Fresh fruit and vegetables have always made up a significant portion of the Indonesian diet which in the past consisted of locally grown produce purchased from traditional retail outlets and markets. Indonesian consumer spending on fresh horticultural products compared to that on rice was 50% in 1994, this has since risen to 75% in 2004 and 100% for urban dwelling Indonesians in 2007 (Horticultural Producers and Supermarket Development in Indonesia Report, World Bank). However, Indonesian per capita consumption of fresh fruit and vegetables is still below the recommended level set by the United Nation’s Food and Agriculture Organisation (FAO) at an average of 40kg per person every year while the recommended amount is 70kg (Indonesia Statistics Bureau Survey). Indonesia’s upper middle class, who will swell to 30 million people by 2015 according to World Bank estimates, will contribute to this new trend as increased awareness about health and the nutritional benefits of fresh fruit and vegetables as part of a balanced diet become entrenched in everyday eating habits. This trend is also being accelerated by improved supply chains and the ease of access to modern retail facilities such as supermarkets in urban areas which allow for the correct storage of fresh produce thus making previously unavailable varieties of fruit and vegetables available to consumers (See The Rise of Modern Retail Outlets). The market is therefore highly promising for both local and foreign producers; however the country’s reliance on imports is highlighting the declining competitiveness of Indonesia’s domestic horticulture sector as well as the government’s moves towards more protectionist and restrictive trade policies.
Imported fresh fruits and vegetables are coming to make up an increasing share of fresh produce sales in Indonesia. In 2006, horticulture imports stood at $600 million USD and rose to $1.7 billion USD in 2011 (Ministry of Trade). Approximately 45% of such imports constitute fresh fruit predominantly apples ($153 million USD), oranges ($150 million USD), grapes ($99 million USD) and durians ($74 million USD). China is the main source of Indonesia’s fruit imports at 55% followed by Thailand 28%, USA 10%, Chile 4% and Australia 3%. In 2011, imports of fresh vegetables increased by 29% with white onions making up a substantial portion ($242 million USD) as well as red onions ($74 million USD). With regards to vegetables, China is also the leading source contributing to 67% of total imports with both Thailand and Myanmar each making up 10% and India at 8%. The preference for imported fruit is due to the superior quality and taste offered by produce from China and Thailand in particular in addition to the competitive pricing as a result of government subsidies often making imported goods comparatively cheaper to those produced in Indonesia.
Indonesia has long been hailed for its comparative advantages in all things agricultural; mineral rich volcanic soil, a varied tropical climate for counter seasonal cultivation and the wide availability of fertile land for plantations are just some of these advantages. The country’s economy remains heavily dependent on agriculture with over 40% of the labour force engaged in the sector (See Agriculture Overview of Indonesia), however only 11% of the agricultural workforce is absorbed by horticulture (Ministry of Agriculture). The value of the fresh fruit and vegetables market has doubled over the course of 1995-2009 to an estimated $10 billion USD industry (Indonesia Statistics Bureau), however the local horticultural industry is playing less of a role than it is surely capable of. There are various factors involved as to why this is the case, one cause pointed out by local horticultural players is the lack of quality seeds available to local farmers despite the research underway at institutions such as Bogor Agricultural University and the private sector. Government support of the industry to assist in educating farmers on modern cultivation methods has also not been forthcoming making the necessary investments to improve output out of reach for most independent farmers. In contrast, Thai horticulture producers receive state support for their operations to create economies of scale and the country’s fresh fruit and vegetables have become an area of national pride for both the local and export market due to the promotional efforts of the reigning monarch. Transportation and storage is a further issue that has held back local farmers in commanding higher value for their produce as the use of traditional transport methods such as open air trucks results in large portions of the products being spoiled on arrival to their destination.
Indonesia’s horticulture sector represents a key opportunity for local and international horticultural players to work with local farmers to introduce improved production methods and coordinate economies of scale which would result in more competitive pricing in the domestic and international market. Areas such as seed research, modern planting and greenhouse methodology in addition to cold chain storage and transportation networks offer highly lucrative business opportunities. Plantations are a further area of potential to foreign investors given the laws governing investment which allow ownership of up to 95%. While restrictions on fruit and vegetable imports are getting tougher for foreign exporters to navigate (this matter is covered in more detail later), the country’s fruit imports will continue unabated leaving plenty of scope for further growth. However, exporters should position themselves strategically to offer products that cannot be grown locally such as temperate fruit varieties rather than competing directly with local producers. For example, stone fruits such as cherries, peaches and plums as well as various berry fruit types cannot be cultivated in Indonesia’s tropical climate.
Transportation and distribution of goods is a challenge for all consumer goods related industries in Indonesia, however the problem is more acute for fresh fruit and vegetables producers given the time pressures to ensure that the fruit is fresh on delivery. Indonesia’s poor infrastructure and high logistical costs is not a new issue for those in the agriculture sector; however the announcement that as of June 2012 four out of the country’s eight main sea ports will be closed to horticulture products is seen as exacerbating this problem (See Indonesia’s Shipping Sector). Jakarta’s main ports such as Tanjung Priok previously handled up to 90% of the imported horticultural goods which will now have to go through Soekarno Hatta Airport, Tanjung Perak Port in Surabaya, Soekarno Hatta Port in Makassar and Belawan Port in Medan which will significantly add to transport costs. The Indonesian government has justified its decision to close the ports due to the lack of facilities such as laboratories for testing and quarantine. The government’s actions have prompted complaints from 12 horticulture exporting countries in the EU as well as Canada, USA and New Zealand who raised the matter at a World Trade Organisation meeting in May 2012 citing the lack of scientific evidence for Indonesia’s claims regarding phytosanitation requirements as the cause for the closure of the ports. Following on from the lodge of the complaint, three countries namely Canada, USA and Australia have requested a Mutual Recognition Agreement enabling them to continue to export fruits and vegetables through Tanjung Priok provided that Indonesian horticultural goods receive reciprocal treatment.
The Indonesian government move follows the introduction of new quality standards for imported fruit as per the Ministry of Agriculture Regulation No.15/2012 and No.16/2012 which stands as an amendment to No. 89/2011 and No.90/2011 on Technical Requirement and Plant Quarantine Measures on Import of Fresh Fruits and/or Vegetables and Fresh Bulbs into the Republic of Indonesia`s Territory. Such amendments were made following the discovery of traces of formaldehyde in imported fruit products with 19 incidents reported in the prior 18 months according to a statement by the Minister of Trade, Gita Wirjawan. In May 2012, the Ministry of Trade also announced new restrictions on horticulture imports in the form of regulation No.30/2012 whereby producers and importers must obtain a special import license that is subject to the approval of the Ministry of Agriculture in effect as of 29th September 2012. Eligibility for the license will depend on the technical capacity of the importer including ownership of cold storage transport facilities and having relationships with multiple distributors to avoid monopolistic practices and to provide opportunities to local agents.
Indonesia’s fresh fruit and vegetables sector is at a key stage in its development with the scope to offer lucrative opportunities to both local players and international importers. The government’s efforts to tighten their grip over agricultural imports are making life more difficult for importers and local distributors due to the inadequate infrastructure available in Java and Jakarta as the country’s main economic hub and trade gateway. The intent of such measures is clear; locally produced Indonesian products must be competitive in their domestic market to avoid losing out on the surge in consumer demand particularly among the lower-middle income bracket. However, a more hands on approach will have to be taken by the government to have a real impact on the horticulture sector as a whole by providing local farmers with the tools to cultivate higher quality fruit such as better seed varieties as well as education on packing and transportation. The private sector and foreign investors also have key opportunities available to them within an improved local horticulture industry for plantations, distribution as well as marketing. For fruit exporters to Indonesia, the middle-upper income bracket will still provide plenty of demand for their products while greater local producer involvement will also provide a more competitive environment to effectively differentiate and position their products in the marketplace.
Global Business Guide Indonesia - 2013
Contribution to GDP: 13.88% (Q3 2015 including Fisheries & Livestock)
Number Employed in the Sector: 40.12 million (February 2015)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.