Indonesia’s economy shapes packaging industry

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Indonesia is revving up its manufacturing sector scorecard, raising points for the food/beverage and packaging segments, against the back of the upcoming AEC and TPP agreements, says Angelica Buan in this report.

The world’s 16th largest economy is in the troughs of economic transformation in anticipation of the upcoming ASEAN Economic Community (AEC) end of this year. This is along with its plan of joining the Trans-Pacific Partnership (TPP), and opening up to FDIs to shore up its manufacturing sector by reviewing its protectionist regulations, as well as offering tax incentives.

Projecting a 5.3% GDP growth in 2016, which is up from the 4.7% GDP from the second quarter, yet slightly off the 5.5% GDP mark aimed by the government, the World Bank lauds the investment reforms initiated by the country to impede the recurrence of deficits.

Thus, efforts are starting to pay off. Indonesia’s Investment Coordinating Board (BKPM) data showed that FDIs rose from over US$16 billion in 2010 to nearly US$29 billion in 2014. In the third quarter (July-September) of the current year, BKPM pegs the country’s FDIs at close to US$7 billion, an increase of 18.1% from a year ago.

Manufacturing cornerstone in Asia

With a more solidified capital investment, Indonesia maintains its ranking as the third manufacturing hub in the Asia Pacific region. It has high potential to gravitate up the ranks and outpace China or Vietnam with its production-conducive climate. This includes an hourly wage rate that has remained comparatively attractive; 250-million strong domestic market, rapid urbanisation, and substantial purchasing power that can support its priority industries such as packaging, automotive, household goods, electrical & electronics, and medical devices.

By 2030, McKinsey Asia Consumer Centre (MACC) forecasts that Indonesia will account for almost 40% of ASEAN growth. Its population will expand at a rate of 2.9 million a year. Incomes and urbanisation will have vertical growth and will further support its domestic consumption.

A report by the McKinsey Global Institute (MGI) also collaborates that by 2030, Indonesia would have become the seventh largest economy, propped up by the 135 million consuming class, and a healthy US$1.8 trillion market with opportunities in many sectors.

More recently, US President Barack Obama won Indonesia’s endorsement for the contentious TPP with the President of Southeast Asia’s largest economy vowing to join. Joko Widodo has, thus, risked the ire of economic nationalists in Indonesia by pledging to join the pact.

Twelve countries are currently party to the TPP, including Australia, Canada, Japan, Mexico, Vietnam and the US, creating the world’s largest free trade area. The deal is seen by some as a counterbalance to growing Chinese economic clout in the region.

Roping in the F&B industry

Amongst the industries that will benefit from a revitalised manufacturing sector, the food and beverage is specifically addressed as having been largely contributory to the country’s GDP. This was stated by President Joko Widodo during a recent meeting with the Indonesian Food and Beverage Association (Gapmmi). Deregulations are being carried out to further propel the competitiveness of the F&B segment.

In the ASEAN, Indonesia offers plenty of market opportunities for F&B, according to the BKMB, which has projected a 400% growth in food and manufacturing FDI projects from 2010 onwards.

Demand-wise, market research firm Canadean finds demand for commercial beverage production in Indonesia to continue to expand. Soft drinks are growth drivers in the sector, it said, accounting for over two-thirds of the total beverage market. In the coming term, new soft drink products will be launched and new industry players will permeate the market, Canadean says.

On the other hand, market share of packaged water remains strong amid the need for potable, safe drinking water, the report said. Other packaged ready-to-drink (RTD) beverages have since made the cut, especially when packaged in non-refillable PP cups, which provide practicality and low production costs, thus a cheaper cost for consumers, the report said.

Packaging seizes the opportunity

Globally, the success of the F&B industry is stirring up growth for the packaging industry, valued at US$125.7 billion by 2018, up from US$97.2 billion in 2012, according to Markets and Markets. In terms of revenue in 2012, Asia Pacific countries were top billed as the fastest growing, followed by Europe and North America.

The food industry is projected to partake in 33% of the global market share, according to a 2014 Frost & Sullivan report.

Specialised market research firm TechNavio, in its report titled Food Packaging Market in the APAC Region 2015-2019, says that new and innovative packaging materials and techniques are being introduced to increase the shelf life of products and enhance aesthetic appeal.

Drink packaging from 2012-2018 is expected to rise by 3.3% on average yearly, reaching a value of US$102 billion by 2018, according to Smithers Rapra in its report, The Future of Global Packaging to 2018. It also adds that for food items, a 3.4% average yearly growth rate is projected over the report period to US$284 billion by 2018.

Meanwhile, a market finding by research company Euromonitor noted that stand-up pouches, while not counted among the most used plastic pack types, are becoming popular. This type of packaging has etched its presence in many food brands, and in the US$1.9 trillion food packaging units sold in 2014. Standup pouches provide single-serve, easy-reheating, or ready-serve solutions and thus are projected to grow at 6% average yearly from 2014-2019, according to Euromonitor.

Emerging economies where the F&B sector has a firm footing are also gaining from the global wave of packaging growth.

Indonesia to be major player in packaging

Indonesia’s billion-dollar packaging industry is forecast to post a CAGR of 5.1% to US$9.6 billion in 2016, according to the Packaging Industry Outlook in Indonesia report by BRICdata. The industry’s expansion is driven by the country’s rising population and urbanisation. The packaging segment over the report period through 2016 will witness an upshot from the F&B end-user market, which accounted for 67% of the total packaging industry market value in 2011.

Meanwhile, Indonesia’s non-F&B segments, such as beauty, personal and hygiene care, are stimulating demand in the packaging industry, to spawn an estimated market volume of over US$954 million by 2020, according to the online data source Statista.

Euromonitor attributes domestic growth for these undertapped segments to the rising middle-income consumer base. It additionally says that expansion for the sector can be expected as geographical penetration for these products has yet to be optimised.

Pet food packaging rising

Since packaging has universal applications, there are yet other applications beyond F&B.

One example is the pet food market, which is becoming lucrative on account of a growing trend for pet adoption. What is firing up the market is also the growing demand for readymade products that are high quality and nutritious.

Grand View Research, in its latest report, expects a significant take up rate for Indonesia in the pet food market share that is projected to increase to US$98.81 billion by 2022 from US$70.83 billion in 2014.

Meanwhile, Markets and Markets says that pet food packaging will reach over US$8 billion by 2020, with a CAGR of 5.08% from 2015- 2020. While the North American region accounts largely in the total market share at 39.4%, the APAC region as well as Europe are not far behind.

The demand is spurring innovations in pet food products and rising competition in the pet food packaging market, whereby manufacturers are also opting for quality and sustainable packaging to attract customers, the research group stated.

Thus, Indonesia stands to benefit from the growth in the packaging sector, if the notoriously protectionist economy is able to counter its corruption, lower commodity prices and slower growth as a result of China’s economic slowdown.

Other downsides are the high (20%) unemployment among the vast ranks of Indonesia’s youth. This and the need to cut down red tape and economic nationalism to attract further investors are factors that will be looked at closely.

(PRA)