ia EPMAL institut PenGeMBaNGAN MANAJEMEN INDONESIA YTD. NATRA RAYA (A) In Decenber 1990 Hr. Richard Kahler, Managing Director of P. T. Natra Raya (PINR), contemplated some’ najor decisions. PTNR, producer of caterpillar earth noving equipment near Jakarta, Indonesia, vas experiencing the highest sales in company history wath projections of further crowth. Sitting before hin was an internal Task Force Report recommending a $6.7 million plant and capital eqipnent investment project =o increase domestic value added over a three year period. ‘Two critical aacisions were pending: => whether to go shead with thie investment, even though it represented a significant. breck fron PTNR’S historical Assenbly-oriented strategy, and = wnether te expend capacity to a level capable of meeting current denand? Description of operations and Market FINN was a joint venture company between Caterpillar inc. (808), the wor1a’S leaaing manuraccurer of earthneving equipnenc, and $7. Trakinde Usama (208). Trakindo also wes the sole distributor for all Caterpillar products in Indonesia. of rakindo’s unit sales, zoughly cne-haif vere produced by PTNR} the eneinder coaprised ‘sorted, finisned pracucts trom Caterpillar facilities outside rnusnesta PINE Was essentially an ascembly operation (with little on-site fabrication) uhich eed componente purchased domestically Or imported. The chict source of imports was Caverpillar’s Joint venture in Japan; Catespillar brazil was a secondary source. Its product line consistal of small to medium-sized track-type tors, wheel loaders, notor graders, hysraulle excavators and generator sets. (pxn:bit 1 provices additional information about @ PTNR product line.) The List price for Caterpillar earthmoving Winile on conteace sion eather than to an semlnistracive soe Ron hirick, Universisy of Mes Seon Copyright 1992 by revitrelatively expensive by packing and shipping costs), and to demonstrate to the government that PINR supported local Gevelopnent. Maintaining a positive government attitude toward the company and tha emerging local industry was important. AS of Deconber 1990, about 20 percent of the total value of PINR/© components were dourced domestically (either through in— house production cr fron suppliers). The remaining 80 percent consisted of imported components, primarily from Caterpillar’s subsidiary in Japan. 2 ANY ‘The Task Force Report In late 1989 PTWR had decided that it should re-evaluate its gtrategy to remain primarily an assembly company, recognizing the increasing economic and political pressures to increase domestic value added. A multi-disciplinary, internal company Task Force was organized to evaluate what components could ba manufactured locally by the company, to determine the investment required to undertake such an initiative, ana to evaluate the return that could be expected on additional accetc that might be deployed. ‘The Task Force's conclusion vas that import substitution could be done in an economically feasible way. Indeed its Report argued that significant savings were possible by creating a fabrication capability at PINR. Many components imported by PINK had to be loaded “into "skidpacks" before being shipped from Caterpillar’e subsidiary in Japan. This inefficient method of operation involved Significant packaging and shipping costs which could be elininated as local content was edded. And, of course, as import needs declined so would duties pala ‘The Task Force recommended a two-year, $6.7 million investment in buflaings ana equipment that wouls ailov PINR to eubetitute local for inported content. PINR vould purchase rav materials (such as steel), cut, bend, roll, and wela it to produce bulky Components that currently vere costly to import. The capability to Produce these components would represent a significant shift from PINR’s mininal investment, assenbly-only modus operandi toward becoming a much broader-based producer. The new fabrication facilities potentially would increase PINR’s local content Significantly. The investment also vas oxpacted to yield a cost reduction of $2 million each year at a cales ievel of approximately 650 units per year. Higher or lower sales, or shifts in the "mix" ef products sold, vould influence the exact payback. Market Denane During the last year a booming Indonesian econony and a streng export market for the logging had led to a surge in unit soles at PINR (see Exhibit 3). Sales hed increased from an average of 43 units per month during 1989 to a level of 62 units per month during September through Novenber of 1990. PINR sought to keep up with aCURRENT BUSINESS ENVIRONMENT resuES ‘Trade Liberalization and Conpetiter actions As a mejor cil-exporting nation, indonesia hag been hit hard by the 50 percent drop in world oil prices in 1986. The governnent had responded to this crisis by embarking on a policy of deregulation and trade liberalization designed, over time, to make he non-oil producing sectors of the economy more efficient and internationally competitive. ‘There was the distinct possibility that at some point in the future the earth moving equipment industry would be affected. Specifically, the danger existed that tarirf protection for carth-noving equipment would be eliminated oF Substantially reduced. There also vere rumors that the government was considering allowing a third multi-national entrant into the industry. In addition, Komatsu was thought to be considering a major increase in its investment in Indonesia. ‘The Macroeconomy Bocause of the nature of PTNR’s business, the health of the Indonesian economy was a very important factor in determining success. Over the last couple of decades the economy had average. Feal economic growth rates of 5-6 percent a year. Under the ispetus cf a major devaluation of the rupiah against the U.S. dollar in 1986, the non-oil export inaustry had ricen substantially. further impetus to aonestic demand was added by the financial deregulation of 1988 which lad a rapid eurga in credie availability and liquidity. In particular, the money supply nad expanded very rapidly, reaching annualized growth rates in excess ef 30 percent during i989 and i990. All this stimulus had led to Strong scononic growth over the last two years. (See Exhibit « for a summary of Key macroeconomic indicators.) There also had been an geceleration in the overall inflation rate, and even more rapid increases in the price of tangiple aseets, such ac real estate, Most recently the central bank had embarked on a tight money policy to sharply reduce money supply growth rates and to control this inflationary surge. In late October, the government announced Ehat one of its prime solicy objectives was to hold inflation Selew 10% for 1990 and to reduce it to st in 1991. (At the tine of this announcenent, the nine-month inflation rate was 9.1%, ie. prices at the end of Septenser were 9.1% higher than they had been at the beginning of January 1990.) ‘he governnent also was concerned about the mounting size of Indonesia’s external debt, estinated to be in excess of $50 Billion. The growth in GNP in recent years had led to a cubstantial increase in imports, vith the biggest inerease being in capital equipment. Despite strong growth in non-oil and natural gas exports since i885 devaluation, Indonesia’s trade and current account - Position had deteriorated.EXHIBIT 1 PT. Natra Raya Caterpillar Product LineEXHIBIT 3 P. T. NARA RAYA VEHICLE SALES DATE, TOTAL UNIT SALES 1986 ey 1987 295 | 1988 50s. | 1989 525 JANUARY 1990. 74 [ FEBRUARY 3990 40 MARCH 1990 45 APRIL 1990 35 MAY 1990 44 JUNE 1990 48 JULY 1990 4a AUGUST 1990 53 SEPTEMBER 1990 70 OCTOBER 1990 47 NOVEMBER 1990 6s