automobile supply business are relied on few major car makers to buy a

majority of their products (Monteverde & Teece, 1982). Therefore, suppliers are

extremely susceptible to the demands and requirements of the automobile

manufacturer hold very little power. Furthermore, threaten to enter their car-makers’

industry is considered impossible since the feature of car industry possess that

producing one car needs a very complex supplier chain and technology (Morris,

Willman & Wood, 1985).

23
 6.1.1.5. Substitute

Substitute products in Indonesia for car markets seemed to be relatively high than

other neighbor regions that Indonesia’s public transportations are vary with shared bus,

mini bus, bus, taxi, shared taxi and train (Priyambodo, 2011). However, it has been

found that the increasing purchasing power in Indonesia has increased the ownership

of cars recently and has moderated the level of substitute in car industry (World Bank,

2014). Furthermore, it is found that the motor vehicle fleet has been increasing at 8%

per year since 1982, and in Jakarta the growth is closer to 15% a year (Hook &

Replogle, 1996).

6.1.2. Consumers

In Indonesia, the seven-seat family car was traditionally popular among consumers.

However, small cars are expected to be the fastest growing segment over the coming

years as drivers look to save on fuel costs and navigate worsening congestion in urban

centres according to GBG Indonesia (2014). Nevetherless, various factors need to be

analyzed precisely in order to determine the consumer demands.

Income of the consumers can determine the potentility and demand of the market.

One of determinants that indicate the income of consumer is GDP per capita which

may becalculated as GDP devided by the midyear population of the nation (Gans et

al., 2011)

24
 GDP per capita (US$)
4000

3500

3000

2500

2000

1500

1000

500

0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Figure 6.1.1. GDP per capita of Indonesia (US$): 1980-2012. By World Bank.

As shown in Figure 6.1.1, it has been mostly rising over time except the period of 1997-

1998 when Asian Financial Crisis occured. The exponential line briefly tells that the

GDP per capita is expected to grow over time in the future which means automotive

industry, as a luxury goods, has increasing potential oppotunity due to rise in

consumer’s income and purchasing power (Kotler & Armstrong, 2010). In fact, the

consumer confidence significantly increased paradoxically from 1998 to 2012 in which

GDP per capital increased almost 7 times from 500$ to 3500$, even surprisingly the

consumer confidence index (CCI) in 2008 was 111, when the global financial crisis

occured, which is considered high (Djaja, 2009).In order to segment the consumers

by income, the distribution of income needs to be analyzed further.

25
 Income Share of Indonesian Population, 1984-2011
50 45.98
42.76 42.64 43.65
39.46 40.71 39.62
38.79 38.9 39.11 38.88
40
Percentage

30
22.05 21.83 21.69 21.53 21.28 21.36 21.3 21.04 21.51 21.82 21.18
20 16.88 16.84 16.83 16.74 16.33 16.83 16.53 15.83 15.87 15.57 14.85
12.93 13.18 13.19 13.15 12.67 13.35 13.02 12.03 11.87 11.33 10.71
8.68 9.36 9.39 9.47 9.01 9.58 9.53 8.34 8.11 7.63 7.27
10

0
1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011

Income share held by lowest 20% Income share held by second 20%
Income share held by third 20% Income share held by fourth 20%
Income share held by highest 20%

Figure 6.1.2. Income share of Indonesia population: 1984-2011. By World Bank.

Difference of Income distribution among Indonesian population has been increasing

over time. In Figure 6.1.2, income share of highest 20% increased from 39.46% in

1984 to 45.98% in 2011 whereas income share of lowest 20% decreased from 8.68%

in 1984 to 7.37% in 2011, and the share of midst 60% slightly decreased throughout

the time. Therefore, it may be favorable for JT to target the consumer segment of

highest income with the luxury products that have enhanced quality and services.

Illustration:in terms of purchasing power, for example, ‘fourth 20%’ group above may

not be profitable segment, according to the calculation for year 2011,

[$846,341,443,778.42(GDP) X 0.2118(Income share)] / [245,613,000 (2011

population) X 0.20 (proportion)] = $3,649.13. It means ‘fourth 20%’ group averagely

26
earns $3,649.13 annually which has not enough purchasing power to purchase luxury

automobiles.

Gross Regional Domestic Product (GRDP) may be an critical variable that needs to

be considered to segment the consumers by the region. GRDP is a subnational gross

domestic product for measuring the size of that region’s economy.

Figure 6.1.3. GRDP per capita across province in Indonesia. By BPS.

Figure 6.1.3 provides variations in regional GDP per capita across provinces in

Indonesia. Jakarta is obviously found to be the richest province, and so is the second

of East Kalimantan. By region, it is assumed that JT should target the richest

provinces,or at least, the provinces which are obove the average line.

27
 Motor vehicles (per 1,000 people) in Indonesia, 2000-
2011
80.00
69.17
65.99
70.00 61.18
59.59
55.27
60.00
46.90
50.00
39.87
Units

40.00 33.31
29.92
25.36 26.12 27.32
30.00

20.00

10.00

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 6.1.4. Motor vehicles per 1,000 people in Indonesia: 2000-2011. By World

Bank.

According to World Bank (2014), 69.17 units of motor vehicles are owned per 1000

people in Indonesia as of 2011 whereas in 2000 only 25 units of motor vehicles are

owned per 1000 people as shown in Figure 6.1.4 above. This emphasizes the

tremendous growth potential as Indonesia’s economy is set to surpass Germany’s to

become the world’s seventh largest by 2030, according to Raoul, Richard, Areif,

Fraser and Morten (2012).

Overall, the consumer confidence and purchasing power have been increasing

significantly over time. Moreover, the income inequality is observed to be larger as

time goes by. Therefore, the possible market segment for JT can be the group of

people who live in richest province such as Jakarta, East Kalimantan, and who is

28
involved in a group of highest 20% of income share, in order to effectively distribute

the luxury automobiles.

29
7. Mode of entry

Since strategic decision selection has great impact on the competitive advantage of

JT, as a multinational enterprises, in entering a foreign market, entry mode thus play

a crucial role. According to Contractor and Lorange (1998), knowledge on the different

effects of these theories influences a foreign investor’s ability to achieve control over

local ventures, monitor local operations, reduce operational risks, and fulfill strategic

objectives. Pan and Tse (2000) suggest there are 3 mains schools of thoughts to

decide the mode of entry: First school views the international business is inherently

risky that it argues the selection of entry mode should be continuum of increasing level

of resource commitment; Second school is originated from transaction cost economics;

and the Third school suggests that entry modes should be considered based on

Dunning’s OLI theory. In this section, modes entry will be identified, three schools of

entry mode will be analyzed and applied based on those theories, and the optimal

entry mode for JT will be investigated.

7.1. Exporting

Perhaps the simplest and most common form of mode of entry is exporting domestic

products to a foreign country. Exporting is the process of selling goods and services

from one country to another for distribution, sale and service (Hill, Cronk, &

Wickramasekera, 2013). The advantage of exporting is that the firm can gradually

enter an international market without taking too many risks. Exporting also has the

advantage of helping the firm to acquire knowledge about a local market before

30
making large investments (Ireland et al, 2008). Even though this method of market

entry sounds quite simple and attractive, it has its disadvantages, such as vulnerability

to tariffs, high logistics costs or differences in opinions with distributors (Hill, Cronk, &

Wickramasekera, 2013). This mode is expected to facilitate JT’s performance with the

combination of other entry mode because it enables JT to minimize the risk.

7.2. Licensing & Franchising

Licensing is the process of entering an international market by leasing the right to use

the firm’s intellectual property – technology, work methods, patents, copyrights, brand

names, or trademarks – to a firm doing business in the desired international market

(Ireland et al, 2008). The benefits of this mode are little direct costs and risks for the

licensor. On the other hand, the licensee may adopt the technological process and in

the end become the competitor of the licensor (Hill, Cronk, & Wickramasekera, 2013).

Franchising is the licensing of a good or a service and business model to partners for

the specified loyalty fees. The franchisor provides trademarks, operating systems and

well-known products as well as service support such as advertising, specialized

training and quality-assurance program (Ireland et al, 2008). However, licensing and

franchising are not appropriate for JT due to its lack of control over market, and

because especially franchising is suitable for selling intangible assets such as trade

marks (Hill, Cronk, & Wickramasekera, 2013).

31
 7.3. Strategic Alliance

Strategic alliances refer to “cooperative agreements between potential or actual

competitors” (Hill, Cronk, & Wickramasekera, 2013). It involves formal joint-venture

and contractural agreements.

7.3.1. Joint-Ventures

When a company does not have the capacity to analyse and handle a market, it enters

into joint ventures to protect itself against political and economical risks(Hu, 2007). By

joint venture, the logistics costs for the parties involved are minimized and the control

over supply chain is strengthened due to the local firm’s established managerial

system and know-how (Hu, 2007). Also, the governmental control over the foreign

ownerships is ensured, and the facilitation with personnel in a local market will be

easier with the local parnter. Since JT is entering Indonesia without prior knowledge

and experience about it, joint venture will be beneficial and efficient to quickly

penetrate the market as well as to minimize the political, cultural and economical risks.

7.3.2. Contractual agreements

Contractual agreements involves strategic management and manufacturing that are

signed by the companywith another company or the government.It is form of

outsourcing and enable the firms to reduce costs, however, it has less control over the

32
production (Knowdell, 2011). Due to its lack of control, it is not the favorable entry

mode for JT in terms of maintaining quality of products and services control.

7.4. Wholly Owned Subsidiaries

The firm owns 100 percent of the shares in Wholly Owned Subsidiaries and it can be

divided into Greenfield investment and Aquisition (Hill et al., 2013). In a Greenfield

venture, a firm buys or leases land, constructs a new facility and hires or transfers

managers and employees, and then independently launches a new operation without

involvement of a partner (Hill et al, 2013). The firm maintains full control of its

operations with a Greenfield venture (Ireland et al, 2008). This entry mode is found to

be pertinent for companies with close contacts with customers, high level of

professional expertise of the employees, innovative/ exclusive services (Hu, 2007).

The main disadvantage of the Greenfield venture is high risk and costs at the foreign

market and, of course, lack of knowledge of the market (Hill, Cronk, & Wickramasekera,

2013). Aquisition of local firm also needs high costs and brings higher risks even

though it provides knowledges of location and protection of technology (Hill et al, 2013).

While JT needs to minimize the risks with the moderate investment and involvment at

the first stage, Greenfield investment and/or aquisition is not an appropriate entry

mode.

33
 7.5. Risk of foriegn operation – First school

The first school sees the operations in foreign markets as risky that political and

cultural differences should be considered and prefers minor or moderate initial

commitment when implementing foriegn operation (Hammarlund, Hansson, &

Hansson, 2008). Pan and Tse (2000) suggests that the firms should enter foriegn

market with low risky entry mode such as export and gradually increase their

commitment and involvement after aquiring market knowledge and experience.

Although JT is established in 1960 and is experience in many foreign countries, it may

need to be considerate for commitment of risk since it is firstly entering Indonesia.

Hence, it is suggested to implement foriegn operation not only with high commitment

such as aquisition, joint-venture, but also with the combination of low commitment

modes such as exports.

7.6. Internalization and Transaction Cost Theory – Second school

According to Johansson (2000), internalization is to retain control over its firm-specific

advantages either through domestic production, which is the export option, or foreign

investment, that is the FDI option. The Internalization Theory is viewed that it assumes

perfect competition where any activity is perfectly performed, and disregards the

importance of location in choosing entry mode (Ekeledo & Sivakumar, 2004).

Internalization theory is supported by the transaction cost analysis which is the

combination of the elements of industrial organization, organizational theory, and

contract law (Anderson & Gatignon, 1986). “In principle, transaction cost theory

34
explains the organizational preference between firms and markets” (Chen, 1999).

Anderson and Gatignon (1986) believed that the most appropriate entry mode is

through maintaining balance between control and the cost of resource commitment or

choosing a suitable mode by analyzing risk return and/or cost control trade-offs effect.

Transaction costs analysis provides four constructs that determine the optimal level of

control: transaction-specific assets; external uncertainty; internal uncertainty; and free-

riding potential. The challenge for the JT is on how it will minimize the transaction costs.

As an automobile provider, JT’s transactional costs may be substantially high if it

would pursue low-commitment entry mode such as export. Thus, export modes of

entry needs to be considered further with another modes of entries.

7.7. Dunning’s OLI (Eleclectic Paradigm) – Third school

Dunning (1988) suggested ownership advantage, location advantage, and

internalization advantage as three key determinants that a firm should look into upon

entering the market. Owner advantage provides the benefit from the accumulation of

intangible assets, technological capacities or innovations, location advantage is the

advantages that arise from using resources that are located in certain foreign location,

and internalization advantage is the benefit that the firm may be able to obtain by

keeping the production within the firm which is related to transactional costs (Hill et al,

2013). However, Ekeledo and Sivakumar (2004) argue that the eclectic model fails to

explain the entry mode choice in a unified perspective. Furthermore, even Dunning

and Lundan (1993) notices a defect that the model is not appropriate to the case when

two firms doing similar business and with similar ownership, internalization, and

35
location advantages would not select the same entry mode in the same target market.

However, automobile industry in Indonesia is filled with a variety of MNCs that possess

different level of ownership, internalization and according to section 6.1 competition.

Thus, JT’s entry mode may be analyzed based on eclectic paradigm. JT should

maintain its ownership advantage, internalization advantage andhigh level of control

to retain its brand image of premium car and quality control, and seek the increasing

market demand and location-specific resources. Hence, it is favorable for JT to enter

Indonesia with FDI rather than licensing.

7.8. Optimal Entry Mode

According to section 7, various entry modes and the relevant theory was analyzed.

Licensing and franchising was found to be not suitable for JT as licensing provides

less control over the operation whereas JT needs to maintain its quality control due to

its core competency, and franchising is the form of selling intangible assets.

Contractual agreement may be helpful for costs reduction, however, since it is not

suitable for quality control, it is not appropriate entry mode. Greenfield and M&A need

highest commitment and involvment of JT to enter Indonesia which also bring highest

risks. Also because of the existence of lack of experience and knowledge, those are

not selected for JT’s entry mode.

However, export and joint-venture are found to be the most appropriate modes of entry

for JT to enter first time into Indonesian car industry market. Export will be mainly used

for catering niche demand in which the firm will sacrifice low-commiments. Also, Joint-

36
venture is the main theme of entry mode for JT to penetrate Indonesian market as it

can reduce various risks, provide high control over the operation and the market, and

make JT to utilize the localized knowledge and experience at the same time. This is

illustrated in Figure 7.1 below. Furthermore, detailed operational strategies are

described in Section 8.

Figure 7.1. JT’s entry-mode decision making frame work.

37
8. Operational strategies for internationalising

For the long-term market presence and retaining and positioning JT’s core

competencies into consumer market, JT will mainly implement the operation in

Indonesia by Joint-Venture with PT.INKA (Industrial Kereta Api). PT.INKA is

established 1958, is wholly owned by the government which may reduce the potential

conflicts with the government such as new coming government on July 2014. It

manufactures the locomotives and manages the railways (INKA, 2014). It has

manufacturing and maintenance facilities in over 24 cities throughout the nation, and

used to produce automotive, namely GEA, in the past but was not success (INKA,

2014).

There is one conglomerate, namely PT.Astra, which distributes the automobiles in

Indonesia, however, many foreign automotive firms are operating joint venture with it

already such as Toyota, Daihatsu and so on (Indonesia Investments, 2014). Thus,

there is possibility that JT’s confidential strategies are revealed to competitors if JT

were joint-venture with PT.Astra. For example, HyunDai automobile went into China

by joint venture with Chinese government-owned train company and it went successful

(Lee, 2011).

Also, JT will only implement the operation with the few main products that possibly can

reduce the costs and become increasingly popular. While JT and PT.INKA produce

and assemble those few main products, other non-main products will be sold through

38
export entry mode to cater the niche market. This strategy is to minimize the costs and

to test the market.

In addition, 7 out of 10 joint ventures have been found to fall short of expectations or

be disbanded (Yankelovich et al, 1984). It is crucial to seek and have decentralized

operation with another entities for the case of dissolution with the partners.

Exit Strategies

Expanding the venture and operating the business is usually considered as the priority

for most of the organizations but if the organization are planning to involve outside

invests, the exit strategy for the venture should be built prior to invest (Vinturella &

Erickson, 2003).

Strategic reallocation

When the organization faces the difficulties in the venture the initial responses might

be reducing variable costs such as labor, inventory or maintenance. The strategic

reallocation could be done by involving switching production between plants to protect

the output levels of the more efficient plants, maintaining production of the product

within the firm at the same level but at lower cost and, in this way, protecting net

revenue (Clark & Wrigley, 1997). However, it is suggested that the organization should

hold limited number of plants to implement this strategy as the switching the strategic

allocation could affect even negatively by losing the brand equity and reliability (Clark,

& Wrigley, 1997). JT can use this strategic reallocation as a first exit strategy when

39
they face the financial difficulties in Indonesia. Switch the strategic alliance from

PT.INKA (Industrial Kereta Api) to other possible company that has more cheaper

labor cost with same capabilities will help JT to maintain their core competency

(premium quality) and aim for cost leader ship as well.

Restructure

Another strategy for exit in venture is to reducing production and closing permanently

certain plants within the firm rather than reallocating, which aims for another chance

(Clark & Wrigley, 1997). To implement this strategy the organization has to confront

the burdens of exit sunk costs. The organization should try to minimize the closing

costs, especially, financial obligations with the real estate, plants and employees, by

attempting to shift those costs to other parties (Mitchell & Mulherin, 1996)

40
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49
Appendix 1

GDP Growth Rate. By IMF

GDP and Population. By IMF

50
Main Commodity Groups of Import. By BPS.

51