The strategic groups Features of the industry

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2.2.2 The strategic groups

In Indonesia, three different groups of CPO producers can be identified: the public estates, private companies and smallholders groups. The public estates group comprises 10 public estates with a single Joint Marketing Office. Hence, it is assumed that all of these estates act strategically as a coordinated group. The private companies are dominated by 10 conglomerates Casson 2000. Unlike the public estate, they do not have a single marketing office. However, together with the public estates, these conglomerates are the members of the Indonesian Palm Oil Producers Association. The existence of such an association allows the members to homogenise their perceptions of both the market state and other firms’ information Clarke, 1983. Therefore, the private companies are also assumed to act strategically as a coordinated group. The public estates and private companies are usually organised on traditional lines from president director to local supervisors. Most possess good infrastructure and operate estates with size more than the minimum efficient scale. On average, the size of an individual public or private estate is approximately 10,000–25,000 ha, and is usually a part of a larger group whose estates ranging from 100,000 to 600,000 ha Casson 2000. Both public estates and private companies appear to be highly vertically integrated, from the seed gardens to the cooking oil refineries. They have good access to capital markets, new technologies and information. However, public estates tend to be more bureaucratic, less adaptable to change and consequently less efficient Barlow et al. 2003, pp. 10-13; van Gelder 2004, pp. 31-45; LONSUM 2005. Smallholders appear to have a different organisation from that of the public estates and private companies. In general, they tend to have a lack of technical knowledge, for example many of them could not distinguish poor and good seeds and periodically purchase the low yielding seedlings. Others plant without terracing or following the appropriate fertilizer applications. This leads the smallholders to produce crops of low yield and quality. While on average, the private companies and public estates could produce 20 and 15 tonnes per ha, respectively, smallholders could only produce 10 tonnes per ha Barlow et al. 2003; Zen et al. 2003. Universitas Sumatera Utara 17 Smallholders can be divided into supported and independent growers. On average, the size of supported smallholders’ individual plantations can be less than five ha, while that of the independent ones is less than 20 ha. Without sufficient economies of scale, smallholders are unable to operate their own CPO mills or other essential facilities, and do not have access to capital market to obtain credit for planting. Supported growers are integrated with public estates or private companies, with whom they often have verbal or written contract to sell their products. In contrast, independent growers cultivate their oil palm crops without any assistance and sell their Fresh Fruit Bunches either directly to local mills or through service providers. However, both the supported and independent smallholders often have problems in selling their products, especially in determining the quality and price of their products. The quality of Fresh Fruit Bunches is mainly determined by their oil content or CPO rendement. Problems in determining the quality of their products stem from several factors. First, given a lack of knowledge to choose good seedlings and to apply the appropriate technique of production, many of smallholders produced Fresh Fruit Bunches with low level of oil content. Second, the rendement is not the same among each of the smallholders’ products. Third, most of smallholders do not have enough knowledge to measure the rendement of the oil palm. Similarly, problems in determining the price of their products arise from several factors. First, while market prices fluctuate in daily bases, prices offered to smallholders are calculated based on the 2-week average prices, hence current market prices are not always the same as prices received by the smallholders. This gives incentives for supported smallholders to break their agreement with the public estates or private companies and sell their products to other millers that offer higher price. Second, with no processing facilities and given the perishability of the Fresh Fruit Bunches, smallholders appear to have low bargaining power and often have to accept prices offered by the buyers Susila 2004. Accordingly, in 1993, during the peak season, hundreds of tonnes of Fruit Fresh Bunches produced by the smallholders were spoiled as they were not processed within 24 hours. Capacities of the CPO mills were less than the Fresh Fruit Bunches production and they give priority to process Fruit Fresh Bunches produced by Universitas Sumatera Utara 18 their integrated estates rather than that of the smallholders. However, after the implementation of Otonomi Daerah Local Authority in 2001, many independent CPO mills—which were not supported by oil palm estates—were established with permits from the kabupaten regional authorisation. In fact, such mills help smallholders to avoid delays in processing their Fresh Fruit Bunches production. Some of them even finally sign agreements to integrate with the independent smallholders. Smallholders do not have any joint marketing associations, and have areas less than 200 ha, smallholders are not listed as members of the Indonesian Palm Oil producers Association. In 2001, the government helped smallholders to establish their own association called Indonesian Association of Palm Oil Farmers Assosiasi Petani Kelapa Sawit Indonesia APKASINDO . It accommodated some of the smallholders’ inspiration, but this association still has not dealt with any marketing arrangement, hence smallholders do not act strategically. Together with the perishable characteristic of the Fresh Fruit Bunches and lack of processing facilities, smallholders appear to be price takers. Therefore, although the total size of smallholders’ production has reached 40 per cent of the market share, we could argue that they are effectively a high-cost competitive fringe. Hence, this group is not considered as one of the strategic groups in the industry.

2.2.3 Government intervention