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Mode of Entry, Location Decision and Cultural

Management for “Catexhaust” for its East Asia and
Pacific Region Operations.

Abstract
The essay looks at the benefits which “Catexhaust GMBH”, Germany will gain from having its
operations in South East Asia.It examines the various modes of entry available and recommends the
most suitable one It considers the advantages and disadvantages offered by Indonesia and Thailand as
countries of investment and further on this analysis recommends the one which suits it the most. Further
it states the key cultural differences of the chosen country which “Catexhaust GMBH” needs to consider
when it starts its operation in the chosen country.

Course 882N1 Autumn 2010

International Accounting and Financial Reporting for non-financial managers
Tutor: Mr. Christopher Stratford

Submitted by
Reg. no:66701
M.Sc International Marketing
Business, Management & Economics School
University of Sussex
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1.1Introduction
Catexhaust GMBH in Munich , Germany is the no.2 supplier of the VW, Audi, Skoda &
SEAT(VAG) in Europe. VAG had set up in manufacturing plant outside Bangkok as it
wanted to gain a share in the growing Asian market and to compete with other car
manufacturers like Toyota, GM, Ford who have got a very strong manufacturing operations
in the South East Asia.VAG has been able to cut down its manufacturing costs cost which
are quite high in Europe and gain access to Asian markets. It also has a plant outside
Jarkata though it is very small as compared to the Bangkok one.Besides importing catalytic
exhausts from “Catexhaust GMBH” and “Gloexhaust GMBH” (no 1 supplier of catalytic
exhausts) VAG also buys from Bangkok based manufacturer, though for low cost vehicles
only. There is also a growing fear that “Gloexhaust “may open a plant in Bangkok which
may make VAG rethinks its export operations and may source the “Gloexhaust Asia”only.
Besides this apparent threat from “Gloexhaust” having a presence in Thailand would
result in following benefits to “Catexhaust”.

• Reduction in manufacturing costs due to availability of cheap labour.

• Reduction in time period between orders and delivery.
• Huge savings on the transportation costs.
• Risks which exist at present due to chances of import policy changes like
increase in the import duties, imposition of quotas and restrictions by
Thailand/Indonesia will be eliminated.
• It will help in spreading the economic and currency risks.
• As cost of manufacturing is less in Asian countries exports from the location to
the rest of the world would be cheaper.
• New opportunities of supplying to car manufacturers in countries like China,
India Korea and Thailand.

2.1Mode of Operation
“Catexhaust” may enter the Asian market (Thailand) through various methods each of which
has certain and advantages and disadvantages

2.1.1 Exports (Agents, Distributors, Sales force)

Exports are generally the first step towards entry into new markets and provide
an overall view to the exporter about the market demands, economy and
operational set up of the country to which products are exported.

This mode of operation is assumed to be already being used by “Catexhaust”.

2.1.2 Contractual (Franchising and Licensing)

Licensing involves transfer of products/product technology to the Licensee to
produce while Franchising involves the transfer of the right to use brand name for a
certain royalty fees (Hill, 2008).While Franchising is good for service industry,
Licensing works well for manufacturing industry.

All the information which has been both underlined and italicized is assumed and has been highlighted
in yellow.
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Advantages
• Licensing/Franchising are low capex(personnel and capital) and the easiest
modes of expansion to gain global market.
• Scale of commitment low.
• Generally used when entry restrictions exist in foreign markets.
• Used by firms possessing some intangible assets which have business
implications but do not want to develop the applications.

Disadvantages
• Less control as the franchisee holds the key to the success of the system.
• Successful only when good synergy exists between franchiser and the franchisee.
• Limited control over overall strategy, manufacturing quality of goods and
marketing.
• Every chance that franchisee may start supplying directly to other manufacturers
after acquiring the required technology.

As there is very little control over manufacturing and markets and there is a risk
that in future licensee may supply the catalytic converters directly to car
manufacturers in East Asia and Pacific region due to it having an access to the
technological know how. It does not fit into the long term strategic goal of
“Catexhaust” if it wishes to establish its presence in the East Asian and Pacific
markets.

2.1.3Foreign Direct Investments

a. Strategic Alliances, Joint venture

Strategic alliances and Joint ventures are formed when two partners want to benefit for
each other experience and knowledge. In this type of partnership the local partner seeks
to benefit from the technology of the foreign partner while the foreign partner seeks to
gain knowledge of raw material resources and markets.

Advantages
• Resources shared by both partners, minimizing investment risks.
• Flexible and may latter lead to the acquisition of the local partner by the foreign
investor.

Disadvantages
• The local partner may always feel the pressure of acquisition by the foreign
partner.
• Chances of conflict of interests between the partners.
• Chances of technology leakage as no party had absolute control.

b.Mergers and Acquisitions

‘Mergers as well as acquisitions involve one or many companies purchasing all or part
of another company. A merger is a result of two firms, often of similar size, agreeing to
move ahead and exist as a single new company(Peterson, M.).’ A new company is
generally created and new stocks are issued to be traded and a single administrative
section then manages the new union(Nocke, V. & Yeaple, S.,2007).
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In acquisition generally the larger company takes over the smaller one and become one
entity and the stocks of the larger company are traded. Legally the smaller company
ceases to exist.
Advantages
• Generally a fast process.
• New entity gets country specific knowledge like raw materials and markets if it
is able to hold the on to the original managerial team.
• Risks due to policies of the importing countries, currency fluctuations are
eliminated.
• Desired role in managerial decisions is high.
• Greater control over markets.
• Opportunities for extension.

Disadvantages
• Initial costs are high.
• Post acquisition cost can be high to achieve and organizational fit with relation to
matching the administrative practices, cultural practices and personal
characteristics of the two companies.
• Generally not looked as favorable by the countries where acquisition takes place.

c. Green field Investment

Greenfield investment involves setting up new manufacturing plant.

Advantages
• Greater control over the management of the plant.
• Cultural clashes would be avoided.

Disadvantages
• Needs lots of time and capital to establish a new investment.
• Uncertainty risks are high.
• Chances of making costly mistake due to very little knowledge of markets and
cultures.

A Strategic alliance with the local Thailand based company which also supplies to
VAG Asia should be the preferred mode of investment for “Catexhaust” in
Thailand. The justifications for such a venture are:

• A strategic alliance will be a low risk venture as “Catexhaust” has no

knowledge of the market and the work atmosphere of Thailand.
• An alliance will lead to access to raw material sources market knowledge. It
will involve lesser amount of knowledge about country specific procedures
as these will be handled by the local partner.
• It will be the quickest mode of direct investment in Thailand as compared to
Mergers/Acquisition or Greenfield investment and hence will remove the
chances of “Gloexhaust” (competitor) of gaining access to the market.
• It provides an opportunity for the Acquisition of the partner at the latter
stage.
• Since “Catexhaust” does not have any operation in East Asia and Pacific the
alliance will act as a learning experience before investing directly by means
of Merger/ Acquisition or Greenfield investment.
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3.1Location decision for foreign direction Investment either in Indonesia or

Thailand
Both Indonesia and Thailand are located in East Asia and Pacific region and both of them do
have similar cultures and values. Further both of them belong to lower middle income group of
countries and have a high rate of economic growth but Thailand during the last 12 years has
been a more preferred choice of investment than Indonesia because of the of investment
policies, reduction of business costs through reduction of taxes and investment facilitation
approach. Some of the major differences in the key factors which generally favor investment
and business set up in Thailand when compared with Indonesia are:

3.1.1Economic Conditions (Markets, resources, competiveness)

An over all view of the stability and growth prospects of the markets together with availability
of technical and skilled labor with technology suggest that Thailand to be better place of
investment rather than Indonesia which is obvious with the greater amount of foreign direct
investment FDI( Fig. 1) made in Thailand over the last 7 years. Further look at key factors
related to the growth of economy show an advantage towards investing in Thailand. (Table 1&
Fig. 2)

Figure 1..Source UNCTAD

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Country Indonesia Thailand

GDP growth annually 4.5 -2.3
GNI $US 2230 3760
External Debt % of GNI 2008 30.4 30.4
GDP per capita $ US 2009 2349 3893
Inflation consmer prices % annually 4.6 4.6
Total reserves in gold $ US 2009 66,118,916,966 138,419,000,000
Merchandise trade(% of GDP), 48.8 11.9
Table1.Source UNCTAD
Figure 2.Source World Bank
3.1.2Country policies (Macro policies, private sector, trade and strategy, FDI policies)
A look as the policies and procedures showing that is easier to do a business in Thailand as
compared to Indonesia (Table 2) .Also on the latest report published by the world bank on doing
business Thailand is at 3 rank while Indonesia stood at 19 in the south east Asia and Pacific

Country Indonesia Thailand

Export Documents(no) 5 4
Import Documents(no) 6 3
Lead time to export(days) 2.1 1.6
Lead time to import(days) 5.4 2.6
Total tax rate(% of profits) 37.6 37.2
Corruption index2 111 84
region1.The ranking has been derived as an index average of 9 topics, made up of a variety of
indicators, giving equal weight to each topics.
Table 2.Source World Bank and Transparency International

3.1.3Resources (Human , Infrastructure & Facilities)

A study of the infrastructure like transport, banking facilities, commerce and communication
facilities, capable human resource, literacy level, school colleges, Thailand seems to be a better
location for starting business.(Table 3)

1.Ranking parameters
Country Indonesia Thailand
Overall Rank 19 3
Starting a Business 21 11
Dealing with Construction Permits 12 5
Registering Property 14 2
Getting Credit 15 7
Protecting Investors 7 4
Paying Taxes 24 18
Trading Across Borders 6 3
Enforcing Contracts 21 4
Closing a Business 18 5
Source:World Bank
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Table 3.Source World bank. & CIA World source book.

Although negative GDP growth,(which can be explained to the fact that exports are
merchandise based which have slowed down to economic recession)and political risks,
seem act as a deterrent from investing in Thailand but an overall investment scenario like
ease of doing business, country investment policies, infrastructure like roads , telecom,
banking , human resources, banking and currency etc. still favor that “Catexhaust”
should invest in Thailand rather than Indonesia. Further risk analysis (sovereign risk,
currency risk, banking sector risk, political risk and economic structure)also favours
investment inThailand. Looking at the car sector Thailand is the 15 largest car
manufacturer in the world and has tremendous growth opportunities. Also as assumed
VAG operations are bigger in Bangkok , which it makes greater sense of having a
investment in Thailand .

4.1Cultural Differences considerations

Cultural differences play a significant how should “Catexhaust” operate in Thailand particularly
if the mode of entry is a strategic alliance. The cultural differences between to two countries can
be classified into five different dimensions (Hofstede, 1980, 1991, 1993, cited by Stehle &
Erwee, 2007).Fig.3

4.1.1Power Distance Index While German culture shows a very low power distance index
level it is quite high in Asian societies. In Thailand the persons working in the lower grade in an
organization accept role of higher management in taking decisions and giving directions.. In
Germany subordinates value the notion of being asked for their inputs and suggestions in
decision making process and formation of rules and regulations, particularly the ones which are
going to affect them.Such participatory management is considered inappropriate and even
incompetent by Asian employees (Stehle & Erwee,2007).

4.1.2Individualism Germany society has a strong individualist character wherein everyone is

expected to look after him/herself and his/her immediate family. Hence loyalties are towards
certain values rather than persons. On the collectivist side, like that found in Thailand people are
integrated in strong groups and the decisions taken are collective i.e everyone is consulted
before some decision is taken. So preferences of individual appraisal over team importance do
not fit into Thai working culture.
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4.1.3Masculinity A low index is an indicator that the society is less assertive and competitive.
On the other hand in a highly masculine society greater importance is given to such values and
are considered important. Where masculinity values are high the roles the male and female roles
are well defined within the population. Germany has a high masculinity value which implies
that focus is usually placed on getting job done rather than thinking about emotional and
relationship costs involved. This generally has created an assumption of Germans being too
rude and direct, while high Femininity approach as seen in Thai culture wherein importance is
given to relationship costs also makes them seen as people who avoid issues to the German
society (Brodbeck, Frese and Javidan, 2002).
4.1.4Uncertainty Avoidance Index Though uncertainty avoidance is high in both German and
Thai societies, in Germany it is an elaborate and formal system of rules, laws and standard
procedures which are used to control and direct work and behavioral environment , whereas an
elaborate informal system based on religion, culture and behavioral norms controls the Thai
environment. Asian cultures are uncertainty avoiding cultures and people try to avoid such
situations by doing things per methods which are empirical and tested.On the other hand
European cultures like Germany are more open and accept to different ways of doing things and
on the philosophical and religious level more easily accept different thought of view.

4.1.5Long-Term Orientation In Short Term Orientation values are created due to respect for
traditions and fulfilling social obligations while saving and planning for future and persistence
is considered as long term orientation .Where Asian countries like Indonesia and Thailand have
a very high value short term orientation Germany has the opposite.

Figure 3.Source :Lasserre(2007)

Thus it is important for the managers in the strategic alliance between “Catexhaust” and
the local Thai company to understand to key cultural differences which can pose a
challenge to the successful working of the alliance.
4.1Conclusion
So a strategic alliance with the local Thai manufacturer should be the first step towards
investment which should be explored by “Catexhaust GMBH”.
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Human resource Indonesia Thailand

Adult literacy 3
92 93.5
Public expenditure on education4 3.6 4.5
Unemployment, total (% of total labor force) 2007 1.2 9.1
Prevalence of HIV, total (% of population ages 15-49) 0.2 1.4
Infrastructural facilities
Access to safe drinking water(% of rural population 2008) 71 98
Mobile and fixed-line telephone subscribers (per 100 pl)2008 75.2 102.4
No. of cars per 1000ppl 30 42
Port logistics and facilities5 Poor Good
Airport logistics and facilities5 Poor Good
Road networks5 Fair Good
Railway networks5 Good Good
Bibliography
Arnold, J. M. & Hussinger, K. (2010) ‘Exports versus FDI in German Manufacturing:
Firm Performance and Participation in International Markets’. Review of International Economics, Vol.
18(4), pp.595–606.

Álvarez, I. & Raquel, M. (2010) ‘Entry modes and National Systems of Innovation’. Journal of
International Management, Vol. 16, Issue 4, pp. 340-353.

ASEAN Investment Report, 2006. Retrieved November 15, 2010 from:http//www.aseansec.org

/documents / AIR2009.pdf
Bartlett, C. A., Ghoshal, S. & Brikinshaw, J. (1998) Transnational Management:Text, Cases and
Readings in Cross-Border Management. 4th edn. Mc Graw Hill.
Brodbeck, F.C., Frese, M. and Javidan, M. (2002), ‘Leadership Made in Germany: Low on Compassion,
High on Performance’. Academy of Management Executive, Vol.16, Issue 1, pp.16-29.
Doing Business 2011.Retrieved November 7, 2010 from:http ://www.doingbusiness.org/
~/media/fpdkm/doing% 20business/documents/annual-reports/english/db11-fullreport.pdf.9

G. Barkema, H. G., Bell, J. H. J. & Pennings, J. M. (Feb., 1996) ‘Foreign Entry, Cultural Barriers, and
Learning’. Strategic Management Journal, Vol. 17, No. 2, pp. 151-166.

Global Corruption Index 2009.Available from: http ://www.transparency.org/policy_research/

surveys_indices/gcb/2009.(Accessed on 11 November 2010).
Gilroy, B. M. & Lukas, E. (July 2006) ‘The choice between greenfield investment and cross-border
acquisition: A real option approach’. The Quarterly Review of Economics and Finance, Vol. 46, Issue 3,
pp. 447-465.
Hill, C. W L. (2010) Global Business Today. 6th Edn. Mc Graw Hill.

Hill, C. W. L., Hwang, P. & Kim, W. C. (1990) ‘An Eclectic Theory of the Choice of International Entry
Mode’. Strategic Management Journal, Vol. 11, No. 2, pp. 117-128.

Kogut, B. & Singh, H. (Autumn, 1988) ‘The Effect of National Culture on the Choice of Entry
Mode’.Journal of International Business Studies, Vol. 19, No. 3 pp. 411-432.

Lassere, P. (2007) Global Strategic Management. 2nd Edn. Palgrave Macmillan.

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Nocke, V. & Yeaple, S. (2007) ‘Cross-border mergers and acquisitions vs. Greenfield foreign direct
investment: The role of firm heterogeneity’. Journal of International Economics, Vol. 72, pp. 336–365.

Peterson, M.(2007) , The Difference Between Mergers and Acquisitions. Retrieved December 5, 2010
from: http://www.many-articles.com/Article/Business/Business/200701/The-Difference-Between-
Mergers-and-Acquisitions/

Stehle, W. & Erwee, R. (2007) ‘Cultural Differences Influencing German HR Policies in Asia’. Journal
of Asia Business Studies, Vol. 2, Iss: 1, pp.34 – 47.

UNCTAD (2010) .Retrieved Novenber 7,2010

from:http://unctadstat.unctad.org /TableViewer/tableView.aspx? ReportId=89

World Bank Data, Indonesia. Retrieved November 7, 2010 from: http://data.worldbank.org

/country/indonesia

World Bank Data, Thailand. Retrieved November 7, 2010 from: http://data.worldbank.org

/country/thailand
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Appendix 1
Thailand - Logistics Infrastructure Source: CIA The World Fact Book
Ports Good
Ports and terminals: Bangkok, Laem Chabang, Prachuap Port, Si Racha
Most containerized cargoes have been transshipped over Singapore, partly because of the draft
limitations that exist in the river port of Bangkok. Laem Chabang port has begun to receive direct calls
in major East-West trade.

Merchant marine:
Total: 400 ships (1000 GRT or over) 2,808,509 GRT/4,317,320
DWT
by type: bulk carrier 60, cargo 145, chemical tanker 14, container 21, liquefied gas 29, passenger 1,
passenger/cargo 6, petroleum tanker 91, refrigerated cargo 32, specialized, tanker 1
foreign-owned: 45 (China 1, Egypt 1, Indonesia 1, Japan 4, Norway 30, Singapore 6, UK 2)
registered in other countries: 34 (Bahamas 1, Mongolia 1, Panama 9, Singapore 22, Tuvalu 1) (2006)
Airports Good
Major international airports include Suvanabhumi, Chiang Mai, Chiang Rai, Hat Yai, and Phuket.
The new Suvarnabhumi will add 120 parkng bays (currently other airports have 179 bays in total) and can
be accessed through the Bangkok - Chon Buri Motorway.

Airports: 108 (2006)

Airports - with paved runways:
Total: 66
over 3,047 m : 8
2,438 to 3,047 m: 11
1,524 to 2,437 m: 22
914 to 1,523 m: 20
under 914 m : 5 (2006)
Airports - with unpaved runways:
Total: 42
1,524 to 2,437 m: 1
914 to 1,523 m: 15
under 914 m : 26 (2006)

Roads Good
Road condition as a whole is in favorable.
Asian Highway is all completed, connection to neighboring Burma, Laos, Cambodia, and Malaysia. More
than 60% of all Asian Highway sections meet high standards, with more than 4 lanes.

Total: 57,403 km
Paved: 56,542 km
Unpaved: 861 km

Railways Good
Railway plays a lesser role in freight transport with a share of 2.1% against total freight.
Two international routes to Malaysia are avaiable through Padang Besar, and Sungai Kolok.
There is Heavy congestion between Laem Chabang to Lat Krabang ICD.

Total: 4,071 km
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narrow gauge: 4,071 km 1.000-m gauge (2005)

Appendix 2
Indonesia - Logistics Infrastructure Source: CIA The World Fact Book
Ports Poor
Ports and terminals :Banjarmasin, Belawan, Ciwandan, Krueg Geukueh, Palembang, Panjang, Sungai
Pakning, Tanjung Perak, Tanjung Priok
The major ports handling most of Indonesia's export and import cargoes are tanjung Priok, Surabaya,
Semarang, Belawan, and Makassar.
Operation of Tajung Priok is less efficient compared to to other major ASEAN Ports, with small handling
capacity for vehicle cargo.
Terminal handling charges in the country are the highest among major ASEAN ports.

Merchant marine:
Total: 824 ships (1000 GRT or over) 3,773,771 GRT/4,887,614 DWT
by type: bulk carrier 43, cargo 451, chemical tanker 21, container 50, liquefied gas 7, livestock carrier
1, passenger 41, passenger/cargo 58, petroleum tanker 132, refrigerated cargo 2, roll on/roll off 12,
specialized tanker 4, vehicle carrier 2
Foreign-owned: 30 (France 1, Germany 1, Japan 3, South Korea 1, Norway 1, Philippines 1, Singapore
17, Switzerland 3, UK 2)
Registered in other countries: 122 (Bahamas 4, Belize 2, Bermuda 1, Cambodia 1, Georgia 1, Hong
Kong 4, Liberia 1, Panama 50, Singapore 56, Thailand 1, unknown 1) (2006).
Airports Fair
Major international airports are Jakarta, Surabaya, Medan, Semarang, Denpasar, Manado and Palembang.
Because of the insufficient sea and land transport networks, air freight transport is becoming increasing in
demand of use. Also, because of it's relatively lower fares.

Airports: 662 (2006)

Airports - with paved runways:
Total: 159
over 3,047 m: 4
2,438 to 3,047 m: 15
1,524 to 2,437 m: 49
914 to 1,523 m: 49
under 914 m: 42 (2006)
Airports - with unpaved runways:
Total: 503
1,524 to 2,437 m: 6
914 to 1,523 m: 26
under 914 m: 471 (2006)
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Roads Fair
Roads play most important roles in cargo transportation - approximately 96% of total cargo
Although the roads have been developed especially for access to may economic centers, traffic congestion
in the cities has been a problem. Especially, heavy traffic congestion in central Jakarta and Surabaya is
quite serious
Poor accessibility to Tanjung Priok Ports causes stagnated freight transport

Total: 368,360 km
paved: 213,649 km
unpaved: 154,711 km

Railways Good
Indonesia has four unconnected railway systems: one in Java, and three in Sumatra.
The availability and reliability of service are low, due to inadequate maintenance and lack of spare parts
Freight traffic moved by the Java railways consists mostly of petroleum fuel, fertilizer, cement and coal
Total: 6,458 km
narrow gauge: 5,961 km 1.067-m gauge (125 km electrified); 497 km 0.750-m gauge (2005)