Despite its wealth of arable land located in cultivation friendly climates as well as an immense pool of cost competitive labour, Indonesia has long been unable to take full advantage of its potential as a destination for agribusiness. In addition to being one of the primary causes of the country’s sizeable current account deficit, a lack of companies carrying out value added processes has proven to be a major hurdle in the effort to move away from an overreliance on raw material exports. This stands to change, however, with the government’s initiative to incentivise business activity in downstream agricultural industries. Increased taxes levied on the export of unprocessed commodities such as palm oil have created a host of different opportunities for investors, who are well positioned to offer much needed technical know-how and effective consumer branding expertise to local companies looking to make the jump from harvesting raw materials to now creating consumer products. Moreover, though much has been said about Indonesia’s potential as a supplier of biofuels derived from palm oil; there are other equally interesting but less saturated industries open to foreign investors that make use of this abundant resource.

Manufacturing biodegradable plastics, which can be made from palm oil extracts and other raw materials native to Indonesia such as starches taken from cassava, is an area that should be explored, given the rising popularity of regulation restricting the use of traditional plastic bags in developed markets. Recent EU proposals to cut the use of plastic bags by 80% by 2017 put in place the framework for individual member states to impose bans or charges on non-biodegradable lightweight bags (European Commission). Individual states within the U.S. have similarly put forward bills to introduce a 5 cent tax on all disposable plastic or paper bags provided by retail outlets to customers.

However, while the cost of manufacturing biodegradable alternatives is approaching a level comparable with traditional plastics due to continued research and development, it remains up to 2 to 10 times more expensive depending upon the specific materials used during production (Australian Academy of Science). Thus, in tapping into an industry expected to achieve global production in excess of 5 million tonnes in 2016 – up from 675,000 tonnes in 2011 (European Bioplastics) – companies are encouraged to minimise costs associated with labour and land acquisition by basing their production facilities in Indonesia. To expedite start up time and bypass regulatory inefficiencies, foreign investors should seek out partnerships with established local firms with an existing network of raw material sources and a keen understanding of how best to work with local human resources. Companies planning to obtain and manage their own feedstock plantation should be aware that current regulation allows up to 95% foreign ownership in plantation businesses occupying an area of more than 25 ha, subject to approval from the Ministry of Agriculture.

From a domestic market point of view, trends driven by an emerging middle class such as the rising consumption of cosmetics and beauty products open up doors to businesses in the field of cultivating natural ingredients. In order to compete with renowned international brands, local cosmetic manufacturers have taken to producing make up and skin care using local heritage resources such as langsat and hibiscus. Both of these materials are key ingredients in whitening treatments that are popular in Indonesia as well as in neighbouring Asian markets.

There exists considerable scope for investors to bridge the gap between the smallholders that grow said ingredients and major manufacturers that require raw materials to meet swelling domestic demand. Expertise in efficient agricultural processes, access to the latest technology and capital are sorely needed by local agribusiness companies currently unable to fully supply the cosmetic and beauty product industry. Moreover, foreign companies with experience in integrated agribusiness will also find that there are significant opportunities available to them in providing branding and marketing consultation to local businesses targeting a move up the value added chain by manufacturing products for end users made from their existing supply of raw materials. This is particularly true in the coffee and tea industry, where Indonesian companies have yet to successfully create internationally renowned brands despite the country’s reputation for cultivating some of the world’s best coffee beans and tea plants.

Through initiatives to modernise a sector that accounts for 39% of the labour force (CIA World Factbook, 2012), Indonesia’s government has implemented regulations that will facilitate progress in the country’s downstream agriculture sector. In addition to steeper export tariffs, major steps are being taken to position the country as a leading source of natural, biodegradable products that are now very much in demand in increasingly environmentally conscious markets in the west. The most notable of these initiatives are outlined in the MP3EI, Indonesia’s master plan to achieve accelerated economic success and stability, and include the large scale allocation of land for agricultural commodity estates. The twin momentum to increase feedstock production and foster a regulatory climate conducive to downstream growth, coupled with existing advantages in competitive labour and arable land, firmly consolidates Indonesia’s potential as a production base for both export oriented and domestic focused companies. Indonesia’s downstream agribusiness industry presents the country with an opportunity to carve out a competitive niche, provided it has the right technical know-how and global market access to realise this potential.

Global Business Guide Indonesia - 13th December 2013

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Indonesia Agriculture Snapshot

Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.

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