Value chain analysis Indonesia essential oils

This CBI-commissioned value chain analysis (VCA) identifies opportunities and obstacles in the Indonesian essential oil sector, vis-à-vis European markets for essential oils, but especially value-added products, such as organic essential oils. 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 plant extracts.

Chapter 2: The European market

Based on information on trends, demand, requirements and value addition propositions, the study shows good potential for essential oils on European food and cosmetics markets. The study also shows that, although Indonesia has a large raw material production base, its product range is quite uniform and companies lack unique selling points. Companies have not yet taken advantage of the European market trends that could benefit Indonesian producers, such as increased demand for organics and compliance with corporate social responsibility (CSR) and traceability requirements. Finally, the analysis shows a big difference in compliance between SMEs and big players, and in the perception of European buyers towards their products. The table below summarises these aspects of the European market’s trends, demands, requirements and the opportunities and the potential for Indonesian essential oils.

Chapter 3: Structure and Governance of the Value Chain

Chapter 2 shows that the value chains for essential oils in Indonesia are generally long and complicated, leading to low levels of traceability and security in terms of quality and quantity. Trust, communication on quality and volumes and transparency in terms of prices is low. Key issues, for example, health and safety at the distilling level, remain unsolved.

The chain generally involves farmers, collectors, distillers and exporters, but other intermediaries might be also involved. Coordination among actors in the value chain, including supporters and influencers is weak but the sector association, DAI, can provide a solid basis to improve this situation, since it has a good coverage of the sector.

Chapter 4: Opportunities and Obstacles and Sustainability in the Value Chain

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

• Lack of supply chain management: Many Indonesian essential oil exporters act as traders and do not take responsibility to ensure a sustainable supply chain in terms of volumes, quality and traceability. They face therefore many issues around accessing raw materials at the right quantities, the right times and at the right prices.
• 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.
• No market access: Indonesian SMEs specifically have little contact with the European market and European buyers so they do not learn about buyers’ requirements and do not communicate with buyers on product development and improvement. Therefore, companies do not develop USPs.
• Perception of European buyers: In terms of quality, European buyers see problems with Indonesian businesses’ food safety management, consistency, documentation and communication with SME suppliers of essential oils.
• There is little coordination amongst players in the sector, especially for organic essential oils, which limits their ability to tackle obstacles beyond the influence of individual companies.
• Across the board, local business support organisations (BSOs) do not offer sufficient services to meet the needs of exporting companies, such as organic certification.
• Although R&D into essential oils exists, the private sector is not well connected with the actors responsible for it. More research in, for example, organic production, 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;
• Best cases for business where companies can learn from one another;
• Growing, strong demand in the European market;
• Strong research focus;
• Priority sector for government.

Chapter 5: Possible Interventions and Support Activities

Chapter 4 proposes the following interventions for essential oils:

• Improve sector coordination;
• Export development for SMEs and setting up best practices for development of USPs through supply chain management, sustainability and product diversification;
• Develop traceability and compliance tools;
• Develop market information tools for the sector;
• BSO service delivery development.

For certified organic essential oils, Chapter 4 proposes additional interventions:

• Capacity building for organic sector service providers;
• Market orientation to the organic market for exporters, BSOs and public institutions.

Chapter 6: Conclusions

In the conclusions, the research team provides recommendations on focused market segments, key considerations for interventions to succeed, and multi-sector interventions, identifying risks, risk mitigation actions and indicators.

The research team recommends a market focus on cosmetics and food sectors. In terms of key interventions in the essential oils sector, we recommend:

• Identifying committed suppliers willing to work towards developing USPs in terms of full traceability, CSR compliance, certification and product diversification, such as developing or reinvigorating the smaller oils produced in Indonesia.
• Building awareness of opportunities offered by different USPs through market orientation and market intelligence.
• Developing a sector strategy to create an enabling environment for USP creation.

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 amongst sector stakeholders.