An Australian company opening an independent clothing company in Indonesia
Introduction: I was asked by the management of the company to represent the report on the proposal of opening the new clothing company in Indonesia. This report covers some main and vital issues to be considered before making any decision.
Report:
Financial Risks in Indonesia: Investments in Indonesia will bring a higher rate of financial risks as compared to any other developed country such as China or Japan. The reasons behind this financial risk are the inflation rate, level of corruption and the shortage of required labor. Opening of an independent clothing company in Indonesia will be required to have a massive amount of money to sustain such inflation rates and financial risks. Therefore, it is recommended to issue higher budgets for the independent clothing company in Indonesia. Indonesia falls in the 4th category of Country Risk Tier (CTR) which indicates that if the company decides to develop an independent clothing company in Indonesia, then it will be very difficult for them to generate the funds or cash from the shareholders. Ultimately the company will consider the loan arrangement and will suffer a huge expense in the form of interest payments. (Indonesia-investments.com, 2014)
Political and Law Issues: Before the development of the independent company in the Indonesia, it is very important to complete the legal requirements of the Indonesia. The legal requirements such as the hiring of a local lawyer and a chartered accountant are most common legal requirements for listing on the stock exchange these days. Furthermore, management must consult or hire the lawyers from Indonesia to resolve and guide the management in case of any unfamiliar legal issue. The corruption level in Indonesia is not ideal for businesses. However, the corruption rates are reduced from the year 2002 but it is highly probable that the independent company will face or forced to perform many illegal and unethical actions such as bribes, to get clearance or business certificates. There are many other issues to consider which can reduce the profitability of the company such as acquisition of land and electric problems of Indonesia which are increasing. (Indonesia-investments.com, 2014)
Cultural Differences: Australia and Indonesia are two different countries on the basis of culture and heritage. To develop a clothing company in Indonesia, it is very important to adopt the culture of Indonesia to gain required profits. The culture of Indonesia includes the dressing sense of their people. Therefore, it is very important for the management of the company to make sure what type of designs or a raw material they are going to produce to generate profits. As compared to the Australia, the buying power of Indonesians is much lower and high price and high quality products may face failure in the markets. (Indonesia-investments.com, 2014)
Tax Issues: Tax system in Indonesia is very simple for the corporate sector like any other country. The tax rates and bands are defined clearly in the taxation system. However, the only difference in the taxation system is the usage of financial statement in a different ways as compared to the Australian Tax system. Tax System must not be a concern for the management of the company because the rates of corporate tax are almost same in every country which starts from 30% and goes to 50% in case of huge profits. (Pajak.net, 2014)
Corporate Governance: Indonesia has their corporate governance acts, as compared to the companies act in Australia. Indonesian corporate laws are different from the Australian acts; however, it is important to state that the purpose of both acts is to make sure that the companies are not making frauds with the government and the shareholders. In the implementation of the independent company for making clothes, management must establish the company in such a way that it covers all the required corporate acts. Similarly, the auditing requirements and the hierarchy of the company such as the number of directors, registrar, internal auditors and non executive directors are the part of Corporate Governance. (Ina.or.id, 2014)
Global Business Issues: Global business Issues plays an important role in the investment from the other countries. The investors are keenly interested in the returns and the safety of their funds. In these circumstances, the behavior of governments is the main signal to consider the global business trends. In case of Indonesia, the behavior of government has changed since 2004 and they are interested in getting foreign investments. In these circumstances, the management can explore the markets of Indonesia by implementing their own business tactics. One more important signal from the government of Indonesia is that they are also allowing the trend changing products because, like many third world countries, Indonesia is also not discovered 100%, by the multinational countries. Therefore, it is the right time to invest in the progressing market of Indonesia to capitalize most of the market for the future profits. Another important thing to consider is that the location of Indonesia is very important because it is in the middle of 50% population on the planet. Indonesia is close to China, India and Malaysia. In the future, management can enhance their business in these larger markets also. (Birdman, 2014)
Recommendations: To minimize the financial risk for the company, it is advised to the management to consider the child or associate clothing company in Indonesia as compare to the independent clothing company. This tactic from the management will reduce the financial risk by eliminating the factor of the loan arrangements if the company fails in generating cash from right issue. Moreover, the reputation of a multinational company is better than the independent company and it will assist the child company in gaining good stock exchange results. However, in case of the independent clothing company, it is recommended to announce enough funds for the independent company to avoid any type of gearing problems. (wiseGEEK, 2014)
It is recommended to make a merger or joint venture with good reputed local cloth making company to minimize the chances of government influences. By investing heavily in the local company, Australian company can obtain a large number of shareholding in the company. This tactic of the management can reduce the extra expenses of bearing legal and development costs. Moreover, the experience of working and investing in the Indonesian clothing company can be used to enhance the clothing business in the future. Another advantage of making a joint venture is that it will minimize the expense of hiring and training the local employees and workers.
It is recommended to hire the local fashion designers who have graduated from the Indonesian universities to give ideas regarding the fashion and trend of Indonesian people. Hiring of few fashion experts will not create a huge expense to the company. However, it will certainly assist in maximizing the profitability to the company. Furthermore, it is highly recommended to not produce the products which do not match the taste and trend of the Indonesian people to avoid financial losses.
For taxation issues, it is highly recommended for the management to hire the local accountancy firm or the tax firm to file and pay the taxes at the right time. The records of the company must be kept at the safe place to utilize in the future. Moreover, the tax consultants must be consulted to reduce the tax payments by using the tax saving techniques known as smart taxation. However, the first responsibility of the management must be to pay taxes on time to avoid legal issues. Hiring of specialized tax firm can manage all the tax issues of the company.
It is recommended for the management that they must hire the local accountancy firm to take care of the accounting records and legal requirements for the companies act in Indonesia. By hiring the professionals, it is highly probable that the accounting laws and financial laws will be performed accordingly. Moreover, management of the company must hire the reputed and recommended audit firm and perform audits on the annual basis. By implementing Corporate Governance according to the Indonesian act, will increase the trust of shareholders and assist in raising funds from the right issues.
It is recommended that the management must consider the changing behavior and intentions of the government of Indonesia and penetrate in the market of Indonesia as soon as possible. The reducing rates of corruptions in Indonesia and increasing rates of progress are the signals of the profitable markets. The independent company can generate the profits in Indonesia if they invest in marketing their products.
References
Birdman, H. 2014. Global Business and Cultural Issues | eHow. [online] Available at:
http://www.ehow.com/info_8151848_global-business-cultural-issues.html [Accessed: 31 Jan 2014].
Ina.or.id. 2014. Corporate Governance and Sustainability. [online] Available at:
http://www.ina.or.id/interest/corporate-governance [Accessed: 31 Jan 2014].
Indonesia-investments.com. 2014. Governance in Indonesia - Indonesian Bureaucracy – Analysis
| Indonesia Investments. [online] Available at: http://www.indonesia-investments.com/doing-business/risks/governance/item242 [Accessed: 31 Jan 2014].
Indonesia-investments.com. 2014. Ethnic & Religious Violence | Indonesia Investments. [online]
Available at: http://www.indonesia-investments.com/doing-business/risks/ethnic-religious-violence/item244 [Accessed: 31 Jan 2014].
Indonesia-investments.com. 2014. Infrastructure Development in Indonesia - Analysis |
Indonesia Investments. [online] Available at: http://www.indonesia-investments.com/doing-business/risks/infrastructure/item381 [Accessed: 31 Jan 2014].
Pajak.net. 2014. Introduction to the Indonesian Tax System. [online] Available at:
http://pajak.net/info/indonesian_tax_system.htm [Accessed: 31 Jan 2014].
wiseGEEK. 2014. What is Financial Risk?. [online] Available at:
http://www.wisegeek.com/what-is-financial-risk.htm [Accessed: 31 Jan 2014].
