Food processing and value chain development in Indonesia

Indonesia’s economy is the largest in Southeast Asia. Transformations in the Indonesian food processing sector are driven by this growing economy, along with changing food consumption patterns. The manufacturing sector (excluding oil and gas) contributes around 20 per cent of Indonesia’s total GDP through the domestic market, valued at around AUD$200 billion. Food, beverage and tobacco processing represents 37 per cent of total manufacturing, and the industry is expanding rapidly, at an average annual rate of 10 per cent over the last decade.

Food processing is also a major source of employment within Indonesia, increasing from 2.93 million in 2010 to 4.26 million people in 2013, at a remarkable rate of 15 per cent annually. Significantly, much of this growth in employment has come from micro enterprises (employing less than five people) and small enterprises (employing less than 20), which together make up more than 76 per cent of employment in food processing. Medium and large enterprises, however, are responsible for an estimated 83 per cent of the total output value in the sector. The food processing sector has also experienced strong growth in investment
Despite these positive indicators, Indonesia’s participation in the global food industry remains marginal, where it contributes around 1 per cent of total global exports. Indonesia faces difficult political choices in regards to a coherent policy framework around food production and food processing, but enhanced integration with regional and global production networks is likely to provide important growth opportunities for the food processing sector in the future.

Leading Indonesian-based food-processing firms such as Indofood, Garudafood, CP Prima and Delfi have emerged as market leaders in their respective categories with sophisticated managerial and technical capacities, and have successfully penetrated export markets. ‘National’ ownership, however, is complicated, as ownership structures are frequently embedded within the broader Southeast Asian cultural diaspora, with strong links to holding companies in Singapore and Hong Kong. This is, perhaps, less important, as the Indonesian food processing sector has remained relatively open to foreign investment, and global food companies such as Nestle, Danone, Coca-Cola, Mondelez and Unilever all maintain a manufacturing presence in the country, and have been responsible for capacity building and technology transfers.

The project found that by regional standards, Indonesia still has an undeveloped distribution and retail infrastructure, with modern retailing having a relatively limited reach beyond the major towns and cities. This has provided something of a brake on upstream sectoral development. Modernisation of retail and distribution would also likely lead to greater competition between local and imported products. The project reveals that the complexity of Indonesia’s distribution network and inadequate infrastructure is often particularly problematic. Leading firms, such as Indofood and Delfi, have responded with downstream vertical integration of their own networks. Long term, retail distribution channels are expected to become more efficient, as centralised warehousing and distribution centres expand around the country.

The project identified the effect of protective trade and industry policy on Indonesia’s marginal role in the regional and global value chains. This is consistent with a relatively high degree of self-sufficiency and insulation from global market perturbations, but it also means that Indonesia is missing out on growth opportunities that accompany the expansion of global value chains. Indonesia-based food processors are often forced to pay more for basic ingredients than their regional competitors, often as a result of policies that are ostensibly designed to protect farmers and ensure food security.

Despite these limitations, Indonesia has developed export competitiveness in processed product sectors that utilise basic ingredients produced in Indonesia. This includes the production of intermediate cocoa ingredients from raw cocoa beans and the processing of seafood items such as tuna, shrimp and crab. It is noteworthy that export competitiveness appears to decline when processed products include tightly regulated ingredients, such as rice, sugar and dairy. In contrast, instant noodle manufacturing appears to have developed competitiveness by combining locally produced palm oil with imported wheat products, but where the latter is relatively free from regulation as it does not compete with domestic production.

The project found that foreign investment and joint ventures have been important in developing export competitiveness in the cocoa ingredients and seafood processing sectors, but have been far less important in instant noodle manufacturing. Due to significant bottlenecks and inefficiencies in both agricultural supply chains and distribution networks, Indonesia-based food processors are often required to be more vertically integrated than in other countries, and local firms are far better positioned to make the necessary investments that foreign firms may find too risky.

Results and findings

The food processing sector is one of Indonesia’s largest and fastest growing sectors and is the largest sub-sector of manufacturing, serving a domestic market of 255 million with a rapidly expanding middle class. Increasing demand for value-added processed foods that meet the need for convenience, nutrition and evolving taste preferences is creating exciting new opportunities for the sector. With these increased opportunities, it is in the strategic interest of Indonesia to enmesh itself within globally competitive food value chains. This requires increased sensitivity to how food is produced, innovative methods of food production, and awareness of nutrition, content and labelling practices.

In summary, tariffs may have gone down but protectionism has proliferated in recent years, mostly in the form of non-tariff barriers. While this is evident in almost all sectors, the food products sector remains one of the most protected. This increasing protectionism has proved counterproductive, as it tends to inhibit the involvement of Indonesian firms in more dynamic regional production networks, affecting competitiveness and stymieing access to new technologies and ideas. Attempts to protect domestic producers have come at the expense of the competitiveness of food processors, who are forced to pay high prices for key inputs such as sugar, salt, milk and grains. Food processors overwhelmingly rely on the relatively protected domestic market as a result. Many of the recent regulations have hindered rather than supported development in the food sector.