Impact of Generics on the Indonesian Crop Protection Market

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The Impact of Generics on the Indonesian Crop Protection Business

by

Anshul Sarda

A research study submitted to meet the degree requirements of Master’s of Business Administration.

Examination Committee: Dr. Roy Kouwenberg

Nationality: Indian Previous Degree: Bachelor in Commerce with Honors.

St.Xaviers College, Calcutta, India

Scholarship Donor: AIT Fellowship

Asian Institute of Technology School of Management

Thailand August, 2005

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ACKNOWLEDGEMENTS This research work would have not been possible without guidance from my advisor, Dr. Roy Kouwenberg. I would like to express my profound gratitude to him for his immensely helpful comments, criticisms and suggestions throughout the entire period of my study in AIT. I gratefully acknowledge the important contribution of the top management of Bayer Cropscience, Indonesia and above all of Mr. Bruno Tremblay (Country Head of Bayer Cropscience, Indonesia) who provided me with the substantial amount of material and information and continuous guidance throughout the period of my internship. I am highly indebted to Mr. Pascal Cassecuelle(Head of Marketing Development Team Asia - Pacific) for giving me this opportunity to work in Indonesia. I am appreciative of the time that many agronomists, economists, crop managers contributed to share their own practical experiences, outlooks and views. I would like express my sincere gratefulness to the members of examination committee for their comments and valuable time. Finally, I would like to convey my deepest respects and sincere thanks to my parents Mr. Shyam Sunder Sarda and Mrs. Nirmala Sarda and above all my grandfather Mr. Karnidan Sarda for their continuous support and guidance all around.

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ABSTRACT

The study focuses into the crop protection business which forms a USD $24 Billion business on a global basis. The business consists of protecting the crops through specially identified and constituted Active Ingredients directed towards specific crop diseases and insects eating through the crops. There are 13 major Multinational Companies (across 3 tiers depending on their value size) and over 100 generic companies who are competitively involved in this business around the world. The business is segmented into 3 categories namely:

Herbicides Fungicides Insecticides

The study gives a brief outline of the world crop protection business and its future trend. It will discuss the Indonesian Macro and Micro economic conditions which are directly and indirectly a contributor to the crop protection business in the country. Each segment constitutes a wide range of active ingredients directed towards particular crop and crop category. Some ingredients are precautionary and are put before the crop has problems and some after. In Indonesia this business accounts for USD 268 Million shared by 5 major Multinational Companies and over 30 generics as on 2004 and is expected to grow @ 2-3 percentage YoY after adjusting for currency fluctuations. Thus it promises to be an attractive market considering the fact that most markets in this business is on the verge of saturation.

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TABLE OF CONTENTS CHAPTER TITLE PAGE

TITLE PAGE i ACKNOWLEDGEMENTS ii ABSTRACT iii TABLE OF CONTENTS iv LIST OF TABLES v LIST OF FIGURES vi ABRIVATIONS vii

1 INTRODUCTION ..................................................................................... 1 1.1 Rational of the Study ................................................................... 1 1.2 Statement of a Problem ................................................................ 1 1.3 Objective ..................................................................................... 2 1.4 Scope of the Study ....................................................................... 2 1.5 Research Methodology ................................................................ 3

2 LITERATURE REVIEW ........................................................................... 4 2.1 Crop Protection Business ............................................................. 4 2.2 Global Crop Protection Business with Trends .............................. 5 2.3 Definition of Generics ................................................................. 6 2.4 Choices Available to the Farmers in Crop Protection ................. 10 2.5 R&D-based Companies ............................................................. 11 2.6 Patenting Problems .................................................................... 11 2.7 Generics and Alternative Choices by the Government ............... 12

3 INDONESIA ECONOMIC AND AGRICULTURE PROFILE ................. 14 3.1 Country Overview ..................................................................... 14 3.2 Agriculture and Availability of Labor ........................................ 16 3.3 Major Crops Outlook .................................................................. 18 3.4 Country Crop Protection Market – Value and Competition ......... 29

4 CASE STUDY OF BAYER CROPSCIENCE INDONESIA ..................... 32 4.1 P.T. Bayer Indonesia .................................................................. 32 4.2 Market Conditions ...................................................................... 34 4.3 Current Scenario – Generics ....................................................... 34 4.4 Business model of generic and MNC .......................................... 35 4.5 A comparative Strategic Model between BCS and Generic ......... 35 4.6 A Comparative MNC and Generic Distributional Set Up ............ 38 4.7 The MNC dilemma and proposed solution: ................................. 41 4.8 A comparative analysis of different MNC and generic companies

in the Indonesian crop protection market ................................................... 42 5 RECOMMENDATIONS AND CONCLUSIONS ..................................... 44

5.1 Future Market Conditions, Implications and Conclusion ............. 44 5.2 Future Strategic Framework for MNC ........................................ 45 5.3 Possibility of Generic Acquisition by the MNC .......................... 51 5.4 Changing Generic Business Strategy .......................................... 52 5.5 MNC Strategic Focus ................................................................. 53 5.6 Indonesian Government Role in Future ....................................... 54 5.7 Limitations of the Research ........................................................ 54

6 BIBLIOGRAPHY ..................................................................................... 56 7 REFERENCES ......................................................................................... 57

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LIST OF TABLES Table 2.1: Market Size of some leading off patent products ....................................... 7 Table 2.2: The Generic herbicide market in 1997....................................................... 7 Table 2.3: Global Market position of leading Multi National Corporations and generic companies ............................................................................................................... 13 Table 3.1: Historical Farm Income Evolution in Indonesia ...................................... 17 Table 3.2: Historical percentage growth rate in the Indonesian Oil Palm production 22 Table 3.3: Region wise Oil palm plantation in Indonesia ......................................... 23 Table 3.4: South East Asia Oil palm plantation area and estimated forest area cleared based on industry estimates (in Mha.) ...................................................................... 26 Table 0.5: Indonesia corn planted area, production and yield ................................... 28 Table 4.1: Comparative Strategy of BCS and Generics in Finance and Product ....... 36 Table 4.2: Comparative Strategy of BCS and Generics in Customer and Organization ................................................................................................................................ 37 Table 4.3: A comparative analysis of different MNC and generic companies in the Indonesian crop protection market ........................................................................... 43

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LIST OF FIGURES Figure 2.1: World Crop Protection Business .............................................................. 4 Figure 2.2: Crop Protection Global Market Value Segmentation 2002 ....................... 7 Figure 2.3: Estimated Split of New Generics ............................................................. 8 Figure 2.4: Influence of Market Factors on entry strategy for Generics .................... 10 Figure 2.5: Crop protection product selection process for a farmer .......................... 10 Figure 3.1: Indonesian Economic Snapshot ............................................................. 15 Figure 3.2: Indonesian Historical Foreign Exchange Reserve Position ..................... 15 Figure 3.3: Historical and projected Farm Income and Population absolute growth figures ..................................................................................................................... 17 Figure 3.4: Global Rice Imports with Indonesia as the biggest single country importer in the world ............................................................................................................. 21 Figure 3.5: Country Wise Historical Oil Palm Production ........................................ 21 Figure 3.6: Historical Evolution of Indonesian Oil Palm Production ........................ 22 Figure 3.7: Annual Rate of Planting of oil palm in Indonesia ................................... 24 Figure 3.8: Total Established Area of Oil Palm plantation in Indonesia.................... 25 Figure 0.9: Indonesian Potato Plantation Area ......................................................... 27 Figure 4.1: Bayer CropScience Logo with some of its products in the Indonesian Market ..................................................................................................................... 32 Figure 4.2: Crop Protection market attractiveness and BCS Market Share ............... 33 Figure 4.3: Comparative 3 phase Generic and 4 phase MNC Business Model .......... 35 Figure 4.4: Comparative Generic and MNC crop protection distributional set up in Indonesia, 1995 ....................................................................................................... 38 Figure 4.5: Comparative Generic and MNC crop protection distributional set up in Indonesia, 2004 ....................................................................................................... 40 Figure 4.6: Historical and Estimated Market Share from 1995 to 2014 .................... 42 Figure 5.1: A 4 point optimal strategic framework ................................................... 45 Figure 5.2: Generic vs. MNC in Indonesian Crop protection distributional framework 2009 ........................................................................................................................ 48 Figure 5.3: Generic vs. MNC in Indonesian Crop protection distributional framework 2014 ........................................................................................................................ 49 Figure 5.4: Probable business strategy of generics in Indonesia in future ................. 52 Figure 5.5: Recommended Business strategy for MNC in future .............................. 53

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ABRIVATIONS BCS Bayer CropScience

AI Active Ingredient MNC Multi National Corporation

IRRI International Rice Research Institute

GDP Gross Domestic Product

YoY Year on Year Ha Hectare

IDR Indonesian Rupiah

USD United States Dollar BPS Badan Pusat Statistik

FAO Food and Agriculture Organization

IOPRI Indonesian Oil Palm Research Institute GMO Genetically Modified

Mha Million Hectares

IGM Integrated Gross Margin

KPI Key Performance Indicator

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CHAPTER 1

INTRODUCTION

1.1 Rational of the Study The study focuses on the growing strength of generics in the crop protection business and highlights their business strategy vis-à-vis strategy of an R&D based company (in this study Multi National Corporations). The Multi National Corporations in Indonesia are increasingly losing market share under the wake of severe generic pesticide pressure. This is also relating to higher costs with more competitive points and lower revenues. The new product launches are easily getting copied and the market is getting saturated with fakes of block buster products. The study highlights this market condition and considers the fact that the problem is persistently growing. The competitive pressure is getting intense on both generic and micro economic front and the study focuses on finding flaws in the MNC operation and how it can amend and add on it in the coming years to equip itself with more competitive edge. This study constitutes a case study on Bayer CropScience, Indonesia which is taken as an example of MNC or R&D based company. The working strategy of Bayer is taken to be a representative of crop protection MNC in the Indonesian Market.

1.2 Statement of a Problem The biggest threat to Multinational Companies involved in this business is coming from generic companies actively involved. Their strategy in this business is similar to what is seen in other industries i.e. working on simplicity of operation, cutting of prices and reaching out to the customer by cutting through the distribution channel. This is exactly what the thirty plus generics companies are doing in Indonesia. Their support system mostly comprises of countries like China and India (2 of the world’s biggest generic active ingredient manufacturers.) The generics in the country have steadily managed to increase their market share from 16.9 percentage to 21.1 percentage over a period of 10 years. Most of this growth has come in the last few years. The trend is in favor of generic manufacturers who are predicted to capture almost 50 percentage of the market in the coming 10 years. They are also slated to corner much of the growth coming in the business with expanding agricultural landscape in the country.

The generics benefit from corrupted government officials who are willing to release the product formulations (sometimes also achieved by reverse engineering and sometimes by the product going off patent) of Multinational Company patented active ingredients for a price. The cost savings is huge in terms they have no R&D costs (a major source of fixed cost for the MNC) and being smaller in size gives them a lot of flexibility enabling them cutting the time to market. Moreover being closer to the consumer in their supply chain they are better adapt to understand and cater to the market needs than the hierarchical MNC. The consistent growth in the number of generics in the market has led to competition intensification and has put pressure on the MNC ability to increase prices and sustain market share.

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1.3 Objective The aim of this research study is to recommend strategic moves a Multi National Company might take in order to counteract stifling competitive pressure brought about by generic competitions. It will also focus on comparative models between generic and Multi National Companies business strategy and assess suitability of each under a given set of conditions. The research will be directed towards:

a. To analyze the Indonesian economy with an agrarian focus b. To find and analyze the impact of the major strategic crops contributing to the

agrarian economy of Indonesia in the years to come c. To strategically analyze the growing Indonesian crop protection business

presently under severe generic pressure and scrutinize the government policy on the business.

d. Analyze, compare and measure the performance of Bayer as a Multi National Company competing against generic onslaught from product, price, financial, supply chain, managerial and strategic point of view.

To provide recommendations and statistical forecasting focusing on strategic moves a Multi National Company must take to improve and strengthen its position at the same time keeping in view the counter-actions of competitors.

1.4 Scope of the Study The reference for this research will be P.T Bayer CropScience, Indonesia which is the 2nd largest Multi National Company in terms of market share in the crop protection business in Indonesia.

As part of my MBA curriculum requirement of obtaining a real time company experience I did my internship in the above company. I was involved in the project to make a diagnosis of the company in the present state of affairs and also to make strategic recommendations for future course of action the company needs to take to strengthen its position in the wake of severe competition. The analysis of the research was supported by the top management of Bayer Cropscience, Indonesia, agronomists and economists of the country whom I interviewed.

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1.5 Research Methodology To achieve the objectives, literature review, journal, FAO, inputs from agronomists, internally collected company data, government documents, information from Non Government Organizations, Agriculture Research Institute and white paper will be studied in detail. Also practical models will be formulated and discussed with department heads of BCS covering: Technology Aspects Marketing Aspects Supply Chain and Distribution Aspects Financial Aspects Services and Assistances Supported by the Government Policies Problems Encountered Product and Pricing Packaging Mergers, Acquisitions and Strategic Alliances Further Assistances Needed and Strategic Decisions to be taken

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CHAPTER 2

LITERATURE REVIEW

2.1 Crop Protection Business The business consists of protecting the crops through specially identified and constituted Active Substances directed towards specific crop diseases and insects eating through the crops. There are thirteen major Multinational Companies (across three tiers depending on their value size) and over hundred generic companies who are competitively involved in this business around the world. Global crop protection business stands at USD 25.7 Billion as of 2002. This business is growing in all three of its major segments. However, the segmental rate of growth varies with region and market. The projected growth figure as stated below is world average. The industry conditions have undergone massive changes and one of the most significant trends is massive generic pressure on the business.

Source: 2002-2007 CAGR. Source: Phillips McDougallAgriServices, FMC Figure 2.1: World Crop Protection Business

The business is segmented into 3 categories namely:

Herbicides Fungicides Insecticides

Each segment constitutes a wide range of active substances directed towards particular crop and crop category. Some ingredients are precautionary and are put before the crop has problems and some after. Each of these subcategories can be briefly defined as follows:

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Herbicides Herbicides are weed-killers - by controlling weeds, they alleviate the most important factor leading to lower crop yields. In the developed world, the alternative to herbicides is mechanical cultivation, a practice associated in many areas with soil erosion and moisture loss. Judicious use of herbicides, as in zero tillage, contributes greatly to sustainable agriculture whilst offering cost-effective solutions to growers' weed problems. In the developing world, herbicides are replacing the drudgery of hand weeding, thus increasing agricultural productivity and releasing the young and enterprising for more productive work.

Fungicides

Fungicides prevent and cure diseases, which can have profound effects on crop yields and particularly quality. The main markets are fruit and vegetables, cereals and rice. Growth is expected in developing markets and in high-volume fruit and vegetables. Plant diseases are caused by a variety of pathogens. Accordingly, this market consists of many products used in combination or series to control the full range of problems in ways that minimize the chance of resistance emerging

Insecticides

These products are used to control insect pests, which reduce crop yield and quality. The market for insecticides is growing rapidly and has immense potential for new products based on advanced technologies. The largest insecticide markets are in fruit and vegetables, cotton, rice and corn. Important market forces include changing regulatory requirements, insect resistance, and demand for products with enhanced safety and environmental profiles.

2.2 Global Crop Protection Business with Trends Over the past six years, four phenomenon, in particular have significantly impacted the chemical crop protection business: Genetically Modified Crops (GMO) Asian generics pesticide competitors Low commodity prices Declining industry profitability and massive consolidation leading to

significant market access challenges

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2.3 Definition of Generics A generic pesticide is manufactured by a company other than the original manufacturer, i.e. a generic manufacturer is, “a company, or division of a company, whose major activity consists of manufacturing the active substances of pesticides, the patents for which have expired, and for which it did not hold the original patents” (Hicks, 1994). A generic is a product that is a bioequivalent copy of an original product, the patent of which has expired. Generics can be sold under the name of the active ingredient (unbranded generics) or under a brand-name (branded generics, such as certain store-brand generics). Generics are much cheaper to produce than the original brand product they are based on. They can take advantage of the research and development (R&D) spent to create the original product and, in many countries, are not required to submit detailed clinical trial information to the extent that is required for the original branded chemical. (Regulatory Efforts to Promote the Use of Generics – Government Versus Big Pharma by Milena Izmirlieva). Historically, crop protection industry is dominated by research based, manufacturing companies. However, with increasing consolidation amongst such companies, the escalating cost of R&D, the patent expiry of chemicals and new active substance discovery during the 1970s and 1980s, has resulted in generic pesticides becoming the fastest growing sector of the agrochemical market. In 1996, patent-protected active substances accounted for 47 percentage of the total global agrochemical market (Anon, 1998). Out of the remaining 53 percentage, a relatively small percentage was manufactured by generic manufacturer, in spite of these products being off-patent. An estimated 10 percentage of the total market was held by generic manufacturers. “It is anticipated that by 2005 the picture will be very different, with approximately 30 percentage of global sales arising from active substances under patent, and 30 percentage of all active substances being made by more than one manufacturer, i.e. generics (Pesticide Outlook – February 2002)” The global crop protection market is segmented into a three-tier structure based on the value of the business. Tier 1 comprising of Multi National Companies who are the market leaders as well as the product innovators. They are followed by Tier 2 companies which mostly act as organized generics by mass producing the products out of patent. They don’t invest much on R&D and their business strategy is mostly being an industry follower. The Tier 3 is mostly the unorganized generics which are now gaining importance. More than 100 in number they are now cashing in the lucrative market by obtaining chemical details of patented products illegally and marketing the same at a lower price.

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Figure 2.2: Crop Protection Global Market Value Segmentation 2002

The primary target of the generic manufacturers has been herbicides, followed by insecticides and fungicides. Glyphosate with global sales in excess of $2 billion at end user level in 1997 is the leading generic crop protection product (Hicks, 1998). According to a research by Produce Studies Research, (Anon, 1999) this trend is set to continue.

Table 2.1: Market Size of some leading off patent products Leading Generic Products

Sales $ Millions Glyphosate 3,120 Paraquat 470 Acetochlor 425 Chlarpyriphos 420 Atrazine 320 Metolachlor 305 Mancozeb 295 The major herbicides currently being developed as generic pesticides (Anon, 1999) are:

Table 2.2: The Generic herbicide market in 1997

($M) 1997

Imidazolinones 932 Sulfonylureas 925 Propionic Acids 353

Source: Anon, 1999

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Source: Anon, 1999 Figure 2.3: Estimated Split of New Generics

2.5.1 Generic Suppliers There are three distinct types of generic supplier – manufacturers, third-party suppliers and parallel importers (Anon, 2000). Manufacturers Manufacturers make active substances and usually formulate products as well, often supplying their own packed material to the market. This is the category with the highest investment as production facilities are needed, and regulatory data are usually generated in order to obtain and defend registrations. All R&D-based companies produce off-patent products. As the generic market continues to develop rapidly, some of these companies have acquired major shareholdings in, or bought, established generic manufactures: for example, DowAgrosciences/Sanachem, AgrEvo/Stefes and DuPont /Griffin (Anon, 2000). Third-party suppliers Third-party suppliers buy active substances and/or products from another manufacturer to supply. Data may be generated on the formulated product, but the primary manufacturer will usually be relied upon for data on the active substance (Anon, 2000). Parallel importers Parallel importers simply buy packed products which are identical to those in the country into which they will be imported. The importer registers imports and supplies such products under its own name. This requires no data generation other than proof of identically (Anon, 2000). Out of the three categories, the third party suppliers are in majority and are involved in sourcing products from a number of manufacturers, including generic manufacturers. As an example, of all the companies holding approvals of Marketing strategies for generic herbicides are based around either selling volumes of product at an acceptable profit above production cost (“cost-up”) or maximizing the value from an existing supply chain (“discounting”).

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2.5.2 How does a generic manufacturer decide upon manufacturing an Active Substance?

The following factors are considered before a generic manufacturer decides upon manufacturing an active substance: A sizeable current market and positive future outlook. Presence of manufacturing capability to produce the active substance of the

same quality as available from the former patent holder. The raw materials required should be readily and consistently available. It should be relatively cheap to manufacture and market the product. A sizeable price differential or a strategic reason must exist to manufacture the

product in comparison to the original branded product. The consumer should be more price sensitive than brand sensitive. The active substance should not be on the verge of technological and

regulatory obsolescence.

2.5.3 Generic Strategy to Business The generic companies follow a 2 tiered pricing strategy to penetrate the market and get a competitive edge. This can be elaborated as follows:

1. In most cases generics adopt what is called a “cost-up” product pricing strategy wherein the active substance manufactured by them is offered to the end user at the cost of manufacturing plus a operating margin. This is the usual method of overcoming the image of security that the branded product possesses. This strategy is designed to bring about a crash in the price of the branded product and to give immediate competitive advantage to the generic manufacturer vis-à-vis the branded product.

2. The second strategy frequently adopted by the generic companies is what is

called a “discount” strategy which is adopted for a slow erosion of the brand. In this kind of strategy the generics price the product at almost the same price as the branded product positioning them equal to the brands in all respects. However, the generic product is sold mostly at discounts from the mark up giving an impression of getting the product cheaper than the branded ones. Moreover it adds the effect of believing that the branded product being identical with the generic in all respects is just plain expensive. It is a value creation effect cautiously supported through an existing supply chain network for the generic product.

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Global

Regional

Patent Expiry Market Size Production Original PatentHolder ResponseGeneric Entries Generic Strategy

Large

Small

Easy,Low cost

Diff.,Exp.

Tolerant

AggressiveMany

Few

Cost Up

Discount

One

Figure 2.4: Influence of Market Factors on entry strategy for Generics

2.4 Choices Available to the Farmers in Crop Protection The agribusiness industry is in a state of upheaval and rapid change. Low farm commodity prices and depressed farm income have impacted sales. Margins have eroded, putting pressure on financial results and the distribution channels. Restructuring in the agribusiness industry has created a more aggressive competitive environment. New technologies, including genetically modified crops and precision agriculture, are challenging traditional farming practices. Moreover, farmers and growers are increasingly influenced by other players in the food chain, from food and feed processors and food company’s right down to supermarkets and consumers. (Novartis, 1999).The choices available to the farmers in the form of generic and branded products are continuously on an increase. However, we must understand that in developing countries the purchasing is still mostly based on recommendations by the retailers and the farmers are highly influenced by these people(they provide them with credit, most of the times these retailers are the only source of information for the farmers about the crop protection). A model showcasing the position of a farmer in the choice of product can be drawn up as follows:

Figure 2.5: Crop protection product selection process for a farmer

Product

Product Selection

Product

Technical Solutions

• Distributor

• Buying Group

• Distributor Agronomist

• Independent Agronomist

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2.5 R&D-based Companies R&D companies are companies that are able, through their own R&D activities, to produce new molecules and therefore completely new pesticides products (European Commission Staff IV Working Paper). R&D companies invest heavily in developing new Active Ingredient directed towards specific crop related problems. They have research and testing laboratories where they conduct clinical trials on the crops before launching the new products post patent into the market. These companies enjoy patent protection for their products in the market for the period of patent after which the product comes under generic threat. R&D companies are mostly big Multi National Companies who have dedicated research facilities helping them in developing new products targeted to different markets.

2.5.1 Concern for R&D-based Companies Marketing related tools i.e. quality of performance offered to farmers, quality of

service, distribution and price competition, timeliness of product introduction to market, total value of market and “binding” i.e. the farmer must buy the seeds and the AI from the same company

Product related tools i.e. product performance and commercial viability of the product to be marketed.

Public acceptance and environmental characteristics of the product.

R&D i.e. the discovery of new agricultural traits or molecules in the product segment

Other factors i.e. exchange rates and foreign currency fluctuations, changes in commodity prices, availability or raw materials, raw material supplier contracts, litigation and market consolidation.

2.6 Patenting Problems Appreciatively 25 to 35 percentage of the conventional crop protection market is made up of proprietary products i.e. products that are protected by patents. Patent protection differs between products and product categories, the average “on the market patent life” is considered to be 18 years, maximum protection time (MPT) extending up to 25 years. The second categories of Plant Protection Products, which represent 35 percentage of the market, are proprietary off-patent products. These are products where the company owns the initial rights of the molecule (proprietary company). The final group is the truly generic products. It is estimated that the proprietary companies hold 70 percentage of the agrichemical market while generic companies hold 30 percentage. The total commercial lifetime of a crop protection product may be long, in some cases up to 80 years. Some products which were launched in the 1930’s are still on the market today. However most of the profit is made during the first 20 to 30 years of product life after which most products end up being cash cows with virtually not much growth coming through the same composition of the active ingredient. (Source: Pesticide Outlook – February 2002) The patent laws and time frame governing it differ from country to country. These periods may be further extended by other patents concerning the production technology and processes. In addition, marketing activities like branding and sales organizations as well as distribution may still further extend the dominant position of

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a certain Plant Protection Product on the market i.e. the propriety off-patent sales period. However, it is seen that generic companies actively infringe patented products and launch the generic compound in the market even before the product goes off patent. This is mostly done through obtaining the product formulations by bribing government officials in developing countries or by obtaining the formulation from the country where the product is already off patent. Many generics come out months or even years before a patent expire. As per research, generics win 73 percent of all court-decided infringement cases, the majority of which are early patent challenges (Patents hold no guarantee new generics marketplace - Generics Watch by Michelle L. Kirsche).

2.7 Generics and Alternative Choices by the Government It is interesting to note that generics are sometimes preferred by the local governments to the original branded products. Though this phenomenon is seen mostly in the case of generic pharmaceutical drugs but crop protection is also not indifferent to this phenomenon. The reasons being: The introduction and promotion of generics remains the most promising cost-

containment strategy for the underdeveloped and developing governments often burdened with higher costs of the branded products. They want to provide better facilities to their farmers but are often not in a position to subsidize in one form or the other the expensive branded crop protection products. Hence generics form a preferred choice.

It is seen that Regulatory efforts to promote generic use have included

strategies to influence factors on both the supply side and the demand side of the market. Supply-side mechanisms utilized so far to promote generic use include promoting the availability of generics through simplified approval, preferences for first-to-market generics, allowing generic manufacturers to use clinical data provided in the original brand’s approval application, spring boarding and establishing price and reimbursement mechanisms favoring generics. Demand-side strategies to promote generic use have aimed to influence farmer choice of generic AI’s distributors and retailers promoting generic products over the branded R&D based company products.

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Table 2.3: Global Market position of leading Multi National Corporations and generic companies

Leading Crop Protection Companies Globally – 2003 Market Share in percentage (ECPA 2004)

Company Market Share +15 15 – 5 5 - 2

European Bayer Syngenta

BASF

USA Monsanto

Dow Agrosciences DuPont

FMC

Japan Sumitomo Arysta

Other MAI Nufarm

Source: European Commission Staff IV Working Paper

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CHAPTER 3

INDONESIA ECONOMIC AND AGRICULTURE PROFILE

3.1 Country Overview

The 17000 island Archipelago Indonesia is the biggest Muslim country and the 5th largest in terms of population in the world. The geography gives Indonesia its unique diversity in all aspects of life. Indonesia is an agro-economy. Indonesia consists of four large islands and thousands of small ones. More than half of the total land area is either swampy or very steep (slope > 15 percentage), and therefore unsuitable for agricultural development. The outer islands still have relatively sparse populations, and it has been estimated that approximately 47.1 million ha are available as new agricultural land (with slopes of 0-3 percentage, 3-8 percentage, and 8-15 percentage). Around15-20 million ha of which are potentially suitable for the cultivation of tree crops or estate crops.

3.1.1 Country Conditions The country is divided into internal debtors and external creditors. Even the local investors have lost faith in the country’s economic recovery prowess actively shunning internal investment and are looking for foreign investment channels. The foreign exchange reserve though on a rise is majorly backed by inflow from plantation exports and oil exports from oil backed by rising oil prices. Agriculture still plays a dominant role in the economy providing employment to over 45 percentage of the population. The economic crisis of 1998 has put a halt to the once fastest developing South East Asian economy with present growth of 4 percentage being clocked by just internal consumption in the wake of increasing population. Agriculture land is also on an increase with transmigration into effect. This is resulting in the opening up of uninhabited and sparsely inhabited islands for ever growing population with government grants. This phenomenon is mainly effective in islands of Kalimantan, Sulawesi and Irian Jaya.

3.1.2 Overview and Prospects – Macroeconomic Factors Before the 1997 Asian Economic Crises, Indonesia recorded one of the highest economic growth rates in the South East Asian regions and was hailed as one of the fastest developing economies. However the economic crises took its toll in 1998 and the economy started showing signs of weakness. The Rupiah depreciated from Rp 2791/USD to Rp 9065/USD marking the highest percentage fall within an economic year. This massive depreciation could not arrest the fall in GDP which recorded a negative growth rate of 13.1 percentage YoY. The country suffered from political and social unrest at the same time negatively impacting the foreign investment into the country. Indonesia also suffered from high inflation rate of over 12 percentages on an average coupled with high unemployment rate of over 11 percentage. With foreign debt to GDP ratio reaching over 80 percentage in 1998 the economic growth was driven majorly by internal consumption. The economy needs significant socio-eco-political changes to keep pace with its fast developing South East Asian neighbors. With a 220 Million population and an annual net population growth rate of 1.4

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percentage Indonesia poses as one of the most promising markets considering major part of the growing population is the working age group of 17 – 55 years.

Figure 3.1: Indonesian Economic Snapshot

The 2004 Presidential elections have brought in focus some key aspects:

1. Indonesia’s commitment to democracy. 2. People long term belief in the public institution showcased by high voter

turnout. 3. Results are anticipated to bring in socio-political stability and put the country

in the track of economic growth with policy changes in favor of foreign investment.

3.1.3 Foreign Exchange Reserve External liquidity remains strong reflected by increasing foreign exchange reserves. Official reserves have increased up to April 2004, resulting in an increase in Net International Reserves from USD24.2 billion as of December 2003 to USD25.7 billion as of April 2004. It came from proceeds of oil and gas export, issuance of global government bonds, and other sources like agro exports. The trend is expected to stay positive.

Figure 3.2: Indonesian Historical Foreign Exchange Reserve Position

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3.1.4 GDP Growth Drivers The key GDP growth drivers are following:

1. Internal consumption funneled by increasing population @ 1.35 percentage on an average and rising consumer income.

2. Rising exports in key sectors as oil palm and rising oil prices in the international market.

3.2 Agriculture and Availability of Labor The reason for farmers’ willingness to tie their capital to land is lack of alternatives. With the land holding average of as less as 0.3 hectare there is hardly any alternative for the farmer who is unwilling to risk moving to the city selling off his meager land holding. Consequently over the years a better strategy has been adopted by the farmers with their family members moving to non farm work adding on a new source of income. Eventually, the family may sell out, but this is after establishing its roots in the city. This is the reason why only a small fraction of the labor force leaves agriculture in any given year, which is a universal finding. In the case of frontier land, labor is a scarce factor and the pace of the development is determined by the supply of labor. All the major tree crops (oil palm, rubber, coffee, cacao, coconut, and tea) are harvested by hand and require a continuous harvesting at frequent time intervals almost the year around. Because the harvest labor constitutes an important cost item, the scope for scale economy is reduced. In conclusion the migration trend to big cities though very much in existence does not lead to increase in the farm size at a rapid rate as farm sell off is not as high. Moreover with increasing population rural families are increasingly finding additional help within the family who can move on to the cities. Hence the correlation of migration to increase in average farm holding is not very high.

3.2.1 Consequences on Agriculture Being an agro-economy, agriculture has formed the backbone of Indonesian economic growth over the years. With as high as 47.7 percentage of the workforce dependent on agriculture contributing to over 16 percentage of the GDP in 2001, agriculture is definitely a key economic variable for Indonesia.The 33.5 million hectares of arable land(www.nationmaster.com/country/id/Agriculture) is striving maintain status quo as conversion for commercial construction is on the increase. Government is initiatively trying to stabilize the same by opening new planted areas especially for rice in regions like Kalimantan, South Sumatra and Sulawesi. One of the key focus areas in agriculture in the recent years has been oil palm which has been growing at rate much higher than the country agriculture output as a whole. Indonesia has emerged as second largest exporter of oil palm in the world accounting for 41 percentage of the world oil palm exports. Indonesia in its quest to become the biggest oil palm exporter is expected to favor sizeable increase in planted area in the coming years. As per the government regulation oil palm is the priority sector and the convertible forest land can be used for oil palm plantations. Timber companies are proactively clearing less productive timber land and converting the same to more lucrative oil palm fields. With the opening of the foreign participants in the sector by the government, foreign investors especially from Malaysia are acquiring more forest land for oil palm plantations. Small oil palm farmers are dying out under the threat from big players and the land is being acquired by the big players increasing the overall productivity.

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Consecutively farm income in the oil palm sector is on the rise and is expected to continue strong growth in the coming years.

3.2.2 Farm Income Evolution Farm income plays a significant role in determining the purchasing power of the farmer and in turn the willingness and ability of the farmer to spend on crop protection. Indonesian farm income evolution gives a mixed trend. The farmers holding >1 hectare of land area have shown a higher growth in income historically and are expected to continue to do so. The smaller farmers <1 hectare farm holding are unable to increase at a higher rate mostly because of their unorganized nature and unavailability of mechanized farming. The BPS handbook 2004 gives the following farm income figures:

Table 3.1: Historical Farm Income Evolution in Indonesia Avg. farm net Income

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 581.4 666.3 661.4 239.4 334.9 354.5 317.3 381.9 452.6 471.4

Source: BPS Handbook 2004. The IDR figures are converted to USD by the historic exchange rates.

Source: BPS and Internal Data from Bayer CropScience, Indonesia

Figure 3.3: Historical and projected Farm Income and Population absolute

growth figures The projection of farm income from 2005 - 2014 has been done considering the following factors: Historical data from BPS (www.bps.go.id) The analysis is done on the farm holding type, migration trend and increase in

the farm holding pattern. The consideration is also made on the land holding average for different

segments like rice, oil palm, vegetables etc. oil palm recording the highest average increase whereas vegetable the least.

Income per capita in farm is expected to grow at a higher rate than the GDP growth rate as migration to alternative employment sources is a trend which is witnessing a higher farmer income as the cultivating acreage for each farmer is on a rise due to the migratory trend.

The overall prices of the farm produce is on the rise where the productivity is anticipated to be better with increased usage of pesticides which are expected to reduce in price and usage of better yielding seeds.

0

0.5

1

1.5

2

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1401002003004005006007008009001000

Population growth Avge farm net income (USD)

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The income trend is computed also considering the different land holding types in Indonesia of .5 < .5 – 1 and >1

Trend projections are made considering all the above factors and a universal average is computed based on that trend.

3.2.3 Country Agriculture It is important to understand the major crops of Indonesia in terms of production and importance to analyze the business size of crop protection associated with it and to determine the growth potential in future.

3.2.4 Overview and Prospects Land holding average is at 0.3 hectares which is insufficient even for self sustenance in the wake of growing population. With the division of families this average is tending to decline in the initial years to come. However, the farm size is expected to increase as many farmers are expected to shift to alternative sources of income as agriculture becomes less rewarding. The immediate sell off is not anticipated as the general mindset is to keep the land as ancestral roots. Agriculture is still the priority for development by the government and rice still remains as the key political crop. At 2.2 million tonnes import per year Indonesia remains the largest importer of rice in the world. Arable land availability in Java is at its optimum level and it’s focused on rice and vegetables. Growth is anticipated in Kalimantan and Sumatra mainly in oil palm. GMO is absent in the market so far but with increase demand for food crops their introduction with major growth in hybrid seeds cannot be ruled out.

3.3 Major Crops Outlook A. Rice

It is clearly the political crop of Indonesia. The staple food of 220 million Indonesians rice production has always been a priority for Indonesia with over 11.4 million hectares of land devoted towards it. However, the country is the biggest importer of rice in the world and is striving for self sufficiency. The government is actively working towards the self sufficiency program with formulating import restrictions and opening up of new arable areas for rice. The policy also encourages increased intensification and usage of high yielding variety of seeds. However with the growing population and an average per capita consumption of 157.3 kgs it would be a Herculean effort to attain the coveted vision of self sufficiency any time soon. There are several constraints to sustainable rice production in Indonesia:

a.) Due to already high national yield at 4.5 tonnes/ hectare, further increase in rice yield requires the development and use of presently unavailable novel technologies.

b.) The climatic vagaries, such as prolonged drought season pose a hindrance in the rice cultivation.

c.) Large quantities of cheaper illegal imports of rice plague the countries sustainable rice production program and also put pressure on the minimum price.

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d.) Weeds, insects and diseases: BPH, stem borers, BLB, Blast, RTV cause significant losses in terms of production. The potential insecticide market is growing in this segment as measures to increase productivity are implemented.

e.) The conversion of potential agricultural land to other purposes, especially housing and tourism industry, has also contributed to the decrease of the total rice production. At least, 50,000 hectares of potential agricultural land have been converted to other purposes annually in the last 10 years.

f.) Land fragmentation. With the increasing population and growing families the ancestral land is being divided amongst the family members consequently decreasing the overall productivity of land.

g.) The productivity of newly opened up land by the government is still categorized low as it takes time to have optimal productivity especially considering the newly opened lands are forest converted.

h.) Social transformation from agriculture to non agriculture sector has resulted in scarcity and consequently expensive labor force, especially in the agricultural production centers.

i.) Relatively low price of mostly agricultural products (especially food crop commodities) resulted in lack of appropriate response and contribution by farmers in sustaining food crops cultivation.

j.) The quality of product produced is relatively low, which therefore reduces competitiveness in the global market.

k.) Income from the production of rice forms just 33 percentage of the rice farmers’ income and is thus a discouraging factor in the cultivation of the same.(Source: Interview with Mr.Mahyuddin Syam, Liason Scientist for Indonesia, Malaysia and Brunei Darussalam)

l.) Small rice farmers find more opportunity in production of horticulture and high priced fruits and vegetables

m.) Infrastructure facility needs a lot of improvement and no major government spending is planned in this sector.(Source: Interview with Mr.Mahyuddin Syam, Liason Scientist for Indonesia, Malaysia and Brunei Darussalam)

Rice self sufficiency is more of a political propaganda rather than reality in the near future in the Indonesian Agriculture scene. The major drawbacks to attain self sufficiency are:

a. Per capita consumption of rice stands at 140 kgs which is one of the highest around the world.

b. Increasing population @ 1.35 percentage on an average means more mouths to feed. The gap in production and consumption will be increasing further in the coming years.

c. The cultural aspect is also a hindrance to growth. The general belief at the lowest farm level is to eat rice produced in their own farm. This is leading to massive poverty and low productivity as these are mostly subsistence farmers who are unable to use better technology to increase productivity. This is also lowering the per capita land holding from already a meager 0.3 hectare/capita to even lowerer.

d. There is no real incentive for rice production in the wake of low market price specially considering that better alternative sources of income in producing other crops is more lucrative.

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e. Imported rice is relatively much cheaper and provides more incentive to deal with and hence acts as a drawback in producing more.

f. The average yield at 4.6 tonnes/hectare and in sulphate soil regions of Indonesia as high as 5 tonnes/hectare is already at its peak considering it is the highest amongst the south East Asian countries.

g. Hybrid rice usage is not very prominent as of now though it is expected to increase.

However the self sufficiency in rice can be attained if the following conditions are met:

a. The GDP growth rate is higher in turn increasing welfare and subsequently reducing per capita rice consumption from 140 – 120 kgs. This will narrow down the gap in production deficiency.

b. Hybrid usage is increased at a rapid rate increasing productivity. However the poor distribution channel and high price of the seed makes it difficult to do so.

c. More land is opened up for rice plantation. As from IRRI (International Rice Research Institute, Bogor, Indonesia) sources approx. 1 million hectares is ready for plantation in Papua region. They claim 20000 hectares of the same has been already planted. However the slow moving policies of the government act as a hindrance in taking concrete decisions.

d. Better seed, fertilizer, pesticide distribution channel will increase availability of better technology and increasing yield and productivity.

However considering the past performance of the government the dream of attaining self sufficiency seems a distant reality. Indonesia is expected to continue importing rice to meet its growing domestic consumption needs triggered by growing population. It will continue to be the biggest rice importer in the world in the year 2014. The productivity increase is expected but not as much to suffice growing domestic requirements. From the crop protection business perspective, rice still forms as the major market till Indonesia’s struggle for higher and quality rice production continues. The focus in the coming years will be on Hybrid seeds and further down the line on GMO varieties. The pesticide business growth will be coming in by multiple usages necessitated by increased level of intensification. With the expected increase in the farmer income and continuing increase in the general awareness more areas are expected to come under pesticide usage increasing the overall business. However, since the focus in the future will be on higher productivity and better quality it will open a business opportunity in the better quality seed business in the recent future. Government is committed for the development of rice and with opening of new rice cultivation areas the overall business is expected to grow. Multiple usages are also expected to come from overall price reduction in real terms accounting for inflation.

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Figure 3.4: Global Rice Imports with Indonesia as the biggest single country importer in the world

B. Oil Palm

Palm oil is currently the world's second most consumed edible oil, and is set to overtake soy in less than a decade as the world's most consumed oil. By 1996 there were around 2.4 million hectares of oil palm plantations in Indonesia, of which state-run companies possessed 443,000 hectares of older productive plantings, smallholders have 824,000 hectares, and private companies the rest, primarily new, immature plantations (Potter and Lee 1998). The Ministry of Agriculture then announced in 1998 that an additional 1.5 million hectares would be added as part of a new policy to address Indonesia’s economic crisis. In June 1998, after the freeze on foreign ownership had been lifted, the Directorate General of Plantations stated that 50 foreign investors (of which 40 were Malaysian) were in the process of developing oil palm plantations covering 926,650 hectares in Sumatra and Kalimantan (Jakarta Post 12/6/98). Other major foreign investors come from the British Virgin Islands, England, Belgium, the Netherlands, Hong Kong, South Korea and Singapore.

Source: The Hesitant Boom: Indonesia’s Oil Palm Sub Sector in an Era of Economic Crisis and Political Change, 1999

Figure 3.5: Country Wise Historical Oil Palm Production

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Figure 3.6: Historical Evolution of Indonesian Oil Palm Production

Table 3.2: Historical percentage growth rate in the Indonesian Oil Palm production


What with increasing international demand for palm oil products and to Indonesia's low production costs, assisted by the government's subsidization of land and capital; the Indonesian government maintains its ambition to become a major player in the internationally growing export market. As a result, the area covered by oil palm plantations is likely to continue growing. Forested areas allocated for conversion to oil palm plantations fall into the category of conversion forest. During 1990-2000, the total area planted with oil palm almost tripled from 1.1 to 3 Mha in 2000.In the 1990s, the annual planting rate averaged 190,000 ha per year, with a peak in 1997/98 before dropping to approximately 75,000 for the remainder of the decade. In the past two years, oil palm companies have more financial room to maneuver than during the 1997-1999 financial crises, and many have therefore resumed their expansion plans.

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Table 3.3: Region wise Oil palm plantation in Indonesia

Province Smallholders Government Estate Private Estate Total

Area Prodn. Area Production Area Production Area Production (ha) (tonnes) (ha) (Tonnes) (Ha) (Tonnes) (Ha) (Tonnes) Aceh 39,249 34,799 31,593 70,210 105,704 223,300 176,546 328,309 N Sumatra 99,344 255,614 237,726 1,120,680 247,676 905,119 584,746 2,281,413 W Sumatra 41,599 46,110 3,256 15,509 85,283 156,660 130,138 218,279 Riau 165,861 388,663 56,460 252,126 300,113 545,160 522,434 1,185,949 Jambi 112,749 148,044 8,326 29,028 74,385 78,430 195,460 255,502 S Sumatra 113,680 109,055 27,209 100,680 106,220 143,847 247,109 353,582 Bengkulu 17,380 17,648 4,345 5,100 38,672 56,160 60,397 78,908 Lampung 21,537 4,456 12,996 44,116 26,556 17,300 61,089 65,872 W Java 6,296 13,758 11,071 12,160 4,135 7,450 21,502 33,368 W Kalimant. 125,420 142,651 28,179 99,589 74,113 53,237 227,712 295,477 C Kalimant. 10,641 8,291 0 0 52,595 24,355 63,236 32,646

S Kalimant. 350 0 0 0 68,891 37,198 69,241 37,198 E Kalimant. 22,816 44,241 9,360 15,340 17,043 12,296 49,219 71,877

C Sulawesi 6,047 12,900 2,000 0 16,569 6,839 24,616 19,739 S Sulawesi 19,206 30,427 7,964 20,644 36,214 20,015 63,384 71,086 Irian Jaya 11,000 36,172 8,250 15,070 0 0 19,250 51,242 Total 813,175 1,292,829 448,735 1,800,252 1,254,169 2,287,366 2,516,079 5,380,447

Source BPS 2001

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In 2002, the total mature oil palm plantation area reached 2.7 Mha. The planting rate is estimated to have reached 240,000 ha in 2002.The growth in area actually planted does not represent the total area that is opened up for oil palm in Indonesia. According to Indonesian Oil Palm Research Institute (IOPRI) estimates 18 Mha of land in Indonesia are suitable for oil palm plantations. By 1996, the Indonesian government had set aside around half such an area of forestland for oil palm development: 9.13 Mha of which 5.56 Mha is in the Moluccas and Papua. Prior to the financial crisis, the Government of Indonesia processed hundreds of applications from companies interested in developing oil palm plantations. 1992-2002, the Indonesian Investment Coordination Board (BKPM) approved 453 new oil palm investment projects, with a total area of 7.2 Mha. As of 2002, only 7.5 percentage of these new investments were actually planted. Despite this extremely low realization rate, the Indonesian government continues to process and issue new permits.


Figure 3.7: Annual Rate of Planting of oil palm in Indonesia Early in 2003 the Indonesian Agriculture Ministry announced it had licensed 74 companies to open new oil palm plantations covering an additional 672,977 ha. The Ministry claims that with the additional new oil palm plantations, Indonesia's CPO production is expected to outstrip Malaysia's in two to three years' time. Considering the low realization rate of approved projects, the Ministry's expectations may be considered to be overly optimistic. However there is little doubt that ultimately some 9 Mha of new (as of 1996) oil palm plantations will be established in Indonesia because the investment proposals for most of this area have already been approved. Assuming recent planting rates, the total area of oil palm plantations in Indonesia is set to increase to 11.2 Mha in 2020.

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Source:Friends of the Earth NGO

Figure 3.8: Total Established Area of Oil Palm plantation in Indonesia It is highly likely that the Indonesian government, either at national or local level, will bow to the massive interest of the private sector to engage in the oil palm business as well as to the ambitions of local governments who, along with decentralization policies, were empowered with great land use decision making powers in 2001. According to the latest revisions of permanent forestlands, not officially published, the area of convertible forestland has increased from 8 Mha in 2000 to 14 million in 2002. Motivated by greater autonomy, many district and provincial governments have in recent years announced schemes to develop vast new areas for oil palm in their areas. For example, the governor of Jambi aims to develop 1 Mha of oil palm plantations in the province compared to 300,000 ha established at present. The oil palm area of North Sumatra is set to increase from some 750,000 ha at present to 1 Mha. In West Kalimantan, the plantation area is set to expand from 338,000 in 2002 to 3.2 Mha. The governor of East Kalimantan plans to expand the planted area of 70,000 in 2002 to no less than 2.1 Mha. Meanwhile, Papua has plans to develop some 2.8-3 Mha of oil palm plantations as opposed to the 58,000 ha actually realized in 2002. If these plans are indeed realized and these trends are extrapolated to other provinces, the Indonesian NGO Sawit Watch estimates that the total area opened up for oil palm may reach up to 18 to 20 Mha nation wide. Indonesia out-competes Malaysia in terms of labor cost by five times and in cost of land by four times, thereby making it the cheapest producer of palm oil in the world.18 Thus, well over 100 Malaysian companies entered Indonesia's oil palm industry where they gained access to an estimated 1.5 Mha.

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Table 3.4: South East Asia Oil palm plantation area and estimated forest area cleared based on industry estimates (in Mha.)

Oil Palm

Plantation Area (2002)

Share of oil Palm plantations

involving forest conversion

Forest Area cleared for oil palm (to end 2002)

Total oil Palm area target/allocation(2003)

Additional Area to be established

Additional forest to be

cleared

Malaysia 3.67 33% 1.21 3.74 0.07 0.02 Indonesia 3.1 66% 2.05 9.13 6.03 3.98

PNG 0.07 n.a n.a n.a n.a n.a Total 6.77 48% 3.26 12.87 6.10 4.00

Remark: (n.a = .not available) Source: The Hesitant Boom: Indonesia’s Oil Palm Sub Sector in an Era of Economic Crisis and Political Change, 1999

Currently, 96 percentages of all oil palm plantations in Indonesia are located on the islands of Sumatra and Kalimantan. In order to give the islands East of Java ‘their equal share’ of oil palm, the Indonesian Government began to direct investors to West Papua. The Habibie government gave permission to 28 Indonesian private companies to open large-scale oil palm plantations in the province after having put in place a number of incentives. These include long-term licenses (99 years) and access to a maximum of 100,000 ha per company (as opposed to 40,000 ha in other provinces).Information from the Indonesian NGO Sawit Watch indicates that around 2.8 Mha in the districts of Jayapura, Manokwari, Sorong, Merauke, Yapen Waropen, Nabire and Timika have been reserved for oil palm plantations so far. In the first four districts, some 343,000 ha have been allocated to oil palm companies (including Sinar Mas, PTPN II, Siringo-ringo, Korindo and others). However, of the area allocated to these companies, only 11 percentage (40,000 ha) has been planted. Whilst currently actual realization of oil palm projects is slow, this may change in future. The region has some 7.4 Mha of forestland set aside for conversion; 2.8 - 3 Mha of which may be developed into oil palm. From the Crop Protection market perspective oil palm forms the most potential and growing market in Indonesia. With the government’s struggle to utilize the full potential of this crop the market for the involved herbicide is expected to continue growing. There is however some indications that EU, one of the major Indonesian Oil Palm market will allow imports of only non pesticide used oil palm by 2005. However in the wake of the growing demands and limited number of suppliers and with Indonesia as one of the biggest player the probability of that happening is very remote. The major pesticide in the segment is Syngentas Paraquat. The chemical is already banned in Malaysia and is expected to follow suit in Indonesia also. However such a ban cannot come into effect in Indonesia till 2011 considering the newly gained license expires in 2009 with a market move out period of additional 2 years. The generics will benefit immensely from this market and the potential business growth is huge backed up planted area and usage increases. In terms of total planted area for oil palm we estimate the government statistics to be overly optimistic. However total planted area of 6 Mha is not far fetched.

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C. Vegetables

Key crops are shallot, potato and chilly which form major part of the overall vegetable production in Indonesia. Supermarkets catering to the vegetable requirements of the population 10 percentage in 1998 have grown to over 28 percentage in 2003. The majority of the vegetable and fruits being retailed by these markets are imported from the neighboring countries keeping in mind the quality concerns. A key factor in the determination of the vegetable supply in the market is the population density around major cities like Jakarta and Surabaya etc. Since being a perishable commodity the freshness requires the production area to be as close as possible to the area of consumption. Migration trend to the big cities suggest population movement from small villages to towns and big cities and in turn putting burden on the city population. The planted area for vegetables is not expected to grow significantly in the highland region and has already reached optimization in terms of agricultural intensity. Intensification and marginal land expansion is probable in the coming years in the lowland region. Rise in the imports of vegetable is also a probability as dominance of supermarkets increase and population pressure around big cities intensifies.

Source: BPS, 2002

Figure 0.9: Indonesian Potato Plantation Area

D. Corn

One of the biggest potential markets from the crop protection perspective in Indonesia is corn. The average yield from corn plantation is much higher than that of rice. The profitability is higher and the labor involvement is lower in comparison to rice. All in all corn forms an ideal crop for Indonesian market and is of growing importance as far as the crop protection business is concerned.

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Table 0.5: Indonesia corn planted area, production and yield Indonesia : Average Corn Yield

Area Harvested (1000 HA)

Production(1000 MT)

Yield (MT/HA)

1993/1994 2,950 5,400 1.8 1994/1995 3,652 6,100 1.7 1995/1996 3,531 6,000 1.7 1996/1997 3,200 5,950 1.9 1997/1998 3,900 5,700 2.0 1998/1999 3,200 6,500 2.0 1999/2000 3,000 6,200 2.1 2000/2001 3,000 5,900 2.0 2001/2002 3,000 6,000 2.0 2002/2003 3,050 6,100 2.0 2003/2004 3,200 6,800 2.1

Source: FAO (www.fao.org)

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3.4 Country Crop Protection Market – Value and Competition

3.4.1 Regulation The Data Protection law was issued in 1997. The implementation of the same is almost negligible facilitating rampant generic activities. The generic companies easily obtain the MNC product formulations from the government sources through bribery and legally register the duplicates under their own brand name. The laxness in the regulation is not expected to tighten in the coming years and violation of the data protection norms is expected to continue.

3.4.2 Competition The growth in generics has led to competition intensification and has also put a severe resistance to the price increase by the MNC. The number of generic formulators and traders is consistently on the rise in the wake of increasing pesticide business. The market share for generics at around 21.1 percentage in 2004 is anticipated to increase significantly over the years. The generic companies are at an advantageous position on the following grounds: They are able to easily obtain data protected MNC formulations and legally

launch the formulations under their own brand name at a lower price. They are adapt in cutting layers in the distribution channel and always try to

stay close to the farmers. The overhead costs are a fraction of the MNC They have no spending on R&D The organization structure is more flexible and country specific. They recruit

the best available manpower in the industry often swiping them from Multi National Corporations.

The product manufacturing is generally done on “Toll” basis where the product is manufactured by contracted factories. This reduces fixed costs as well as obviates the need for storage. Production usually matches the demand condition.

Competitive pressure is also coming from other MNC who are also trying to capture and retain their share in this generic threatened market.

3.4.3 Technology Cartagena Protocol which prohibits usage of a country as a bio testing ground has been ratified in 2004 by Indonesia. However for the moment there is no indication of near future GMO development. The major focus at the moment seems to be on the Hybrid varieties. However with the increasing population and consequently increasing food crop demands, the introduction of GMO seeds in phases cannot be denied. Technological development is one of the major areas which Indonesia needs to work on to increase productivity on all accounts.

3.4.4 Price/Volume evolution and expectation MNC are finding it increasingly difficult to raise prices on the existing products in the market for the following reasons:

a) Intense competitive pressure where generic manufacturers are providing the same AI at a lower price.

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b) Product substitutability is very high both with the generic and other MNC product

c) Many of the major products are entering its maturity or cash cow stage where growth is almost negligible. Increasing the price of such products will put an end to their life cycle .

d) The general trend is a decrease in prices with more generic companies coming in with similar products. Under the circumstances it is very difficult to increase the price of the existing product.

However above average price increase is possible in case of newly launched products targeted to the growing segments of Rice Herbicide etc. as there is no major competitive threat there. However, on average a price increase of 1.5 – 2 percentage YoY seams probable. This price increase will not be able to compensate the inflation rate expected to be around 6-7 percentage pa and marginal depreciation in Rupiah. The overall sales volume is anticipated to grow. Rice and Vegetable herbicide segments are expected to be the key growth drivers. Company growth will be propelled by key continuing products and anticipated launches. Assumptions for Growth projections:

1) Increased intensification 2) Increase in treated area with Indonesia aiming for self sustainability in food. 3) Increase in generic companies also increases the market access as they provide

access to previously untapped markets 4) Lowering prices taking inflation into account and rising farm income is an

encouraging sign for multiple pesticide usage. 5) Some key sectors like Oil Palm, Corn and Rice are expected to witness

sizeable growth in terms of acreage and production. This will give the crop protection market a much needed boost.

6) A price increase of 1.5-2 percentage on an average is probable which will increase the revenue. This increase is expected to be higher for some key products.

3.4.5 Past and Future evolution

Growing markets are insecticide and herbicide. After the ban of 57 Organic-Phosphate, Pyrethroid is the most important insecticide group. Herbicide is growing due to the expansion oil palm and the growth is expected to continue at an increased rate with intensification and expansion in oil palm plantations. Rice is expected to be the growth driver in the fungicide segment as Indonesia aims for self-sufficiency. The planted area for rice is expected to grow marginally as Indonesia is trying to attain self sufficiency status in rice. The underlying assumption in the growth of planted area under all segments and all crops is Conversion of Convertible forest land for agricultural and plantation purposes meeting the growing demands for exports and internal consumption. Out of the total allocated 26.4 million hectares of convertible forest land approx 8.6 mil hectares stand covered with forest area to date. The steady conversion of the forest land is continuing trend expected to continue in the coming years.

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3.4.6 Competitive Environment

Since 2001 the number of players per AI is not restricted anymore which led to an increasing competitive environment within the country. The competition intensification is seen on all fronts i.e. from product portfolio to price. Syngenta has emerged as the market leader propelled by Paraquat sales which is still very much in use in the market. The government regulations are hinting towards the ban of paraquat in the near future following in the footsteps of neighboring countries like Malaysia. However till that happens (expected to be around 2010) Syngenta is expected to continue to be a major player in the absence of any concrete alternative to paraquat. Dupont and Dow are relying on mature products and no significant launch has been witnessed or expected from them in the near future. A possible merger or takeover bid for either or both of the company with some local player cannot be ruled out in the next 10 years. BASF sales are Fipronil driven and absence of any strong driver in their product basket will see their market share dwindling in the coming years. The most severe competitive threat will be coming from ever increasing generics. The sales of MNC will be affected substantially by product substitution by price cautious farmers.

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CHAPTER 4

CASE STUDY OF BAYER CROPSCIENCE INDONESIA In this study R&D companies as defined in chapter 2 and Multi National Companies are one and the same.

4.1 P.T. Bayer Indonesia Following the stipulation of Law Number 1 Year 1967 which provided the legal basis for foreign capital investment in Indonesia, the Bayer Group decided to set up its own production facilities and established PT Bayer Farma Indonesia on 14 March 1969. Therewith Bayer was among the first German investor with production facilities in Indonesia and was granted pioneer status.

On 1 April 1971, PT Bayer Agrochemicals was established. The company produced agrochemicals and household insecticides in Jakarta Industrial Estate Pulogadung. On 18 May 1982, PT Bayer Agrochemicals merged with PT Bayer Farma Indonesia and the Company's name was changed to PT Bayer Indonesia. In the same year, the Company went public and offered its shares at the Jakarta Stock Exchange.

Today PT Bayer Indonesia Tbk is engaged in the business of Consumer Care, Pharmaceuticals and Crop Protection. The company's production sites are located at Cibubur and Pulogadung.

4.1.1 P.T.Bayer Cropscience Indonesia P.T. Bayer Cropscience Indonesia is the crop science arm of P.T Bayer Indonesia. It is engaged in the crop protection business. With over 31 AI presently in the market and business size of over USD 39.5 million the company has 2nd largest market share in the industry (as of 2003).

Figure 4.1: Bayer CropScience Logo with some of its products in the Indonesian

Market

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4.1.2 Market position of Bayer CropScience, Indonesia BCS has a varied market share in differed crop protection sectors in Indonesia. This is because of its varied nature of product presence in different market segments. Traditionally BCS is stronger in the insecticide market while it falls short in the Herbicide segment because of absence of any block buster product in this segment within its product portfolio. The Market Share of BCS in the various segments can be graphically represented:

Figure 4.2: Crop Protection market attractiveness and BCS Market Share The X axis represents the current percentage market share of BCS for the year ending 2003. The Y axis represents the attractiveness of the market in the future. The size of the bubble represents the size of the pesticide market in that segment. For example the Broadacre Insecticides with market attractiveness of near 1 and market size of USD 7.4 Million is not a growing market and not very important for the future even though BCS has a major market share of 27.7 percentage. BCS is facing emerging generic problems with its active ingredients formulations many of which are still patented being readily obtained by the generic manufacturers. As per the law any AI being used has to be registered with the government of the country. However, it is easier for the generic manufacturers to obtain the formulations by bribing the government officials who are sometimes corrupt. Some chemical formulations are also obtained from countries where the product is already off patent and is then used to make the exact chemical compound at relatively lower price. The exclusivity law for data protection has been issued by the Indonesian Government as early as 1997 but its effect is still to be seen. Its implementation is still on a limited basis and cases of non abidance are aplenty.

Vegetable Fungicides

Rice Insecticides

Rice Herbicides

Vegetable Insecticides

Rice Fungicides

Broadacre Insecticides

Plantation Insecticides

Plantation Herbicides

1.00

1.50

2.00

2.50

3.00

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Rice Insecticides Rice Herbicides Vegetable Fungicides Vegetable Insecticides Rice FungicidesBroadacre Insecticides Plantation Insecticides Plantation Herbicides

34

In the scope of the research we will try to analyze the competitiveness of the company in the wake of the generic pressure under the following categories:

Product Portfolio Marketing Aspects Supply Chain and Distribution Aspects Financial Aspects Services and Assistances Supported by the Government

Policies Further Assistances Needed and Strategic Decisions

4.2 Market Conditions R&D breakthroughs in agrochemicals, seeds and biotechnology drive the crop

protection market The rate of introduction of new technology i.e. new actives is expected to slow

down in favour of seeds & genomics Industry consolidation in the past ten years has led to generic/mixed brand

distributors / manufacturers gaining market share Many important active ingredients are now post-patent in major and there are

several others within a few years of losing patent protection This can only be countered by a flow of new technologies which offer

improved benefit : cost ratios and by strategic changes to the traditional working of the business in the market

4.3 Current Scenario – Generics Generic manufacturers are sophisticated marketers They are getting access to more off-patent and patent protected products And they are growing in sales, in infrastructure, in resource availability and in

networking Many important actives are now off-patent and several others, some “block-

busters” in agrochemical terms are within a few years of losing patent protection giving better scope for the generics.

Data protection law is not effectively enforceable in place and flouting of it is quite common

Government official are sometimes corrupt and getting the patented formulations is relatively easier for the established generics

Clinical tests and environmental policies are not in place giving immense scope for the generic mass market.

Farmers and distributional players are getting more cost conscious and are increasingly getting attracted to generics

Traditional distribution-logistics chains are being dismantled, bypassed or re-structured by new and innovative strategies

Experienced, qualified personnel from the consolidated industry are now available to aid the generic manufacturers & distributors, to create new entities competing directly with the key players, to provide technological know-how to manufacturers

35

4.4 Business model of generic and MNC

Discovery &Research Development Manufacturing

and DistributionMarketing

&Sales

P - 1 P - 2 P - 3 P - 4

MNC

Outsource Manufacturing and Distribution

Marketing&Sales

Generics

Discovery &Research Development Manufacturing

and DistributionMarketing

&Sales

P - 1 P - 2 P - 3 P - 4

MNC

Outsource Manufacturing and Distribution

Marketing&Sales

Generics

Source: Model Developed after analyzing the market situation Figure 4.3: Comparative 3 phase Generic and 4 phase MNC Business Model

The business model of the generics and MNC differ in the fundamentals itself. While the MNC spend a major chunk of their revenues on R&D and development of the product to make it marketable, the generics outsource the same. By outsourcing it means that they obtain the product formulations without spending much on its development. In Indonesia where the data protection law is not easily enforceable and clinical testing not very prominent (In spite of ratification of Cartagena Protocol in 1997) its easier for the generic companies to cut through the 2 phases and quickly move on to phase 3 of operation. It is seen that most generic companies do not possess there own manufacturing facilities also and they outsource the same to contractual manufacturers. This is a huge savings in terms of fixed costs keeping their product cheaper than the original branded product. However this kind of strategy works only when the order size is up to a specific level. Once the order size gets bigger the variable cost of outsourcing gets higher to compensate for fixed cost of manufacturing. A major percentage of MNC revenues (approx 7-10 percentage) are spent on the phase 1 and 2. Moreover the production facilities are huge and require a high level of fixed cost. Marketing of new products require more costs and offers less flexibility in comparison to the generic companies who work on tried and tested products.

4.5 A comparative Strategic Model between BCS and Generic A comparative Strategic Model between BCS and Generic on the grounds of Finance, product, customer and organization can be drawn up as follows:

36

Table 4.1: Comparative Strategy of BCS and Generics in Finance and Product

STRATEGY Objectives Action leverage Objectives Action leverage

Keeping low capital requirements

a) Continuing contract manufaturing

a) Develop an improved sales forecasting system, thereby increasing predictability

b) No R&D costs

b) Re-align production policies

c) Minimising Employee requirements

a) Contract manufacturing

Improving overall value of business

Work on volumes not on margins

b) Streamlining, improving margins on old products

Accelerate launch of new products.

Increasing presence into the profitable and growing herbicide segment.

Improvement of CoG's / IGM

Targetting Government agencies and international markets where the product is off patent.

Target key crop segments like rice, oilpalm, cotton and herbicides in which low Market Share.

Adding to product porfolio by obtaining more patented AI formulations

Targetting AI of all MNC in this segment and working on price differential.

Product (Innovation &

diversification)

Reduction of working capital / improve asset management (ROCE)

Business development strategic products / segments

Increase diversification into profitable & growing

Increase IGM of strategic products & projects. Develop new AI with increased R&D

Asset Management / working capital

Finance

BCS GENERICS

The table highlights the difference in the strategy and focus area for MNC and generics companies. Where as the generic focus is mostly short term and product basis the MNC focus is mostly long term and future market approach oriented. Generics focus more on networking with the key government officials whereas Multi National Corporations are focused more on innovation and launch of new products into the market. Generics are more focused on reducing fixed costs whereas variable cost is of immediate concern for the MNC companies. From the strategic side it can be seen that the generic companies work on an immediate vision whereas the MNC work on a long term focused vision to develop teams and working systems.

37

Table 4.2: Comparative Strategy of BCS and Generics in Customer and Organization

KFS Objectives Action leverage Performance indicator Resources targeting indicator (future

performance)

* Targetting the end user i.e the farmer as the customer.

Removing the distributional layers and enabling access of products to the end user as quickly as possible.

Swapping of MNC customers

Giving attractive price and better margins in stocking their products.

* Creation of Core Team for customer interface

* Rationalization of sub-dealers

* Re-assess headcount after customer segmentation / analysis and formation of Trade Team

Less but more effective employee in the organization

Swapping best employees from MNC by paying better pay packets and offering better organizational positions.

Reduce both time to market and peak sales

Working on tested waters Being aggressive followers to the successful product launches and shunning away from failed products.

* Employee get togethers Motivation and commitment of employees.

Employee welfare schemes and better incentive based plans.

*

BCS GENERICS

Focus on & develop Strategic customers

Product launch Acceleration

Demand generation of strategic products targeting customers / retailers with farmer data bank through Promotion Team. Customer incentive plans and promotional activities.

Organisation

Customer

Headcount Optimisation

Further Increase Motivation & Commitment of employees

Better pay and bonus schemes.

The differential strategy of generic and MNC can be seen in terms of their customer focus. While the Multi National Corporations are going for a tired set up wherein their customers are actually National Distributors and big wholesalers, the generic companies are cutting through the traditional distributional framework and are targeting the end user i.e. the farmer to be their customer. The MNC companies spend a good amount of money in training and development of an employee thorough various training programs. Generic companies on the other hand try to poach such employees with better package and position. With better margins and stocking facilities provided, the dealers are also keener to work with generic products rather than MNC product which carry a high amount of carrying cost.

38

4.6 A Comparative MNC and Generic Distributional Set Up

Comments / DynamicsImport level

NationalDistributionlevel

ProvincialWholesalelevel

Retaillevel

Farmlevel

1995

BCS

TradersGenerics

# 15

Private Nationaldistributors

# 3

State-Owned National distributors

(+ formulation / re-packaging)# 1

Private WS# 50

Co-Operativesfew

Farms# 25.000.000

5 % 90 %20 %

10 %90 %90 %

75 %

90 %5 %

Local Manufacturers /

Formulators

100%

#510%

5%

10%

R1 #145

R2/3 # 400080%

20%

100%

The power of distribution centralizes in provincial wholesale > 90%

Cooperative group act only as complementaries whenever government release special project/ subsidy program

The key dynamic factor is loyalty degradation at retailers’ level to wholesale , and distributor level to manufacturer/ formulator.

Business trend was driven by real demand from the farms level

Figure 4.4: Comparative Generic and MNC crop protection distributional set up in Indonesia, 1995

39

The historic distribution set up in the Indonesian Crop protection business gives a similar picture to what happened and in many cases still existent in most developing countries. A 4 tier distribution set up in place which channels the product to final consumers i.e. the farmers. The main reason for such a distributional set up is: Non existence of Manufacturer to Farmer distributional infrastructure Often more costly to supply directly with prohibitive costs of warehousing and

small purchases by the farmers. Farmers often buy on credit terms which are only easy to negotiate with the

retailers in their area whom they know for a long time and sometimes even for generations.

It’s very difficult to bypass this tire set up as it’s historically in place and provides employment to many people who will otherwise be rendered jobless. Moreover it’s difficult for a MNC to trust at the local level as they deal mostly in cash.

The requirement at the farm level is not very high at a time and hence it is better for a MNC to deal with the national distributor rather than going through small stockists at tier 2 or tier 3.

From the above diagram the strategic difference in distribution between the generics and the MNC is clearly visible. While the generics cut the distribution tier by supplying 90 percentage of the products directly to tier 2 or Private Wholesalers the MNC go through National distributors for 25 percentage of their sales. This adds on more levels to their distribution channel and in turn increasing costs in terms of tier margins. The generics are able to follow this strategy because of the following reasons: Relatively new entrants into the market and are able to capitalize on the

mistakes made by the MNC. They have realized that the power of distribution lies at the Provincial Wholesale level and are hence able to supply to them directly. They don’t have any historic bonding with the national distributors and hence are not obligated to go through them in the distribution channel.

They follow a more aggressive and risky strategy as their understanding of the market is better being mostly the local player.

Their costs are low and margin of profit high giving them buffer to take risks of facing bad debts.

They work on mostly established products and hence they are confident that chances of their product success is high enabling them to cutting a tier and going directly at the lower level.

They are willing to work on small quantities and offer credit terms which are more flexible than MNC and hence are able to bypass the Provincial Wholesalers in a big way.

The above distribution set up gives indication that the end users i.e. the farmers had to pay a higher price because of so many levels of distribution channel. The rigidity of the structure made it difficult to cut levels for the MNC whereas the generics benefited as they were relatively new and without prior obligations.

40

Comments / DynamicsImport level



Retaillevel

Farmlevel

2004

BCS

TradersGenerics

# 12

Private National distributors# 2

Private WS#42

Farms# 20,000,000

5 %

50 %

90%

90 %10 %


Formulators

50 %5 %

#10

90%

10%

R1#160

R2/3#3400

100%

80%

20%

There is shift in the power of distribution to the retailers’ level, since some of the provincial wholesalers start acting as generic national distributors and/or licensed holder of generic products.

The loyalty factor is not a key issue anymore in the distribution network. Business driver is price competitiveness, products availability, strong demand/brand in the market.

Even the generic traders are focusing at the retailers level, due to competition problems at provincial whole sale level.

The demand center is really at farmers level

Figure 4.5: Comparative Generic and MNC crop protection distributional set up

in Indonesia, 2004 In the distributional set up from 1995 to 2004 we see a strategic shift in favor of tier 3 or Retailer 1. While 90 percentage of the generic products are channeled through them, about 5 percentage of the MNC product find ways Retailer 1 directly. In case of MNC the Provincial National Distributors are still playing a significant role whereas the generics have been successfully able to cut through 2 distributional layers and have become that much closer to the farmers. This is mostly because of the competition problems at the provincial wholesale level. In this strategic shift we can see that the generics are well suited under the market conditions to adapt to the changes required whereas the MNC are quite slow to react to it and sometimes it’s almost impossible for them to cut through historically established channels. The slow adaptability of the Multi National Corporations can be related to the following: Lack of availability of accurate market data. Indonesia with its diversity

encompasses numerous problems in accurate data collection and market predictions.

41

Higher price pressure points whereas increased costs due to increasing competition. The Multi National Corporations don’t want to risk on the distribution front.

A hierarchical structure with strategies sometimes being made other countries than Indonesia. This leads to strategies which do not always adapt to the local market conditions.

The problem with the management is sometimes that they don’t want to think outside the box (sometimes because of economic – strategic reasons) giving them less flexibility in the market of doing something different

Multi National Corporations are bound to maintain business ethics and abide by the rule of the land to maintain their status globally. This can lead to strategic disadvantage in a country like Indonesia where laws are easily crafted to ones own benefit by the generic companies.

4.7 The MNC dilemma and proposed solution: The MNC in Indonesian crop protection business are facing the classic model of technology ‘push’ and market ‘pull’. The market is such that both ‘push’ and ‘pull’ are changing faster than ever before. This is creating greater tensions within the innovation model of Multi National Corporations and leads also to greater uncertainty in the future. A potentially successful, but difficult to accomplish, strategy for R&D-based companies is to move from simply introducing new active substances, towards the following: The innovation of novel active substances which provide key benefits over the

state-of-the-art available technologies. These benefits are increasingly not only performance related (more highly active molecules with a new mode of action) but are also influenced by customer needs for improved flexibility, safety and environmental characteristics.

It is needed to enhance the performance of existing active substances by

modulating its delivery to the biological target. This can be achieved through formulation technology, but also through improved application methods or combination with other control measures in integrated crop management.

The development of crop solutions which are tailored to meet the needs of

specific customers or customer categories. This becomes feasible with more comprehensive data-systems together with more holistic and deterministic models of product performance integrated into the overall cropping system. Such a strategy is based on the assumption that there is a need for new solutions to existing problems and new customer needs. Old generic products available in the market at the moment will be replaced by modern, more desirable alternatives.

However the underlying assumption is that the farmers seek to maximize their profits through tailoring solutions to individual needs, the customer base changes as food processors, retailers and consumers desire more knowledge on the provenance of agricultural produce.

42

Comparitive Market Share

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Syngenta

Bayer

DuPont

DOW

BASF

Monsanto

Nufarm

FMC

Generic

Source:Internal Data from BCS, Indonesia

Figure 4.6: Historical and Estimated Market Share from 1995 to 2014 The above figure shows the comparative historical and future market share of different crop protection companies presently involved in the Indonesian crop protection scene. The figure is calculated through internally generated data of BCS, Indonesia and projections are done by having extensive consultations with top management of Bayer, market trend, future product outlook of different companies, projected growth conditions of the market.

4.8 A comparative analysis of different MNC and generic companies in the Indonesian crop protection market

43

Table 4.3: A comparative analysis of different MNC and generic companies in the Indonesian crop protection market

Prod. margin,distribution

networkProductProductProductProductProductProductProductProductOthers

Local Mktunderstanding

>30 years exp>30 years exp>30 years exp>30 years exp>30 years exp>30 years exp>30 years exp

>30 years expCountry Advantage

Very HighLowLowLowLowLowLowLowModerateFlexibility

DecentralisedCentralised Centralised Centralised Centralised Centralised Centralised Centralised Centralised Logistics

5%3%5%3%3%3%3%3%3%Prov. Dist. Margin

10%6 - 7%6 - 7%6 - 7%6 - 7%6 - 7%6 - 7%6 - 7%6 - 7%Retailer Margin

56.622.117.722.913.822.617.541.553.3Size

21.18.26.68.55.18.46.515.519.9Market Share

Depend on Private

manufactureres. No plant of

their own.

Having Own. Plant capacity

capable of meeting

increased future demand


capable of meeting



capable of meeting


Difficulty in increasing production.

Anticipated to import fipronilfrom china.


capable of meeting



capable of meeting


Having Own. Plant

capacity capable of

meeting increased

future demand


capable of meeting


Production

Almost negligibleLowLowLowModerateModerateModerateHighHighBrand Value

Key people generally

swiped from MNC

Best at the Top level and

mostly contractual at

the lowest level



the lowest level



the lowest level



the lowest level



the lowest level



the lowest level

Best at the Top level

and mostly contractual

at the lowest level



the lowest level

HR

Mostly R1,Sales to R2 and to farmers in

near future.

Focued mostly on ProvicialDistributors

Mostly R1Focued mostly

on ProvicialDistributors




Focuedmostly on Provicial

Distributors

Focused on Provincial

Distributors and R1

Distribution

Pyrethroids,Glyphosate,Dithio Carbamate

Furadan,ArrivoGlyphosateand 2.4DRoundupRegent,FastacDursban,Ditha

neAlly,CurzateDecis,Confidor,Buldok,Fo

licur

Paraquat,Score,Curacron,Ma

tador ECPortfolio

Rice and PlantationRicePlantationPlantationRiceVegetable and

RiceVegetable and

PlantationRicePlantation

Herbicide & Rice Fungicide

Crop Focus

GenericsFMC NufarmMonsantoBASFDowDupontBayerSyngenta

Comparative Diagnostic 2004

Source: Internally generated data from BCS and consultations with industry experts

44

CHAPTER 5

RECOMMENDATIONS AND CONCLUSIONS

5.1 Future Market Conditions, Implications and Conclusion 1. Increasing populations, changing dietary habits of majority of the world’s

population, restricted growth of arable land is likely to drive need for increased agricultural productivity.

2. Older products likely to decline due to resistance and regulatory pressures at the expense of newer, safer products;

3. New chemistries with different Mechanism of Action (MOA) needed and valued for resistance management;

4. The insecticide market potential likely to be in replacement markets and new uses that include unique pest or product combinations;

5. GMOs remain a limited threat to high-value crop and specialty markets: – Prophylactic treatments on row crops the main target of GMO input

traits, and majority of the impact on row crops has already occurred; – New opportunities will arise as pest spectrums shift due to GMO, and

move to protecting crops with valuable output traits; 6. Key focus emerging areas are high-value crops and non-crop Specialty

markets. 7. Packaging for the products should be more consumer friendly considering the

fact the farmers are mostly illiterate. Pictorial markings should be used rather than inconvenient stickers. Moreover for the subsistence farming class in some crop segments small packs of the product would be most useful to get inroad in that market.

8. Display though is not a major determining factor in the crop protection market however; it still plays an important role. Competitive display at the consumers’ immediate view is desirable. Ready accessibility of the product for the consumer with attractive packaging and frontal display will surely make a difference in sales.

The research shows that the new customers unaware of the once patented original product are going for competitive brands. The simple reason is the above factors coupled with the retailer margin. The retailer has to block 1.5 times the capital in our product and it gets ½ the margin it makes on the generic products. Considering the situation there is no real incentive for the retailer to sell MNC product. He is just thriving on volume. But this volume trend is on a decline and eventually the retailer may not be interested in stocking MNC product at the present terms. The fact remains that retailers are the ones who are dealing with the ultimate consumers and are hence the most important source of farmer information and also act as a guide to them when making buying decision. Hence increasing the price more than the marginal expectation will not harm the sales, infact it can increase the same as long as the margins are better for the retailer. The incentive for retailers can be better margins or incentives for higher sales. However in the small retailer segment better margins would be the key driver.

45

5.2 Future Strategic Framework for MNC From the strategic perspective a 4 point framework should be adopted to get a better insight into the market and develop counter strategies in different market scenarios in the future.

Figure 5.1: A 4 point optimal strategic framework The so called business opportunity is derived from the theoretical size of farm and crop planted. However this has not translated into actual business in the market place. From a strategic point of view the following needs to be done by an MNC Need for the MNC to build a transparent communication system within the

firm. Consolidation in all spheres of activity from manufacturing to distribution by

going through strategic acquisitions. Even acquisitions of generics can be considered.

Focus on the distribution set up. It is necessary to be flexible and try to get closer to the farmer. Promoting the retailers to the become stockist can be an option.

User friendly packaging and display holds the key Increasing incentive to the retailers is one of the most important factors to gain

faster growth. Retailers at the moment are working on lesser incentive on

ANTICIPATE

Identify drivers of change.

Define the ranges of possible future

Develop scenarios

FORMULATE

Develop an optimal strategy of each scenario

Compare optimal strategies and define core and contingent elements

OPERATE

Execute core strategies

Monitor the environment

Exercise or abandon as appropriate

ACCUMULATE

Acquire capabilities needed to implement core strategies

Take options on capabilities needed for contingent strategies

46

MNC products than what they get from generic products. Hence, to win their interest in selling branded products higher incentive is to be offered. This in turn may impact the profit margins of the MNC’s. However this incentive system can be offered in a planned way as follows so that it does not impact the margins substantially: Higher margins should be offered on new products which are to be

launched in the market. Multi National Companies at the moment have several new products poised for the Indonesian Market in the offing.

Prices of reinvented product or AI mixtures can be increased and the increase can be passed on to the retailers in terms of higher margins.

With cutting through the supply chain level there would be savings in terms of margin which in turn can be passed on to the retailers.

Internal reconstitution, consolidations and cost savings can enable better margins to the retailers without affecting the profit margins of the MNCs.

Incentives can be other than cash margins like retailer lottery programs, annual trips for their families and benefits like soft loans.

Prices can also be increased in power brand products which have no real competition from the generic products.

Key people who have better understanding of the market, laws and are more familiar with changing set up should be employed. It is to be seen that poaching by the generics is curtailed.

A shift in the traditional business strategy can be sought in by the MNC by entering the generic market themselves. They can enter into production of profitable off patent products of other MNC companies and distribute the same in association of their own products. This can boost their margins and offer a ready market with minimum additional cost. Aventis Pharmaceuticals has been adopting this strategy world wide. It offers immense scope in a country like Indonesia. Working with off patent products is not unethical from the company’s point of view also.

MNC companies can go in for acquisition of generic companies. The target for acquisition should be companies which have more products targeted to the acquiring MNC’s products. This would give multiple benefits as follow: Brand erosion by the generic can be stopped by acquiring the generic

company and controlling the production of the copies of the MNC branded products.

Acquisition would give the MNC a deeper understanding of the generic way of working and can facilitate to replicate the generic model for their other products. It can give better access to the target market as generics are always able to cut down the distribution channel and to get closer to the final customers.

Acquisition will also facilitate consolidation and additional capacity at lower cost than setting up additional infrastructure afresh anticipating the growth in the market in the coming years.

From the distributional landscape it seems that perhaps the MNC companies are not truly aware of the retailers who are playing the distributional role. That may be a reason why the MNC companies are more dependent on National and Provincial distributors to carry down their product. Generic company acquisition can fill in the knowledge gap.

47

It can be a good idea to segregate the R&D facility from the central command structure to more business specific. Most MNC companies are diversified chemical companies with central R&D focus. Moreover, care should be taken to take country decisions by people knowledgeable of the country conditions rather than taking such decisions in head offices by people who are really not aware of the grass root problem. Frequent projects to assess country future outlook and conditions can be a good option to take strategic decisions.

Data collection should be more frequent and should be consistently updated. Companies can also consider outsourcing of manufacturing of certain off

patent products to save on fixed costs. Importing and exporting to company establishments in the other countries within the free trade ASEAN can open up new market opportunities and can give more flexibility.

Learning to work together in teams Having a customer centric focus at all times and at all levels Nurturing an environment which does not hesitate to question strategic

decisions and processes. Flatter organization structure with less hierarchical sub categories Managing the excess baggage is also a major issue of concern. With more

acquisitions and mergers on the way the key challenge is integration. This requires comprehensive programs and training initiatives. The companies should also proactively consider removing the least attractive product out of their portfolio and focus on their growth areas i.e. better brand management.

Currency fluctuations can be better handled through forward hedging in the financial futures market. This hedging though in practice should be more regularly.

It is wise to promote networking with the key government officials to get inside market information and continue to get the favor.

Promotions and participation in the trade and farm show will boost company image and make the products better known to the consumers and distributors.

It is better to give preferential treatment to distributors to whom the company is more important than other companies rather than having same treatment with all distributors and stockist.

The strategy of each company will be different considering various factors like short term and long term strategy, market importance for the company, product portfolio and life phase of the product, new products in the pipeline, country outlook for the company and top management decisions. The 2009 country distribution set up might look like the following considering the past trend and the conditions in other developing countries on similar footage:

48

Comments

Import level



Retaillevel

Farmlevel

2009

MNCsTradersGenerics

# 15

Private WS# 32

Farms# 17.500,000

90 %

75 %

10 %


Formulators

10 %

95%

5%

15

R1#135

R2#291670%30%

100%

15%

Reduction in MNC’s (merger/acquisition) and increase in the local manufacturers/generics due to transformation of some big provincial distributors to local manufacturers.

The brand alternatives are available with variations in price and packaging.

Continuous shift in power of distribution to the retailers level (last layer and direct in the front of farmers). The general trend of the power shifting close/ direct to the farmers/ users

The real demand is driven by the brand image of

the product at the farmers’ level.

Figure 5.2: Generic vs. MNC in Indonesian Crop protection distributional

framework 2009

The power of distribution will gradually shift in favor of the retailers and it is in best interest of the Multi National Corporations to realize this and try to capitalize on it. The national distributors will mostly convert themselves into generic companies and will become competitors.

49

Comments

Import level



Retaillevel

Farmlevel

2014

MNCs#6

T/O=216.9

TradersGenerics

# 25T/O= 84.8

Farms# 15,000,000

T/0= 301.7


Formulators# 15

Private WS# 25T/O= 173.52

80%

20%

90%

10%

65%

R1#128T/O=232.48

R2#2500T/O=191.35

25%

100%

40%

60%

10%

Shifting a big part of distribution directly to the farmers level. Private wholesalers still maintain selective popular brand

The real competition is driven by brand image products, price competitiveness, farmers’knowledge and stock availability

Figure 5.3: Generic vs. MNC in Indonesian Crop protection distributional

framework 2014 The power of distribution is more prominently going to be shifted to the retailers 1 and 2. This would be possible with the consolidation of the retailers at both levels making them get bigger and more organized. The retailers are expected to get financially capable also in handling more of the supply chain. Private wholesalers are also expected to reach directly to the farmers and distribute 10 percent of their business directly through to them. This would be possible with the farmers getting bigger in size. This phenomenon would be seen only with farmers having land holding of more than 1 Ha and who are closer to the warehousing set up of provincial wholesalers. These farmers would get more educated in terms of crop protection requirement and will be able to cut through the retailer channel and approach and do business directly with the provincial wholesale as their requirement of crop protection is expected to get significant enough to attract provincial wholesaler’s attention.

50

Why Multi National Companies are unable to replicate the generic distributional model? After scrutinizing the distributional set ups in the past and expected set ups in future a question seems obvious as to why the MNC are unable to replicate the generic business model even though they believe it is a better way to get across to the final consumer. The following should be considered in answering the question: Generic companies have the late mover advantage. The MNC companies have

been historically bound by the distributional set up through the National Distributor and Provincial wholesalers who provided them with the financial security and greater access to the market. It is difficult for the MNC now to break through the traditional way of working and cut through the channels and go to the retailers whom they don’t know personally. Generics on the other hand are relatively new and have no such problems. They can easily start their distributive operation at the retailer level and hence can cut through the channel.

The retailers at the moment are not consolidated and lie scattered. Excepting a

few most do not have the financial or infrastructure capability to support the MNC way of working in bulk. The retailer requirement in general is small and is feasible for them to meet the same from the provincial wholesale who also act as stockist. Dealing directly with the MNC would require them to put the stocking capacity also at additional costs. Generics on the other hand deal in small quantities and suit ideally for the retailer requirements. As generics outsource their production they do not require the retailers to stock their product in bulk and are able to supply the requested products faster as generally their outsourced production facility is nearer to the retailer.

Retailers often work on credit terms and being small in size the risk of default

associated with them is significantly higher than with the provincial wholesaler or national distributor. MNC generally do not prefer to work on credit terms and risk of default being quite high in the Indonesian retailer context at the moment, it is not feasible for the MNC. Generics on the other hand working on high margins and small quantities can afford such defaults and credit terms.

MNC prefer working with a few provincial wholesalers and national

distributors looking after their market than working with hundreds of small retailers scattered all across the country. Linking up directly with them would require huge costs in terms of distributional infrastructure be it warehousing, delivery vans or new hires.

It is possible that working traditionally with the provincial wholesalers and

national distributors the MNC companies are not correctly updated on the retailers. They would not like to immediately change their present distributional set up for market which is not very known to them(in terms of retailers position, their business size etc.)

Hence considering the above factors it is apparent why the MNC are not able to replicate the aggressive distributional strategy of generic companies immediately.

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MNC should work towards the distributional set up by getting more market information.

5.3 Possibility of Generic Acquisition by the Multi National Company It is highly probable that the in the future the MNC will be looking at the acquisition of powerful generic companies and not only merging or acquiring other MNCs. Generic acquisition would give them better advantage in terms of market knowledge, distribution and reach than doing the same of another MNC. A MNC may consider the following before deciding upon a generic acquisition: The size of the generic company in question. The market reach of the same

and the value and volume of business it generates will prove as an important indicator when deciding whether to go for acquisition of the same or not. A generic company with wider market access and ready customers will prove as an ideal acquisition candidate.

Generic companies which have generic products conflicting significantly with

the branded MNC product would also be eyed for acquisition. This would be reducing the erosion impact of the brands by these companies. This kind of acquisition would be more to protect the brand rather than for business benefit.

A third kind of acquisition which might be possible is of generic companies

producing competitor’s product than that of the MNC considering acquiring it. This is more of a strategic acquisition in which the MNC would be interested in acquiring this generic company and producing competitive products for its competitors to dilute the competitors market and at the same time push its own product forward.

Hence, it is highly probably that the generic companies would be key targets for MNC companies striving to gain ground under severe competitive pressure and in a bid to improve their dwindling margins. Such an acquisition would be more of a strategic nature and a means of earning that much extra cash. It would also serve as an important tool for understanding the elusive market characteristics and to facilitate better marketing of the MNC product through the acquired generic channels.

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5.4 Changing Generic Business Strategy

Figure 5.4: Probable business strategy of generics in Indonesia in future The above model illustrates how in future the generic companies are going to organize themselves into a much stronger competitive opposition to the MNC by collaborating with other generic companies and posing a common front. Generic companies are gaining financial power and product knowledge quite fast. With increasing financial power they will be looking in for acquisitions and brand building in future as has been the case in other countries. The generic company might go in for technology licensing and marketing collaboration other than mergers, acquisitions and strategic alliances with other generic companies to gain market advantage. It would be interesting to note that some Multi National Companies would assume the form of both a generic and an R&D based company. They might get into production of off patent competitor products and hence acting as generics while at the same time continuing with their own R&D. A replication of Aventis worldwide model seems highly probable in the Indonesian context.

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5.5 MNC Strategic Focus

Figure 5.5: Recommended Business strategy for MNC in future

The MNC should be more focused on the market needs rather than following a push strategy of pushing the products down to the consumers. It should launch the products identifying the suitability of the same in the Indonesian market and requirement of it by the end user. Fixed cost is of growing concern for MNC companies and they can actively think upon discontinuing certain products in their portfolio which have reached a declining phase or try to reinvent them. Their focus should be to reach out to the end user i.e. the farmer by making products safer to use and environmentally friendly. It is also required to see that the target group is mostly illiterate and the packaging of the product should be more pictorial considering this fact. MNC should look in for active collaboration in distribution and can even consider outsourcing manufacturing in certain products depending upon the size of the product and required time to market. Another option for an MNC company is to go for acquisitions. This kind of acquisition can be of a generic company which is actively creating problems for the Multi National Corporations product category. It might be cheaper to acquire the company as a whole rather to suffer loses as a consequence of generic products marketed by the company targeted towards the MNC product. The MNC can establish a better linkage facilitated by its presence in all member ASEAN countries by redefining its supply chain. It can also be seen as a potential export market and a means to hedge against the fluctuating currency.

R&D

HRM

Increased I.T Usage

Cost Reduction

Consolidation

Focus on Core

Increasing Demand

Low Export Focus

Fragmented Industry

Low level of local R&D

Data Protection Problem

Market Conditions

NAFTA,AFTA, ASEAN

Increasing no. and

size of generics

MNC Should focus

Aggressive Growth Strategy

• Stimulate demand

• Access to Consolidation through mergers, acquisitions

and even internal consolidation

Focus on local need based R&D

Cost Reduction • Operation

al

• Financial

Collaboration •Distributional

•Institutional interaction •HRM

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5.6 Indonesian Government Role in Future Data protection laws should be more actively enforceable by the government

and the government should work towards collaborating with MNC so that they can reduce prices and design products which can be specific to the country crop requirements.

Work on the environmental protection norms and implement the Cartagena

Protocol which the government has ratified in 1997 in a stricter format. Departments like BPS and IRRI can play a more active role by collaborating and giving farm and crop specific information to the MNC working on development of new products.

Ensure farm development by implementing similar schemes like “Grameen

Vikas” in India. This can be done through providing facilities of renting out tractors and providing better seeds and facilities to buy pesticides on credit. Educating the farmers on the proper usage is also a responsibility government agencies can actively play.

Great efficiency gains can accrue by adopting input application techniques based on more site specific information and appreciation of factors limiting crop development. As crop growth varies considerably due to local conditions, it is clear that applying inputs uniformly across large areas is not the right approach. Accurate field mapping with information collected from soil samples, pest monitoring and harvest yield data allows farmers to target the use of plant nutrients and crop protection products, leading to an efficient and judicious use of these products. Highly developed systems use computers installed in farm machinery such as harvesters, fertilizer spreaders and crop sprayers, combined with mobile satellite Global Positioning Systems, enabling farmers in some situations to spatially vary the rate at which inputs are applied, thereby optimizing the growth potential of the crop based on accurate determination of soil and crop needs. Precision agriculture does not, of course, always require a highly sophisticated technological approach. The principle remains that farmers in all situations can significantly improve the precision of their management techniques by collecting and analyzing information from soil and plant testing.

5.7 Limitations of the Research The research suffers from the following limitations: It does not give details of the products of the MNC and the future strategy of

those on an individual product by product basis. The research focuses on a probable scenario and does not elaborate on

pessimistic and optimistic situation which are also possible. The research is greatly influenced by the views and market understanding of

the Top management of Bayer CropScience , Indonesia. This may be biased or unilateral.

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Further research on this subject should be conducted after interactions with more MNC and strategists qualified in the market. It should give more detail of the product directed towards specific crops and future outlook and counter strategies of the specific product under generic competitive pressure.

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BIBLIOGRAPHY Name Organization Designation Dr.Christine Jahja Bayer CropScience,

Indonesia Corporate Finance and Tax

Mr. Adisuno Bayer CropScience, Indonesia

Research

Mr. D Djuniadi Bayer CropScience, Indonesia

Development Manager

Mr.Antonious Karbito Bayer CropScience, Indonesia

Controller

Mr.Bruno Tremblay Bayer CropScience, Indonesia

Country Head - Indonesia

Mr.Final Prajnanta Bayer CropScience, Indonesia

Marketing Head

Mr.Mahyuddin Syam International Rice Research Institute

Liaison Scientist

Mr.Pascal Cassecuelle Bayer CropScience, Indonesia

Head of Marketing team development Asia - Pacific

Mr.Sidi Asmono Bayer CropScience, Indonesia

Business Dev.Mgr.–Rice

Mr.Sunaryanto Bayer CropScience, Indonesia

Sales Head

Ms.Maria Winata Bayer CropScience, Indonesia

Head of Supply Chain

Ms.Oche Hutapea Bayer CropScience, Indonesia

Human Resource Head

In addition to the above valuable insights were obtained from several agronomists, economists, government agencies, NGO’s, national distributors, dealers and retailers.

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Impact of Generics on the Indonesian Crop Protection Market

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