As one Asian economy after another appeared to be melting down in 1998, one of the first to fall, and the hardest hit, was Indonesia, the worlds fourth largest country. The result was devastating for the people in Indonesia as the rupiah lost 75 percent of its value over a period of a few months. Inflation seemed to be out of hand, and there was considerable unrest and rioting. It wasnt long before President Suharto was forced to resign.
Foreign companies operating in Indonesia were also hit hard; their managers struggled with how to respond to the events and how much economic risk to take for the potential long-term rewards of a vast market opening up to foreigners. Japanese and British companies have an even greater investment to date in Indonesia than do American companies, which alone have invested some $9 billion there. Lured by abundant natural resources, companies such as Goodyear Tire & Rubber have long had a presence in Indonesia. Unocal has been there for 30 years and plans to stay. Barry Lane, of Unocal notes that major infrastructure projects are so integrated into a country its not like we could pack u5 our bags and leave at any moment. Interdependence of country and foreign investment is further evidenced by Freeport McMoRan, Inc., which mines copper, gold, and silver in the Irian Jaya province; that region is the companys entire mining resource, and the company is the largest corporate taxpayer for Indonesia.
One of the managers caught in the downdraft was John Vondras, U.S. Wests top manager in Indonesia, in charge of running a 500,000-line telephone system in Indonesia. His problems were many: as a result of the devaluation of the rupiah, the company was losing a great deal in dollar terms, even though the local revenues in rupiahs were up 26 percent. In addition, his joint venture has to repay a $615 million loan in dollars, though it earns revenues in rupiahs. In one month, says Vondras, you see your net income wiped Out before your eyes.58
A number of companies, such as a KFC franchise, were in partnership with a member of the Suharto family, often the only entry mode in the past for foreign firms trying to gain a foothold in Indonesia. Other companies, such as General Motors, have been able to get out of this relationship. GM, which has been making cars in Indonesia since 1994, was able to buy out its Indonesian partner, a Suharto half-brother, in 1997. While the local partner has since gone bankrupt-not able to withstand the Asian economic crisis-GM has been able to keep afloat. However, GM cars lost two-thirds of their dollar value within a few days. GM now makes monthly price revisions in anticipation of currency exchange fluctuations. Other strategies to combat the problem have been to increase the GM cars local content in order to take advantage of lower local costs. Bill Botwick, president of GMs Indonesian operation, says he is hanging in there for the long run because they expect to have a good market share.
As the IMF pressures the Indonesian government to privatize state-owned companies in the banking, telecommunications, mining, steel, shipbuilding, and aerospace sectors, investment opportunities will become available and help to reverse the economic decline. Meanwhile foreign managers there assess their exposure to continued economic risk compared to the potential long-term market opportunities.
Comparative Global Managers Respond to Economic Slide in Indonesia : Economic article from Global Management Catagory Comparative Global Managers Respond to Economic Slide in Indonesia
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