Palm Oil Manufacturing: Value Addition and its Indonesian Impact

This literature review examines the palm oil industry in Indonesia, focusing on how manufacturers add value and the resulting effects. It identifies problems and barriers faced by palm oil companies, including habitat degradation, deforestation, climate change, and human rights violations such as child labor. The review also explores opportunities and threats, considering market demand, government regulations, and international trade pressures. It discusses factors leading to the success of exporting value-added products, such as sustainable practices and innovation. Key challenges include employee turnover, infrastructure limitations, anti-palm oil campaigns, and yield gaps. The review highlights the need for sustainable operations, addressing environmental and social risks, and improving supply chain management to ensure the industry's long-term viability and growth. The study uses various sources like journals, books, and online articles to provide in-depth knowledge about the topic and to aid in producing fruitful outcomes for scholars.

Literature Review

TABLE OF CONTENTS
introduction......................................................................................................................................3
Identifying the problems and barriers that palm oil companies face...........................................3
Determining opportunity and threats among companies and government..................................5
Identify factors that lead to success of exporting value added products......................................7
CONCLUSION .............................................................................................................................10
References......................................................................................................................................11
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INTRODUCTION
Literature review is the most important part of any study because it consists of large
amount of information related to the study. For current study, on “how Palm oil manufactures
add value and its effect in Indonesia” different sources like journals, books and online articles
have been used. It assists the researcher to generate in-depth knowledge about the topic through
which it can effectively reach at outcome of the study. Furthermore, themes will be prepared in
accordance with research objectives which aid to produce fruitful outcome for scholars.
Similarly, current study explores all issues associated with palm oil companies. Therefore,
researcher uses several sources for reaching at the aim of the study in an effectual manner.
Identifying the problems and barriers that palm oil companies face
Palm oil is a type of edible vegetable oil which is extracted from palm fruit. It is
generally grown on African oil palm tree but in modern era it can be grown in North America,
Africa and Asia. However, Indonesia and Malaysia are two countries which export approximate
85% of oil. The palm oil sector came into demand from British Industrial Revolution. During
that time, near about 250,000 tons of palm oil was being exported annually from South -East
Asia. It has been increased to 60,000,000 tones today (Palm oil, 2016).
It can be critically evaluated that by using unsustainable measures, companies are facing
issues in their appropriate growth. Such kind of scenario affects the performance of the company
to a great extent. However, there are major issues such as habitat degradation, deforestations and
climate change which affect the palm oil companies adversely. It is well known fact that palm oil
plantation require clean or clear land or forests. Otherwise production process can be carried out
effectively. Carlson and et. al., (2012) asserted that, palm oil cost is paid in term of biodiversity
and ecosystem of country. This is because third of all mammals species in Indonesia are about to
destroyed because of unsustainable development of palm oil. Here, animals are encroached on
their habitat which has direct impact on the environment.
Furthermore, 90% of orangutan habitat destroyed in last 20 years just because of rapid
expansion of palm oil. For example, average 1000-5000 orangutans are killed every year for the
production or planting palm oil in forest. Here, the orangutan is a keystone species in ecosystem
which plays an important role in maintaining health of the same. Here, placental mammal is
essential for clean forest where after spreading rainforest seeds in Indonesia, they (seeds) grow
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when they pass through gut of an orangutan. It reflects that many species in nature are affected
by developing palm oil in South-East Asia.
Harsono and et. al., (2012) stated deforestation is another aspect which is associated with
climate change. Here, during removal of native forests several factors like burning of invaluable
timber, emission of smoke are main reasons through which Indonesia is becoming third highest
greenhouse gas emitter in the world. Furthermore, this particular sector is affecting human being
also who are living in the remote areas. Children are asked to carry huge load of heavy fruits and
they spend their time in completing all these activities. It affects them to a great extent.
Mukherjee and Sovacool (2014) argued that, Palm oil industry in Indonesia violates human
rights such as child labor. Children belong to poor family generally perform task related to
collecting fruit from plantation floor. It can be critically evaluated that even after putting too
much efforts, children get no reward for their performance.
Damayanti, Ujang and Salim (2011) sustainable operation of palm oil industry can be
effective aspect to resolve all issues faced by the companies. At this juncture, activities which
harm personnel and cause deforestation must be avoided by the organization. It facilitates in
ensuring smooth operation with increased rate of return. However, because of presence of
several issues, palm oil industry might suffer from scarcity. However, rules and regulations
imposed by government are followed by the same through which boundary is set for the
organizations. However, RSPO (Roundtable on Sustainable Palm oil) is another corporation
which generates huge income as it operates in accordance with sustainability measures.
Palm oil companies in Indonesia are facing barrier in term of information flow
concerning innovative practices. This happened because of knowledge gap among personnel
associated with the sector. It generates requirement in bringing innovation in the sector for
meeting needs of the clients in an effectual manner. Due to knowledge gap, companies are not
able to beat competition in less time span. This situation tends to affect future performance and
lowers down profitability of the same in the marketplace. Fattah and et. al., (2014) reported that
employee turnover and conflict between government legislation are also crucial barriers for
growth and development of the companies. In this regard, Sustainability training centers and
social engagement and environmental management skills can be focused to implement
innovative practices and determine long run growth of sector in an effectual manner.
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In addition to this, palm oil organizations suffer from several kinds of issues such as
higher crude palm oil export duty. This affects the operations of company to a great extent. This
scenario tends to create barriers for the organization by lowering down its profitability.
Similarly, east Indonesia has slower growth of palm oil development due to lack of infrastructure
facilities. It states that infrastructure facilities are very crucial aspect for the development of the
sector through which business can easily operate with increased rate of return. However, it will
determine continuous production in company to meet long as well as short term objectives of
firm in an effectual manner. On the other hand, campaign of anti-plan oil in Indonesia is another
major barrier through which issues are faced by companies to ensure their consistent growth.
Bazmi, Zahedi and Hashim (2011) reported that government imposes several types of
legislation because their primary responsibilities are to provide safe environment to the general
community. Meanwhile, they are responsible for promoting growth and development of public
corporations operating in the same sector. Owing to this, Bureaucracy system of government
becomes problematic for the private organizations. Owing to this, effective strategies can be
applied by private organization for international trade to recover cost of production and increase
customer base in overseas.
According to Darnoko and Cheryan (2010), there are furthermore challenges that palm
oil companies faces while operating business in international market. It has been noticed that the
poor growth rate in yield in relation to other source of vegetable oil is one of critical issue. It is
because the growth of palm oil depends on these factors. Employees productivity issue is also
one of most critical issue that may impact overall business in negative manner (Darnoko and
Cheryan, 2010). Ahmad, (2013) has contended that he labor productivity in the sector is very low
because employees does not have proper knowledge of process. Improper level of knowledge
among members affects the effectiveness of activities which has direct impact on the
productivity. It has been witnessed, still workforce is not focused towards traditional ways to
extract oil (Ahmad, 2013). It means the mechanism is slow as compared to other sector. It is
necessary for entities to adopt various technological tools that can ensure about the productivity
of workforce. It has been identified that the key reason behind difficulties is improper
merchandising of harvesting operations.
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Yusoff, (2014) has contended that the functional barriers are also critical aspect that
impact overall business and growth of sector. For example, the changes in climate change affects
the production of palm oil. It is necessary for industry to ensure about climate change issues so
that production ratio can be maintained in appropriate manner (Yusoff, 2014). Bari (2012) has
noticed that the environmental and social risk are considered as key factor that create issues for
the palm industry. Environmental aspects are also influenced due to production of palm oil so it
is necessary for organizations to ensure about it in appropriate manner. Work practice culture is
also not well designed as per ethical aspects. It also impacts the work performance in negative
manner. It means the management need to consider it in appropriate manner for sustainable
development (Bari, 2012). Furthermore, pressure for more responsible lending has caused many
major investors to place more social and environmental requirements on lending to companies.
In addition to this, the supply chain issue is also most common factor that impacts the overall
working of palm sector. Demand of palm oil is increasing day by day but improper design of
supply impacts the supply. It is one of critical issue for the companies so supply chain need to be
improved so that barrier can be overcome in appropriate manner.
As per the view of Von Geibler, (2013), there number of frameworks that has been
designed in respect to palm oil production. Demand of palm oil is increasing but the policies
restrict companies to enhance their production. It is also one of critical issue for the sector and
businesses need to ensure about it in effective manner. Any kind of legal avoidance may affect
the overall growth because it may create legal issues in regard to environment policy (von
Geibler, 2013). Tangchirapat (2007) has asserted that the yield gap is also challenged for the
organizations who deals in palm oil sector. The most important technical challenge to the palm
oil sector is probably the large productivity gap between the actual and achievable yields of palm
oil. Economic aspects is also key issue for the sector so industry need to design alternative
strategies that can overcome economic issue.
Tangchirapat (2007) has stated that, in respect to environmental issue the big threat is air
pollution. The extract process demands high installation of mechanism that increase air pollution
so it is considered as critical barrier for the sector. Soil erosion affects the growth of palm oil
industry because the palm growth may be affected by the soil erosion. It has been noticed that the
cultivation of palm oil increases the ratio of forest loss. It also creates environmental and social
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issue which impact overall growth in negative manner (Tangchirapat, 2007). Casson (2010) has
stated that the social workers also have campaigns against work practice of palm oil
organizations because it affect social conditions. It means it is necessary for sector to have long
term development by having effective designing of strategies so that issues can be overcome.
Issue in regard to global warming also impacts overall development of industry because increase
in ratio of global warming affects environmental aspects and forest (Casson, 2010). However, the
production of Palm oil is depended on forest. It means it is also significant for business firms to
ensure about global warming to avoid issue in regard to production of oil.
Determining opportunity and threats among companies and government
Paspi (2016) states that currently palm oil industry in Indonesia is under worlds pressure.
It is believed that the world has conspired to stop the growth of Palm oil businesses. They found
that the issues come from two sides. From demand side, the business has to deal with black
campaign of health issue, environmental problem, regulation process, and palm oil free
(boycott). From supply side, the government has a plan to create “moratorium” for Palm oil
agribusiness in Indonesia. Furthermore, palm industry player still have to face problems from
International trade such as “Indonesia Palm Oil Pledge” (IPOP). On the other hand, the study
found that world’s market still needs the supply from Palm oil in Indonesia for the growth of
demand vegetable oil.
Oostever (2015) believed that global demand of for palm oil is rising to fulfill worldwide
need. The worldwide need enough cooking oil, food ingredients, biofuels, soap and other
chemical. In addition, palm oil production is one of the main factors of economic growth in
producing countries. Due to the higher demand of the productions, the government involve
private company and NGOs to regulate global flow. It is said that multiple network compose
global palm oil provision in recent year.
Rivin (2010) states that crude palm oil (CPO) is the main export in Indonesia. Also, it can
be used as raw material for cooking oil. The objective of the study is to observe the export policy
on CPO and analyze the effect of it on Indonesian’s export competitiveness compared with
Malaysia. The study found that the competition is tending to decreased. However, the researcher
believes that it has positive and negative impact. First, the oil company industry will suffer with
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the policy. Secondly, it hopefully can increase the sales of CPO. Thus, the producer can process
the CPO into refined palm oil which has greater value added than raw material (CPO)
Singh (2013) believed that between the vegetables oil sources, palm oil has the greatest
yield (almost 50% of the fruit is compesed by palm oil). It attracts the firms for developing
economies. The biggest world’s palm oil supply is from Indonesia and Malaysia, where less than
25% is used domestically. Mainly, the CPO is exported to China, India, European Union, and
Africa. The success or failure factors can be divided into business factors and commercial
factors. The study found that the palm oil industry is in early stages to the use of analytical
capabilities in commercial making and effectively monetizing the physical value chain.
Bissonnette (2013) argued about the potential of palm oil agribusiness for sociology-
economic development in Indonesia. Oil palm small holder’s plans are prepared as an economic
and political project by the Indonesian Government. It is said that the homogeneous of project
for socioeconomic improvement conceal the unintended outcomes for the result. These
circumstances created a room for mismanagement of land transactions. It led to unequal access
between small holders.
According to Nemkova et al (2015) exporting enables companies to diversify risk and
generate multiple income streams. Also, the study found three key points. Firstly, It is said that
improvisation is very relevant method for exporting and prevalent decision making among UK.
Secondly, both planning and improvisation improved the responsiveness. Thirdly, the
improvisation has influence to export outcomes. It shows that improvisation will be helpful in
reaching at fruitful decision by providing support in meeting expectations of buyers. However,
company can improve its export activities by focusing on the negative aspect. It will be helpful
for them for ensuring consistent growth in the marketplace with the increased rate of return.
Cahyandito and Ramadhan (2015) states that, palm oil is one of the most important
commodities in Indonesia. The rapid growth in demand of palm oil is increasing and led the land
conversion from shrub land to palm oil plantation. The study found that based on the cost-benefit
analysis on three ecosystem services (provisioning, regulating, and cultural services), the palm
oil plantation is worth to build on shrub land.
Chin and et. al., (2014) stated that major threat associated with the sector is palm oil tree's
pest and disease. Owing to this, anti palm oil campaign are launched by many of authorities
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which slow down the performance of this sector to a great extent. Similarly, health and footprint
carbon issues of industry is also affecting palm oil sector. Furthermore, it has relatively slow
growth in non-Asian countries as there are unjustifiable tariff charges and barriers from fat
markets.
As per the view of Arrieta (2009), the palm oil sector also have better opportunities in the
market. By having use of technological tools and industrial standards the business firm needs to
have improvement in conditions. Companies need to focus on building relationship with
government and social authorities so that issues can be overcome in appropriate manner. Policies
must be designed in appropriate manner so that issue in regard to environment and social aspects
can be overcome effectively. Developing the capacity to implement social and environmental
best practices in the production of palm oil is also beneficial to attain better opportunities in the
market (Arrieta, 2009). Proper monitoring system can be designed by the authorities and
organizations to make sure that the production and cultivation of palm oil is accomplished in
ethical manner. It will facilitate in overcome social and ethical issues. Proper guidance must be
provided to employees during cultivation of palm so that issue can be resolved in appropriate
manner. Cahyandito and Ramadhan (2015) has contended that the working with social agencies
is also beneficial because it will assist in design of strategies that can improve production and cut
down environmental and social issues. With an assistance of integrated working the growth rate
of industry can be improved for long term development.
Junginger and et. al., (2011) fluctuation in price of palm oil is another issue in developing
markets such as China and India. At the same time, industry has threat of two factors such as
weather anomaly and sustainability which can affect its ethical operation at global as well as
local level. Owing to this, now private sector requires to get Indonesia Sustainable Palm Oil
(ISPO) certificate which shows that coronations takes into account sustainable development.
However, overall sector is growing at rapid speed because of increasing in matured palm areas
along with operation efficiency. It enables the private companies to seek their growth and meet
increasing demand of palm oil in international market by focusing upon export activities
(Indonesia Palm Oil Industry Report, 2016).
Furthermore, companies have the opportunity because of valuable assets in Indonesia.
The first one is oil palm plantation which increases on yearly basis. This is the most effective
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aspect to grow into world biodiesel leader. The other assets for sector are people who are living
in remote areas through this it become easy to operate sector effectively with increased return.
Identify factors that lead to success of exporting value added products
According to Wicke, Sikkema, Dornburg and Faaij (2011) palm oil industry is in demand
because of increasing need of population and use of palm oil in several kinds of activities. It
includes several aspects such as sector overview, plantation, production and consumption as well
as export. Along with that, stock prices, fats are also included in the same. This industry is
considered as the most important aspect for rural economic development and alleviation of
poverty. Furthermore, there are several leading players of palm oil industry in Indonesia such as
PT Astra Agro Lestari Tbk, PT Sampoerna Agro Tbk and PT London Sumatra Indonesia Tbk.
During 2014, Indonesia had 10.3 mn hectares of planted areas and 8.3mn for harvested
palm which reflects that huge space was available for the crop areas. It facilitates in doing
farming of palm oil in an effective manner. During the same time, 50% of world's palm oil
export was from Indonesia (Indonesia Palm Oil Industry 2H12, 2016). It can be critically
evaluated that at the same time, government levied on CPO export for supporting the domestic
biofuel industry. Still this sector has good growth which leads in determining good scope for
palm oil sector in the marketplace.
According to Cahyadi and Waibel (2013) focus can be laid on improving productivity
especially among smallholders which will be effective for the future growth also. A counter
argument might be that issue related to sustainable development in the sector such as restrictions
on conversion of forests to oil palm plantations in Indonesia will have negative impact on the
environment. This will reduce fertility of land through which industry could face issue in
expansion and growth. For this purpose, for success in this sector, training provided to personnel
along with innovation in practices. It aids to creating competitive edge and increasing export of
industry at the international level.
Tan et al (2007) said that the development of palm oil showed a sustainable of biodiesel
productions. High yield and low cost are the main important factors that made the vegetable oil
is attractive in term of economic and environment. They found crucial and different findings
from another NGOs and researchers. It is believed that palm oil is not damaging the
environment. They believe that this business needs to introduce the policy and strategies that will
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guide the palm oil producers towards sustainable production and development. These strategies
might affect sector initially but will be helpful for long run growth of the same. Otherwise,
companies will face issue in getting fertile land at the time of expansion of their palm oil
businesses. Abood and et. al., (2015) argued that nature based sector must require to take into
account sustainable development otherwise they cannot be able to ensure their long run survival.
Sanders and et. al (2014) examined the revisiting of palm oil in South East Asia, between
fuel and food demand drivers. The study found that the crude palm oil is not an important factor
of driver the palm oil boom but food (Carlson and et. al., 2012). Food factors have significant
role in15 years old. Based on this study the author can find the trend of palm oil productivity in
South Kalimantan, Indonesia. Therefore, scope of palm oil can be understood by companies for
ensuring their own growth in the marketplace with long term certainty.
Tan and Ndubisi (2014) evaluated the relationship among organizational resources,
technological revolution, relationship quality, and enterprise performance as the mediating effect
of palm oil processing sector in Asia. The study found that the quality of relationship between
business partner is crucial for develop business performance. Suppliers in this case have an
important role in establishing business performance in oil processing sectors.
Pichler (2015) analyze the strategic that palm oil companies used in Indonesia. It is said
that there are three crucial strategies in the expansion of Indonesian palm oil. Firstly, the name of
codification of land ownership. Secondly, the concentration of land possession, and the
vaporization of natural resources. The study found that these strategies have a greater influence
to organize and protect a large palm oil project as they succeed in dominant interest. Also, the
researchers believe that the problems are coming from the competition between soybean oil and
palm oil industry (Harsono and et. al., 2012). Yet, the benefit of palm oil is higher that soybean
oil. For instance, the production cost is cheaper. It shows that the world’s market of Palm oil has
competitive advantage to fulfill the demand. Therefore, they found that the trend of petroleum oil
price has negative correlation with palm oil. It is said that palm oil commodity is very important
to keep the world’s demand stable.
According to Arshad, Shamsudin and Hameed (2011) landscape management approach is
effective aspect for success of palm oil industry in Indonesia. For this purpose, at first landscape
boundaries can be defined for effective operation of sector. However, several partners such as
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business, government and small holder farmers are included in this plan. It would be beneficial
to cater need of all parties effectively. Accordingly, parties can put efforts to allocate the land to
its best or high value. Mukherjee and Sovacool (2014) argued that steps can be taken by
corporations or private companies or other partners for protecting valuable eco-system. In
addition to this, , effective monitoring can be done for smooth operation of private companies
operating in Indonesia for exporting palm oil product at national or international market
(Climate policy initiative, 2015).
As per the view of Mukherjee and Sovacool (2014), technological orientation is also a
key factor that needs to be consider effectively for better success in export market. In order to
have effective exporting of palm oil the technological aspects need to be refer in appropriate
manner. It allows business to gain better competitive advantage in the market. With an effective
use of technological tools the effectiveness of exporting activities can be improved in optimistic
form (Mukherjee and Sovacool, 2014). Pichler (2015) has also said that the identification of
local market is also necessary because any kind of avoidance may affect overall business in
negative manner. For example, the Indonesia is looking forward to have export of palm oil
products but they have not analyzed the demand of products in local market. It might affect the
overall development in negative manner. It is necessary to understand the analysis of geographic
areas so that issues can be resolved in appropriate manner (Pichler, 2015).
In order to have effective exporting of palm oil products the business firm need to gain
pricing advantage. In this support, Tan and Ndubisi (2014) has stated that the economic aspects
of nation and market need to be analysed in appropriate manner. It is because the success of palm
oil industry depends on the economic conditions. For example, export pricing is not according to
economic conditions then it might be possible that business may face critical issues.
CONCLUSION
The aforementioned study concludes that there are several types of barriers which impede
performance of palm oil sector. All these factors can be considered by corporations for their
smooth operation. It aids to ensure certainty for future business activities. It can also be said that
success factors are based on appropriate utilization of present land by introducing innovative
practices. It will be helpful in providing training among personnel associated with project so as
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