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Indonesia – an economic success story

Indonesia – an economic success story

Maggie Bauer

In the past 30 years, Indonesia has grown from one of the world’s poorest countries into a large and thriving market for U.S. agricultural commodities.

Last year, Indonesia imported record amounts of agricultural, fish and forest products from the United States.

The population – already the world’s fourth largest – is expected to swell to more than 212 million by the turn of the century. Upper and middle income groups – those most likely to purchase imported products – represent 5 and 10 percent, respectively, of the population. Consumers in these two categories exceed the population of Singapore and Malaysia combined.

As a result of the economic growth, Indonesia’s population is moving from a diet of primarily local fruits, vegetables, rice and meat to a diet with much more variety and a greater proportion of animal protein. The government has encouraged local agricultural production to meet the increasing demand for these foodstuffs. But, finding good land for agricultural production is difficult as industry and urban sprawl overtake Indonesia’s most productive agricultural land, especially on Java.

Export diversification beyond Indonesia’s traditional dependence on petroleum exports has helped improve the country’s international finances. Indonesia is the world’s largest producer of plywood and the second largest producer of palm oil. Other major exports include rubber, spices, coffee, tea and fish products.

Joint ventures, local licensees and locally owned companies manufacture snack foods, confectionery, biscuits and bakery products, juices, dairy items, canned fruits and vegetables, canned and frozen shrimp, meat and poultry products and sauces and condiments in Indonesia. Local production of consumer-ready foods is expanding at about 10-15 percent annually.

Agricultural Imports

Indonesia is a large and growing market for U.S. agricultural commodities. The country’s wheat milling industry is expanding at around 8 percent per year and the animal feed industry is estimated at 7 to 10 percent. Growth in both sectors is among the fastest in the world.

Likewise, the food industry is developing at a fast rate to meet the demands for more high-quality food products in domestic and export markets.

Imports of agricultural products have risen significantly in the past five years. U.S. companies have benefited from the changing market situation. U.S. exports to Indonesia have nearly tripled in the early 1990’s, with shipments expanding from $308 million in 1991 to $888 million in 1996.

Bulk commodities have accounted for a major share of shipments. In 1996, U.S. exports of bulk commodities comprised 70 percent of total shipments, including exports of corn, $280 million; soybeans, $213 million; wheat, $68 million; and coarse grains, $40 million. With the dramatic growth in the livestock sector and industry deregulation, U.S. bulk commodity exports doubled between 1994 and 1995. Price factors dampened imports of U.S. bulk commodities in 1996.

U.S. exports of consumer-ready foods have also exhibited substantial growth. In 1991, U.S. exports of consumer-ready products totaled $17 million. By 1996, this figure had risen to $95 million. In 1996, fresh fruit, red meat, processed fruits and vegetables and dairy products were the leading U.S. export items.

Indonesia will continue to grow as a major market for U.S. agricultural products. These include bulk commodities, such as soybeans, feed grains and cotton. Consumer-ready foods with good sales prospects are fresh fruit, red meat, french fries, poultry, tree nuts, snack foods, dairy products, fresh and dried onions, confectionery, pet foods, frozen meals, beverages, garlic and fresh potatoes. Finally, food ingredients of all kinds are sought by local food processors.

Major Competitors

Australia is the single largest competitor of U.S. food exporters in Indonesia. This is due largely to Indonesia’s close proximity to Australia, the size of the Indonesian market and Australia’s economic dependence on agricultural exports. However, Indonesia is a price- and quality-sensitive market with a number of agricultural suppliers.

In 1995, the top ten agricultural suppliers of Indonesia were: Australia, the United States, China, Singapore (mostly transshipments), Malaysia, India, New Zealand, Pakistan, Hong Kong and Europe.

Carefully executed market promotion programs have been very successful in this large and growing market. Some of these activities include market research, training, advertising, food shows, trade missions and restaurant and supermarket promotions. Among U.S. competitors, Australia has the most active promotion program with New Zealand, France, Canada and Chile also engaged in promotion efforts.

Competitors’ promotional activities have focused primarily on fruit, beef, poultry and wine.

The size and aggressiveness of U.S. market promotion activities has increased significantly in the past five years. In general, consumers and the trade are aware of the quality image of U.S. products and promotions are well received. However, U.S. supermarket promotions need to have an Indonesian theme.

Distribution System

In an archipelago as large and diverse as Indonesia, with more than 14,000 islands, efficient distribution is extremely important in penetrating the market.

Major market areas for imported consumer-ready foods products are in the large cities – Jakarta, Surabaya, Bandung, Medan, Palembang, Semarang and Ujung Pandang – where nearly one-third of the population lives.

The larger importers have their own distribution networks, but most smaller firms do not. A few distributors cover islands other than Java. The largest consumer product distributors in Indonesia are Tigaraksa, Wicksana, Tempo, Indomarco, Enseval, Diamond Cold Storage and Intermas Tata Trading.

Restaurants and retailers alike complain about the poor distribution system in Indonesia. One of the main problems is obtaining adequate and consistent supplies of quality products. This problem is made particularly acute by the hot and humid climate of Indonesia. Indonesian distributors must deal with a lack of infrastructure, product clearance uncertainties at ports of entry, a poor communications system and thousands of retail outlets spread out over an area the same distance as from California to New York.

Food importing is relatively new and importers and distributors are experiencing growing pains. A new influx of traders – ready to take advantage of the growing food sector – will bring in the competition necessary for a more service-oriented sector. More and more Singaporeans, with a good deal of experience, are starting importing, distribution and promotion companies in Indonesia.

The growing middle and upper income class has had a major affect on the way food is purchased in Indonesia. The number of supermarkets grew from less than 100 in 1985 to over 500 by the end of 1996, accounting for 40 percent of food sales in the major cities and around 10 percent nationwide. Expansion is expected to continue, with supermarket openings projected at 35-40 outlets annually in the next 5 years. Among the major supermarket chains are Hero, Matahari, Golden Truly, Galael, Makro and Diamond.

Since retailers cannot import directly, they usually have sister companies that import some of their products. Retailers also rely on many independent importers and distribution companies for local manufacturers to obtain a full range of items.

Government Import Regulations

Indonesia has made considerable progress in trade and investment deregulation. In 1994 and 1995, it lowered investment barriers and unveiled a comprehensive tariff reduction package that covered roughly two-thirds of all trade goods.

Any registered importer can import food products freely, with the exception of meat, poultry, alcohol, rice, soybeans, sugar and garlic. Meat and products containing animal products must be certified Halal. Meat and poultry imports also require a license. Alcohol imports are handled through one company that distributes a quota of licenses to two importing companies.

Legally, all products must be registered, but many products are brought in unregistered, usually in mixed container loads. Few trade barriers, besides tariffs of around 2025 percent, exist for consumer-ready food products. Nevertheless, it can be a complicated and costly process to clear shipments through Indonesian customs.

A Snapshot of the Competition

Product Major Competitors

Fruit Australia, China, Canada

Red Meat Australia, New Zealand

Dairy Products Australia, New Zealand, Netherlands

French Fries Canada, Australia, Netherlands

Dried/dehydrated vegetables Germany, China

Snack Foods Australia, Singapore(**)

Poultry China, Australia, Singapore(**)

Tree Nuts Australia, China, Singapore(**)

** Transshipments of products from other countries.

Although the Indonesian Government is sensitive to how imports are perceived to negatively affect local farmers and processors, it is generally recognized that imports are necessary to fill the gap between domestic production and demand. Its policy is to gradually reduce duties on imports by the year 2003.

Marketing Recommendations

Exporters who are interested in the Indonesian market should plan on visiting the country several times, being patient and thinking long-term.

It is not unusual for a potential exporter to visit the market two to three times to conduct market research, test the product, compare prices and research government import regulations before details are finalized.

Perhaps nowhere in the world is meeting face-to-face more important than in Asia. It is essential to meet the importers, distributors and retailers. While quality and price are important in import purchase decisions, they are secondary to personal interaction with business partners.

It may be advantageous to start the research in Singapore where a product can easily move into the ASEAN region. Singaporean agents and distributors are sophisticated and know the regional markets well. In addition, the shipping time is less and smaller shipment sizes can be sent into new markets from Singapore. Singaporeans know the customs procedures and often have offices in country to help clear products. Appoint one or several agents on a trial basis and provide them with incentives to get your product into the market. Work with your importer to register the product. Support the agent by maintaining product quality and providing promotional funds. Educate importers, wholesalers, retailers and consumers about your product.

The product should be packed and shipped for a tropical climate. This is especially important as few cold storage or air-conditioned facilities and delivery trucks exist, few stores are air-conditioned and some stores turn off cold storage facilities at night to conserve energy.

Margie Bauer is director of the agricultural trade office in Jakarta, Indonesia. Phone: 62-21-526-2850; fax: 62-21-571-1251.

COPYRIGHT 1997 U.S. Department of Agriculture

COPYRIGHT 2004 Gale Group