Evaluation Of Indonesias Market Export Of Sabah Tea Marketing Essay

1.1 An overview of Malaysia and Indonesia

Malaysia is a nation that situated in central of South-East Asia, bordering Thailand in the north with Singapore to the south and Indonesia to the south and west. The capital of Malaysia is Kuala Lumpur. The nation also includes Sabah and Sarawak on the island of Borneo to the east. Sarawak has an alluvial soil and swampy coastal plains with rivers penetrating the jungle-covered hills and mountains of the interior. This enriches the nation with great agricultural strength. Most of the area in Malaysia is covered by forest, with a mountain range running the length of the peninsula. Extensive forests provide ebony, sandalwood, teak and other wood. The nation is among of the world’s largest producers of computer disk drives, palm oil, rubber and timber. Nevertheless, it has a state controlled car maker, Proton and tourism has considerable room for expansion. Major agricultural products are rubber, palm oil, cocoa, rice, coconuts, timber, and pepper. Major trading partners of Malaysia are Singapore, China, Japan, Thailand Hong Kong and Indonesia. (CIA The World Factbook, 6 April 2011) The official language of Malaysia is Malay language (Bahasa Melayu) and population of 28 million over, 43th rank of populous in the world. There are three main ethnics groups in Malaysia, the Malays 60%, the Chinese 26% and Indians and the indigenous make up the rest. (BBC NEWS, 9 March 2011) The climate in Malaysia is tropical with high temperatures and humidity throughout the year. The temperature ranges between (89-72 degrees F). There are two seasons as well as Indonesia, the rainy monsoon and dry season. (World Travel Guide, n.d)

Indonesia is a nation of islands consisting of 17,508 islands in the South East Asian Archipelago. The capital of Indonesia is Jakarta. Indonesia is known as the world’s largest archipelagic nation. With a population of 200 million over and it is the world’s most populous country. This strategic location has a significant influence towards its Culture, Social, Politics and Economy. Major agricultural products include palm oil, rice, tea, coffee, spices and rubber. Some big industries in Indonesia are petroleum and natural gas, textiles, apparel and mining. Indonesia’s major trading partners are Japan, the United States, Singapore, Malaysia and Australia. (PT Jakarta Setiabudi Internasional TBK, n.d) Indonesia’s population can be roughly divided into two groups, the west of the country is mostly occupied by Malay people, while the east is more Pacific. The official language of Indonesia is Indonesian (Bahasa Indonesia) and about 88% of the population is Muslim. An extimated of 10% of Christian and approximately 2% is Hindu and Buddhist. The climate in Indonesia is mostly equatorial. The temperature ranges between 16-35 degrees Celsius (61-91 degrees F) with humidity ranging from 60- 90 percent. There are two seasons which are the rainy monsoon season (November through May), followed by the dry season (June through October). (World Travel Guide, n.d)

1.1 History of Sabah Tea

Sabah tea plantation is the first that nestled into the tropical wilderness of Malaysia’s first ever World Heritage Site, Mount Kinabalu, and a 6,200 acre (2,509 hectares) land at 2,272 feet above the sea level. It is surrounded by the world’s oldest rainforest of about 130 million years. Sabah Tea plantation is the largest single commercial tea plantation in Borneo with approximated area of 1,000 acres endowed with Camellia Sinensis, (an interesting plant and agriculture resources).

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In 1976, the state government of Sabah had decided to alienate a total of 6,200 acres of land in Kampung Nalapak to Koperasi Desa (KPD). Then, Sabah Tea Sdn Bhd was then incorporated on April 26, 1978 as a subsididary of KPD to operate and manage the tea plantation. The Honorable Prime Minister, Datuk Seri Dr. Mahathir Mohammad officially opened the Sabah Tea Plantation on February 19, 1984. (Sabah Tea, n.d)

Sabah Tea Sdn Bhd is now a member of Yee Lee Corporation bhd. Sabah Tea Sdn Bhd sold its entire shares to Yee Lee Corporation Bhd in the year 1997. Yee Lee Corporation is a well diversified company with active subsidiaries covering manufacturing, distributing and selling a wide array of Fast Moving Consumer Goods (FMCG) in both locally and Internationally.

1.2 Corporate Information

Sabah Tea Plantation is an organic tea plantation in Ranau, Sabah and it is known for its 100% organic tea. On the production of its tea, Sabah Tea Garden is the sole producer of organic tea in Borneo. The company has exports 15% of its products throughout Australia, New Zealand, Canada, Britain and Singapore and 85% are the remaining for domestic consumption. Sabah Tea sdn bhd’s export has contributed about 10% to the company’s income. Sabah tea has also expanded to become a popular holiday destination for both the locals and the foreign tourists around the world, while remaining to produce tea. Sabah tea Garden is the destination which is located in one of the oldest rainforests in the world, Mount Kinabalu. The Sabah Tea Garden has an area of 6,200 acre (2,509 hectares) and a total area of 485.6 hectares (1,200 acres) are been use for cultivation of tea and tourism activities while the rest remains a tropical forest rich with flora and fauna.

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During the year under review, a drop of 2.4% of tourism in Sabah Tea Garden as compared to the previous year( 2008). The number of local visitors arrived to Sabah has an increased of 5.3% but a tremendous declined in International Visitors, 19.8%. However, this did not stop Sabah Tea Sdn Bhd from achieving 12.3% (RM0.73 million) of sales growth in 2008 to RM0.82 million in 2009. Sabah Tea is upgrading its facilities as well as creating more tourists to come, plus with aggressive marketing strategies, Sabah Tea is confident to increase in tourists.

Nevertheless, the impact of the global financial crisis in 2008 flawed into 2009. As a result of the weak market demand, the revenue of Sabah Tea has dropped to 8.3%, from RM76.07 million, 2008 to Rm69.79 million, 2009. Various solutions were been taken to improve on the delivery efficiency, store coverage and working capital management to boast sales and profitability. This in the end has maintained its profitability. (Yee Lee Corporation 2009 annual report)

2.0 Environmental Analysis

2.1 Political and Legal factors

Indonesia was a country that was being governed by Dutch, so the Indonesian’s legal system is closely related to the Dutch’s systems. Indonesia’s new bankruptcy, capital market and company laws are now based on international best practice where initiatives aim to provide greater certainty to creditors and investors across the Indonesian corporate sector are implemented by the government. It is crucial for foreign investor to understand the importance of legal system of Indonesia as it plays an important role that may influences the business. Political change and reform did bring impact to Indonesia economy status. Indonesia’s president has stress on strong political will to reduce corruption, which is the key to solve Indonesia’s economic problems.

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This will lead to newly strengthened independent auditors and greater central bank independence that could enhance the effectiveness of policy implementation and governance efficiency. (Perkins, 2000). Regarding the laws of share ownership, Indonesia Government Regulation No.20/1994, Article 6, the Indonesian partner’s shares shall be at least five percent (5%) of the total paid- up capital of the company upon its establishment, with that the company is not required to divest its shares to Indonesian parties within 15 years and this is also an advantage upon forming of Joint Ventures. This is a great advantage that Sabah Tea can consider in joining venture with other company, like for example BOH Tea and Kurnia Tea (Indonesia’s Tea Manufacturer) example, they had joint venture together. In this case, Kurnia Tea’s shares will stand approximately 50% of the total paid-up capital upon mutual agreement between both parties when establishing BKI (BOH and Kurnia Tea) for tea business.

According to the legal system of Indonesia, company (in this case Sabah Tea) must submit a proof that they have paid the issued capital, if Sabah Tea would consider about joint venture with other tea company in Indonesia. Also, the funds being transferred have to be reported to the Indonesia’s Government. They have the right to draw taxes of 20% or royalties from the business since foreign direct investment companies must pay corporate income tax based upon Indonesian source revenues. (Introduction to the Indonesian Tax System)

There are employment rules to oblige to as well according to the Employment act of Indonesia. Indonesia has one of the largest labour forces in the world which make it stand on 5th rank. So, to protect the labour rights the government has made a law called Labour lawsArticle 28D (2). According to this law 7-hour workdays and 40-hour workweeks, with one 30-minute rest period

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for each 4 hours of work is legal in Indonesia. One day of rest weekly also mandatory in Indonesia. In April 1992, the Government of Indonesia signed a Memorandum of Understanding with the International Labour Organization under the International Program for

the Elimination of Child Labour (IPEC) where the minimum working age is 14 years. (Labour &

Social Protection in Indonesia, 2009). Principally, labor matters in Indonesia are regulated by some laws and regulations as below:

Law Number 13 of 2003 concerning Manpower

This law concerns on Manpower and includes matters of employee’s minimum wage, working hours, training programs, benefits and allowances.

Law Number 21 of 2000 concerning Labor Unions

Labor Union is formed if there are ten or more employees in a company joined the union. Besides, BKI has to ensure that their employee is joining the right Labor Union and cooperate with the respective Union to prevent the occurrence of disputes between the company with union. (Budiardjo et al., 2005)

Law Number 1 of 1970 concerning Work Safety

Work Safety concerns on workplace safety and the benefits or compensation due when an employee is injured while on duty. It is important for SKI to ensure the workplace safety of the company especially the company plantation and manufacturing workplace. Inspection on workplace safety has to be carried out for every certain period to ensure the workplace is safe and every employee is following the workplace rules and regulations. (Budiardjo et al., 2005)

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Law Number 3 of 1992 concerning Worker Social Security

In Indonesia, an employer with 10 employees or more or having a payroll of at least one million rupiah a month is obligated to ensure his or her employees are joining the Social Security for Manpower (Jaminan Sosial Tenaga Kerja), “Jamsostek” program that consists of employees occupational accident security, death coverage, old age security, and health maintenance security.

5. Law Number 11 of 1992 concerning Pension Funds.

A company in Indonesia can provide a pension scheme for its employees by way of pension fund set up and controlled by the Employer, which also known as Employer’s Pension Fund.

Besides, there is law concerning human rights which is Legislation Number 39 Of 1999 Concerning Human Rights Section Seven, Right to Welfare. Both men and women who works has the right for pay equilibrium to work, fair and adequate remuneration. In this case, Indonesia will exercise no discrimination among male or female who will performing equal workload and paid according to their job scope and provide adequate rewards and compensations for the entire employees to ensure it is sufficient for both own and family expenses. (Muladi, 1999)

2.2 Economical factor

Indonesia is considered as a developing country. Developing country is a term generally used to describe a nation with a lower level of income. With the Government Policies and Treasure of National Resources, Indonesia GDP has been growing and increasing rapidly from last few years. Indonesia spends GDP of 23.5% to develop their nation. According to the last budget

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announcement, Indonesia had revenues of $92.62 billion and expenditures of $98,88 billion in year 2008. It has been 23rd rank in Oil production and 8th position in natural gas production and export as well. (The World Bank, 2008)

GDP: 

Indonesia has made significant economic advances through last years. Indonesia’s debt-to-

GDP ratio in recent years has declined because of increasingly robust GDP growth which was6.1% ($915.9 billion) in 2008 compare to 5.5% ($811.1 billion) in 2006 and compression to the world. They are on the 54th position in GDP growth. Indonesia’s main GDP earning comes from Industry, 48.1%, service sector, 37.5% and lastly, 14.4% of GDP earning from agriculture. (The World Bank, 2009).

Inflation rates:

One of the major reasons of Indonesia’s economic downturn is the inflation rate. Inflation rate is still major but it has come down after a high of 20.7% in 1999. It was 9.9% in 2008 compare to 6.3% in 2006. (CIA, the world factbook, n.d)

Import:

Indonesia’s import and export trade are rapidly increasing every year. In 2008, the total import was $ 1 25 billion compare to 85.26 billion in 2007. The major import for Indonesia are chemicals, fuels, machinery and equipment. Import partners are Singapore 16.9%, China 11.8%, Japan 11.7%, Malaysia 6.9%, US 6.1%,South Korea 5.4%, Thailand 4.9% (2008). (CIA, the world factbook, n.d)

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Export:

In the same way due to economic growth improvement in productivity, government

policies, export is also increasing rapidly. It was $93.3 billion in 2008 compare to $83 billion in2007. The major export are oil and gas, electrical appliances, plywood, and textiles. The major export partner of countries are Japan 20.2%, US 9.5%, Singapore 9.4%, China8.5%, South Korea 6.7%, India 5.2%, Malaysia 4.7%. (CIA, the world factbook, n.d)

2.3 Social Factors

Indonesia is one of the large population nations in the world. It has a total of 240,271,522 populations and it is the 5th largest population all around the world. As we all know, Indonesia is a multi culture and multi ethnic country with different religious view. The majority of the religion in Indonesia is Muslim, as much as 86.1%. Protestants, 5.7%, Roman Catholic 3% and lastly, Hindu 1.8%. According to the (CIA, the world factbook, n.d), the age structure of Indonesia is as follow:

Age structure:

0-14 years: 28.1% (male 34,337,341/female 33,162,207)

15-64 years: 66% (male 79,549,569/female 78,918,321)

65 years and over: 6% (male 6,335,208/female 7,968,876)

Education: If a country has good literacy rate then it has bright future. Same thing apply on

Indonesia. 90.4% of its populations are literate in which male are 94% and female are 86.8%.

3.6% of their GDP is spent on education.

Besides, Indonesia is also a collectivist society. It places higher importance on group than the

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individual. The Indonesian counterparts will always place family and community concerns over that of the business or individuals. Other than that, a business’s welfare is important in Indonesians culture, so a business must demonstrate its contributions to the community to ensure the protection gained from the community to protect the business (Foss, 2009). A business that fulfills the obligation towards the living and community gets to enjoy few advantages. The advantages will be quicker bureaucratic processes such as obtaining a permit, resolving disputes through the musyawarah (an important process to solve conflict that involves all concerned parties with policeman intervention and the results are based on community consensus) and acts as surveillance of crime and information sharing (Perkins, 2000). What’s more, Sabah Tea can be used as beverages to create a family spirit in a working environment or even create a relaxing environment when families chill at home on a family day to spend some time together. Sabah tea can also always group employees in a company as a team as they bond through the tea sessions during work and this best fit a company when bonded employees comes together to operates the company together as one.

2.4 Environmental Factors

Indonesia is an archipelagic island country in Southeast Asia, lying between the Indian Ocean and the Pacific Ocean. It is in a strategic location astride or along major sea lanes from Indian Ocean to Pacific Ocean. The country’s variations in culture have been shaped, although not specifically determined by centuries of complex interactions with the physical environment. Although Indonesians are now less vulnerable to the effects of nature as a result of improved technology and social programs, to some extent their social diversity has emerged from

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traditionally different patterns of adjustment to their physical circumstances the geographical resources of the Indonesian archipelago have been exploited in ways that fall into consistent social and historical patterns. Nevertheless, the weather in Indonesia is hot and humid. The landscape ranges from rainforests and steaming mangrove swamps to arid plains and snowcapped mountains. Also, Indonesia’s climate is almost entirely tropical. The uniformly warm waters that make up 81 % of Indonesia’s area ensure that temperatures on land remain fairly constant, with the coastal plains averaging 28°C, the inland and mountain areas averaging 26 °C, and the higher mountain regions, 23 °C. Temperature varies little from season to season, and Indonesia experiences relatively little change in the length of daylight hours from one season to the next; the difference between the longest day and the shortest day of the year is only forty-eight minutes. This allows crops to be grown all year round. (CIA, the world factbook, n.d),

One of the most important factors is the natural or environmental disaster. Because of its geographic location, Indonesia has faced many natural disasters such as earthquakes and tsunami, for example in December 26, 2004, Indonesia has an earthquake of 9.0 magnitudes which as a result caused a tsunami in the Indian Ocean. These natural disasters had caused 155,000 people died. Nevertheless, deforestation, soil erosion and massive forest fires were quite a hit in Indonesia. In1983, a 3 million Ha (hectares) worth of US$ 10 Billion were destroyed in a fire and was caused due to piles of dead wood left behind by the timber industry. In the mid 1980s, Indonesia was rated as the highest deforestation in Southeast Asia.

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3.0 Product Description

3.1 Sabah Tea’s Product Description

Sabah Tea is produces in Mount Kinabalu, Ranau in Sabah. The location of cool hills of Ranau has bring advantages to Sabah tea. According to Sabah Tea’s tea plantation, Sabah’s tea are been carefully harvest and are 100% free of pesticide which leave the tea untouched and pure. Sabah Tea’s POP (Point of Purchase) is that the tea is protect to ensure its quality of origin and unlike other tea companies, the leaves are pure and that is free from any substances of chemicals. Due to its location, the tea has preserved it natural flavor without any added colorings. Nevertheless, Sabah Tea has also has an interesting plant added in to their teas, which is Camellia Sinensis, whereby not many organic tea plantations are able to have.

Sabah Tea’s plantation has also been certified for organic production by SKAL Internation B.V of the Netherlands, an internationally recognized organization that performs inspections and grants certification for organic production. (Trademall, Malaysia’s Leading Trade Portal, n.d).

Tea lovers are able to enjoy pure and Borneo rainforest organic tea and Health researchers have even analyze that the Sabah Tea has the effect of lowering the risk of heart attack, lowering bad cholesterol (LDL) and promote circulation of blood as well.

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4.0 Conclusion

4.1 Evaluation and Analysis of Indonesia

According to the above environmental analysis, Indonesia is a great market to invest in Tea, Sabah Tea. One of the reasons is that Indonesia’s GDP growth has steadily risen, achieving real growth of 6.3% in 2007 and 6.1% growth in 2008. Although growth slowed to 4.5% in 2009 given reduced global demand, Indonesia was the third-fastest growing G-20 member, trailing only China and India. Growth has rebounded in 2010, with the forecast for growth of 6.0%. Nevertheless, Indonesia’s GDP earnings for agriculture has the 3rd highest earnings for Indonesia as stated by (The World Bank, 2009) as high as 14.4% of GDP, as follow by Industry, 48.1% and service sector, 37.5%.

Poverty and unemployment have also declined despite the global financial crisis, with the poverty rate falling to 13.3% (March 2010) from 14.2% a year earlier and the unemployment rate falling to 7.4% (February 2010) from 7.87% (August 2009). This has a great effect on Sabah Tea, that the buying power of Indonesia’s customers or potential customers increased. Poverty rate decreased and GDP of Indonesia’s earning also comes from agriculture, Indonesia is no doubt a place to invest Sabah Tea. Although the competition in Indonesia is no question is high, Sabah Tea can take into consideration on joining venture with one of the Indonesia’s tea manufacturer, as what BOH tea has did, joining venture with Kurnia Tea (Indonesia’s tea company) to form BKI, BOH and Kurnia tea Industry.

Indonesia’s overall macroeconomic picture has also stable. By 2004, real GDP per capita returned to pre-financial crisis levels and income levels are rising. In 2009, domestic

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consumption continued to account for the largest portion of GDP, at 58.6%, followed by investment at 31.0%, government consumption at 9.6%, and net exports at 2.8%%. Investment realization had climbed in each of the past several years, until the global slowdown in 2009. It is again rebounding in 2010. (TDS, n.d).

In the social factors, Indonesia’s culture and Malaysia’s culture have no much difference in terms of religions, demographic and geographical factors. To succeed in Indonesia, the first thing to achieve is to establish a face to face relationship, preferably with a person of similar age and status quote from (Perkins, 2000). This has not a problem as the religion in Malaysia is similar as well, Malaysia is able to send a mediator or translator. This is because Indonesians communicates in English or Bahasa Indonesian and Malaysia is able to present a well communicable Malay as a mediator, so that a message is transmitted clearly to every business partners or employees of the company. Also, a business that fulfills the obligation towards the living and community gets to enjoy few advantages. The advantages will be quicker bureaucratic processes such as obtaining a permit, resolving disputes through the musyawarah (an important process to solve conflict that involves all concerned parties.

Environment of Indonesia has a slight difference compare to Malaysia, but overall, Indonesia’s climate and environment is a suitable place for growing teas and people tend to enjoy a warm cup of tea. The weather in Indonesia is hot and humid. The landscape ranges from rainforests and steaming mangrove swamps to arid plains and snowcapped mountains. Also, Indonesia’s climate is almost entirely tropical. The uniformly warm waters that make up 81 % of Indonesia’s area ensure that temperatures on land remain fairly constant. This allows crops to be grown all year

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round. (CIA, the world factbook, n.d). Sabah Tea can even consider on start a tea plantation to avoid International trade’s limitation and policies imposed by Indonesia’s Government.

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Executive Summary

This report determines to evaluate the Indonesia’s market for export of Sabah Tea, Sabah Tea Sdn Bhd. It intends to determine the effective of market as a potential market for investing and exporting Sabah Tea over to Indonesia through the Environmental Analysis, which includes, Political and Legal, Economic, Social, and Environmental. The environmental analysis of Indonesia, shows that Political and Legal, Economic, Social and Environmental have great opportunities for Sabah Tea to invest and export to Indonesia: One, the economics of Indonesia has showed that Agriculture of Indonesia as the 3rd highest GDP earning. Secondly, Cultural factors have also showed that Indonesia and Malaysia’s cultural background is quite similar and they shared similarities. A business that fulfills the obligation towards the living and community gets to enjoy few advantages. The advantages will be quicker bureaucratic processes such as obtaining a permit, resolving disputes through the musyawarah (an important process to solve conflict that involves all concerned parties. Lastly, environment of Indonesia has not many differences as it is a suitable place for crops to grow. It is recommended that Indonesia is a potential market to invest and export over to.