Industrial Clusters in The Palm Oil Industry in Indonesia

1. Industrial Clusters in The Palm Oil Industry in Indonesia Gorga Parlaungan Yokohama National University The Joint Japan World Bank Scholarship Program Regional Conference “Capacity Development Asia” Jakarta, June 4, 2008

2. Palm Oil in Indonesian Economy • One of main export commodities, increasing contribution to non-oil-and-gas exports • More than 50% of total crops production beginning in 2000 • Involves 1.18 million families in employment • Growth in production and plantation area (5.5 million ha in 2005 and increasing) • Further prospect in manufacturing industries, including biodiesel. Source: DGEC 2006

3. CPO and PKO export Source: DGEC 2006 (processed)

4. World Vegetable Oil and Fat Production Source: Basiron 2007 p. 292 (processed)

5. Palm oil production tree Source: Kehati 2006 p. 7, Pahan 2007

6. Problems of Palm Oil Industry • Monopsony, environmental degradation issues • Social unrest-> work culture, employee dependency, security, and control of working environment and wages • Domination of large business groups, no links with SMEs in manufacturing industry • Export mostly in crude palm oil.

7. Crude palm oil domestic consumption and export tons Source: DGEC 2006 (processed)

8. Firm strategy and rivalry Chance Demand conditions Factor conditions Related and supporting industries Government Palm Oil Industry in Porter’s Diamond Model Source: Porter 1990, p. 127

9. Palm Oil Industry Indonesia • Competitive in agriculture sector • Monopsonic, dominance of large enterprises • Linkages based on networks • Absence of cluster attributes: social capital, joint action • Absence of benefits to micro and SM industrial agents.

10. Clusters “Geographic concentration of interconnected companies and institutions in a particular field” (Porter 1998, p. 78) “Sectoral and geographical concentrations of enterprises that produce and sell a range of related or complementary products and, thus, face common challenges and opportunities” (UNIDO 2001, p. 9) • Proximity • Linkages • Interaction • Critical Mass Attributes:

11. Why Clusters? • Shared capital and risks, in early stages as well as further in penetrating global market • Cost savings, due to the easy access to specialized suppliers, distributors and human resources • Knowledge spillovers • Complementarities • Learning from interaction with customers and suppliers (when network to markets exists). • Pressure for higher performance in head-to-head competition • Fast change reaction, due to the extreme specialization inside the cluster and its high productivity • Imitation facilitates faster adoption of innovation • Establishment of social capital within the cluster.

12. Industrial Clusters in Indonesia • Jepara furniture cluster, 15,271 enterprises from sawmills, warehouses, to showrooms. Revenue up to USD 1.46 billion / year (Roda et al 2007) • East Java clove cigarette industry. 221,000 workers, outperforms international competitors (Kuncoro 2007, Wibowo 2003, Tambunan 2005) • Features: root from strong home demand, historic-know-how basic, presence of linkages to markets.

13. Recommendations • Policies that support the palm oil derivative industries • Further studies on the most appropriate cluster in palm oil industry, based on country-specific and regional characteristics • Seedbed for cluster in palm oil derivative industry, to promote SMEs and strengthen the industrial structure.

14. References: • Bank Indonesia (2007). 2006 Economic Report on Indonesia. • Barlow, C., Zen, Z., & Gondowarsito, R. (2003). The Indonesian Oil Palm Industry. Oil Palm Industry Economic Journal 3 (1) • Basiron, Y (2007). Palm Oil Production through Sustainable Plantations. Eur. J. Lipid Sci. Technol. 109. • DGEC (2006). The Estate Crops Statistics of Indonesia 2004 - 2006. Directorate General of Estate Crops, Ministry of Agriculture of Indonesia. • Kehati, Watch, S., INRISE, Institute, B. A., & Development, M. I. G. D. R. (2006). Indonesian Path Towards Sustainable Energy: a Case Study of Developing Palm Oil as Biomass in Indonesia. • Kuncoro, M. (2007). Ekonomika Industri Indonesia. Menuju Negara Industri Baru 2030? (Indonesian Economic Industry. Towards a New Industrialized Economy 2030?) Penerbit Andi. Yogyakarta. • Pahan, I. (2007). Panduan Lengkap Kelapa Sawit. Manajemen Agribisnis Dari Hulu Hingga Hilir. (Complete Guide on Oil Palm. Agribusiness Management from Upstream to Downstream). Penebar Swadaya. Jakarta • Porter, M. E. (1990). The Competitive Advantage of Nations. New York: The Free Press. • Porter, M. E. (1998). Clusters and the New Economics of Competition. Harvard Business Review, 77-90. • Roda, J.-M., Cadène, P., Guizol, P., Santoso, L., & Fauzan, A. U. (2007). Atlas of Wooden Furniture Industry in Jepara, Indonesia. • Tambunan, T. (2005). Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience from Indonesia. Journal of Small Business Management, 43, 138-154. • Tambunan, T. (2006). Indonesian Crude Palm Oil: Production, Export Performance and Competitiveness. Kadin-Jetro. • Wibowo, T (2003). Potret Industri Rokok Indonesia. (Portrait of Indonesian Cigarette Industry). Kajian Ekonomi dan Keuangan, 7 (2). • UNIDO. (2001). The Development of Clusters and Networks of SMEs.

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