A Value Added Creation for Developing Mayor

A Value Added Creation for Developing Mayor Primary Commodities in Indonesia; Cases and “a Sustainable Model “

Author: John Darmawan August 2010 Jakarta - Indonesia

Preference: Indonesia, a rich natural resources country, but ironically the growth of economic is not impressed. Last year there was a survey which shown the economic growth of Indonesian was in number 41 from 57 survey participants country. “1 Therefore business environment is not conducive for business society. In the year 2009 survey shown that the position of Indonesia is in number 38 from 57 survey participant countries. “ 2 Moreover development program with inappropriate implementation program, because less coordination among stake holder, which result in less competitive advantage of Nation/Indonesia. As stated in the year 2009 survey which put competitive advantage of Indonesia in number 42 from 57 survey participant countries. Hence of it many respective observers sees the direction of Indonesian economic are not well govern The natural resources in Indonesia, consist of exhaustible natural resources such as coal, oil, geothermal, and renewable natural resources such as palm oil, coconut oil, castor oil. In the year 2009 Indonesia produced 244 million tons coal. “3. In the global market, Indonesia coal thermal position is after mayor world supplier “4 The other mayor primary commodity from Indonesia is Palm Oil. The development of Indonesian palm oil industry is amazing. The achievement of national plantation land expansion is 11.8% per year. In other word the land expansion is approx 300,000 hectares per year, it is just for palm oil plantation. In the year 2009 the total palm oil plantation in Indonesia is 7.9 million hectares. These make Indonesia as a number one palm oil producer in the world. “5 Tragic! As presented in above paragraphs, we can see that Indonesia with abundant natural resources but with inappropriate competitive advantageous of nation? The development spirit of this country has already gone, it is really like that? The above question became the basic idea of the thesis; therefore it needs to find an answer: what is the optimum business development model of mayor primary commodities in Indonesia which is gives the optimum benefits to the stake holder Jakarta, August 2010 Author

A.Theorical Foundation A.1 Theory What we have to do in developing business development model? It needs theoretical framework as a solid strategic structure, the most important is applicable. Usually strategy are defined around different type of focus, such as a coherent, unifying, an integrative pattern of decision, an allocation of limited resources, or an establishment of a longterm organizational purpose To implement the theory, need so-called tools of strategy implementation such as: Frameworks: A Framework provide businessmen with effective levers to guide the planning process Frameworks are structure that delineate the major relevant factor to be considered and relationship between factors, known as top – bottom-up approach and supply-demand approach Data Management: Although past and present data will never be perfect, the strategy should still be based on the best data available. Sometimes data are not complete, confusing and need to be check and recheck. In short we have to developed key best practices and tools for gathering what is available, estimating what is unavailable, checking validity of all data, and utilizing the data Strategy: The most famous classical strategy in developing business model come from the Head of Michael E Porter, even though it is impossible to developed an exhaustive model, over the year, some reasonably reliable strategies have emerged. Moreover we can used them for assessing our business model’s Process: An effective planning process can help manage future uncertainties, but as we all know the uncertainty involve in business and we have to recognize what‘s strategy can easily and quickly become optimal or even ineffective due to uncertainties involved

In order To get the optimum business models, we need a structural process analysis, there are the most well-known and widely used ready-made classic frameworks developed by Harvard Business Scholl (HBS) professors and taught at HBS: 1. Porter Five Forces (To answer the question: is this an attractive industry ) 2. Porter Generic Strategies and Porter Value Chain ( To answer the question: how to achieve sustainable competitive advantages in an industry ) 3. Porter Competitive Advantage of Nation ( To answer the question: what is the competitive success of nations look at aggregate, economy-wide, measure it like the balance of trade 4. Balance Scorecard (To answer the question: how to monitor execution?) Besides implementing classic frameworks in developing applicable business models, it is also important to consider macro factors such as geopolitics and environment whereas the natural resources locate and get additional value, this is known as“Resources Nationalism” as the management of energy flows in accordance with vital state interest. “6 Hence of natural resources limitation either limitation of land development, nowadays the sources of natural resources are found in very remote area which is make it very difficult to develop in economic of scale, such Michael T Klare said in his book “New energy discoveries are mainly occurring in place where resources are difficult to extract, physically, economically and even politically “7 Unlike renewable resources, the exploitation of nonrenewable materials is governed by natural extraction cycle. Typically, when natural resources is harnessed for human use, production ramps up quickly and then grows less rapidly until maximum level of output is reach It is not only because of nature condition which chase optimization of all nature resources but there are also many limitation which is came out from government for protecting the usage of all natural resources. Some analysis have tend to apply this term solely to nations with an abundance of natural resources that maximized state control over domestic natural resources and sought to leverage this latent power into a source of political advantage The theoretical application of Resources Nationalism needs to optimize all of the natural resources, moreover it will achieved the interest of all stake holder such as Government, share holders, society, NGO, end users, and employees. Since policy makers are now concerned more with long-term sustainability of human society than with short-term competitive advantage among and between nation, more attention is

paid to consumption patterns of renewable natural resources such as biodiesel from crude palm oil. “8 , and We have only one narrow timeframe of opportunity for ensuring a desirable future our species by reducing fossil fuel consumption while developing renewable energy resources and a sustainable economic paradigm .”9

Keith Thurley was convinced that management knowledge under whatever label must be tested in the field, preferably at the work floor and by direct observation. Cultural beliefs and concepts, attitudes to authority and perceptions of social reality are the foundations of management and administration. “Good “practice, therefore, has to be worked at locally and based on local problems and the local situation. “10 The last not the less, there are many factors will follow the business models such as: 1. Guarantee of commodities availability 2. In order to get additional value, it is importance to optimize the utilization of all natural resources as sources of energy, or as source of food-stuffs 3. Stimulate the procurement of natural resources and distribute it to every outlying place, these activities will reduce economic disparity among region and between different economic capacity, I 4. The business should become high-tech product exporter 5. The Business should develop industry with additional value 6. Increased commercialization of renewable energy and reinvented energy and also optimum usage of local natural energy resources 7. Consider the importance’s of environment aspect in business process, from exploration process until exploitation activities.

A.2 METHOD OF RESEARCH The approach for doing this research consisted of: 1. Desk research 2. Field research Desk Research: To start this thesis proposal I read the trade journal on Palm oil industry and on Coal Industry. Other information came from the Indonesian Trade and Energy market which is I got from the Trade Department of Republic Indonesia and Department of Energy and Mineral Resources Republic of Indonesia and many other resources.

Field research: For this proposal author need some more specific information about the coal industry and palm oil industry, and for those purpose the author get some figure from many respective parties during field research I spend 45 days in Kalimantan Island for the field research which is divide into 3 trips such as: 1. The first field research after return from Holland, from October 28, 2009 to November 27, 2009 2. The Second field research on February 08, 2010 to February 14, 2010 3. The third field research on March 02, 2010 to March 09, 2010 My field research method consisted of interviewing practitioner, interviewing industrialist and also data gathering from many stake holders

B.

THE INDUSTRIES

B.1 PALM OIL INDUSTRY The prospect of palm oil industry in Indonesia is very promising; ironically the government of Indonesia does not paid full attention in developing this plantation industry. These nation face a contradiction situation particularly in developing and expanding the natural resources bases business as author descript in following paragraph Today Crude Palm Oil ( called CPO) dominate world vegetable oil market, these is because the abundant supply of CPO and very competitive CPO price compare to others vegetable oil, finally put the CPO’s as market leader by supplying 70% of world vegetables oil market. Indonesia has the opportunity to increased Indonesian CPO market share from 47% to 50% in the year 2010. If Indonesian CPO could achieve the target, it will be put Indonesia in the stronger position as CPO mayor world market supplier. “11 In the table 1, in 2008 Indonesia with 7 million hectares. “12 could export 16 million tonnes CPO with total value USD 12.4 billion and in the year 2010 with 7.9 million hectares, it is expect to produce 21 million tones CPO and 17.6 million tones of it export allocation .”13

Table.1 Palm Oil Plantation – 24 Provinces. Year 2003-2008 Location N Aceh D North Sumatera West Sumatera Riau Jambi South Sumatera Bengkulu Lampung Bangka Belitung Riau Archipelago West Java Banten Nusa Tenggara Timur West Kalimantan Central Kalimantan South Kalimantan East Kalimantan Central Sulawesi South Sulawesi South East Sulawesi Gorontalo West Sulawesi Papua West Papua

2003

2004

2005

2006

2007

2008

262.151 249.011 254.261 308.560 274.822 274.135 919.680 844.882 894.911 979.541 998.966 1.026.644 306.496 279.798 282.518 315.618 291.734 305.871 1.319.659 1.340.036 1.277.703 1 .547.942 1.620.882 1.623.458 456.327 372.804 403.477 568.751 448.899 454.771 502.481 497.933 548.678 630.214 682.730 718.068 80.218 126.252 147.125 165.221 163.455 161.505 137.721 145.542 148.535 157.229 152.409 158.488 94.886 119.635 130.037 133.284 172.227 171.535 0 6.849 13.698 6.933 6.678 6.547 6.242 8.070 8.744 9.831 10.550 11.573 19.200 12.614 14.076 14.077 14.894 15.046 0 0 0 0 0 0 416.807 358.175 381.791 492.112 451.400 476.891 241.615 401.663 434.481 571.874 616.331 709.206 141.638 172.650 134.621 243.451 257.862 265.187 201.871 171.581 201.236 237.765 339.294 368.504 43.743 48.236 48.334 48.431 52.298 52.169 18.932 13.925 16.018 24.490 15.708 16.232 4.078 4.106 466 2.966 18.912 21.213 0 0 0 0 0 0 0 52.476 57.476 75.154 115.906 117.261 49.812 51.051 39.090 29.736 29.736 25.926 0 11.540 16.540 31.374 31.144 33.646

Source: Majalah InfoSawit Vol IV No.7 July 2010 -Department of Agriculture Republic of Indonesia page 22

It is expected that in the year 2010, Indonesian CPO could fulfill the World Demand of Vegetable oil and fats. The demand will be 5, 5 million tons, these are exceeding World Supply of vegetable oils and fats which is 3.25 million ton and 50% of it is CPO. Cause of this opportunity is the limitation of land expansion for plantation. The growth of CPO and also the fractions export is very significant, as seen in the table 2

Table 2. Palm Oil Export, Base on HS 6 Digit

HS 151110

151190

151321

Description Palm Oil & Its Fractions, Crude, Not Chemically Modified Palm Oil & Its Fractions, Refined but Not Chemically Modified Palm Kernel or Babassu Oil & Their Fractions, Crude, Not Chemically Modified

2004

(US $ mio)

2005

2006

2007

2008

1.444

1.593

2.375

3.738

6.561

3.111

1.997

2.162

2.442 4.129

5.814

2.832

385

448

506

807

1.172

2009*

516

Source: Trade Department Republic of Indonesia, 11/6/2009 page 1

CPO Business is very promising either there are many constraint, particularly for export market such as to Uni European Countries, there are negative campaign such as environment issues. Previously it happened to mayor private plantation in Indonesia which is contract terminate by PT Unilever Tbk and also from Burger King USA Because of Global Warming Issues, in the year 2009 the Indonesian Government stop land expansion for plantation and no more land expansion until 2011, even though there are 8,8 million hectares land conversion allocation until 2009. Nowadays there are 2.4 million hectares land with Land Concessions (Hak Guna Usaha) and only 1, 6 million hectares were planted .”14 The other constrain is Indonesian Banking support to the palm oil industry is very minimum, the high rate of undisbursed loan, and high interest rate as one of constraint in developing plantation. “ The growth will be increase, therefore the bank interest rate have to be reduce ” . ”15 Regarding the Agriculture Law number 18 year 2004 and Decree of Minister of Agriculture number 26 year 2007 about Agribusiness Licensing, the Investor and community around plantation area has to be in a partnership relation so-called Kemitraan. The Investor as Nucleus and the community as Plasma, both are in mutual relationship. In the implantation there are a lot of dispute which is give negative effect to productivity of the plantation “16 Either there are many problems but an opportunity is still there, therefore what the optimum business development models are for Indonesian Primary Commodities?

B.2 COAL INDUSTRY “ From every coal mining sites, we convey energy to the world and to deliver our best coal mining services as our main business, we also dedicate integrated coal mining processing such as coal stockpile, crushing plant, loading conveyor and barging port “ The opening Paragraph of these chapter is very common vision in many mining companies, it expressed macro aspects and also micro aspects of mining business. But the implementation is not as simple as written, therefore it is author duty to describe and conclude it, also to find an answer from it. Indonesia is a country with abundant coal resources. As seen in table 3, the estimate deposit of Indonesian coal is 104.7 billion tons and the estimate reserve is 20.9 billion tons Table 3. Indonesian Coal Reserve & Deposited Island Sumatera Kalimantan Sulawesi Papua Java Maluku

Estimated Reserve 11.55 b.t 9.41 b.t 0.23 b.t 0.15 b.t 0.01 b.t 0.002 b.t

Estimated Deposited 52.53 b.t 51.83 b.t na na na na

Source: Majalah Tambang.Edisi January 2010/Th IV. 40 Note: b.t = billion metric ton

Department of Energy and Mineral Resources Republic of Indonesia stated that there are 47 big mining concessions under PKP2B (Perjanjian Karya Pengusaha Pertambangan Batubara) and 2500 small to medium size mining concession which dominated by coal mining concession under KP (Kuasa Pertambangan) ”17. Indonesian coal ranges from lignite to bituminous, with most of current production coming from low cost, open-cast mines In the year 2010, as predicted by GlobalCoal the coal price will increased. These are a result of global economic recovery and the increasing coal demand’s as source of energy. The price increased 14% compare to the year 2009 coal prices. The price trend from USD65 per metric ton to US 75 per metric ton at first quarter 2010. “18

TAble 4. SWAP NEWC Closing 31 July 2009

(US $)

Period

Bid

Offer

mid

Change

Jul 09 Aug 09 Q3’ 09 Q4’ 09 Q1’ 10 Q2’ 10 2010 2011 2012 2013

74,87 72,50 73,00 72,50 75,00 76,50 77,50 86,00 89,75 91,50

75,37 73,00 73,50 73,00 75,50 77,00 78,00 86,50 90,25 92,00

75,12 72,75 73,25 72,75 75,25 76,75 77,75 86,25 90,00 91,75

0,62 -0,25 1,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00

Source: GlobalCoal, State of the Globe Report 31 July 2009 Note : GlobalCoal provides this information for indicative purposes only, no guarantees are Given to its accuracy

The production increase would mainly be supported by the improved economy of three major coal export destination, namely Japan, Korea and Taiwan, Meanwhile, two other countries whose economies were not too affected by the recent crisis, namely China and India, would still demand a substantial supply Table 5. Indonesian Coal Production and Export Year 2006 2007 2008 2009 2010 (June)

Production

Domestic

179.580.407,15 178.790.775,68 194.391.850.37 226.170.443,14 98.847.296,07

76.016.384,42 77.682.760,34 53.451.291,66 73.246.344,84 30.827.133,68

(In ton) Export 103.564.022,73 101.108.015,34 140.940.558,71 152.924.098,30 68.020.162,39

Source: Data Center of Department of Energy and Mineral Resources Republic of

Indonesia At present, developments of a number of power plants to be included in India’s crash program of 50,000 MW are already concluded. Supply of coal for the plants, however, is scare. The country’s demand for Indonesia coal could therefore soar in the near future. India could be real hungry for Indonesian coal. China, meanwhile, could withhold its demand as the country could already fulfill its domestic needs from its own reserve, albeit at a bigger figure compared to India.

Table 6. Indonesian Coal Export Destinations by Country: Country

Percentage

Japan Taiwan Korea India Hongkong China Thailand Malaysia Philippine United State Singapore European Countries Others

15 % 10 % 10 % 10 % 8% 6% 6% 5% 3% 2% 1% 15 % 2%

Source: Majalah Tambang, Edisi January 2010/Th.IV

Indonesia domestic consumption of coal was divided for the energy sector, industries and household requirement. Meanwhile, coal export in year 2010 would mainly be grabbed by Japan, India, Korea, Taiwan and Hongkong. The Indonesian exported coal would mainly be used for power plants especially at the three countries aggressively developing energy infrastructures, namely China, India and Japan. China itself might be the most potential market for the Indonesian coal, as the country itself had just experienced a plunging export from 40 million tons to a mere 20 million tons, ultimately due to soaring domestic requirements. Recently, Indonesia leaved the OPEC because its declining oil production which is now less than 1 million barrel per day, and the growing demand mean the country can no longer as ” a nett exporting petroleum country ” . The country is also facing increasingly frequent power blackouts, and domestic coal demand is growing quickly. Domestic consumption in the year 2010 would still dominated by the requirement of the state electricity company (PLN in its Indonesia abbreviation), mainly for existing power plants, as well as for the first phase 10,000 MW electricity generations Mega-Project. Unfortunately, there are facts that the implementation of such a crash-program has always been delayed, resulting in a protracted utilization of the already accessible coal supply for domestic need Other aspects of primary commodities industry in Indonesia is the regulation in landuses, there are many overlapping cases over land-uses between two business entitles, these happened because Department of Agriculture issues Land–uses concession for

plantation, and Department of Energy and Mineral Resources issue Land-uses concession for mining In the Mineral Mining and Coal Mining Law number 4, year 2009, stated that every mining company have to do a proper reclamation after finish mining activity in certain mining area, but it does not 100 % workable, therefore it is hard to uses ex mining site for plantation, moreover it create a reluctance from plantation company to work together with mining company. As seen in below in picture 1 and picture 2

Picture 1: Ex Mining Site near Balikpapan City – East Kalimantan, 28 October 2009

Picture 2: Ex Mining Site, Sanga-Sanga – East Kalimantan. 30 October 2009

Other aspect in the development of coal mining industry is the infrastructure feasibility, every company whose proposed land-uses permit for mining activity have to build road from mining site to Jetty facility, the all create additional investment for developing business in Indonesia. In the South Sumatera governor do not allow mining company to use public road, hence of these the mining company has to build 280 kilometers special road for hauling there coal from mining site to Jetty location in Tanjung Siapi-api Port. “ 19

C. FORMULATION 1. Community Sustainable. It is necessary to consider community participation and community involvement in the developing industry and also in reducing industrial negative effect to environment. 2. Green Employment. Mutual relationship in business models between the Investor as Nucleus and the community as plasma have to be established 3. Indonesia need low carbon emission industry. Effect of carbon emission to the climate is very significant. Many swamp/peat moss area were convert to palm oil plantation or mining site. Nowadays Indonesian government does not allow any industry to utilize swamp/peat moss area with more than 3 meters thick. Because this type the swamp/peat moss release 1000 metric carbon emission per hectare per annum. 4. Indonesia needs Industry with respective social responsibility 5. Indonesia needs source of economic growth, particularly natural resources such as plantation and mining. Basis of these industries are natural resources a combination of exhausted natural resources and renewable natural resources 6. Indonesia needs sustainable business development model which is applicable with

the involvement of stake holder

INDEX 1.

KOMPAS, 14 May 2010, page 34 from- IMD World Competitiveness Year Book 2009

2.

KOMPAS, 14 May 2010, page 34 from- IMD World Competitiveness Year Book 2009

3.

Majalah Tambang, Edisi January 2010/Th.IV, page 39

4

Sembiring, Simon Felix, Ir PhD. Jalan Baru untuk Tambang: Mengalirkan Berkah bagi Anak Bangsa, Jakarta: Elex Media Komputindo. 2009 page 224

5

Majalah Tropis, Edisi 01/Tahun III/January 2010, page 13

6

Klare, Michael T, Rising Powers Shrinking Planet; the new geopolitics of energy, New York: Metropolitan Books-Henry Holt and Company, 2008 page 23

7

Klare, Michael T, Rising Powers Shrinking Planet; the new geopolitics of energy, New York: Metropolitan Books-Henry Holt and Company, 2008 page 39

8

Heinberg, Richard, Blackout; Coal, Climate and the Last Energy Crisis, Canada: New Society Publishers, 2009, page 160

9

Heinberg, Richard, Blackout; Coal, Climate and the Last Energy Crisis, Canada: New Society Publishers, 2009, page 169

10

Hesseling P, From Marshall to Hongkong, June 1997, page 8

11


12

Majalah InfoSawit Vol IV No.7 July 2010 -Department of Agriculture Republic of Indonesia page 22

13


14

KOMPAS, May 12nd 2010, page 21

15

KOMPAS, May 12nd 2010, page 18

16

KOMPAS, May 29th 2010, page 18

17

Majalah Tambang, Edisi December 2009/Th.III, page 47

18

GlobalCoal, State of the Globe Report 31 July 2009, page 1

19

KOMPAS, May 21th 2010, page 23

TABLE Table 1 Info Sawit IV/7/2009 page 22 Table 2 Trade Department Republic of Indonesia, 11/6/2009, page 1 Table 3 Trade Department Republic Indonesia, 11 Juni 2009, page 1 Table 4 GlobalCoal, State of the Globe Report 31 July 2009, page 1 Table 5 Department of Energy and Mineral Resources Republic of Indonesia (Data

warehouse 11/7/2009), page 1 Table 6 Department of Energy and Mineral Resources Republic of Indonesia (Data

warehouse 11/7/2009), page 1

PICTURE Picture 1. Palm Fruit Picture 2. Ex mining site near Balikpapan city East Kalimantan Picture 3. Ex mining Sanga-sanga site near Samarinda city East Kalimantan

BIBLIOGRAPHY Department of Energy and Mineral Resources Republic of Indonesia - Data warehouse 11/7/2009 GlobalCoal, State of the Globe Report 31 July 2009 Heinberg, Richard, Blackout; Coal, Climate and the Last Energy Crisis, Canada: New Society Publishers, 2009 Hesseling P, From Marshall to Hongkong, June 1997 Klare, Michael T, Rising Powers Shrinking Planet; the new geopolitics of energy, New York: Metropolitan Books-Henry Holt and Company, 2008 KOMPAS, 14 May 2010, IMD World Competitiveness Year Book 2009 KOMPAS, 12 May 2010, Majalah InfoSawit Vol IV No.7 July 2010 -Department of Agriculture Republic of Indonesia Majalah Tambang, Edisi January 2010/Th.IV Majalah Tropis, Edisi 01/Tahun III/January 2010 Porter, Michael E, Competitive Strategy, New York: Free Press, 1980 Porter, Michael E, Competitive Advantage-Creating and Performance, New York: Free Press, 1985

Sustaining Superior

Porter, Michael E, Competitive Advantage of Nation, New York: Free Press, 1998 Sembiring, Simon Felix, Ir, PhD. Jalan Baru untuk Tambang: Mengalirkan Berkah bagi Anak Bangsa, Jakarta: Elex Media Komputindo. 2009 Trade Department Republic of Indonesia, 11/6/2009

ABOUT THE AUTHOR

John Darmawan was the Author of The Value Added Chain for Patchouli Oil Industry in Nias Island, and A Market Profile of Cocoa and Cocoa Products in the European Common Market, and also EC-12 Main Import from Indonesia, 1988-1992. He spends over 11 years of his career in the field of Business Development in Palm Oil industry, Coal Mining industry, Telecommunication. He also spend over 9 years in the field of marketing and Operation in Retail industry. Darmawan dedicate his experience and knowledge as Community Development Worker in Indonesia He also expand his network by active as Senior Advisor at the Fortech Strategic Consulting PROFESSIONAL EXPERIENCE  PT. Salim Indoplantation - Palm Oil Plantation, Department Head, 1988 – 1990  PT. Ometraco Arya Samantha – Telecommunication, Business Development Asst General Manager, 1993 - 1996  PT. Bank Universal Tbk - Consumer Bank, as Branch Manager & Card Center Officer, 1996 - 1999  PT. Makro Indonesia – Retail, product Group Manager, 1999 - 2001  PT. Ramayana Lestari Sentosa Tbk - Retail, General Manager, 2001 – 2004  PT. Renaldy Jaya Eka Inti – Retail, Marketing & Operation Director, 2004 - 2007  Fortech Strategic Consulting, Senior Advisor in mining sectors, 2007 - 2009

EDUCATIONAL BACKGROUND  Erasmus Universiteit Rotterdam, Euro Asia Interface, EURASIA Institute, Faculty of Economic, 1992-1993

 

Lppm Business School – Indonesia, Wijawiyata Manajemen (Fresh Graduate MBA) 1987-1988 Catholic University of Atma Jaya Jakarta, Faculty of Business Administration 1981-1986