Industrial Clusters in The Palm Oil Industry in Indonesia

Gorga ParlaunganYokohama National UniversityThe Joint Japan World Bank Scholarship Program Regional Conference “Capacity Development Asia”Jakarta, June 4, 2008

Palm Oil in Indonesian Economy

One of main export commodities, increasing contribution to non-oil-and-gas exports

More than 50% of total crops production beginning in 2000

Involves 1.18 million families in employment Growth in production and plantation area (5.5 million

ha in 2005 and increasing) Further prospect in manufacturing industries, including

biodiesel.

Source: DGEC 2006

CPO and PKO export

-

10

20

30

40

50

60

70

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Total Export Value (USD bil)

Share of Palm Oil Export

Source: DGEC 2006 (processed)

World Vegetable Oil and Fat Production

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1980 1985 1990 1995 2000 2005

Palm oil

Soyabean oil

Rapeseed oil

Sunflower seed oil

Tallow & grease

Source: Basiron 2007 p. 292 (processed)

Palm oil production tree

Fresh fruit bunch

CPO Palm Kernel

Palm Kernel Oil Palm Kernel MealVarious Palm

Oil and fats

Margarine, Cooking Oil, Mayonnaise, Chips

Cosmetics, detergents, soaps

Paints, grease, candles

Oleo chemicals

feed

livestock

biofuels

Source: Kehati 2006 p. 7, Pahan 2007

Problems of Palm Oil Industry

Monopsony, environmental degradation issues

Social unrest-> work culture, employee dependency, security, and control of working environment and wages

Domination of large business groups, no links with SMEs in manufacturing industry

Export mostly in crude palm oil.

Crude palm oil domestic consumption and export

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

1998 1999 2000 2001 2002 2003 2004 2005

Domestic

Export

ton

s

Source: DGEC 2006 (processed)

Palm Oil Industry in Porter’s Diamond Model

Factor conditionsFactor conditions

Related and supporting industries

Related and supporting industries

Demand conditionsDemand conditions

Firm strategy and rivalry

Firm strategy and rivalryChance

Government

Source: Porter 1990, p. 127

Palm Oil Industry Indonesia

Competitive in agriculture sector Monopsonic, dominance of large

enterprises Linkages based on networks Absence of cluster attributes: social capital,

joint action Absence of benefits to micro and SM

industrial agents.

Clusters

Proximity Linkages Interaction Critical Mass

“Geographic concentration of interconnected companies and institutions in a particular field” (Porter 1998, p. 78)

“Sectoral and geographical concentrations of enterprises that produce and sell a range of related or complementary products and, thus, face common challenges and opportunities” (UNIDO 2001, p. 9)

Attributes:

Why Clusters?

Shared capital and risks, in early stages as well as further in penetrating global market

Cost savings, due to the easy access to specialized suppliers, distributors and human resources

Knowledge spillovers Complementarities Learning from interaction with customers and suppliers

(when network to markets exists).

Pressure for higher performance in head-to-head competition Fast change reaction, due to the extreme specialization inside the

cluster and its high productivity Imitation facilitates faster adoption of innovation Establishment of social capital within the cluster.

Industrial Clusters in Indonesia

Jepara furniture cluster, 15,271 enterprises from sawmills, warehouses, to showrooms. Revenue up to USD 1.46 billion / year (Roda et al 2007)

East Java clove cigarette industry. 221,000 workers, outperforms international competitors (Kuncoro 2007, Wibowo 2003, Tambunan 2005)

Features: root from strong home demand, historic-know-how basic, presence of linkages to markets.

Recommendations

Policies that support the palm oil derivative industries

Further studies on the most appropriate cluster in palm oil industry, based on country-specific and regional characteristics

Seedbed for cluster in palm oil derivative industry, to promote SMEs and strengthen the industrial structure.

References:

Bank Indonesia (2007). 2006 Economic Report on Indonesia. Barlow, C., Zen, Z., & Gondowarsito, R. (2003). The Indonesian Oil Palm Industry. Oil Palm Industry Economic

Journal 3 (1) Basiron, Y (2007). Palm Oil Production through Sustainable Plantations. Eur. J. Lipid Sci. Technol. 109. DGEC (2006). The Estate Crops Statistics of Indonesia 2004 - 2006. Directorate General of Estate Crops, Ministry

of Agriculture of Indonesia. Kehati, Watch, S., INRISE, Institute, B. A., & Development, M. I. G. D. R. (2006). Indonesian Path Towards

Sustainable Energy: a Case Study of Developing Palm Oil as Biomass in Indonesia. Kuncoro, M. (2007). Ekonomika Industri Indonesia. Menuju Negara Industri Baru 2030? (Indonesian Economic

Industry. Towards a New Industrialized Economy 2030?) Penerbit Andi. Yogyakarta. Pahan, I. (2007). Panduan Lengkap Kelapa Sawit. Manajemen Agribisnis Dari Hulu Hingga Hilir. (Complete Guide

on Oil Palm. Agribusiness Management from Upstream to Downstream). Penebar Swadaya. Jakarta Porter, M. E. (1990). The Competitive Advantage of Nations. New York: The Free Press. Porter, M. E. (1998). Clusters and the New Economics of Competition. Harvard Business Review, 77-90. Roda, J.-M., Cadène, P., Guizol, P., Santoso, L., & Fauzan, A. U. (2007). Atlas of Wooden Furniture Industry in

Jepara, Indonesia. Tambunan, T. (2005). Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience

from Indonesia. Journal of Small Business Management, 43, 138-154. Tambunan, T. (2006). Indonesian Crude Palm Oil: Production, Export Performance and Competitiveness. Kadin-

Jetro. Wibowo, T (2003). Potret Industri Rokok Indonesia. (Portrait of Indonesian Cigarette Industry). Kajian Ekonomi dan

Keuangan, 7 (2). UNIDO. (2001). The Development of Clusters and Networks of SMEs.

Thank you