A growth strategy in lock-step with Indonesia
By Ramakrishna Prasad, Senior Vice President, Olam Indonesia
As Southeast Asia’s largest economy, Indonesia’s importance to Olam is self-evident. On the supply side, the country is the world’s largest producer of palm oil, of cloves and cinnamon, as well as one of the top producers of a multitude of agricultural products – natural rubber (second only to Thailand), cocoa (third after Cote d’Ivoire and Ghana), coffee (fourth largest), cassava, coconut oil, nutmeg, rice, tobacco and tea. On the demand side, Indonesia is the largest consumer of sugar in Southeast Asia and amongst the top 10 markets in the world. It is also one of the top five rice consumers in the world.
The country has maintained steady growth – above 5% – even as it deals with the challenges of its massive, scattered geography. This trend looks likely to continue into next year and beyond with inflation remaining under 4%. With a large population, moderate inflation, rising wages and government spending, consumption will continue to rise.
The food and beverage (F&B) sector has been growing at 3% year-on-year which is significant given the size of the country and geographic spread. Indonesia already has a large downstream F&B industry, but still needs to add capacity to feed the growing population.
However, low farm productivity and the lack of downstream capacity are keeping food imports bill high. Indonesia still remains a largely import dependent economy when it comes to feeding its population, including essential commodities like sugar, rice, beef, salt, etc.
Major investments are therefore required in the primary processing as well as secondary processing industries in the F&B sector. With credit to the current administration, investment has been a clear success story and a significant priority of President Jokowi who has personally supervised various projects across the archipelago since he came to office in 2014.
In order to attract more foreign capital, the government has launched a number of initiatives including its BKPM Online rapid licensing system, investment incentives and duty-free imports of capital goods for industries. Specifically to address yields in agricultural production, the government is initiating public private partnerships for state-owned enterprises. With the current price protection mechanisms in place, these initiatives will continue to attract large private investments in the coming years, particularly so for midstream and upstream investments.
In lock-step with Indonesia
Within this macro-economic framework, we have gradually built up our presence in this country from a simple trader to large scale midstream player. Today, Olam is the largest exporter of Robusta coffee and a leading exporter of Arabicas in Indonesia with a combined market share of approximately 15%. We are also the largest exporter of cocoa products with 26% market share.
Over time, our broader commitment to Indonesia is reflected in our growth strategy and our leadership in creating sustainable sourcing and value-adding, growth platforms as the country responds to its agricultural productivity shortfalls and food imports reliance.
As one of the largest certified cocoa and coffee suppliers in Indonesia, we run some of the best sustainable sourcing programmes that involve more than 40,000 certified cocoa farmers and more than 20,000 farmers who supply coffee directly to us. The Sulawesi Alliance of Farmers, Olam and Blommer Chocolate (SAFOB), our flagship initiative under the Olam Livelihood Charter, is one of the largest cocoa programmes in the world that aims to improve the economic and social welfare of farming communities.
We create value through midstream participation in sugar refining; management of cocoa processing operations for BT Cocoa Indonesia; and most recently by joining hands with the world’s fourth largest and Asia’s largest sugar producer Mitr Phol for large scale sugar milling and refining.
We also improve farmer yields through our upstream investment in a 3,500-hectare model cocoa plantation in Seram Island, Ambon, which we are developing as a prototype for a long term joint partnership with the chocolate industry to expand across Indonesia. With the same principle, we have built Arabica coffee farm shelters in Bandung where we work closely with farmers to improve yields for specific coffee varieties as contracted by customers.
We approach our growth in Indonesia in tandem with the nation’s needs to be self-sufficient, and to improve farmer aid and support. We have therefore undertaken these investments selectively, cognisant of Indonesia’s long term supply and demand deficit outlook and the regulatory regimes for the selected agri-commodities. For example, our Cocoa business has shifted from being a bean sourcing and export model to an integrated plantation-to-processing model as the government imposes bean export duties and incentivises local value-addition.
|Olam Co-Founder & Group CEO Sunny Verghese (right) with Mitr Phol Chairman Krisda Monthienvichienchai: Both companies formed a joint venture to invest in sugar milling in Indonesia in 2017.|
Another case in point is our Sugar business which started in 2007 with us acquiring PT DUS, then a sugar refinery running below capacity, and turning it into one of the most cost-efficient sugar refineries in Indonesia. PT DUS now runs at a capacity of 800 MT/day compared with 100-200 MT/day before takeover and our plan is to take it to 1,000 MT/day by 2019. Further, to address the continuing, growing sugar supply deficit while staying aligned with the government’s objective in attracting major agri-players to invest in Indonesia, we entered into a 50/50 strategic partnership with Mitr Phol for an integrated greenfield milling opportunity that will not only drive efficiency and secure steady margins, but also benefit multiple stakeholders – most of all, the farmers.
A strong relationship with the government and local authorities that has developed from our appreciation of the country’s needs now backs our growth strategy and execution.
Olam today directly employs more than 800 people across our cocoa, coffee, sugar, spices, edible oil and rice operations, which stretch from North Sumatra through Java and east to Sulawesi. This is set to increase as we expand on product and value chain adjacencies, which play to our strengths as a leading, global agri-business, and concurrently feature prominently on the government’s self-sufficiency agenda.
Indonesia is a vast country which, inevitably, throws up significant and diverse challenges. But it is also a vast opportunity for Olam – not only to build our businesses but also to make a fulfilling contribution to Indonesian society.