Lenzing AG: Expanding in Indonesia
Case Review

Summary

Lenzing AG is one of the worlds largest rayon fiber manufacturers, originating in Lenzing, Austria. In 1938 Lenzing AG was founded, starting pulp and viscose fiber production.

Up until the 1980’s, Lenzing was a company that held its production and management in the same country and town where the company had originated. Until one day , the Chairman of Lenzing had agreed to go into a joint partnership with an international investor. The joint venture was with an Indian entrepreneur by the name of Ashok Birla, who saw opportunity in Indonesia for Lenzing and the rayon industry within. Lenzing viewed this as an opportunity to break out of their domestic Austrian market, and tap into Indonesia’s none existent textile market. The resulting partnership would be South Pacific Viscose (SPV).

In the beginning, SPV was the only producer of rayon textiles in Indonesia, and by 1994 had grown to be successful, more so than Lenzing management had originally thought. Over the years, there began to be an increase in competition throughout Indonesia, although none reaching the capacity of production that SPV was reaching each year.

Lenzing and SPV began to view some long term potential problems as the years went on, with tariffs and trade barriers becoming an issue, as well as potential political problems in Indonesia possibly effecting the company in the future.

Problem Statement
In 1994, Lenzing AG, the world's largest rayon manufacturer, is deciding whether to expand production in South Pacific Viscose, its Indonesian subsidiary. Lenzing has viewed Indonesia as a booming market for rayon, and see’s a lot of potential for growth in international markets, but management still has some concerns about the expansion.

First, in order for the plant to remain successful, Lenzing's primary customers, textile producers, must remain in Indonesia in order to cut the costs of international tariffs. If SPV plans to create a strong stream of income from these plants, they would need to cut costs, because despite being located in an area of tropical forests, the Indonesian plant has no local access to wood pulp, its most critical input.

Although Indonesia is home to about 14 pulp producers, none of these producers have made the switch from paper grade pulp, to dissolving grade, which is essential in the creation of rayon. With having to import its most important ingredient internationally, they will need to cut costs wherever they can.

As well, there is the fact that the booming business in Indonesia could slow down at anytime, due to the slow down in the consumption of clothing. With that said, people may slow down buying clothes, but also, as companies begin to look for more and more ways to cut costs, textile producers in Indonesia may be drawn away to other countries such as China or India, and Lenzing would be unable to compete with their low labour costs.

Finally, with the expansion, Lenzing is increasing its exposure in Indonesia, though at first was viewed a stable country, both economically and politically is now beginning to become less and less balanced. As Indonesia’s leader Suharto, is planning to relinquish his power several years after the expansion. As Indonesia will become a more democratic state, you would think that this would create a better political and economical country, although its effects could end poorly for Lenzing.

S.W.O.T Analysis

Lenzing has been in operations for over 50 years, and up until their merger with Ashok Birla, had been producing only in Austria. As a company who has been producing rayon for many years, I believe that one of the company’s keys strengths is their management. When originally considering the expansion to Indonesia, Lenzings management was against it, but after carefully considering the potential growth they could they could have in an untapped market, the expansion happened. With strong organizations comes strong management, and a company like Lenzing should use this to their advantage.

Although Lenzing is up against many threats, I don’t believe that there are many current weaknesses within the company, although there are some things that are hurting the company. As a producer of rayon, Lenzing’s most important fundamental constituent is dissolving grade pulp. This is a rather uncommon form of pulp, in which they have been purchasing from Brazil to their production plant in Indonesia. This would be viewed as a weakness, as in Indonesia there are 14 pulp producers, none with the technology to create the dissolving grade pulp, but pulp none the less. I believe that Lenzing has an opportunity to create an agreement with one or more of these local pulp producers, to enable them to produce the necessary grade of pulp.

As rayon requires a large amount of pulp for its production, they have purchased a percentage of a company in Brazil to meet their pulp needs. For Lenzing, this was a valuable purchase and has made it possible for them to continue the production of rayon in Indonesia. Although, I believe that there is an opportunity locally that would satisfy their need for pulp. Indonesia has 14 producers of pulp, none of them with the technology to create the required grade that is needed in the production of rayon. Rather than purchasing a percentage of the pulp company in brazil, and having to ship the pulp time after time internationally, it could have been a more economical transaction with the Indonesian pulp companies. There could have been an opportunity to create an agreement with several of these companies, in which, Lenzing provide them with the necessary technology to produce this grade of pulp, in exchange for a certain amount of pulp production going to them each year.
As a company that is aiming to grow both internally as a company as well as internationally, Lenzing has created opportunities that have given them the chance to do so. At the same time, there are threats that are visible to the company that should be addressed. One being that the direction the government in Indonesia is heading could be a bad one. Despite Indonesia’s drive for democracy, this could affect Lenzing in a negative way. For example, since gaining its independence in 1949, Indonesia has been ruled by only two men, Sukarno and Suharto, both of whom had tight control over all levels of power, using force in most cases to accomplish their intentions. With that being said, if Indonesia were to become a democratic state, foreign companies may loose many of their agreements with past leaders and be forced to do business elsewhere.

Recommendation

It could be recommended that SPV stay in Indonesia and continue production. In 1993, sales rose by 18% since the previous year, with growth like that, I would recommend that they continue with planning on the Third Line and continue to expand their capacity. A potential opportunity is at hand with the departure of Suharto and this could give SPV the chance to completely dominate the textile industry in Indonesia.
If SPV were able to form an agreement with pulp producers in Indonesia, this could be a large step forward in the path of success. I believe that if this is done, they will have no added costs of bringing in materials