Value chain analysis Indonesia botanical extracts

This CBI-commissioned value chain analysis (VCA) identifies opportunities and obstacles in the Indonesian plant extracts sector, vis-à-vis European markets for extracts intended for use as a traditional food ingredient, food supplement or as an ingredient for cosmetics, but especially value-added products, such as extracts based on traditional use for food, health or beauty. This analysis identifies characteristics of trends, demand, requirements and options for value addition, describes the actors and relations in the value chain, identifies clear obstacles and opportunities and proposes targeted interventions.

In addition to this VCA report, CBI developed two additional reports: on seaweed extracts and essential oils.

Chapter 1: The European Market

Based on information on trends, demand, requirements and value addition propositions, the study shows good potential for Indonesian extracts on the European food supplement and cosmetics markets. The study also shows how Indonesia’s strong traditional knowledge on the use of natural products for food, health and beauty could be leveraged to develop innovative and proprietary extracts for European markets.

These qualities are in demand among European manufacturers seeking to differentiate themselves in the market. However, Indonesian producers have yet to leverage favourable European market trends such as increased demand for organics and compliance with corporate social responsibility (CSR). In addition, Europe imposes strong requirements on producers willing to do business with European companies, while European buyers currently do not picture Indonesia as a source of such innovative extracts. The table below summarises these aspects of the European market trends, demands, requirements and the opportunities and the potential for Indonesian plant extracts and traditional food ingredients for food supplements.

Chapter 2: Value Chain Structure and Governance

Chapter 3 shows that the Indonesian value chains for extracts intended for use in the pharmaceutical or herbal medicine sectors, are transparent. Outside of these markets, value chains are longer and more complicated, reducing the level of traceability. There is little coordination among actors in the value chain, spread among suppliers of cosmetics, fragrance and flavours, pharmaceuticals, Jamu, and supplements, each industry with its own sector association, namely the Indonesian Cosmetics Association (PERKOSMI), the Indonesian Essential Oils Association (DAI) and the Association of Herbs and Traditional Pharmaceutical Producers (GPJ). The extracts sector as a whole is not considered by government organisations in their policies or support activities and the service industry to the sector is not well developed in key needed services, such as efficacy research. The value chains typically involve:

• Different producers of raw materials, such as farmers, wild collectors and company plantations;
• Traders at different levels, covering a community, district, province or other regions;
• Extraction companies mostly focusing on or integrated with domestic companies specialised in cosmetics, food supplements or pharmaceuticals.

Chapter 3: Opportunities and Obstacles in the Value Chain

In terms of obstacles, Chapter 3 identifies the following key issues:

• Indonesian SMEs lack knowledge specifically on:
  • European market trends, so they do not develop products which meet market needs, and do not leverage high-growth segments in Europe.
  • European market access requirements and standards, so they do not comply with quality, documentation and certification, or the right route to introduce innovative products to the European market.
• Extraction companies have no contact with European buyers, so they do not learn about buyers’ requirements and do not communicate with buyers on product development and improvement.
• The current low-skilled human resources available to the sector, for example in areas such as product development, leads to unstandardised extracts which do not meet EU buyers’ requirements.
• In terms of innovation, European buyers do not see Indonesian extract exporters as prospective suppliers of proprietary extracts.
• For extracts, there is no vision on development of the sector, which is also reflected in the unclear legislation on access and benefit sharing (ABS). The local business support organisations (BSOs) do not offer sufficient services to meet the needs of exporting companies.
• Research and development (R&D) actors are not well connected with the private sector. More research in, for example, organic production and safety and efficacy of extracts is also necessary to compete in value-added markets.

Chapter 3 identifies the following opportunities:

• Good availability of raw materials and options to increase raw material supply;
• Growing demand in the European market;
• Documented traditional knowledge to meet demand for innovation;
• High-quality extraction companies;
• Strong local market.

Chapter 4: Possible Interventions and Support Activities

Chapter 4 proposes the following interventions for Indonesia’s plant extracts for food supplements and cosmetics:

• Improve sector coordination;
• Set up best practices for supply chain management, sustainability and USPs, and product introduction to Europe;
• Develop market information tools for the sector;
• Develop service delivery of BSOs;
• Build workforce skills, HR capacities
• Curricula development;
• Support on access and benefit sharing (ABS).

Conclusions

The conclusions recommend focus on specific market segments, key considerations and risks associated with possible interventions. In relation to market segments, the research team recommends a market focus on the food supplement and cosmetics sectors. In terms of key considerations for interventions in the plant extracts sector, the research team recommends:

• Making a business case for developing innovative extracts for European markets, providing strong support to selected companies.
• Strengthen the business case for the CBI to obtain best results by:
  • Building interest among government institutions and BSO to invest in a business enabling environment for the sector;
  • Enticing more companies to invest in extract development;
• Manage risks using a combination of proprietary and extracts, in addition to better-known and commodity extracts.

The research team identified the following key risks for possible CBI interventions:

• Commitment of companies;
• Government interference;
• BSO resources and capacities;
• EU regulatory changes;
• Dissent among sector stakeholders.