Thai foreign direct investment in Indonesia's rubber industry:
To get near new raw material sources
By Jon Fernquest |
Thailand's rubber companies are starting to expand into Indonesia, the number two rubber producer in the world, right behind Thailand.
Thai foreign direct investment (FDI) in the Indonesian rubber industry not only puts these companies closer to an important and growing supply of rubber, Indonesia is quickly becoming "the world's largest production hub for block rubber, a product with an upward price trend that could influence the global market.
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ASIA FOCUS
Proximity breeds profits
Walailak KeeratipipatpongSaturday August 23, 2008
Sri Trang is cashing in on the rubber boom by putting itself where the raw-material supply is.
Among a handful of rubber exporters of Thailand, Sri Trang Group is confident it has a competitive edge over its rivals as it has an operation right where the supply is, in Indonesia. In the near future, Indonesia could become the world's largest production hub for block rubber, a product with an upward price trend that could influence the global market, says Kitichai Sincharoenkul, executive director of Sri Trang Agro-Industry Plc (STA), a member of Sri Trang Group.
To capitalise on the trend and the bright outlook of the rubber industry, the group plans to increase by 60% the capacity of rubber block at its operation in South Sumatra, PT Sri Trang Linga Indonesia Co, to 80,000 tonnes a year, from 50,000 tonnes currently.
"We will also conduct a survey for a possible new site, somewhere in Kalimantan, with an investment cost of about 400 million baht," Mr Kitichai said.
Investing in Indonesian bloc rubber industry
Sri Trang first took the plunge to invest in Indonesia four years ago by forming a venture to produce block rubber, a more constant-viscosity product that is largely used in many industries including vehicle tyres, replacing ribbed smoked rubber sheets (RSS).
Sri Trang is the fourth largest Thai investor in the country after the agro-industry conglomerate CP Group, the coal miner Banpu, and the cement, paper and petrochemical giant SCG Group.
"We have employed about 500 local workers and they get along well with our 10 Thai-Muslim staff from our companies in the Muslim southern provinces of Thailand," said Mr Kitichai.
Indonesia lags only Thailand in rubber production
The Indonesian government has a clear policy to promote the country as the top producer and exporter of rubber and palm oil over the next few years, he says.
The country is now the world's second largest rubber producer, with 2.5 million tonnes last year, lagging only Thailand which produces about three million to 3.2 million tonnes rubber per year.
Earlier this year, the Indonesia Rubber Association announced a plan to overtake Thailand by 2015, when production is forecast to reach 3.8 million tonnes. The ambitious goal is supported by new plantations, higher productivity and the assistance provided by the government to boost the country's status in the field.
Though Sri Trang has no rubber plantation in Indonesia, it can easily acquire the raw material from local producers to make block rubber for export. The operation in South Sumatra helped push total sales volume of STA to 700,000 tonnes last year, and it expects 15% growth this year.
The growth reflects persistently strong global demand, especially from China, which imports about 1.5 million tonnes of rubber products a year.
Singapore, world center for rubber trade
Getting close to the raw material source is among the three criteria for any company seeking to stay ahead of the competition. Apart from that, effective marketing and distribution networks and good products are also important, he said.
To achieve these goals, STA has set up a marketing company in Singapore to cover the rubber trade in the region, the hub of the world's major rubber producers and exporters which also include Malaysia.
Singapore is the trade centre of many commodities and the Singapore Commodity Exchange handles more than half of the world's rubber trade today, which stands at about 8.5 million to nine million tonnes. Of the total trade volume, three million tonnes are from Thailand, the largest exporter.
The office in Singapore allows STA to cover markets of all products - rubber sheets, latex, and block rubber - boosting its trade volume to surpass its own production.
"Having operations in both Thailand and Indonesia is a significant advantage for us," he notes.
STA, based in Trang in southern Thailand, is now among Thailand's top five rubber exporters, alongside Southland, Von Bundit, Thaitech, and Thai Hua Rubber.
According to Mr Kitichai, rubber production requires not only hard work and patience but also professionals. For instance, tapping latex can be done only before sunrise, while price volatility and market changes affect manufacturers.
Technology upgrades necessary
The shift in demand to block rubber, or technically specified rubber (TSR), has forced many rubber-sheet manufacturers out of business in recent years, especially small and medium-scale companies. It calls for higher investment and more complex production processes that only large-scaled manufacturers can afford.
RSS3 (ribbed smoked sheet No. 3) is still being produced, but only for niche markets such as tyres for bulldozers and aircraft, which require higher proportions of natural rubber than synthetic product.
In Thailand, Sri Trang Group runs 20 rubber plants to supply a variety of products to the market. It also plans to invest about 400 million baht in a new plant in Nong Khai to capitalise on the government's policy to promote the rubber industry in the Northeast, in addition to the South, where plantation areas become limited due to the aggressive expansion of oil palm, an energy crop.
The company is not very keen about the upstream industry. Although it has its own plantations, it has secured a number of reliable raw material suppliers.
"We have only around 1,000 rai in Trang and Songkhla, which are considered a very small when compared with more than a million rai of other rubber companies," said Mr Kitichai.
STA's sales revenue this year is expected to rise by 20% to 60 billion baht, 60% of which will be from block rubber, and 20% each from latex and rubber sheets.
Sri Trang Group also generates about 7-8 billion baht in revenue from about nine billion rubber gloves, making it the country's biggest producer.
Vocabulary:
Rubber Vocabulary
block rubber - a form of rubber with more desirable properties (constant-viscosity) than traditional sheet rubber, used in many industries including vehicle tyres, uses more advanced methods of processing which means the initial investment is greater (See technically specified rubber (TSR) below)
viscosity - the thickness and stickiness of a liquid
constant-viscosity - all the liquid has the same thickness and stickiness
ribbed smoked rubber sheets (RSS) - natural rubber in sheet form, the oldest and the most popular type of rubber, the simplest and easiest to produce on a small scale by small farmers (See All About Rubber glossary)
plantations - large farms with many workers growing commodity crops such as rubber, sugar, or coffee
technically specified rubber (TSR) - rubber that meets international standards for rubber production, many of these are block types of rubber that use new methods of processing (See All About Rubber glossary; also see this site; also see list of ISO standards at Mahidol University)
synthetic - products made from chemicals and not natural substances
synthetic rubber - rubber made artificially from chemicals in a factory (See Wikipedia)
natural rubber - rubber from rubber trees (See Wikipedia)
General Vocabulary:
Foreign Direct Investment (FDI) - when a foreign company invests directly in a business in a country (in a "portfolio investment" an investor only holds stock)
proximity - being near to something
cashing in on - making money (cash) from something you have (such as an advantage or opportunity)
a raw-material - a material used to make a product or good
a competitive edge over Y - has a business advantage, that company Y does not have
rivals - competitors (other businesses in the same industry trying to get sames customers)
capacity - the greatest amount (maximum) that can be produced with existing machines and facilities
the capacity of a factory - the greatest amount that can be produced with the current factory
the capacity of operations - the greatest amount that can produced with current business operations
increase capacity - increase the greatest amount that can be produced
increase by 60% the capacity of rubber block at its operation in South Sumatra
took the plunge - decide to do something risky
agro-industry - companies with businesses related to agriculture
conglomerate - a large company that owns many different kinds of companies
petrochemical - a chemical that comes from oil or natural gas (after refining)
X lags Y - X is behind Y
X overtakes Y - X passes Y
X surpasses Y - X passes Y
boost the country's status in the field - make the country more well-known in the field and industry
persistent - continue doing or happening for a long time, even though there are problems
persistently strong global demand - people around the world continue to but a lot of the good
distribution networks - the transportation used to get the product from the factory to the store and customer
price volatility - prices that move by large amounts suddenly and unexpectedly
niche markets - small markets for people with special needs
capitalise on Y - use situation Y to gain an advantage
aggressive expansion - expanding faster than normal
an upstream industry - an industry that supplies the raw materials to this stage of production (for example, raw rubber supplied to a tyre manufacturer)
