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Packaged food, meat will lead growth under Asean

/ 03:55 PM September 21, 2015

The formation of the Asean Economic Community (AEC) later in 2015 holds immense opportunity for the food and agriculture (F&A) sectors in Indonesia and across Southeast Asia as the region experiences integration, urbanization, and population growth.

The Asean region has a predominantly young and growing population of 625 million and the world’s seventh-largest gross domestic product (GDP), which is expected to grow to US$3.6 trillion by 2020.

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Higher average income levels for Asean citizens will see them shift away from a carbohydrate — heavy diet to one that is richer in fat and protein — demand will be boosted for industries such as dairy and meat.

Increased urbanization will also drive demand for packaged food as consumers look for more convenience in their purchase habits.

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A report released last week by Rabobank titled “AEC: One Large Non-Homogeneous Market” in Singapore predicts packaged food and meat are the F&A sectors that will gain most from AEC integration – growing by 5 per cent and 4 per cent per annum to exceed 52 million tons and 20 million tons respectively by 2020. By comparison, global growth of these sectors in the same period will be three per cent for packaged food and two per cent for meat annually.

The higher standard of living across the region will also pose a huge opportunity for regional downstream producers and consumer food and beverage businesses as the AEC improves access to a larger consumer base, increased flow of capital for investments and investment in infrastructure development.

While regional businesses are expected to be the biggest winners from the AEC, they will need a regional strategy to compete against multinational companies (MNCs) attracted by improved business conditions, whose presence will raise competition across the market. Currently, only 55 per cent of regional firms have an Asean strategy, compared with 81 per cent of non-Asean companies, according to a survey by The Economist Intelligence.

Stiff competition from MNCs and established F&A companies will push Asean-based firms to expand their regional footprint, streamline their operations and diversify revenue streams in order to stay relevant and efficient.

Companies with better access to funds and management bandwidth would be better placed to execute a pan-Asean expansion strategy.

With the right strategy and support in place, this could even present an opportunity to develop the region’s first home-grown multinational food and beverage companies.

While majority of quantitative tariff barriers have already been reduced across the AEC, integration is still far from complete. Consequently, the full effects on F&A commodity trade flows will not be seen while common food production challenges, quality differences, and strategic national trade barriers exist — including the protection of Indonesia’s, Malaysia’s and the Philippines’ local rice and sugar industries from being flooded by cheaper imports from Thailand or Vietnam.

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Challenges at a country level will greatly impact the future of F&A businesses under the AEC. Indonesia will need to focus on building production efficiencies across a number of its F&A sectors for local producers to be able to compete with other countries in the region such as Thailand.

Another key challenge for improving Indonesia’s F&A sectors is infrastructure development. Currently, the cost of shipping dry cargo such as wheat, corn and rice within different islands in Indonesia can be higher than the cost of shipping them to China or across the Pacific Ocean.

As AEC integration continues, to remain competitive, countries will need to address issues such as non-tariff barriers to trade, effective infrastructure, a conducive regulatory framework and agricultural skills shortages.

While it’s understandable that countries want to protect their local industries, it could also be argued that these sensitivities should be dropped in the longer run to allow commodities to flow from the most efficient producers and reduce the overall cost in the region’s supply chain.

Governments have committed to gradually eliminate non-tariff barriers in the long term, however in the short term, it is more likely to see a barter trade of non-tariff barriers removal between Asean nations.

Overall, this push towards integration will help countries focus on productivity improvements in agriculture – Rabobank is confident that the AEC is a step in the right direction for the F&A industry.

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TAGS: AEC, ASEAN, Asean Economic Community, Beverage, Business, economic growth, economy, food, Southeast Asia, Urbanization
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