Update COVID-19 in Indonesia: 29,521 confirmed infections, 1,770 deaths (5 June 2020)
05 June 2020 (closed)
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Turnover in Indonesia's food and beverage industry is expected to grow 8.5 percent year-on-year (y/y) to IDR 1,400 trillion (approx. USD $105.2 billion) in 2017, while direct investment in this industry is expected to remain flat at around IDR 63 trillion (approx. USD $4.7 billion) with especially investors from Japan and South Korea eager to invest. Considering Indonesia's huge population (numbering more than 255 million) and their recovering purchasing power (after the five-year economic slowdown ended in 2016, while commodity prices have improved) the food and beverage industry is an attractive one for investors.
However, despite this seemingly positive economic and social context, Adhi Lukman, General Chairman of the Indonesian Food and Beverage Association (Gapmmi), said his institution deliberately did not set a too ambitious target for growth of turnover in Indonesia food and beverage (F&B) industry in 2017. In fact, the 8.5 percent (y/y) growth target that was set for 2017 is regarded rather conservative (after recording a growth pace of 8.4 percent y/y in the preceding year). This conservative view is caused by several government policies that can undermine profitability and attractiveness of Indonesia's F&B industry.
Lukman said the new policies that burden entrepreneurs in Indonesia's F&B industry include Law No. 33/2014 on the Halal Product Guarantee. This law requires all food, pharmaceutical, and cosmetic products that are consumed in Indonesia to have halal certification (which indicates the product was prepared according to Islamic law) by October 2019 (the latest). This law is regarded an obstacle to the business and investment climate of Indonesia as it increases red tape as well as costs (halal certification requires a fee).
Another policy that is still being discussed among government circles is an excise tax on plastic packaging. Since early 2016 the Indonesian government has been discussing the possibility of imposing an excise tax of at least IDR 200 (approx. USD $0.02) on plastic bottles and packaging in an effort to boost tax revenue, while protecting the environment as well as health of the consumer as the tax should lead to a reduction in consumption of plastic products, while health can improve because most of the F&B items that are wrapped in plastic are unhealthy (for example soda drinks and snacks). The plan led to fierce criticism from dozens of industry associations. Whether the government will go-ahead with this excise remains unknown.
The F&B industry of Indonesia also urges the government to lower gas prices (for industrial usage). Currently, the competitiveness of Indonesian industries is undermined by high local gas prices. Indonesian industries pay USD $9 - 12 per mmbtu, while in other countries the price is in the range of USD $3 - 5 mmbtu. It is estimated that energy prices account for about 12 percent of a F&B company's total production costs. Recently, the Indonesian government lowered the gas price for several companies in the petrochemicals, fertilizer and steel industries, but not for the F&B industry.
Above-mentioned policies undermine the competitiveness of Indonesia's F&B exports and therefore the nation is a net F&B importer. Lukman said Indonesia's F&B trade balance showed a USD $767 million deficit in the first 11 months of 2016, rising sharply from the USD $276 million deficit in full-year 2015. Lukman emphasized that the global F&B industry is very competitive, implying that when Indonesian exports become too costly, importers will switch to products from other nations. Currently, many Indonesian exporters are offering their export products at cheap prices, hence profit margins become small.
Meanwhile, the import and export product classification influences the basis for basically all import and export transactions as well as the resulting tax and tariff assessment and fees levied by customs and other regulatory authorities worldwide (including the country risk assessment). For Indonesian F&B exporters, the systems means that they have to face higher export taxes (between 10-12 percent), while ideally it would be only 6 percent.
Meanwhile, Lukman also stated that Indonesian entrepreneurs in the F&B industry need to become more innovative and improve their management. But it is also vital that the Indonesian government implements clear and solid policies. For example, salt imports continue to form a problem in Indonesia because it remains unclear whether imported salt that is used in the F&B industry constitutes so-called "consumer salt" or "industrial salt". The difference between both has a big impact on the import procedures and allowed quota. Therefore, communication and relations between the government and the players within Indonesia's F&B industry need to be improved.
Lastly, regarding direct investment in Indonesia's F&B industry in 2017, Lukman expects to see a figure similar to that of last year: around IDR 63 trillion.