Sustainable business model for biofuel industries in

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Sustainable business model for biofuel industries in Indonesia

Sustainable business model in Indonesia

Joni Jupesta Institute of Advanced Studies, United Nations University, Yokohama, Japan

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Yuko Harayama Tohoku University, Sendai, Japan, and

Govindan Parayil Institute of Advanced Studies, United Nations University, Yokohama, Japan Abstract Purpose – This study aims to focus on the design of a sustainable business model on the development of a biofuel industry in Indonesia. Design/methodology/approach – The changed status from a net oil exporter to net importer in 2004, the highly subsidized price of fossil fuel, the depleting oil resources and a strong dependency on oil for domestic production are the driving forces for introducing biofuel in Indonesia. The Indonesian government enacted an energy policy in 2006 which aims to partially shift fossil fuel consumption to renewable energy sources including biofuel. The mandatory requirement to use biofuel and the given subsidies will help to make biofuel competitive. However, till now, biofuel still has not achieved the aimed target for several reasons, e.g. higher cost of production relative to fossil fuel, distribution barriers due to geographical constraints, reluctance from industry due to uncertain markets and relative low participation from local government. This paper develops strategic analysis based on the diffusion process of biofuel development. Findings – The tools applied are a SWOT analysis, Porter 5 Force analysis, and Business Portfolio analysis to understand the position of the biofuel industry. Originality/value – This study provides an innovative business model to accelerate the integration of biofuel into the Indonesian energy markets and create profitable and sustainable business. Keywords Biofuel industry, Energy policy, Key player, Strategic analysis, Sustainable business model, Sustainable development, Indonesia Paper type Research paper

1. Introduction The challenge of doing business in the development of biofuel in developing countries, such as Indonesia, is that the market suffers from a lack of information, infrastructure and institutions. With inadequate assessment and a poorly equipped infrastructure (local scale policy, market, science and technology and public acceptance), any initiative for a large-scale introduction of biofuel will be premature. Assessing the present governmental policy may help to identify the barriers and at a later stage to find the solutions to ease the penetration of biofuel into existing energy systems. However, biofuel development can show how business deals with this challenge by devising This study was funded under United Nations University-Institute of Advanced Studies (UNU-IAS) Postdoctoral Fellowship Program. This paper was presented at the Annual International Conference Asia Pacific Business in Society (APABIS) on 4-5 November 2010 in United Nations University, Tokyo, Japan.

Sustainability Accounting, Management and Policy Journal Vol. 2 No. 2, 2011 pp. 231-247 q Emerald Group Publishing Limited 2040-8021 DOI 10.1108/20408021111185394

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inclusive business models that join business and the community at the base of the pyramid local (poor) community, farmers, plantations and industrial workers, to create value for all. In this context, biofuel industry refers to the processing plants to convert the crops feedstock into biofuel products (biodiesel and bioethanol) and usually integrated with the plantation of the biofuel’s feedstock. Lately, between January 2009 and April 2009, several companies stopped biofuel production due to the increasing price of the feedstock (mainly palm oil). The price of palm oil suddenly rose due to the biofuel development in Indonesia. It is reported that the loss of production value is US$2 billion. Out of 22 companies, it is reported that 21 have already closed their operation. The only firm which is still operating is Wilmar International. Industry still waits for a tax incentive since biofuel price is still higher than that of fossil fuel. The market drivers for a biofuel industry are: change (technology innovation, way of life, socio-politic and economic situation), the customers, the biofuel industry and competition. The market for biofuel is the transportation sector in Indonesia, whereas excess production could be exported to several buyers as: China, Japan and the EU. Globally, biofuel industries enjoyed a tremendous growth of 23 percent annually from 2000 to 2006, pushed by increasing oil prices, energy security and climate change concerns ( Jupesta, 2011). This paper develops strategic analyses based on the diffusion process described in a previous study (Jupesta, 2011). The tools applied to understand the position of the biofuel industry are: a SWOT analysis, a Porter 5 Forces analysis and a Business Portfolio analysis. These strategic analyses must fit in with the government’s aims for biofuel production: job creation, economic growth and helping the poor (local farmers). The strategic analysis is based on unstructured interviews with several experts in biofuel development. Unstructured interviews are chosen since the biofuel development perceived from multifaceted perspectives. The interviews were held during the UNESCO International Scientific Conference Technologies on Development, February 2010 at EPFL Lausanne, Switzerland, the Alliance Global Sustainability Annual Meeting in March 2010 at Tokyo University, Japan, the International Conference on Applied Energy in April 2010 at Singapore and the International IAEE Conference in June 2010 at Rio de Janeiro, Brazil. The conclusions from this study enable to set a strategic business model to accelerate the integration of biofuel into the Indonesian energy systems and create profitable and sustainable business. This business model finally gives recommendations to the policy makers on how to run the biofuel industries by involving local communities and creating value for the other stakeholders: society, industries and government. This paper consists of five parts. After the introduction part, the second part is the biofuel industry in Indonesia from industrial process and the driving forces of this biofuel development related with regulatory framework. The third part is the strategic analysis for the biofuel development. The fourth part is the description of an innovative business model and the last part is the conclusion. 2. Biofuel industry in Indonesia 2.1 Industrial process of biofuel: technological perspective The biofuel are defined as the liquid, gas and solid fuels that made from organic matter biomass (Nigam and Singh, 2011). It has emerged as one of the most strategically

important sustainable fuel sources and is considered an important way of progress for limiting greenhouse gas emissions, improving air quality and finding new energetic resources. In short- and medium-term, biofuel expected to curb the high energy demand in particular in transportation sector ( Jupesta, 2011). While the transport sector expanding in particular in rapidly industry countries such as China and India, the other alternatives than oil is consider one of the important elements to secure energy supply and while possible tend to shift into more cleaner and sustainable production of energy sources (Luque et al., 2008). The use of biofuel as transportation fuel has reasserted the links between energy and agricultural output markets. Biofuel have multiple benefits related to energy security and socioeconomic and climate protection. Biofuel, which is at present mainly used as an energy source for transportation, can improve the energy autonomy of an economy by reducing the dependency on oil and gas. The use of biofuel shows a fast growth, because it can curb greenhouse gas emissions by the substitution of fossil fuels. However, most of the crops used for biofuel production are originally grown for food consumption. Competition between crops for energy and food has resulted in increasing food prices. This situation is often referred to as the “food versus fuel” dilemma (OECD-FAO, 2008). To avoid this, there is intense pressure to strive for higher yields and minimize fossil fuel consumption during production through technology improvements. One of the parameters used to measure how effective biofuel is in replacing fossil fuel, is the energy ratio, i.e. the ratio of energy contained in a biofuel, relative to the fossil fuel energy used for its production. The energy ratio for sugarcane ethanol is set at 4.9 in this study, while palm oil biodiesel has been set at a value of 3.6, for all scenarios. The value of the energy ratio varies from 2 to 9, depending on the biofuel crops analyzed (FAO, 2008). Biofuel produced applying advanced technologies can provide a higher energy balance. Sugarcane processing technology has already been fully developed compared to palm oil processing for biofuel production. However, the net energy balance, which is the difference between energy output and energy input during production, has the highest value for palm oil compared to all other biofuel crops. Another problem that needs solving is balancing the supply and demand of crops for food and fuel purposes. This can be achieved by directing the excess supply for food into fuels, and vice versa. Biofuel, at present, is produced in large quantities in other regions, such as the USA, Brazil and Western Europe. In the future, the restriction in the allocation of land and higher feedstock cost in these regions will shift the production of biofuel to other regions that have more land available and have lower feedstock cost, such as Indonesia, Malaysia, Thailand, etc. (Jupesta, 2010). First-generation biofuel have already reached a competitive price in some regions, due to economies of scale and technology learning, as in Brazil, where the price of bioethanol is 0.23 US$/litre at an oil price 0.25 US$/litre (Coelho et al., 2006). Second-generation biofuel are produced from non-food materials, such as cellulosic biomass, wood, rice straw and grass. Another non-food (third generation) biofuel source will be biofuel produced from algae. This type of biofuel will have even more advantages, as the yield of product is higher than that from first- and second-generation technologies. Plant oils, such as palm oil and oil from Jatropha, can also be seen as alternative feed stocks for petroleum refineries to produce renewable diesel. In addition, biofuel must compete with other energy resources and low carbon technologies, such as solar energy, wind and tidal power, newer atomic energies,

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hydrogen fuel cells and hybrid engines. Later, second- and third-generation biofuel may be available on a large-scale, offering much better perspectives and competitive fuel prices in the long term, between 2020 and 2030. It must be noted that in other countries, the introduction of biofuel in the transportation sector is done predominantly by means of subsidies and incentive policies.

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2.2 Driving force of the biofuel industry in Indonesia In 2008, the fuel and electricity subsidies amounted in Indonesia was US$14 and US$6 billion, respectively, equalling the total central governmental capital and social spending. Oil and gas contributed to 32 percent of government revenues in 2006, but decreased to 20 percent in 2008, in accordance with depleting oil resources and a decrease in oil production from 9 billion barrels in 1987 to half of that in 2007 ( Jupesta, 2010). In 2006, the government already enacted the so-called mix energy to reduce dependency on oil by the use of a mixture of energy sources. They hoped to utilize local resources to make renewable energy (e.g. biofuel). The biofuel feedstock comes from palm oil and Jatropha for biodiesel while cassava and sugarcane for bioethanol. The target was to reduce the share of fossil oil in providing energy from 52 percent of total energy consumption (as in 2006) to 20 percent by 2025. By that year, the remaining energy should come from coal (35 percent) and gas (30 percent), whilst renewable energy sources are hoped to provide 15 percent of total energy consumption. Figure 1 shows the Mix Energy Policy (2006), which states that the share of renewable (geothermal and hydropower) will increase from 4 to 15 percent within 20 years. Biofuel was introduced with the objective of fulfilling 5 percent of the total energy consumption by 2025. It was expected that biofuel development could create at least 4 and 7 million jobs by 2010 and 2025, respectively. In 2008, the transportation sector consumed 26 Mtoe, as depicted in Table I. The replacement of 5-20 percent of this oil by biofuel will reduce 1.5-6-billion litres of fossil oil consumption per annum. Because the transportation sector used 30 percent of the total energy consumed in 2008 (in this calculation, biomass derived energy for cooking in rural areas is excluded), Energy Mix 2006 Hydro 3%

Energy Mix 2025 Hydro, others Biofuel 5% 5%

Geother mal 1%

Geo 5%

Gas 29% Oil 20%

Gas 32%

Coal 15%

Figure 1. Indonesia’s Mix Energy Policy

Source: Jupesta (2010)

Oil 52% Coal 33%

a mixture of biofuel with gasoline and diesel fuel can significantly diminish oil consumption on a national scale. The legal basis for the biofuel development is the Presidential Instruction No. 1/2006 regarding “Provision and Utilization of Biofuel as Alternative Fuel” published on 25 January 2006 which depicted in Table II. Through this regulation, there is an incentive and tariff for biofuel development and it should simplify the incorporation of the biofuel trade into the entire fuel trade system. There are three important aspects in the biofuel development program: (1) land provision for biofuel production; (2) biofuel production and market; and (3) financing.


As Indonesia is a vast country, there is no problem in finding locations for biofuel plantations. However, the land availability could be changed due to the agreement between Indonesia and the Norwegian Government regarding forest moratorium in May 2010. In principle, according to Indonesia Ministry of Energy and Mineral Resources, almost 13 million hectares land are available for biofuel production, as shown in Table III; what part can be used for biofuel plantations depends on the above-mentioned agreement.

Gasoline Diesel fuel Others (biofuel) Total transportation Final energy consumption

2000

2002

2004

2006

2008

Growth (%)

10.6 8.4 n/a 19.0 63.9

11.9 8.8 n/a 20.7 65.6

14.6 9.7 n/a 24.3 73.0

14.6 7.9 0.2 23.2 72.0

17.2 7.9 0.9 26.1 87.8

7.4 2 0.74 116.7 4.7 4.7

Notes: In million ton oil equivalent; Mtoe

No. Regulation 1 2 3 4 5

10 11

President’s Instruction No. 5 (2006) President’s Instruction No. 1 (2006) President’s Instruction No. 5 (2008) President’s Regulation No. 45 (2009) Minister of Energy Regulation No. 32 (2008) Minister of Energy Decree No. 0219 (2010) National Quality Standard for Biodiesel National Quality Standard for Bioethanol Director General of Oil and Gas Decree No. 13483 (2006) Government Regulation No. 1 (2007) Ministry of Finance Decree No. 117 (2006)

12

Ministry of Finance Decree No. 79 (2007)

6 7 8 9

Table I. Fuel consumption in the transportation sector in Indonesia

Remarks Mix Energy Policy Biofuel utilization as alternative fuels Economy Program Focus 2008-2009 Subsidies fuel and befouls Mandatory of biofuel utilization Subsidies Fuel and Biofuel Pricing Index Register No. 04.7182 (2006) Register No. 7390 (2008) Biodiesel specification for domestic market Income tax facility for capital investment in biofuel Credit for bioenergy development and revitalization of plantatation Credit for food and energy security

Table II. Regulation supports biofuel development

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Provinces

Area (ha)

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South East Sulawesi North Sulawesi Nusa Tenggara Timur Maluku Papua West Kalimantan Central Sulawesi South Kalimantan Total

212,123 34,812 101,830 2,304,932 9,262,130 514,350 251,856 65,638 12,747,671

Table III. Land provision for biofuel development

Source: Indonesia’s Ministry of Energy and Mineral Resources (2008)

2.3 The key players of biofuel industries in Indonesia Land provision is complemented with seed supply. There are several big palm oil companies which also produce seed, such as the Palm Oil Centre Medan (PPKS), PT. Socfin, PT. Lonsum, Pt. Dami Mas, Pt. Tunggal Yunus, Pt. Bina Sawit Makmur, Pt. Tania Selatan which sells 147 million seeds per year to be planted on 700,000 hectares of land. Other R&D centres such as those of the Ministry of Agriculture, the Agency of Assessment and Application for Technology (BPPT), Lemigas, and the Bandung Institute of Technology (ITB) also do extensive research in biofuel technology. ITB focuses on conversion technology and the Ministry of Agriculture, through the Centre for studies in Mechanization in Agriculture, focuses on mixing biodiesel and automotive diesel fuel for stationary machineries. In 2006, the government set the target to build eight biodiesel refineries with an annual production capacity of 3,000-6,000 tons, at total cost of US$7 million, which are financed out of the National Budget. A private company has also plans to build a refinery in Dumai, Riau province with an annual production of 350,000 tons. Biofuel markets, both domestic and international, are offering huge opportunities. The opportunities for export are great because of high consumer demand from the EU, China and India. The government plans to spend US$51 billion in five years to develop palm oil, rubber and cocoa. Two-third of the funds are to be allocated to palm oil plantations. Supported by this policy and high demand, the biofuel development program has attracted private investors both domestic and international. Early in 2007, 60 agreements on biofuel development projects between various parties, including investors and 26 domestic investors have been signed. Altogether, the project’s value was around US$9-US$10 billion. The banking sector also invests US$3.7 billion in this sector. There are several banks involved: Pt. Bank Negara Indonesia, Bank Republic Indonesia, Bank Mandiri, Bank Bukopin, Bank Daerah Sumatera Barat and Bank Daerah Sumatera Utara. The bank interest rate for factories is 14-15 percent and for small holders 10 percent. Most of the biofuel produced in Indonesia are in form of biodiesel due to vast amount of palm oil, the feedstock for this biodiesel. Table IV shows the biofuel producers in Indonesia. In 2010, Indonesia produces approximately 20 million tons of crude palm oil (CPO) per year from 7 million hectares of oil palm plantation, of which approximately 80 percent is exported. In terms of revenue, CPO exports provide Indonesia with its biggest non-petroleum source of export income, and this is expected to grow

No. Biodiesel company 1 Wilmar Group 2 Musim Mas Group 3 Eterindo Wahanatama 4 Permata Hijau Group 5 Sumi Asih Bioethanol company 1 Sugar Group 2 Medco Group 3 Molindo Raya Industrial 4 Anugrah Kurnia Abadi

2008 (ton/year) Capacity Domestic

2009 (ton/year) Capacity Domestic

700,000 50,000 120,000 200,000 100,000

300,000 10,000 120,000 75,000 50,000

1,000,000 350,000 240,000 200,000 200,000

300,000 100,000 240,000 120,000 100,000

70,000 60,000 12,000 2,500

70,000 60,000 12,000 2,500

100,000 60,000 50,000 2,500

100,000 60,000 50,000 2,500

Source: Indonesia’s Ministry of Energy and Mineral Resources (2008)

in the future. Beyond revenue generation, oil palm plantations also currently provide a livelihood for more than 3 million Indonesian families. This, too, is also expected to grow in the future (Waltermann and Streubel, 2010). The international investment comes from the USA, Japan, China, India, South Korea, Brazil, Malaysia and Germany. The US Agency for International Development, through its Agribusiness Market and Support Activities (AMARTA) program, is interested in partnership with Development Alternatives, Inc. Japanese investments are Mitsubishi, Ithocu and Mitsui besides the Japanese Bank for International Cooperation. China invests through the China National Offshore Oil Corporation and Hong Kong Energy and is considered to be one of the biggest investors in the biofuel sector. The companies, together with the local company Sinar Mas invest US$5.5 billion in Papua and the Kalimantan region. This project is based on (palm oil and Jatropha) biodiesel and (sugarcane and cassava) bioethanol. The Chinese Government invests through the Malindo project. Each hectare of plantation requires US$3,297 for palm oil, US$1,648 for sugarcane, US$330 for Jatropha curcas and US$3,846 for cassava. 3. Strategic analysis towards biofuel development in Indonesia[1] Several strategic tools were used to analyse the biofuel industries. 3.1 SWOT analysis Table V shows the SWOT analysis for the biofuel industry. The strength of the biofuel industries is the high demand for biofuel at domestic and global level. The mandatory rules for using biofuel in a mixture with fossil fuel will secure domestic demand. Also, a high demand in the global market will require biofuel to be available as a commodity. Indonesia has a reputation as a good supply stock for natural resources in terms of energy and mining, in extend to bioenergy crops such as palm oil, Jatropha curcas, cassava and sugarcane. The position of industries, through government and business association in Indonesia, is – by nature – closely related to potential buyers such as Japan, the EU and China. The USA is perhaps not so interested in buying from Indonesia, as Brazil is closer geographically. Indonesia has already mastered the first-generation biofuel technology,


Table IV. Biofuel industries in Indonesia

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Table V. SWOT analysis

Strength

Weakness

Opportunity

Threat

High demand domestic and global Reputation as supplier

Innovation technology low Geographical situation High investment to set up the industries Bureaucracy in investment procedure Oil price still subsidized

Land availability

Deforestation

Economic growth stability High potential for resource efficiency Promise for future demand

Food security

Close tie with the buyer countries ( Japan, EU, China) Technology availability Climate condition

Subsidy for biofuel

Price still higher than oil Volatility market and climate investment still unclear Institutional support

and knowledge is available worldwide. The climate conditions for biofuel crops are very suitable as the tropical climate will produce a higher yield than in sub-tropical climate; this enhances Indonesia’s competitiveness. There are several weaknesses in biofuel development in Indonesia. The innovation technology position is relative low, which means the implementation of new technologies could be more difficult. The geography of Indonesia, which consists of many islands, could hinder the development of biofuel production and use, because of higher logistic costs, which will increase the selling price. Moreover, even without considering logistic costs, the production cost of biofuel already exceeds the prices of fossil fuel. The investment set up to start business in Indonesia is relative high, not due to the technical cost but to non-technical cost. The bureaucracy is a factor that hinders the investment in this business. The get the required permits from several institutions such as the Ministry of Forestry, Finance and Trading is time consuming. The transparency to do business is one obstacle in business competitiveness. There should preferably be one single window for investments. As discussed previously in the paragraphs on the diffusion process, the subsidized oil price still makes it difficult for biofuel to compete. Even, without subsidy, the biofuel price usually is higher than the price of fossil oil. This policy does not educate society to use energy in an efficient and effective way. This inappropriate policy should be reviewed again; public resistance is another factor to consider. There are several opportunities for biofuel development. The availability of land in Indonesia is one of the positive factors for biofuel feedstock supply. Indonesia’s Government allocated 10 million hectares for biofuel production, without deforestation. However, this must critically assessed since at present the expansion of biofuel production is the main cause of deforestation in Indonesia. Economic growth was stable over the last ten years and will ensure economic development and in return increase demand for energy, including demand for biofuel. Considering that biofuel technology is in its infancy in Indonesia, there is a high potential for the improvement of resource efficiency in process production and product development. The production process could use an integrated energy system, which in the end simplifies the production chain and reduces the production cost. In future, the demand for biofuel is expected to grow due to the increase in global demand for energy. The government supports developments by giving a subsidy on biofuel prices. The amount of subsidy is still in discussion between parliament and government.

The price of biofuel, unlike agricultural commodities, is greatly influenced by the cost of its substituent, gasoline and diesel fuel. There are several threats for biofuel development. The high deforestation in Indonesia is mainly caused by new biofuel plantations. The business interests make the local governments give permission to clear land for plantations. In the long term, this will cause huge problems, since the impact on climate change due to deforestation will become more critical. This is related to low institutional control by central government and conflicts on policy between central and regional authorities. Globally increasing food price cause a conflict over the land allocated for food and fuel production. Since land is limited, the allocation for biofuel and food purpose will hinder biofuel development, as discussed in a previous study (Jupesta, 2011). The study from The World Bank shows that the increase of food prices is not a temporary phenomenon but likely to persist in the medium term. While there is predictions of high food price in the medium run are further strengthened when we factor the impact of policies aimed at achieving energy security (through biofuel production) and reduced carbon dioxide emissions, there is a strong tradeoff with the food securities objectives (The World Bank, 2011). Further, the study from United Nations Economic and Social Commission for Asia and the Pacific has estimated that high food and energy prices in 2011 may lead to as many as another 42 million people in the region living in poverty in addition to 19 million already affected in 2010 (Heyzer, 2011). There is need for urgent response at various levels. At the national level, food and energy price rises should be combated with targeted measures to have direct impact on prices and reduce the burden on the poor. Besides reducing prices through lowering tariffs and taxes, buffer stocks of food should be established and utilized in a countercyclical manner, social protection measures should be undertaken in the form of food vouchers, targeted income transfers and school feeding programs. To response with this matter, there is several options could be done by the academia, local community and policy maker. In terms of research and development, the technology development still has its challenges in scaling up and balancing the renewable energy price with the fossil oil price. Technology learning is believed to curb in 20-30 years. Beside new higher productivity seed, a new conversion technology could also cut the overall production costs. This depends on the geographical region due to differences in energy demand and energy production. The increasing oil price in the future will also contribute to help the price of biofuel to become competitive. For the time being biofuel price is higher than that of fossil fuels. The development of renewable energy markets relies on political support in terms of subsidy and carbon tax and on the decision maker interest, i.e. voters in general elections, climate agreement such as the Kyoto Protocol, the Copenhagen Accord, oil politics in the Middle East, etc. The new autonomy policy of the central Indonesian Government gives a bigger role to local authorities. Spread over 33 provinces, the biofuel industries in Indonesia could be more competitive in one region than another depending on the interests of and support by the local authorities. Local community could also response by using energy source in more rational way, and foster creativity and innovation in local level by utilized the local resources such as the usage of biogas for cooking purpose in villages which already implemented in Java, Sumatera and Papua region (Indonesia Coordinating Ministry of Economic Affairs, 2009).


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3.2 Porter’s 5 forces analysis The Porter’s 5 forces analysis is used since this tool is one of the most useful to make a framework for understanding the opportunities and threats faced by competitor. There are five elements for this tools analysis; industry competitor, potential entrants, substitutes, buyers and suppliers (Porter, 1980). (1) Industry competitor – intensity of rivalry. Rivalry between the biofuel industries will be exacerbated because the market share for export is limited to several buyer countries. Considering the high investment for biofuel industries, the exit barrier is high and the competitors in these industries have high stakes in staying in the industry, since there are a lot of incentives in this sector. Thus, the competitors believe that in a certain time, they will get payback on their investment. This condition could lead to price wars, and the innovation technology and process could be one of the strength of these biofuel industries. Indonesia has a high potential as biodiesel producer considering its abundant palm oil feedstock. The neighbouring Malaysian biofuel industries could have the same advantage as Indonesia’s. However, the biofuel industries in Indonesia have their own market because of the domestic obligation and do not only have to compete with the biofuel industries from other countries. In future, while the domestic demand for biofuel is accelerate exceed the production capacity, the export share would be decrease and this will make the biofuel industry less attractive for investment since most of the profit of this industry is obtained through international demand. Since most of the biofuel industries from Indonesia use palm oil as feedstock as well Malaysian’s biofuel industries did, there is potential of intense competition in this industries with Malaysian’s-based biofuel industries. (2) Potential entrants – threat of mobility. The threat to entrants is diminished by the following conditions: economies of scale to create cost competitiveness, experience curve due to learning by doing, increasing domestic and international investment in this industry, central and local authority support and high promising market growth for these products make it promising to invest. In Indonesia, the potential to entrants is relatively low due to the high investment cost in plantations (to secure the feedstock supply) and processing plants. Since there is need of huge amount of investment which is in millions US$ to set this biofuel industry, the international investment is mainly predominated this industry while small share would belongs to the domestic players. Regards to the operational license of the biofuel industry, the license will obtain from regional government instead of the central government due to decentralization. Since the industry is not relying of the advance technologies, the competitiveness of this investment could be attained through highly efficient process production and economies of scale. The efficient production process could be attain though supply chain management from seeding, growing, harvesting into logistic into processing plant and distribution to the market (domestic and port for export) and economies of scale with large processing capacity. (3) Substitutes – threat of substitute’s products. Biofuel is the substitute for fossil oil and has no substitute fuels, but it knows substitute technologies. Biofuel is mainly used in the transportation sector which now relies on oil fuels for 99 percent. However, in future low carbon vehicles, which rely on hydrogen or fuel cells, will become available. This will reduce the size of the biofuel market. Still, these technologies will take 30-50 years to implement. The other low carbon sources for transportation sector is hybrid vehicle which already developed by several car industries such as Toyota and Mitsubishi. However, this vehicle

which uses both gasoline and electricity is still not favourable due to relative higher price compare with the conventional gasoline-based engine vehicle. Beside for transportation, biofuel also could be used as the fuel for the power generation, the potential threat for biofuel in this sector is geothermal. Regards to the deforestation as impact of the by land expansion for the biofuel crops, the other renewable sources such as geothermal could be more favourable as renewable energy source to supply the power generation. Owing to its located in volcano Pacific Rim, Indonesia has huge amount of geothermal potential which amount at 27 GW which is approximately 39 percent of worldwide resources (Jupesta et al., 2011). Still, geothermal development is challenged due to lack of technology availability since Indonesia does not have enough experience in this sector. While the international cooperation such as technology transfer between the USA, Finland, Japan and New Zealand ties with Indonesia already exist, in long run the geothermal could take over the significant share of the energy sources from power generation sector. (4) Buyers – bargaining power. There are two kinds of buyers: domestic and international buyers. There is only one domestic buyer for biofuel products, the Oil State Company PERTAMINA. PERTAMINA buys all biofuel for domestic use, and blends it for nationwide distribution. The international buyers would be several big companies such as Sumitomo, Marubeni, Ithocu, Neste Oil. Owing to high international demand, export is perhaps more attractive than the domestic usage, because the international price is higher than the domestic price (which is still being subsidized by the Indonesia’s Government). With one national buyer and a lot of international buyers the bargaining power of the biofuel industry’s buyers are relatively low. The price of the biofuel is mainly determined by the production cost which derived from the feedstock cost and processing cost. Since palm oil is one of the feedstock for the biofuel, the price of the biofuel was also dependent of the price of the palm oil as the biofuel’s feedstock. In certain case, there is more profit for the biofuel industry which based on palm oil feedstock to export not as the final product but in form of CPO. Regards to this, the government already put domestic market obligation to set minimum amount that must sold to the PERTAMINA to secure domestic supply. Also, government put additional export tax for the CPO instead of the export tax waived for the biofuel products refers to the Government Regulation No. 1 in 2007 which shown in the Table II. This policy aims to create value added by create more jobs for the processing of palm oil to biofuel products and in the same time give more incentive to the biofuel industry. (5) Suppliers – bargaining power. Usually, the biofuel industries have their own plantations to secure feedstock supply. However, some of biofuel industries also buy biofuel crops from local farmers. Beside the local farmers, other suppliers are the fertilizers and seed industries. There are huge amount of suppliers in this industries because the biofuel feedstock also used for food. The bargaining power of the biofuel industry’s supplier is low due to there are many actors act as the suppliers for the industry since biofuel feedstock also used for food. In term of supplier for capital investment, the most of the investment are from outside while small portion comes from domestic. 3.3 Business portfolio analysis A portfolio analysis analyses the insight in the reality in the market and the industry’s positioning in comparison with competitors, and is used for strategic analysis. The method is used here to position the biofuel industries in Indonesia which based on the BCG (1968) Growth-Share Matrix as shown in Figure 2. On the vertical axis,


20%

Biofuel industries

High

Market growth rate

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242 10%

0% Relative market share

Figure 2. Business portfolio analysis

High

Low

Source: Adapted from the BCG Portfolio Matrix, 1970, The Boston Consulting Group

market growth rate provides a measure of market attractiveness. On the horizontal axis, the market share provides the demand of the products. The relative market share serves as a measure of company strength in the market. By dividing the growth-share matrix, there are four strategic business units that can be distinguished. Products with high market share and slow market growth rate are “cash cows” refers to the product which generate large amount of cash. Products with low market share and slow market growth are “dogs”. Low market share with high market growth rate are the “question marks” and high market share with high market growth are “star”. The business portfolio analysis tools show that the biofuel market in Indonesia is a question mark with less than 1 percent market share. However, the competitive position of Indonesia according to the SWOT analysis is good, e.g. because of the favourable climate stimulating crop yield over that in sub-tropic countries. This leads to a move into the star position in the business portfolio analysis. The state-owned oil company PERTAMINA can dictate buying price, whereas the government through Ministry of Energy and Mineral Resources also controls production by its land allocation policy, domestic market obligation rules and set the selling prices for the biofuel domestically. The biofuel industry is also important for economic development since strongly related with poverty alleviation program by create jobs and generate income for the respective local community in the respective area. Increasing the bargaining power for the biofuel industry can also be achieved by seeking new buyers from, e.g. the EU, and cooperation with local government rather than central government in accordance with Indonesia’s decentralization policy which seeks to delegate power to provincial level. Unfortunately, due to economic motivation the local government shows high interest to the development of the biofuel industry and give land concession without consider the thoroughly assessment in terms of ecosystem changes and biodiversity impact of this land use changes. The other negative effects of biofuel production may be scarcity of water, nutrient run off due to monoculture,

and haze from the forest fires (Jupesta, 2011). On the other hand, the issue related with management of climate change impact due to deforestation, energy consumption, etc. was still handled by the central government. Therefore, the development of biofuel production must account policy coherent between national and local level. A sound business strategy should make use of the opportunities given by the central government (regional autonomy, poverty alleviation, job creation, sustainable policies), local government (wealth creation, direct access with less bureaucracy), and the interests of industry (profit) and the population (wealth, health and education), i.e. take into account these interests of all parties involved. Under current effort and support from government and international demand, the biofuel industries in Indonesia could become a cash cow in five to ten years, depending on the diffusion process. The concept of product life cycle, as shown in Figure 3, provides useful input for making product decisions and formulating product strategies. Biofuel products pass through a series of stages. Each stage is identified by its performance and is characterized by competition, profit and marketing programs. The PLC analysis fulfils the gap for marketing objectives and strategies regarding to market the technology product. There are four stages of the product life cycle analysis: introduction, growth, maturity and decline. In the biofuel market, the market is segmented in four regions: (1) Asia Pacific (Indonesia, Thailand, Malaysia, etc.). (2) North America (USA). (3) South America (Brazil). (4) Europe.


Asia Pacific is still in the infant phase since biofuel production just started early 2000 and achieved a peak in 2006 (driven by Indonesia’s energy policy). North America’s Europe and South America

Product life cycle North America

Sales Recycle?

Sales and profit

Asia Pacific Profit

Time Introduction

Growth

Source: Adopted from Utterback (1994)

Maturity

Decline

Figure 3. Product life cycle analysis for biofuel

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market is merely for domestic consumption since in the USA biofuel use is mandatory with a 3:97 mixture of biofuel: gasoline. This market segment is growing. South American countries such as Brazil started using biofuel since the 1970s. Europe is driven by the EU Directive for biofuel which started in 2003 and was revised in 2009 (European Union, 2009). Beside improvement of energy efficiency, the increasing renewable energy’s share also became an objective of this directive. This directive sets as a target that biofuel makes up 10 percent of transportation fuel in 2020. The policy is adapted by the EU members. Both of these regions already have a mature market since the demand already exists and the policy has already been well established. 3.4 Sustainable business model The biofuel industry is one of the industries contributing to the transition to a low carbon economy. As Indonesia is today the world’s largest producer of CPO, a desirable feedstock for biodiesel production, it has the potential to grow into a world biodiesel leader and a model for industry sustainability. The needs to decouple the emissions from economic growth are the main drivers to push industries to grow, on top of energy security and economic development (Enkvist et al., 2008). In response to this, a possible conflict between biofuel industry and local society, a new business model is urgently required which involves and benefits all stakeholders and includes social innovation, i.e. which means to run a profitable business and serving society (Dorf and Byer, 2005). The biofuel industry could contribute to social innovation through such a new business model. The business design means to deliver value to customers and earn a profit from that activity. Business design incorporates the selection of customers, its offerings, the tasks it will do itself and those it will outsource, and how it will capture profits. The outcome of business design is a business model: a business model is a statement of how a firm will make money and sustain its profit stream over time (Morris et al., 2005). At the operational level, the model represents an architectural configuration. The focus is on internal processes and design of infrastructure that enables the firm to create value. Decision variables include production or service delivery methods, administrative processes, resource flows, knowledge management and logistical streams. Figure 4 shows an innovative business model/social innovation concept for the biofuel industry in Indonesia. The biofuel industry receives 80 percent of the dividends into the company. The remaining 20 percent of dividends are to benefit society at large through non-profit organization. This share is entitled to tax exemption for public or non-profit purposes. Local society is important since the biofuel industry (including biofuel plantations) is located in rural areas which are relative underdeveloped. A non-profit company could be set up by the biofuel industry itself or established by a non-governmental organization which specializes in this field. The share should be allocated to education and medical services, since these two are deficient in most of the rural areas. 4. Conclusions Based on the expected diffusion process, the strategic analysis regarding biofuel is done through a SWOT analysis, a Porter’s 5 Forces analysis, a business portfolio analysis and a product life cycle analysis. The SWOT analysis yielded several strengths: the biofuel industries have a potential strength due to high domestic demand due to mandatory use, and international demand due to climate change concern over the consumption of oil. The weakness of the biofuel industries are the relatively low innovation rate due

Biofuel industry

80% of dividends taxed

Profit company

Investment domestic and international

NPO company

Public service projects

20% of the dividends tax exempt

Education

Medical

to the mature technology (first generation), the relatively high investment cost to set up production plants, the bureaucracy in investment procedure and the uncompetitive price in Indonesia. The opportunity for the industries are: land availability, economic growth at a stable pace, high potential for resource efficiency and the increasing demand in the near future. Threats for these industries are deforestation and increasing competition in land allocation for food and fuel. Also, the production cost of biofuel is still higher than for fossil oil and relatively low institutional support at regional level. The Porter’s analysis shows that the exit strategy cost is high due to high investment costs but that technology learning is expected to create a competitive price. Biofuel has a high market value due to the upcoming replacement of oil in the transportation sector. The buyers are a state-owned company for the domestic market and for export international firms such as Marubeni, Ithocu, etc. The suppliers for this industries are the plantations owned by the industries itself and to a limited extent by local farmers. In the business portfolio, the biofuel industries position is starting to change from question mark into start. The situation is a question mark since the market share is still low (domestically the obligatory blend started from below 1 percent in 2007); however, the biofuel industry is moving into the star position. The cost leadership and logistic advantage are the major drivers for success in this industry. The product life cycle analysis shows that markets are in their infancy in Asia Pacific, growing in the USA and mature in South America and the European Union. An innovative business model is proposed to make the biofuel industries profitable in a sustainable way whilst considering the interests of all stakeholders. This business model calls for a share 80 percent of the dividends as profit and the 20 percent of the dividends invested in local society, under non-profit institution management. This benefit to society is allocated into the two most important needs in rural areas: medical services and education. Note 1. The strategic analysis part was adapted from the MBA thesis of Jupesta (2006). References BCG (1968), The BCG Growth-share Matrix, available at: www.bcg.com/about_bcg/history/ history_1968.aspx (accessed 22 August 2011).


Figure 4. Sustainable business model

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Coelho, S.T., Goldemberg, J., Lucon, O. and Guardabassi, P. (2006), “Brazilian sugarcane ethanol: lessons learned”, Energy for Sustainable Development, Vol. 10, pp. 26-39. Dorf, R.C. and Byers, T.H. (2005), Technology Ventures: From Idea to Enterprise, McGraw-Hill, New York, NY. Enkvist, P.A., Nauclo˜r, T. and Oppenheim, J.M. (2008), “Business strategies for climate change”, McKinsdey Quarterly, April, available at: www.mckinseyquarterly.com/Business_ strategies_for_climate_change_2125 (accessed 2 August 2011). European Union (2009), “Directive 2009/28/EC of the European Parliament and the council on promotion of the use of energy from renewable energy sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC”, available at: http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri¼OJ:L:2009:140:0016:01:EN:HTML (accessed 1 July 2011). FAO (2008), The State of Food and Agriculture, Biofuel: Prospects, Risks and Opportunities, FAO Publisher, Rome. Heyzer, N. (2011), “Toward a truly Asia-Pacific century”, available at: www.chinadaily.com.cn/ cndy/2011-08/03/content_13037213.html (accessed August 2011). Indonesia’s Coordinating Ministry of Economic Affairs (2009), Development of the Self Sufficient Energy Village, Tim Pengemebangan Desa Mandiri Energi, Jakarta. Indonesia’s Ministry of Energy and Mineral Resources (2008), Press Conference, Document No. 56/HUMAS DESDM/2008, available at: www.esdm.go.id/siaran-pers/55-siaran-pers/ 2053-siaran-pers-seminar-peningkatan-pemanfaatan-bahan-bakar-nabati.html (accessed 5 August 2011). Jupesta, J. (2006), “Market potential analysis for FESTO to enter global energy industries by focus on biofuel industries”, MBA thesis, Hochschule Esslingen, Esslingen am Neckar. Jupesta, J. (2010), “Impact of the introduction of biofuel in the transportation sector in Indonesia”, Sustainability, Vol. 2 No. 6, pp. 1831-48. Jupesta, J. (2011), “Modeling technological changes in the biofuel production system in Indonesia”, Applied Energy, available at: http://dx.doi.org/10.1016/j.apenergy.2011.02.020 (accessed 2 August 2011). Jupesta, J., Boer, R., Parayil, G., Harayama, Y., Yarime, M., de Oliveira, J.P. and Subramanian, S.M. (2011), “Managing the transition to sustainability in an emerging economy: evaluating green growth policies in Indonesia”, Environmental Innovation and Societal Transitions, Vol. 1 No. 2, pp. 187-91. Luque, R., Lorenzo, H., Campelo, J.M., Clark, J.H., Hidalgo, J.M., Luna, D., Marinas, J.M. and Romero, A.A. (2008), “Biofuels: a technological perspective”, Energy and Environmental Science, Vol. 1 No. 5, pp. 542-64. Morris, M., Schindehutte, M. and Allen, J. (2005), “The entrepreneur’s business model: toward a unified perspective”, Journal of Business Research, Vol. 58, pp. 726-35. Nigam, P.S. and Singh, A. (2011), “Production of liquid biofuels from renewable resources”, Progress Energy and Combustion Science, Vol. 37 No. 1, pp. 52-68. OECD-FAO (2008), Agricultural Outlook 2008-2017, OECD- FAO Publisher, Paris. Porter, M. (1980), Competitive Strategy, Techniques for Analyzing Industries and Competitors, Simon and Schuster, New York, NY. Utterback, J.M. (1994), Mastering the Dynamics of Innovation, Harvard Business School Press, Cambridge, MA. Waltermann, B. and Streubel, H. (2010), “Bright future for biodiesel in Indonesia”, available at: www.thejakartapost.com/news/2010/02/08/bright-future-biodiesel-indonesia. html (accessed 7 August 2011).

(The) World Bank (2011), “Rising food prices: policy options and World Bank response”, available at: http://siteresources.worldbank.org/NEWS/Resources/risingfoodprices_ backgroundnote_apr08.pdf (accessed 5 August 2011). Further reading Osberg, S. (2010), “The house that BRAC built”,Stanford SocialInnovation Review, Fall, 2009, available at: http://csi.gsb.stanford.edu/house-brac-built (accessed 1 July 2011). About the authors Joni Jupesta is a Postdoctoral Fellow at United Nations University Institute of Advanced Studies (UNU – IAS) where his research focuses on technology for development. He gained his PhD in Management Science and Technology from the Graduate School of Engineering, Tohoku University. He specializes in green innovation and sustainable business model. He has published in Applied Energy, Sustainability and Journal of China Science, Environmental Innovation and Societal Transition, among others. Joni Jupesta is the corresponding author and can be contacted at: [email protected] Yuko Harayama is the Deputy Director of the OECD’s Directorate for Science, Technology and Industry (STI) where she supports the Director to oversee OECD work on innovation, science and technology policy, business dynamics, information and communication technology policy as well as statistical work associated with each of these areas. She is also a Professor in the Management Science and Technology Department at the Graduate School of Engineering of Tohoku University, presently on leave of absence. In Japan, she served as a Member of the Council for Science and Technology Policy (CSTP) at the Cabinet Office and a member of different commissions related to Science and Technology at the Ministry of Education, Culture, Sport, Science and Technology (MEXT) and the Ministry of Economy, Trade and Industry. Her experience prior to Tohoku University includes being a Fellow at the Research Institute of Economy, Trade and Industry in Japan and an Assistant Professor in the Department of Political Economy at the University of Geneva. A citizen of Japan, she holds a PhD in Education Sciences and a PhD in Economics both from the University of Geneva. Govindan Parayil, an Indian national, joined the United Nations University as Vice-Rector in August 2008 and as Director of United Nations University Institute of Advanced Studies in January 2009. He currently serves as both Director of UNU-IAS and Vice-Rector of UNU. Prior to joining the UNU, he had been serving as full Professor with the Centre for Technology, Innovation and Culture, University of Oslo (Norway) since 2004, where his research focus was on science, technology, innovation and sustainability. He served concurrently as Director of Research and Leader of the Innovation Group for two years. Prior to that, he was the Head of the Information and Communications Management Programme and member of the Faculty of Arts & Social Sciences at the National University of Singapore (2001-2004). He was on the faculty of the Division of Social Sciences of the Hong Kong University of Science and Technology from 1994 to 2001. His previous academic affiliations include Cornell University, Illinois Institute of Technology and Rensselaer Polytechnic Institute (USA), and the University of Sulaimaniyah (Iraq). Professor Parayil obtained his PhD in Science and Technology Studies from Virginia Polytechnic Institute and State University (USA). He authored and edited several books and has written numerous book chapters and articles in Global Environmental Change, Research Policy and other international journals.

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