Weak Supply Chain Hampers Food and Beverage Industry
The food and beverage industry is among sectors with the most potential but it still faces various challenges.
The food and beverage industry is among sectors with the most potential but it still faces various challenges.
The food and beverage industry continues to struggle due to weak links of the supply chain in the business sector, not only related to the availability of raw materials and technology but also lack of synergy between business players.
Despite the various challengers, the performance of the food and beverage industry in the country is not that bad. While performances of most of non-oil industries have declined significantly due to the Covid-19 pandemic, the food and beverage sector is still growing. In the first quarter of this year, the food and beverage industry grew 3.94 percent compared to the same period, 2019.
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In the first quarter, 2020, the food and beverage industry contributed 6.52 percent of total gross domestic product (GDP). The contribution of the food and beverage industry is equivalent to four times of that contributed by four other industries that have a significant share in GDP.
In addition to food and beverages, other industries that contributed significantly to the economy in the first quarter, 2020 were the chemical, pharmaceutical and traditional medicine industries; transportation equipment industry; metal –based industry; and the textile and apparel industry.
Referring to the Trade Ministry study, Indonesia is the largest market for consumer goods in ASEAN, which account for 30 percent of the economic output in the ASEAN region.
The impressive performance of the food and beverage industry is inseparable from market support. Referring to the Trade Ministry study, Indonesia is the largest market for consumer goods in ASEAN, which account for 30 percent of the economic output in the ASEAN region.
At the national level, the food and beverage industry has become one of the most promising industrial sectors in Indonesia thanks to the country’s abundant agricultural resources billed as the fifth-largest in the world in terms of the total volume of agricultural production, according to the Trade Ministry’s study.
Unfortunately, despite such a promising outlook, Indonesia’s food and beverage industry is still growing and standing on a weak foundation. The weakness of the business sector is becoming increasingly apparent in the midst of the Covid-19 pandemic.
A publication from a well-known consulting service, Deloitte, indicates that Covid-19 will have a long lasting impact on the food and beverage industry. The consulting company highlights three main problems in the industry: raw materials, distribution networks, and commodity prices. These three problems also occur in Indonesia.
Raw material
One of the main problems based by the food and beverage industry is the availability of raw materials as a major component of the operation of an industry. Until now, the food and beverage industry in Indonesia relies on imported raw materials. According to the Industry Ministry, 70 percent of the raw material for the food-beverage industry is imported.
According to the data of the Finance Ministry, imports of auxiliary raw materials for the country’s food and beverage industry continue to increase from year to year. Last year, the total raw material imports reached US$8.9 million, an increase of 0.63 percent from those recorded in in 2018.
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In fact, during January to May, this year, the imports of the auxiliary raw materials reached $4.05 million. Even in the midst of the pandemic, the import value increased 2.46 percent compared with those in the same period last year.
The reliance on imported raw materials will remain a major obstacle especially in the middle of the pandemic that nobody knows when it will end. Imports of the raw materials were prohibited in February, this year as part of the government’s efforts to prevent the spread of the corona virus from China. The ban to import the raw materials from China opens an opportunity for the local industries to import from other countries.
In addition to China, Japan, Singapore, Thailand, and the United States are Indonesia’s top five sources of imported products.
According to the Trade Ministry’s data, until May 2020, China remained Indonesia’s largest trading partner, with almost one third of the total imports of non-oil and gas products coming from China. In addition to China, Japan, Singapore, Thailand, and the United States are Indonesia’s top five sources of imported products.
The availability of raw materials for the food and beverage industry continue to decline. The shortage of raw materials for the food and beverage industry has not only experienced by large and medium industries, but also by small and medium industries since a month after the first confirmed Covid-19 case was found in early March, this year. (The Industry Ministry’s press release on 11 April 2020).
It is important to note, the structure of the food and beverage industry is still dominated by micro and small and medium enterprises (MSMEs) . Based on data from the Statistics Indonesia (BPS) , in 2018, of the total 4.26 MSMEs in the manufacturing sector, 1.85 MMSEs were engaged in the food and beverage industry.
In the same year, the total number of MSMSs reached only 37,929 companies. Of the total, about 8,200 companies are engaged in the food and beverage sector.
The decline in non-oil and gas imports or imports of the raw materials for the food and beverage industry should be used as the momentum to reduce the country’s dependence on imports. The problem is that the country is still unable to provide raw materials from its own resources. For example, at the micro / small level only 5,018 companies still rely on imported raw materials.
Technology and synergy
Another inseparable part of the food and beverage industry is the power of technology. For the food and beverage industry, technology becomes a necessity as the food and beverage industry produces products that have a lifetime. As food and beverage products bring health risks directly to the people, the use of the technology in the product cannot be ignored.
As stated by the Indonesian Supply Chain Institute, the food safety is the most important factor in the production of food and beverage products. The main principle of the food safety is to prevent physical contamination, such as foreign objects, chemical contamination, and several others before the products reach consumers. In the midst of this pandemic, the prevention from contamination is very important to note because the virus that causes Covid-19 is able to survive for a long time on a surface.
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On the other hand, the food and beverage industry also needs to maximize storage in the cold chain, which is needed to keep temperature within the standard levels so that the quality of the products can be maintained during the process of collection, processing, and distribution to consumers.
Meanwhile, MSMEs that dominate the food and beverage industry are still struggling with technological limitations. Out of a total of 1.85 million MSMEs in the food and beverage industry, only 138,996 companies have used the internet.
Of that number, 30,211 MSMEs use the internet to buy raw materials. A total of 1.79 million MSMEs have not obtained certificates that indicate they have met the required industrial quality standards.
The links between MSMEs and small and large scale companies in the food and beverage are also still relatively weak. It can be seen from the small number of MSMEs which can export their products. There are only 1,259 out of a total of 1.85 MSMEs which are able to reach the export market.
With such various challenges, the food and beverage industry must set a strategy to ensure the availability of raw materials and to establish a synergy between small and big players in the business sector. On the other hand, the uncertainty in prices of imported raw materials will bring a substantial impact on the company\'s cash flow given the fact that the spending for imports is also affected by the fluctuation on the rupiah exchange rate with foreign currencies.
The rupiah gradually strengthened and returned to the 14,000 level in early July.
As an illustration, the exchange rate of the rupiah against the US dollar from January to February 2020, which was still below Rp 14,000 per US dollar, fell below Rp 14,000 in March. The fall in the rupiah exchange rate continued in the following months, reaching Rp 16,000 per US dollar in April, 2020. The rupiah gradually strengthened and returned to the 14,000 level in early July.
In addition to the lack of raw materials, the food and beverage industry is hampered by their inability to buy the up-to-date technology that can produce food and beverage which are safe for consumption. The high costs in the procurement of the raw materials and technology will create a pricing problem given the decline in the people’s purchasing power amid the pandemic.
An overall improvement from the upstream to downstream sectors has become a necessity to support the sustainability of the food and beverage industry in the country. A synergy is needed in almost all sectors, from the primary to tertiary sectors, to enable the industry survive in the midst of the pandemic and to further grow in the future. (Kompas R&D)