MGM5966

International business theory and

practice

Assignment 2: Group Assignment

Mohammed Asimuddin 26615665

Saima Azad Karbelkar 30006236
Ng Yi Xiang 31435769
Cheah Kar Yean 31060536
Tan Jie En 28431502
Executive Summary
This report discusses the case of GMF Aero Asia and its expansion into the Middle East by
integrating appurtenant international business theories. GMF since its initiation in 1949 has
come a long way, possessing several competitive advantages, therefore this report shall
evaluate GMF’s major competitive advantages ranging from, access to low cost labor, tangible
and intangible resources such as largest narrow body hangar and certifications from over 25
countries globally. Moreover, GMF in an attempt to internationalize, aims to enter the Middle
Eastern market through a joint venture with a local partner, as the Maintenance, Repair and
Overhaul (MRO) sector remains underdeveloped and fast-growing sector in the Middle East.
Hence, this report shall discuss GMF’s decision to opt for a joint venture to enter the Middle
East, and additionally, discuss the opportunities, challenges and sustainability issues GMF is
likely to face in the Middle East.

Introduction: Company Overview

GMF Aero Asia in 1949, then a subsidiary of Indonesia’s national airline Garuda, started out
as a technical division of “Garuda Indonesia Airlines” with operations based in multiple
airports in Jakarta. By 1984, GMF rebranded itself as the “Maintenance and Engineering”
(M&E) division, eventually emerging into an independent business unit in 2002 (GMF Aero
Asia, 2019). Over the past several decades, GMF has transformed into a strategic business unit,
handling all of Garuda Indonesia’s fleet maintenance activities.

GMF since 2010, has famously been certified by Airbus as a maintenance training center for
A320 narrow body aircrafts and jets, only second to “Singapore Airlines” who have been
granted this certification in the Southeast Asian region (Mufti, 2019). Moreover, with various
internationally recognized certifications such as ones from “Federal Aviation Administration”
(FAA) and “European Safety Agency” (EASA), GMF is now considered to be one of the
biggest aircraft maintenance repair and overhaul (MRO) companies globally (Saragih &
Sinaga, 2019).

In late 2017, GMF held an Initial Public Offering (IPO) in order to generate funds majorly
needed for future expansion plans. In a strategic attempt to further diversify and
internationalize by reducing its reliance on its revenues generated via Garuda Indonesia
(Nangoy, 2017), GMF aimed to target the promising Middle Eastern market. Therefore, this
report shall discuss GMF’s expansion into the Middle East, by integrating relevant international
business theories.

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Competitive Advantages of GMF Aero Asia

Competitive advantage is largely achieved when an organization acquires or develops

distinctive assets and attributes that are difficult for competitors to imitate. These attributes are
typically firm specific and are derived from cost, size and innovation. Michael Porter explained
that although a firm can have innumerable strengths and weaknesses in contrast to its
competitors, there are two rudimentary types of competitive advantages a firm can possess,
namely low cost and differentiation (Porter, 1985). We can assess GMF’s competitive
advantages by considering the cost and differentiation advantages.

Cost Advantage

Cost advantage can be achieved when a firm is able to be the low-cost producer in its
industry. Such that, GMF Aero Asia being situated in Indonesia allows them to utilize the
several demographic advantages at its disposal such as a young workforce resulting from a
humongous population of 261 million (Ono, 2018). Moreover, in accordance with a survey
conducted by the “Japanese External Trade Organizations”, average salary of engineers in
Indonesia is one sixth of their counterparts in Singapore. Correspondingly, aircraft maintenance
industry being an extremely labor intensive business, GMF widely benefits by the low cost
labor in Indonesia giving the company a competitive advantage over Singapore and other MRO
competitors globally (Silviana & Setboonsarng, 2017).

Besides, a major hub for air transit and home to “super connectors” like Emirates has potential
markets such as the full and partial repairs, largely untapped due to the lack of facilities and
high labor cost (Saragih & Sinaga, 2019). Similarly, as GMF aggressively works towards
expanding into the Middle East, Iwan (CEO of GMF Aero Asia) concluded that GMF would
hire engineers and technicians from Indonesia, Pakistan and Bangladesh, in order to keep the
labor cost low and maintain a competitive advantage over its competitors (Silviana &
Setboonsarng, 2017).

Differentiation Advantage

Second basic competitive advantage identified by porter was the differentiation

advantage. This is when a firm can uniquely position itself with one or more attributes that are
widely valued and deliver benefits that create superior value for its customers and generate
improved profits for itself when compared with the services provided by a competitor (Porter,
1985). Additionally, to successfully achieve differentiation advantage, firms must utilize

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resources and capabilities to create a competitive advantage eventually resulting in value
creation. Such that, a “resource-based view” of GMF would give a clear picture of GMF’s
competitive advantage by considering resources (i.e. tangible, intangible and human resources)
and capabilities that are superior to those of its competitors (Barney, 1991). Few major
resources and capabilities are as follows.

GMF is only second to Singapore airlines in Southeast Asia that has been certified by Airbus
as a maintenance training center for narrow body aircrafts and jets (Mufti, 2019). In addition,
with safety and airworthiness certification from 25 countries globally, GMF has also been
certified internationally by the likes of "Federal Aviation Administration” (FAA) and
“European Aviation Safety Agency” (EASA) (GMF, 2018). Moreover, GMF in the past decade
has established reputational resources via strong relationships within the airline industry by
serving several major airlines domestically and internationally such as Garuda, Air Asia and
Indigo (GMF, 2018).Lastly, GMF owns several tangible resources such as the largest hangar
for narrow body aircrafts and several other state of the art international standard maintenance
hangars for wide and narrow body aircrafts (GMF, 2018). These tangible and intangible
resources have allowed GMF to uniquely position itself in the MRO industry.

Low Cost Carriers (LCC) to keep the costs low are generally unable to conduct complete
maintenance and are forced to outsource maintenance work to independent service providers.
Hence, GMF with major capabilities and resources, unlike other competitors in Indonesia such
as Technic and FL Technic who do not possess the competitive strength, have the ability to
maximize usage of its hangars and labors when required (Saragih & Sinaga, 2019). Hence,
GMF is one of the few service providers in the industry that possess competitive advantage in
terms of tangible, intangible and human resources eventually resulting in value creation.

Opportunities and Challenges

Opportunities for GMF in the Middle East
The Maintenance, Repair and Overhaul (MRO) sector remains as an immature and fast-
growing sector in the middle east, GMF can tap into the opportunities presented and expand its
reach by internationalization (Morrison, 2010). The internationalization process demonstrates
the pathway taken by a firm from localization to an International level (Jan & Jan-Erik, 2009).

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As pointed out by Iwan, CEO of GMF, the middle eastern region acts as a hub for air transit
and lacks basic amenities of maintenance, full and partial repairs due to extravagant labor costs
(Sarageh & Sinaga, 2019). According to the Boeing press release, the forecast for the aviation
industry was $745 Billion which included the demand for aircrafts to be doubled and hence the
need for aviation services like “... maintenance and engineering services, and aircraft
modification.” (“What’s going on”, 2019). Additionally, there is a forecasted prediction of the
MRO industry demand doubling in the next ten years, it is expected to reach $16.5 billion by
2029 in the gulf region (“MRO middle east”, 2020).

In the United Arab Emirates, one presenting opportunity lies within the new upcoming airport
developments in places like Abu Dhabi and Dubai, in which the major key players like Emirates
have begun outsourcing MRO facilities to third parties (Morrison, 2010). This presents a
suitable ground for GMF to take grasp of the underlying opportunity and gain market share.
Furthermore, by establishing a market share in the middle east, GMF can gain a window into
the neighboring lucrative markets such as North Africa and Europe.

Prospective Challenges for GMF in the Middle East

While trying to expand globally, there are a set of challenges to navigate when setting
foot into unfamiliar waters. GMF is likely to face a few hurdles while stepping into the middle
eastern base. One of the most striking hindrances to consider are the predominant market
players such as “Emirates Engineering, Etihad Engineering and Qatar Airways’ Aircraft
Maintenance Facility” that carry a strong positioning in the industry by establishing their own
large scale MRO facilities in strategic regions across the middle east (Sarageh & Sinaga, 2019).
This can then be explained by the liability of outsidership which elaborates the undue
disadvantage an outsider has due to the lack of networking that is significant for business
opportunities (Karimibabak & Sinclair, 2011). The insights shared amongst this network is
deeply embedded in its operations which may not be apparent but is considered highly relevant
(Karimibabak & Sinclair, 2011). It is further indicated by Karimibabak & Sinclair (2011) that
“by having a wide network with other units or entities, a company can be considered to be an
insider and if it doesn’t it is an outsider”. The new entrant could find it strenuous to establish
trust, commitment and knowledge to commit to the process of internationalization and hence
suffer from the liability of outsidership and consequently the liability of foreignness
(Karimibabak & Sinclair, 2011). It would therefore prove cumbersome for GMF to gain a

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sound understanding of the language, laws and culture in order to construct a strong presence
among the major’s actors already well established among the region.

Another notable challenge would be discovering highly skilled labourers among the region and
preserving them (“Aviation MRO”, 2019). According to Rahul Shah, SVP strategic growth and
business development of AAR corp UAE, there is a shortage of personnel of the right skills as
most of the skillful workers are touching their retirement age hence creating a vast competition
(“Aviation MRO”, 2019). There seems to be a deficiency in home grown labourers that results
in international outsourcing which in turn leads to high labor costs amongst the gulf region
(“Aviation MRO”, 2019). This could pose as a challenge for GMF to recruit skilled labourers
already in shortage of demand essential to carry out their operations in the middle east.

One tremendous challenge lies with keeping up with the era of digitalization and the evolution
of modern technology. These include “...aircraft health monitoring systems, predictive
maintenance, “live” maintenance through wearable and mobile technology, composite repair
capabilities, new repair technology, additive manufacturing, artificial intelligence, and drone-
supported maintenance” (Cooper et al., 2018; Oliver Wyman, 2016; Sarageh & Sinaga, 2019).
Although new equipment and machines come with a much more sophisticated system and are
low on maintenance, the problem exists to find the right skilled personnel with well-versed
capabilities (Sivasankaran, A., 2017). Additionally, MROs face fierce competition with
original equipment manufacturers (OEMs) in the aftermarket (Sivasankaran, A., 2017). OEMs
have a distinct advantage over MROs as they remain as the largest customers of used
serviceable material (Sivasankaran, A., 2017). It is therefore necessary for MROs to have a
secure relationship with OEMs in order to survive and flourish. This could prove to be a great
challenge for GMF to overcome in order to meet the demands of the new and updated
technology by heavily investing and to combat the company’s reluctance to remold in a foreign
market such as the middle east (Sivasankaran, A., 2017).

Joint Venture as an Entry Mode

Researchers over the years have long regarded that entry modes have largely been influenced
by various factors such as resource commitment, risk exposure, profit and control (Pan & Tse,
2000). Moreover, past studies have concluded that firm specific, industry specific and country
specific factors have majorly influenced the choice of entry modes (Erramilli & Rao, 1993).
Intensive researched conducted by Kumar and Subramaniam (1997) concluded that, modes of

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entry can be divided into two major categories that is equity and non-equity based. A Joint
Venture (JV) is classified to be an equity based entry mode that requires higher levels of control
from firm headquarters with a relatively large financial investment and is also considered as
one of the most vital equity based entry modes. (Pan & Tse, 2000; Dunning & Lundan, 2008).
As suggested by Glaister (2004), firms choose JV as an entry mode as it allows firms to gain
access to resources and markets, accelerating learning and reducing overall costs. To further
discuss and analyze GMF’s decision to enter the United Arab Emirates through a Joint Venture,
institutional and transaction theories can be applied.

Institutional Theory and Transaction Cost Theory

As suggested by North (1990), the institutional theory must be combined with

transaction cost theory as it helps a firm understand how institutions provide a structure in
which transactions occur. Institutional theory acknowledges the contextual elements of the host
country that is built upon several regulatory, normative and cognitive pressures, such
institutions create uncertainty for firms setting foot into unfamiliar waters (Peng, Wang, &
Jiang, 2008; Scott, 2013). Yiu and Makino (2002) suggested that multinational firms are likely
to form JV’s with a local partner when regulative and normative pressures in the host country
are high. Hence, the ultimate driver for MNE’s undertaking a JV is to gain legitimacy and
acceptance in the host market by confirming to the host country institution pressure with the
help of a local firm. (Brouthers, 2002; Owens, Palmer, & Zueva-Owens, 2013).

In contrast, the transaction cost theory explains that the cost of finding, negotiating and
monitoring the actions of potential partners influence entry mode choice (Erramilli & Rao,
1993). The transaction theory suggests that a joint venture is preferred over other modes of
entry such as an establishment of a new venture, due to a few major reasons. Firstly, partnering
firms have a mutual need to gain access to complementary assets that cannot be acquired
through market transactions. Second, acquisition of the required complementary assets owned
by other entities can be expensive and difficult due to the tacit nature (Yiu & Makino, 2002).
Cannabal and White (2008), concluded that this theory is important as the costs associated in
entry mode decisions can greatly influence the performance and survival of the MNE’s in a
foreign market.

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 Application of Theories

When a firm decides to expand into foreign markets, costs and uncertainties would
undoubtedly emerge from the international expansion process. These additional costs can be
conceptualized as the ‘liability of foreignness’ (Nachum, 2015). This liability exists because of
the factors, such as the lack of local knowledge and business know-how, that are hindering
information flow between the host country and the MNE (Hilmersson & Jansson, 2012). This
institutional distance thereby increases the likelihood of risks and uncertainties emerging in
foreign operations, which ultimately leads to a rise in the firm’s overall costs – the greater the
distance, greater the costs.

From the institutional theory perspective, even though UAE and Indonesia are considered as
emerging countries, that does not necessarily mean that the institutional distance between both
nations is nonexistent. This is where conforming to foreign institutions is necessary, in
exchange for MNE legitimacy (Kostova & Zaheer, 1999). A JV allows GMF to mitigate threats
and gain market legitimacy, by mitigating foreignness and simultaneously lessen the regulatory
requirements by partnering with a local partner. GMF would largely benefit from local
partners’ firsthand knowledge about the business environment in UAE and could acquire skills
to deal with the government and other formal and informal institutions (Denk, Kaufmann, &
Roesch, 2012; Owens et al., 2013). Moreover, language barriers would be a major difficulty in
the Middle East, therefore, a local partner would play a major role during establishment and
day to day business activities (Hilmersson & Jansson, 2012; Yiu & Makino, 2002).

From the transaction costs theory perspective, acquiring business operation and regulatory
knowledge and skills from local JV partners undoubtedly minimizes all additional costs. As
explained by Hennart (1991), the tacit nature of these institutional knowledge results in high
transaction costs – which is why JVs are preferred because it promotes knowledge sharing
between the partners in a cost-effective manner. Lastly, by partnering with local firms, GMF
would acquire the required resources and entry to an existing customer base, indirectly
reducing overall entry costs (Faulkner & de Rond, 2000).

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Sustainability Issues

The drive towards globalization and the rapid growth of the Aviation industry makes an
undoubted impact on the maintenance, repair and overhaul sector (MRO) which then poses
sustainability issues with it. Sustainability is the ability to meet the current demands while
ensuring that the generation ahead will also be able to meet their demands (Peng & Klaus,
2011). The Indonesian aviation industry is expected to expand with the rising of low-cost
carriers in Asia where GMF plans to have more hangers to accommodate the aircraft commonly
used by low-cost carriers (Sarageh & Sinaga, 2019). One of the difficulties lies in the need for
energy efficiency in the light of an increase in climate change and consequently the need for
reduced usage of high energy sources. The need for reduction of CO2 emissions and renewable
energy could mean GMF would have to rebuild and structure their existing infrastructure to
accommodate and comply with this change (Uhlmann, Bilz & Baumgarten, 2013).
Furthermore, the scarcity of resources with materials used in the MRO industry and fuels can
be an issue towards maintaining a sustainable framework in Indonesia (Uhlmann, Bilz &
Baumgarten, 2013).

While tapping into the Middle eastern territory, GMF is yet likely to further encounter
sustainability hindrances. As people in the middle eastern region become more aware of the
need to address the issues of sustainability, there comes an added pressure for GMF to comply.
UAE is actively working to fight climate change and achieve the United Nations Sustainable
Development Goals 2030 (Tayer 2018). Besides that, Dubai’s Supreme Council of Energy has
already implemented a plan to cut down the greenhouse gases emissions by 16 per cent (11
million tonnes) by 2021 (Tayer 2018). However, the aviation industry experts in UAE predict
that the industry will be growing at a rate of 5.1% annually where this is due to the emergence
of low-cost carriers such as Air Arabia Abu Dhabi and Wizz Air Abu Dhabi (John, 2019).With
this comes the heavy regulation mostly done by the governments imposing limitations on low
cost carriers and their services which will require GMF to adhere to the regulations and hence
result in a high cost system (Ringbeck, Majdalani & Ismail, 2016). As suggested by Dupont “it
is harder for independents to survive”, in an industry with already experienced key players
(‘Grappling with change”, 2018). GMF would need to adopt new strategies to become more
“ecofriendly” and in turn would need to reestablish its practices with strategic planning and a
higher investment (Mazza, 2018).

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Conclusion

To conclude, with the extensive analysis of GMF conducted by integrating relevant business
theories, this report discussed GMF’s expansion into the middle east. There are several
competitive advantages benefitting GMF such as low-cost labor, important resources
including; largest hangar for narrow body aircrafts and several other hangars spread across
Indonesia, and most importantly, certifications from countries globally. These factors have
played a major role in GMF’s success globally in the recent past.

Moreover, opportunities, challenges and sustainability issues GMF might face were identified
and analyzed comprehensively. Lastly, GMF’s decision to enter the middle east via joint
venture with a local firm in UAE was analyzed by integrating relevant international business
theories, leading to a conclusion that GMF has largely benefitted by opting for a Joint venture
as it has resulted in lowered transactional costs and institutional benefits. GMF’s liability of
foreignness will significantly be reduced as the local partner would ease its entry into the
country with support in regulatory affairs and adjusting to country specific cultures and norms.

Total Number of Words: 3280

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