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.