Franciscus “Franky” Welirang, director of PT Indofood Sukses Makmur Tbk, with responsibility for Bogasari’s milling division, is something of a star in the Asian milling and wheat world. Franky, as he prefers to be known, arrived on the morning of Day 2 of the Sixth Annual International Association of Operative Millers Association (IAOM) Southeast Asia District Conference and Expo, held in October in Jakarta, Indonesia. He was unable to attend on Day 1 because he had a meeting with Indonesia’s president, Joko Widodo. The IAOM conference hall was packed despite the early start. After giving his views on the domestic milling market, the popularity of one of Indonesia’s foremost business leaders was clear for all to see as Franky was quickly swamped by well-wishers seeking a photo with the veteran miller. Once the crowd disbursed, Franky was gracious enough to sit down for an interview with World Grain.
Bogasari is a division of Indofood, the world’s largest instant noodle producer and a key division of the Salim Group, Indonesia’s biggest conglomerate. Franky graduated as a chemical engineer from South Bank Polytechnic Institute in London in 1974, after which he joined Salim. He quickly won promotion and became general manager of Bogasari’s textile division in 1978.
Franky’s popularity in Indonesia milling circles is testament to his longevity and political and business influence in Indonesia, but also recognition of his success with Bogasari in maintaining its prominence as Indonesia has transitioned from a relatively closed, state-dominated milling market to one in which competition for market share has become intense.
Until Indonesia’s milling business became deregulated in 1998 after the political upheaval that led to the downfall of President Suharto, Indonesia’s milling market was dominated by five mills operated by Bogasari, Eastern Pearl Flour Mills (previously named Berdikari Sari Utama Flour Mills) and Sriboga Raturaya & Pangan Mas. Since then, competition has become ferocious and by next year, 31 mills, managed by a wide range of Indonesian and international companies all keen to grab a share of one of Asia’s fastest growing markets, are expected to be in operation.
Despite all the upheaval, Bogasari-branded mills remain critical both to flour supply for Indofoods — which buys about a quarter of Bogasari’s wheat flour output — and to Indonesia’s food supply chain. Indeed, Franky said the company retained a 51% market share of the Indonesian flour market via its two huge mills in Java, which are located near the country’s key ports of Tanjung Priok, outside Jakarta, and Tanjung Perak, in Surabaya. These are supported by a major pasta factory located near Tanjung Priok, in easy reach of the port’s terminals from where diverse markets spread across the Indonesian archipelago of more than 17,000 islands can be reached. Indofood also exports its products worldwide, with its noodle brands alone now shipped to some 80 countries supported by a global network of partnerships and subsidiaries owned by the Salim Group.
Bogasari considering expansion
For Franky, Bogasari’s milling business and reputation is a vital cog in the processing and distribution of quality Indofood wheat and pasta products destined for global as well as domestic markets.
“Our core business focuses on the two main mills and our pasta-making factory,” he told World Grain. “We keep on upgrading the mills. We have 15 lines in Tanjung Priok and Surabaya has eight lines. At Tanjung Priok, Jakarta, we mill around 10,000 tonnes a day. Surabaya is about 5,000 tonnes. Our smallest line is 500 tonnes a day and our biggest is 1,000 tonnes a day. But we are upgrading three of our 800-tonne capacity lines to 1,200 tonnes per day.”
He said the most promising areas for expansion in Indonesia were in the eastern regions, where economic development is less advanced.
“In eastern Indonesia, it’s a mix,” he explained. “There are wet markets, SMEs (small-medium enterprises) and, increasingly, big industries are moving in there so it will be a good market.”
But reaching these outlying islands is a major logistical challenge. Not only does distributing to Indonesia’s eastern markets require major shipping distances from Java, but strict cabotage rules, which mean that cargo can only be carried by Indonesia-owned ships, drives up freight costs due to the lack of competition and shortage of back-haul traffic into Java.
“The challenge is transport and sea freight,” said Franky. “For wet markets, we mainly use containers stuffed with big bags up to one tonne in size. The port handles them, and we can then pick up and distribute immediately.”
Bogasari is now strategizing about how to expand its output specifically to serve eastern regions and, in the process, reduce its logistics costs and improve its pricing competitiveness vis-a-vis rivals, most notably Eastern Pearl Flour Mills located in Sulawesi and, since 2004, owned by Singapore-based Interflour Group. “One option is to build a new mill for eastern Indonesia,” he said. “That would be a challenge, and it depends on economic development, but this could be located somewhere in Papua. It’s a possibility. We would then use the international port in Sorong. From a mill there we could then import wheat in bulk and ship out in containers. Sorong will be a big port.”
Franky was reluctant to put a specific time scale on the project and said much would depend on market growth but predicted the development would happen “within the next 10 years.”
He also identified East Timor as another major area of demand growth. “There are no mills there so all Indonesian millers are fighting for this market; it’s very competitive,” he said.
Indeed, competitiveness among Indonesian millers is not disputed and some experts have previously claimed the market is now oversaturated with capacity. Franky disputes the point. “I believe there is no excess capacity, but there is a lot of competition,” he said. “7.4 million tonnes of annual wheat equivalent of wheat flour output is about 75% of capacity; that’s the average,” he explained. “But a spike in demand near Ramadan of 15% to 20% means the industry needs that excess if it wants to expand to service this spike. I don’t believe there is excess capacity, but there is competition and sometimes new market entrants have been dumping. But that’s competition.”
Educating the market
He said Bogasari and Indofood tried to differentiate their products on quality and by understanding the milling and processing businesses better than rivals, as well as understanding what products people in Indonesia want now and in the future as dietary demand evolves and the market for more flour-based consumer goods expands.
“We’re trying to educate the market,” he explained. “There are two things to think about with milling – flour specification and flour character. If you use Australian wheat then it has an Australian character. But U.S. and Canadian wheats are very different and that results in a different flour character and a different end product.
“Then, in terms of application or specification — making the end product — you need to understand how these flours are applied, how soft or crunchy it is or you want it to be. When competing, getting this right is important, and some new millers don’t understand this. They’ll just buy cheap wheat. So if people don’t know how to mix, and then buy the wrong wheat, they get the wrong quality end product. Some new market entrants have found this out the hard way.”
He also said there was ample room for further expansion in Indonesia, both to serve domestic and international markets.
“There is plenty of opportunity to export our flour-based products to the rest of Southeast Asia where often the milling sectors are not as competitive as in Indonesia,” he said. “Over the last seven years Indonesia is producing more flour, but we need better port facilities so we can export processed flour-based products to Southeast Asia. We, as an industry, are doing that already and total exports of wheat flour, by-products and wheat flour-based products have grown in value to $755 million, and in the next few years this will reach $1 billion. So we are a very important industry for the economy and exports will play a growing role in this in the future.”
Looking forward, he said Bogasari would strive to maintain its 51% market share by being competitive on both quality and price.
“We want market growth,” he added. “We don’t want to be alone; competition is good. I think that’s the challenge, how to grow the market in general and keep our market share. We want to see growing bakeries, growing noodle, biscuit and cake markets. We want to reach more SMEs, and we’ll also grow by serving big industry. That’s the business philosophy.
“The farmers and the flour product industry are growing and the consumer is happy. And that’s good.”
Indonesia in numbers
In his keynote speech to delegates at the Sixth Annual Southeast Asia District Conference and Expo, organized by the International Association of Operative Millers, Franciscus ‘Franky’ Welirang explained just how competitive the Indonesian milling market has become over the last two decades.
Pre-deregulation in 1998, the archipelago of some 250 million people and 17,000 islands had just five mills operated by Bogasari, Eastern Pearl Flour Mills and Sriboga Raturaya & Pangan Mas. By 2009, there were 12 mills, mostly focused on Java, the most populous of Indonesia’s islands. From 2010-14, another 16 mills were opened and, in 2015 and 2016, Welirang said another three mills would open up, taking the total to 31. By next year he predicted Indonesia’s annual total wheat milling capacity would reach 11.2 million tonnes.
Meanwhile, wheat consumption increased from 6.2 million tonnes in 2011 to 7.4 million tonnes in 2014. “This year is the only year that we haven’t seen growth,” he said. “That is down to changes in government policy and the slowdown of the economy, and the slowdown of the global and Chinese economies. At the mid-year point, growth was -0.9% but I think over the full year growth will be flat.
“But 20 years down the line, the annual growth average will be about 5% every year.”
He said some 200 large companies currently account for about 34% of total flour consumption in Indonesia, with more than 55,000 SMEs representing 66% of consumption.
“The big companies keep growing, but some have built their own mills and expanded horizontally,” he added. “So of the 31 flour mills, some now supply their own production.”
Wheat imports to Indonesia mainly come from Australia, which tends to supply around 60% of the market. Canada is next with 21% followed by the U.S. with 6.6% and Ukraine with 1.9%.
“We get some from Russian and India, but Black Sea wheat is a filler wheat rather than a main wheat. With today’s technology, anything can happen with pre-mixes and enzymes so the mix is changing as people look for lower costs.”
He said the rapid expansion of Indonesia’s milling sector had not come about without difficulties.
“There are a lack of milling schools in Southeast Asia which means millers must study in Europe and America.”
He said Bogasari runs its own training program but rivals tended to invest less in training. “They often just pick up our people!” he added.