Global Business Guide Indonesia

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Joint Ventures | Technology Partnerships
PG Rajawali II | Ir. Dwi Purnomo Putranto
Ir. Dwi Purnomo Putranto

Indonesia only produces 2.5 million tonnes of sugar and still needs to import because domestic consumption exceeds this amount by 3 million tonnes 

Ir. Dwi Purnomo Putranto, President Director

As a subsidiary of Rajawali Nusantara Indonesia, PG Rajawali II has been able to establish itself as a leading sugar producer in Indonesia. What can you tell us about the company’s background and its strategies going forward?

Based in West Java, PG Rajawali II oversees five sugar mills, three of which date back to the Dutch administration. At these older mills, our company’s success is dependent upon our ability to form relationships with the local farmers who produce the sugar cane that we process. At our more modern mills we have our own plantation land allotted to us by government concession.

At present, we are only able to mill on 100 to 110 days per year; a very low figure that can be attributed to the fact that not many people are willing to grow sugar cane in West Java. Our company has needed to come up with a strategy to increase our sugar cane supply and promote its cultivation. To do this, we have provided incentives such as free land preparation to farmers that agree to produce cane for three years. Over the next five years, it is our goal to increase the number of milling days to at least 140 days.

Indonesia only produces 2.5 million tonnes of sugar and still needs to import because domestic consumption exceeds this amount by 3 million tonnes. The opportunity to fill the gap between production and consumption is especially interesting to sugar mill companies, as it is expected that the government will import only raw sugar as opposed to white sugar. Current regulation states that only companies with sugar mills are allowed to import raw sugar. I thus have to prepare our mills to process the incoming raw sugar. This will require heavy investment and presents an area that we could work together with investors. Our company also operates an alcohol distillery, and we hope to move from producing ethanol to bioethanol.

The government has set a very ambitious target of achieving self-sufficiency in sugar by 2014. What do you think should be done from a regulation and government incentive standpoint to boost production in this sector?

The government needs to impose more restrictions in establishing new sugar refineries. There are many refineries that are supposed to only process raw sugar into industrial grade sugar which is not permitted to be sold directly to the market. What actually happens is that this high quality sugar intended for industries reaches the direct consumption market and distorts the price. This problem is made worse by the fact that the government imposes an import tax of 550 RP per kilo on raw sugar that is to be processed for direct consumption but does not impose a tax on that which is to be processed for industry purposes. The government needs to ensure that its existing restrictions and regulations are better enforced.

 Is your company interested in working with foreign investors looking to enter the Indonesian market with a high quality local partner?

I am open to working with foreign investors and have interest in forming partnerships with companies that can deliver technology, finances and new markets.

Without involvement from international companies, it can be difficult to obtain these three things in Indonesia. Technology and financial capital to buy new equipment such as modern boilers are particularly important as we strive to improve our productivity. We are also interested in learning new management techniques from partners willing to share know-how.

However, to accomplish this goal we, as a subsidiary company, would need to gain approval from Rajawali Nusantara Indonesia. As a state owned enterprise, they would then need to consult the government prior to allowing any joint operations expected to run for longer than five years.

Successful partnerships between foreign investors and local companies are often built on a foundation of a similar corporate culture. What would you like to share about your organizational environment?

Developing a strong corporate culture is one of the management processes that we would like to learn from potential partners. The prevailing management style used in most sugar mills in Java is quite old fashioned; almost all of our employees are in permanent positions and this makes our costs higher than would be the case if we implemented a more modern corporate structure. At present it is very difficult to outsource supplementary staff such as drivers, and we would benefit from any breakthroughs that foreign investors could provide in this area.

Why is investing in the Indonesian sugar industry and PG Rajawali II such an interesting opportunity?

Annual sugar consumption in Indonesia is around 12-14kg per person; a figure that trails far behind the consumption levels in neighbouring countries. Even with this low consumption, Indonesia still suffers from a lack of locally produced sugar. This industry therefore presents considerable business opportunities, particularly if domestic sugar consumption rises in the future. Several notable companies have already begun shifting their focus to sugar production, including Wilmar and Astra Agro Lestari.

In the past, foreign involvement in the Indonesian sugar industry may have been limited by the need for substantial investment to set up a sugar mill. To establish a sugar factory with the capacity of processing 6,000 to 8,000 tonnes of cane per day, a company must be prepared to invest around $150 million USD and this is not taking into consideration the investment needed to obtain land for cultivating sugar cane. The government, however, has recently introduced an arrangement whereby investors building new sugar mills will be granted the right to import raw sugar. Without this compensation that will allow investors to make a profit processing raw sugar while they are putting in the time to prepare land for sugar cane plantations, it would be extremely difficult to set up new operations.

Global Business Guide Indonesia - 2014

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