Asian Agri and the Future of Palm Oil

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  • Published : October 23, 2011
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Asian Agri and the Future of Palm Oil
Dato Yeo How, president of Indonesian palm oil producer Asian Agri Group, read with dismay the news in the July 7,2010, edition of the Singapore Straits TimesrGreenpeace/an environmental nongovemmental organization (NGO), was calling for a boycott of Golden Agri, one of Asian Agri's competitors,l Over the last decade, the palm oil industry had come under growing scrutiny for its environmental impact in Indonesia and Malaysia, which produced close to 90% of the world's palm oil. As a result, several major buyers had publicly pledged to stop sourcing from producers whom the NGOs claimed were destroying high-value conservation land. To Yeo, the controversy cast a cloud over what had otherwise been a largely positive era for the industry and its stakeholders. Over the last four decades, worldwide palm oil production had soared from 430,000metric tons (MT) in 1970 to more than 45 million MT in 2009. Much of this growth had come from Indonesia, where the land area harvested for palm oil increased from 100,000hectares (ha) to over 5 million ha over the same period. In 2009, lrdonesia produced more than 20 million MT of palm oil, of which roughly 15 million MT were exported. As the industry matured, Asian Agri had expanded its plantations and developed palm oil trading, refining, and exporting capabilities. By 2010, Asian Agri was an established grower and Indonesia's third-largest palm oil exporter. Known as the "golden crop" in Southeast Asia, palm oil had the highest yield, lowest production cost, and largest annual production level of any edible oil, making it an abundant and inexpensive food source to the many fast-growing populations across Asia. In commercial food productiory palm oil had the unique advantage of being free of trans fats, making it an attractive substitute for other edible oils in markets (primarily in the West) seeking to limit trans fat consumption. Furthermore, the increasing use of vegetable oil in biodiesel production (particularly rapeseed oil in Europe) created an opening to further increase palm oil's market share in the food sector. lrcreasing palm oil production to capitalize on these market opportunities, however, brought the risk of stoking NGO hostility and worsening the backlash from consumer packaged goods (CPG) companies and sustainability-minded consumers. With the palm oil industry's future decidedly opaque, Yeo was considering a spectrum of options for Asian Agri. First, Asian Agri could leverage its foothold as an experienced Indonesian grower by expanding its plantation area from 160,000 ha in 2010 to 300,000 ha by 2015. Doing so would enhance its upstream competitive advantage, particularly as land in top growing areas was growing scarcer,but would also bring many practical and political challenges-a reality that had recently led some growers to expand into Africa and South America, where land was more abundant and, in some areas, NGOs' pressure less intense. Another option was to develop more trading and refining operations or market a portfolio of branded products, thereby allowing the company to capture more ProfessorDavid E. Bell and ResearchAssociateNatalie Kindre4 Global ReseardrGroup, prepared this case.HBS casesare developed solely as the basis for classdiscussion.Casesde not intended to serveas endorsements, sourcesof primary data, or illustrations of effective or ineffective management, Copyright @2010President and Fellows of Haruard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, This publication may not be digitired mite Harvard BusinessSchoolPublishing, Boston, MA 02163, go to or photocopie4 or otherwise reproduced, posted, or transmitted, without the permission of Harvard...
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