The new megatrends: Why Southeast Asia is leading the way
By Prakash Jhanwer, Regional Head, Southeast Asia and China
Southeast Asia has emerged as a key region for the global agri-industry in the last decade. A leading producer of key agricultural products such as palm oil, rubber and rice, it also boasts of a large consumer base population of approximately 640 million. Although it occupies only 3% of the world’s land area (4.5 million square kilometres), 8.5% of world’s population lives in the region. Southeast Asia is clearly punching above its weight in terms of overall agricultural production.
In particular, in the last two decades, countries such as Thailand, Vietnam, Indonesia and Malaysia have been able to ramp up agricultural production and productivity. In the next two decades, we are hopeful that Myanmar, Philippines and Cambodia will also drive agricultural growth in the region.
Similarly, demand for imported food products witnessed a dramatic increase especially for dairy, grains, corn, soybeans, etc. Southeast Asia is a key market for grains producing countries, such as Australia, USA and Brazil. There are five megatrends which we believe will shape the future of the agri-industry in Southeast Asia.
A low cost producer
Southeast Asia plays a pivotal role in global agriculture with leading positions in crops, such as palm oil, rubber, rice and Robusta coffee. In many of these products, Southeast Asia is not only the largest exporter but also the lowest cost producer underpinned by high yields. Another unique feature of Southeast Asia is the co-existence of smallholders and plantations, especially in Indonesia and Malaysia for palm and Vietnam for rubber.
Indonesia and Malaysia are the top two producers and exporters of palm oil.
The yields in both countries are the best globally and hence they have global cost leadership. Thailand and Indonesia are the top two producers and exporters of natural rubber. Cost of production of natural rubber in Thailand and Vietnam is among the lowest in the world and Indonesia’s rubber yields still have a large scope for improvement. Thailand and Vietnam are also among the top three exporters of rice in the world while Myanmar and Cambodia have huge potential for ramping up rice exports. Vietnam and Indonesia are the top two exporters of Robusta coffee. The former is the largest exporter of cashew kernels and has overtaken India while Thailand is the second largest exporter of sugar.
There is further scope for yield improvement in Southeast Asia which should reduce the cost of production even further, although a larger issue behind this is the size of land holding by smallholders, which puts them at the bottom of the pyramid in terms of income and impedes the mechanisation of farms. The issue of small land holding can be addressed by setting up co-operative structures and encouraging the use of low cost digital technologies to enhance productivity.
A large consumer of processed foods
Over the last decade, processed food consumption in Southeast Asia has increased at a rate of 8-10% a year. This is primarily driven by the increase in overall household income, urbanisation and the increased consumption of convenience foods. The growth has been stellar in countries, such as Indonesia, the Philippines, Thailand and Vietnam. The main product categories that have seen this increase are beverages, bakery, instant noodles, dairy products, instant coffee, chocolate products, nuts as a snack and ingredient, spices ingredients and seasonings.
This demand has been appropriated by national brands, the global food majors as well as the Asian MNCs, such as Universal Robina Corp, Jollibee and Indomie. National players like Indonesia’s Mayora, Wings, GarudaFood have also enjoyed huge growth. This growth trajectory is expected to continue in the near future, which augurs well for the food and agri- industry in Southeast Asia.
Outsourcing food Ingredients and fabric
Southeast Asia has also emerged as a large producer and exporter of food ingredients. The perception of inferior product quality and the lack of processing knowhow and reliability coming out of Southeast Asia is now a thing of the past. This has been overcome through investments in midstream assets and installation of world-class plant and machinery. The seafood and the textile industries were the first to kickstart this trend in value-added processing, which then grew quite rapidly in food ingredient manufacturing, from cocoa grinding, instant coffee and cashew roasting to spices grinding, cassava starch and refined palm.
I believe that Southeast Asia will continue to be an attractive base for exports of food ingredients and textiles due to the combination of labour availability and costs, adequate infrastructure (especially shipping), energy costs and raw material availability.
While the rest of the world seems to be fixated on trade barriers, this part of the world is looking the other way with increased frictionless trade, especially if we exclude sensitive staple commodities such as rice and sugar. We are experiencing huge volume expansion in intra-ASEAN trade flows for food products. This is driven by diligent implementation of the ASEAN Free Trade Agreement regulations for tariff free trade among ASEAN countries.
We have seen a respectable volume expansion in food products, such as cocoa ingredients, instant coffee, nuts and spices ingredients. For example, cocoa grinding in Southeast Asia has expanded from a relatively low base to about 700,000 metric tonnes (MT) over the past two decades, accounting for 16% of global capacity. In fact, our cocoa processing capacity in Singapore is fully taken up and we are expanding capacity in 2019 to support the growth of our customers.
Most importantly, these countries have been able to attract companies to invest in manufacturing facilities in Southeast Asia with eyes set on the larger Asian market. This alone will have the biggest impact on the ASEAN food industry in the coming years and can dramatically increase its competitiveness within the larger, growing Asian market.
Rise of the modern trade
Modern trade in Southeast Asia is growing at a rapid clip, catalysed by the rise of retail giants, convenience stores, as well as traditional wet markets becoming more organised. As the organised retailers grow and their share of the wallet increases, we experience increased consumption of packaged foods and the growth of house brands or private labels. Retailers are increasingly focusing on house brands for margin expansion. The priority for them is to develop their own brands for less complex food categories such as rice, wheat flour, sugar, nuts, etc.
As the trend of smartphone ownership and data availability picks up further pace, online channels will also become more prominent. This will also increase the share of organised retail in Southeast Asia.
Implications for Olam
We have invested significantly in Southeast Asia after we relocated Olam’s corporate headquarters from London to Singapore in 1996. For Olam, the region has shifted from an origination base to a food processing hub as we expand organically and inorganically across multiple product, geographical and value chain adjacencies, from being a supply chain manager of agricultural products to a grower and processor also.
To give an example, we grew our cashew operations in Vietnam by adopting mechanised cashew shelling in 2012 (converting raw cashew nuts into kernels mechanically) when previously for many years we were manually processing these for export. A year later, we moved into value-added processing by slicing, dicing and roasting kernels into high quality food ingredients and recently expanded the facility to accommodate the same processing function for almonds – we bring the almonds from our orchards and factories in Australia and convert these into almond ingredients for export into the growing markets in Asia, ie Korea, Japan, China and India.
Olam Cocoa warehouse, Singapore: For Olam, Southeast Asia has shifted from an origination base to a food processing hub.
Coffee was another notable example. Initially we sourced and processed coffee beans into green coffee for export and later moved upstream into sustainable and traceable coffee plantations in Laos and also into value-added processing, ie manufacturing instant, soluble coffee in Vietnam to cater to the growing appetite for coffee beverages in emerging Asia.
Indonesia, which is both a growing origin and market, is where we source coffee and cocoa beans, and process cocoa beans into cocoa powder – a product Southeast Asia is consuming faster than the developed world. Our partnership with BT Cocoa in Indonesia provides the platform for us to maximise this opportunity.
Indonesia is also the largest consumer of sugar in Southeast Asia and a growing consumer amid rising supply deficit within the country. This is why we have invested in the licenced sugar refining sector as early as 2007 and recently partnered Mitr Phol of Thailand to integrate into sugar milling – an opportunity to address the growing supply deficit issue.
We are excited about the prospects of our investments portfolio across Southeast Asia – a balanced one between achieving short term and long term returns. Early this year we commissioned production at the expanded soluble coffee facility – the third time now – and the plant is already running at full capacity. Our coffee plantations, currently 3-4 years’ old, will grow to full maturity in 2021-2022. Our recent joint venture with Long Son, Vietnam’s second largest processor in cashew, is set to improve our share of the market faster than we would have done so on our own.
Our growing Southeast Asian presence is a testament to our long term belief that this region is going to be an agricultural powerhouse for Asia, and could potentially leapfrog other parts of the world. Southeast Asia is and will remain a bright spot for many years to come and Olam is in a sweet spot to ride on this growth.