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INDONESIAN COMMERCIAL NEWSLETTER
MARKET INTELLIGENCE REPORT ON

FOOD PROCESSING INDUSTRY IN ERA OF GLOBALIZATION

July 2007


Current Issues

Food manufacturing industry came to the spotlight lately after  manufactured food products from China were reported to contain dangerous chemicals. Indonesian  authorities said Chinese food products were found to contain chemicals that could cause health hazard such as formalin. Indonesia is not the only one claiming to have found the dangerous contents, which  will certainly damage  the reputation of Chinese food industry but similar reports have also come from  a number of other countries in Asia and Latin America.

Chinese food products have flooded the world market with highly competitive prices.  Indonesia, the fourth most populous country in the word  with low income is a potential market target for the Chinese cheap products. The Chinese products are highly competitive in price. Local products with basic materials mostly imported  could not meet the Chinese products in open market.

However, the formalin-spiced food issue is only one of the hottest in the food sector in the world lately. Another big issue is the planned acquisition of France's food giant Danone by a bigger giant Kraft, which is the world largest food maker   from the United States. Kraft  plans to acquire the biscuit division of Danone as it apparently wants to tighten its grip of biscuit market in the world especially in emerging markets China, Indonesia and other Asian countries which make up 25% of the world market of biscuits.

Food industry is still growing fast in developing Asian countries  making them an attractive market targets for multinational companies. In industrialized West,  food industry is stable with low growth.

Indonesia has attracted not only foreign products but also foreign investors as the prospects for manufactured food products are encouraging in the country. Indonesia still needs to import considerable quantity of manufactured food products. Foreign suppliers and investors are competing to make their way to the growing market and  home to more than 220 people.

Imports of processed food products growing

Imports of processed food products and basic materials have increased from year to year. Imports for household consumption have increased 14.5% annually in the past five years  - from US$ 720 million  in 2002 to US$ 1.2  billion in 2006. Imports of processed food for industry rose from US$ 440 million in 2002 to  US$ 910 million in 2006  or an annual growth of 20.8%.


The imported products are generally already produced in the country such as snacks including biscuits and candies. Other ASEAN countries and China dominate imports.

The fact that Indonesia still is heavily dependent on imports for basic material such as wheat grain, wheat flour, corn, milk and  soybean  makes local products less competitive facing imported products, opening an opportunity for foreign products to enter the domestic market.  

Based on official record of the Central Bureau of Statistics (BPS), the country's imports of food basic material have continued to scale up in the past five years. Imports of basic materials for household food products rose from US$ 365 million in 2002 to US$ 600 million in 2006; and imports of food basic materials for industrial consumption increased from US$ 1,100 million ton US$ 1,250 million in 2006.

Therefore, imports of food products and food basic materials totaled US$ 4,076 million in 2006. Meanwhile, imports of consumer goods  in the first seven months of  2007 shot up  44.5%  from the same period last year  and imports of consumer goods basic materials increased 15.07%  and imports of capital rose only  by  8.34%. It is more difficult to develop local products  at present  as protection has become a taboo when the world is heading for free trade system. 


Foreign investors eyeing  Indonesian market

The potential market is an attraction for foreign investment  to the country. The presence of foreign investment  may cause a problem for local producers which are mostly small enterprises. Competition, will be inevitable and the outcome  will likely be  that the industry is  dominated by foreign  giants.
In fact multinational companies already hold the domination in certain sectors of food and beverage indusry6 not only in the country but also  in the world. In  soft drink industry, Coca Cola and Pepsi Cola  have long enjoyed domination and  the world  biscuit market is split  between a few large producers such as industry  Kraft  and Arnot, etc. It is noteworthy  that instant noodle industry remain strongly dominated by local producers  in Indonesia although the business in the industry has  reached a global scale with annual sales reaching 1 million tons  worth Rp 10 trillion a year.

So far the Indofood Group  is virtually unrivaled  in instant noodle industry. Any worthy challenge even comes  from another local producer the Wings Group with its Mie Sedaap. Mie Sedaap has contributed largely to reducing  the  domination of Indofood products from 90% to now 70% in instant noodle market in the country.

It is not unlikely, however, that some greedy multinational companies will  acquire a local producer  to establish foothold on the domestic market as an initial step toward domination of the industry. They will not hesitate to learn from the success of Mie Sedap if it would bring them to greater success to finally dislodge the Indonesian giant  the Indofood Group. Small  producers with fairly good marketing networks  would be a likely target of acquisition  of multinational companies.

Waves of acquisition has also slammed across the bakery and pastry industry, originally dominated by small and traditional enterprises. Currently foreign companies have entered the bakery market through franchising system. One example is the appearance of Bread Talk of  Singapore  in the Indonesian market triggering growth of mushrooming foreign bakery franchises in Indonesia, although until now the bakery industry is still dominated by household industries. Modern bakeries account for only 4% of the domestic market, but he potential market of  1.3 million tons a year,  may  soon draw multinational companies  to grab that opportunity in the open market.

Opportunity to grab investment opportunity

There is no way of blocking foreign investment from doing business in food industry  in the country. It is the same as in many other emerging markets.

What is more important is  how to make them serve the national interest that is to help in improving the condition of  the country's ailing economy. They must not be allowed to make Indonesia merely as a market target but they should  develop  and establish  a production base that would make the country a big players in the global market.

The small and medium enterprises, which provide jobs for millions of Indonesians should not be sacrificed  without compensation for  the country.

The huge domestic market is a potential base for large scale development of food industry  with strong competitiveness  in global market.

MONTHLY REPORT

INDONESIAN  COMMERCIAL NEWSLETTER
       
July 2007

       

List of Contents

FOCUS: FOOD PROCESSING INDUSTRY IN ERA OF GLOBALIZATION        1

INDUSTRY PROFILE:

     DEVELOPMENT OF WHEAT FLOUR INDUSTRY IN INDONESIA        5
  • Current issue        5
  • Specifications of wheat floor        6
  • Capacity of wheat flour industry remain unchanged        7
  • Players in wheat flour industry        8
  • Bogasari the largest and most efficient        9
  • Wheat flour production up        10
  • Imports of wheat flour up        10
  • Dumping allegation stronger        12
  • Characteristics of imported wheat flour        13
  • Exports of wheat flour down        13
  • Consumption of wheat flour growing        14
  • SMEs largest users        15
  • Bogasari leads in competition        16
  • Prospects and conclusion        17

     DEVELOPMENT OF BISCUIT INDUSTRY IN INDONESIA        18
  • Current issue        18
  • Structure of biscuit industry in Indonesia        18
  • Main players in biscuit industry in Indonesia        22
  • Global players begin to take control of biscuit industry in Indonesia        25
  • Kraft Foods Inc to acquire Danone Group        26
  • Biscuit sales in  Indonesia        27
  • Market aspect        29
  • Competition        29
  • New Investments        32
  • Prospects and Conclusion        32

     DEVELOPMENT OF INSTANT NOODLE INDUSTRY IN INDONESIA        33
  • Backgrounds        33
  • Producers and production capacity        34
  • Investment small        38
  • Supply of wheat flour        39
  • Exports        40
  • Imports up        41
  • Consumption up        41
  • Marketing        42
  • Sales value of instant noodle around Rp 10 trillion        44
  • Competition tighter between Indomie and Mie Sedaap        44
  • Prices varying        48
  • Distribution        49
  • Conclusion and prospects        49

COMPANY PROFILE: INDOFOOD GROUP A GIANT IN FOOD INDUSTRY        51

INDUSTRY:

     BAKERY INDUSTRY DOMINATED BY COTTAGE INDUSTRIES        59
  • Bakery franchises        59
  • Large scale bakery industry        61
  • Semi modern and manufacturing players mostly in Java        62
  • Nippon Indosari Corpindo the largest manufacturing player        63
  • Bakery production reaches 1.3 million tons        64

     DEVELOPMENT OF FILM PLASTIC INDUSTRY DEPENDS ON FOOD INDUSTRY        65
  • Current issue        65
  • Food processing industry the largest consumer of film plastic        65
  • Production of film plastic stagnant        66
  • Exports of film plastic up        66
  • Imports of film plastic up sharply since 2005        67
  • Consumption of plastic stable        67
  • Plastic packaging and rotogravure printing industry the largest users        68
  • Prospects and conclusion        70

CORPORATE NEWS IN BRIEF:
  • Antam & China to invest US$ 500 million in Alumina factory        71
  • Garuda ends years of being in the red        71
  • Inco to build new nickel smelters to cost US$ 2.5 billion        71
  • Emaar set to go ahead with Lombok US$ 800 million project        71
  • BII considers merger with Bank Danamon        72
  • Asian Agri to expand oil palm plantation in Kalimantan        72
  • Bank Mandiri set for big acquisition        72
  • Yamaha retakes lead putting Honda behind again        72

ECONOMIC NEWS IN BRIEF:
  • FTZ status attracts investors to Batam        73
  • Indonesian airliners allowed to continue flying to Saudi Arabia        73
  • Government revokes 678 regional regulations        73
  • Royalty system used in geothermal power contracts        74
  • RI-Australia move closer to having FTA        74
  • Govt. bans domination of oil palm plantations        74

APPENDICES:
  • Directory of food industry company in Indonesia        75

ECONOMIC INDICATOR:
  • Consumer Price Index in Indonesia        79
  • Oil Prices        80
  • Foreign Exchange and Gold Price in Indonesia        81
  • The Indonesian Economic Trends        82

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