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Food sector weathers economic crisis

Rikza Abdullah
Contributor
Jakarta

Indonesia's food and beverages industries have proven
themselves as business sectors that have not been severely
affected by the recent economic crisis. They, therefore, will
continue to be attractive for investors as economic recovery is
expected to boost their future growth.

Data at the Central Board of Statistics (BPS) shows that the
capacity utilization of the food processing companies declined
slightly from an average of about 81 percent in 1996 to about 80
percent in 1997, the first year of the recent economic crisis.

The capacity utilization fell further to about 76 percent in
1998, when the crisis reached its deepest level. But the capacity
utilization rose back to about 77 percent in the following two
years.

The capacity utilization of the beverages industry rose from
77.9 percent in 1996 to 79.6 percent in 1997 and fell to 71.4
percent in 1998 but it rose back to 77.8 percent in 1999 and to
80.8 percent in 2000.

"The food and beverage sector will never experience extreme
ups and downs because they supply the basic needs of the people,"
the Ministry of Industry and Trade's agroindustry director, Yamin
Rahman, commented in Jakarta Thursday.

Thomas Darmawan, executive director of the Indonesian Food and
Beverages Association (GAPMMI), told The Jakarta Post that the
food and beverage businesses were likely to grow by between 10
percent and 15 percent per annum in the future if the country's
gross domestic products (GDP) can grow by at least by 4 percent
annually, the inflation rate by 10 percent and population by more
than 1.5 percent.

The interests of investors in the food and beverage industry
can also be seen from the value of their investments in this
sector. According to the Investment Coordinating Board, out of
last year's domestic investment commitments worth Rp 58.67
trillion (US$6.5 billion), the second largest portion, worth Rp
11.1 trillion (18.9 percent) was committed for the establishment
of food processing businesses.

The largest portion, Rp 22.33 trillion or 38.1 percent was
allocated for the development of chemical and pharmaceutical
industries. Out of foreign investment commitments worth $9
billion in 2001, the food industry attracted $279 million or 3.1
percent.

Darmawan said corporations that relied on imported raw or
auxiliary materials had thus far shown better performance, with
capacity utilization ranging between 70 percent and 90 percent,
than those relying on locally supplied materials, with a maximum
capacity utilization of 50 percent.

According to the Ministry of Industry and Trade's center for
industrial data (Pusdatin), the capacity utilization of the
monosodium glutamate (MSG) industry, for example, reaped 91.9
percent last year, the soft drink sector 86.4 percent, the milk
sector 76.8 percent, the margarine sector 75.3 percent, the
instant noodle sector 74 percent and the candy sector 73.7
percent.

For comparison, the capacity utilization of the edible palm
oil sector reached only 43.1 percent last year, copra-based
edible oil 22.5 percent, fruit canning sector 24 percent and
coffee powder sector 16.4 percent.

"The industries that rely on imported raw or auxiliary
materials can perform well because they are generally supported
by constant supplies of materials, stability of materials' prices
and availability of technology," Darmawan commented.

The businesses that rely on domestic raw materials performed
worse due to frequent disruptions in the supplies of materials,
fluctuations of materials' prices and high costs of local
transportation, he said.

Fluctuations of materials' prices were caused mainly by the
lack of government policies that encouraged producers to supply
their goods to domestic industries, while the high transportation
costs resulted from illegal payoffs, he added.

He said the fish processing industry was exceptional. It could
perform better -- with a capacity utilization averaging 81.7
percent -- than the other industries relying on domestic
materials because fish processing companies locate their
factories close to resources.

Darmawan said food processors and beverage producers generally
rely on the huge domestic market. The fact that Indonesia's
exports of food and beverages grew slowly indicated that their
role was small in supporting the growth of the food and beverage
sector.

According to Pusdatin, the country's food and beverage
exports, which fell from $748.9 million in 1997 to $657 million
in 1998, increased to $843.91 million in 1999, to $851.68 million
in 2000 and to $931.45 million in 2001. During the first four
months of this year, the country's food and beverages exports
rose 16 percent to $320.09 million from $275.93 million in the
same period of last year.

Darmawan said the food and beverage industries would become
more attractive in the future if the government took certain
measures related to transportation, security, sales of raw
materials, investment, financing, promotion, as well as research
and development.

On transportation, the government should eradicate illegal
fees, both by government officials and thugs, that have caused
domestic raw materials to become more expensive than imports.

On security, the government should guarantee the safety of
people moving from one area to another so that investors,
particularly foreigners, were no longer scared to operate
businesses in the country.

To help guarantee the consistent supply of raw materials, the
government should introduce policies that encourage producers of
raw materials, such as coffee beans and cacao, to prioritize
their sales to domestic processors. Domestic processors usually
have difficulties in obtaining raw materials when their prices
are high on the international market.

The government could also introduce investment incentives like
tax holidays and duty exemptions for foreign investors that would
produce certain goods in remote areas, but it should encourage
them to establish labor-intensive plants with a minimum
investment of $1 million and to use new technology.

To help finance domestic manufacturers, the government should
encourage local banks to channel more credits to them and lower
their interest rates.

"Encountered by financial difficulties, many domestic
manufacturers have been forced to sell majority shares to
multinational companies that have greater access to international
financing," Darmawan said.

On promotion, the government should increase its supports on
the overseas promotion of Indonesian products.

"These measures are important for Indonesia to increase the
competitiveness of its food products and beverages when it has to
face free competition after the implementation of the ASEAN Free
Trade Agreement in 2003," Darmawan said.