Packaging Industry of Indonesia Still Under Pressure

There does exist concern about the performance of Indonesia's packaging industry this year as - contrary to the usual trend - there has not been a marked increase in orders ahead of the fourth quarter. In the fourth quarter retailers usually prepare for the shopping spree that occurs ahead of Christmas and New Year. In this period retailers are eager to engage in promotional sales to entice consumers.

Considering these bleak orders for packaging, the Indonesian Packaging Federation (FPI) revised its target for full-year 2016 turnover in the nation's packaging industry from an 8 percent (y/y) growth pace to a 6 percent (y/y) pace, or in absolute terms, from IDR 80 trillion to IDR 74 trillion.

Susanti informed that the plastic and flexible packaging segment continues to grow strongly (around +12 percent y/y). Flexible packaging is particularly used by Indonesia's small and medium-sized enterprises. However, this growth can wane in case the Indonesian government decides to implement an excise on plastic packaging. Earlier this year the government suggested to introduce this controversial policy. It is controversial because it is considered to have a negative impact on sales and could even hinder development of Indonesia's manufacturing industry. The food and beverage industry is the biggest buyer of packaging products but if the excise on plastic packaging is indeed implemented then prices need to rise, implying that consumers will consume less products (especially snacks and soft drinks).

Why does the Indonesian government want to introduce the excise on plastic packaging?

1. By making food and beverage products that are wrapped in plastic a little bit more expensive, the government slightly discourages consumption of these products. It is estimated that more than 80 percent of food and beverage products in Indonesia use plastic material for packaging. However, most of these items, such as snacks or soft drinks, are unhealthy. As such, the government tries to improve the overall health of the people through this excise tax on plastic packaging. Moreover, various studies indicate that plastic packaging has a negative impact on people's health. When consuming drinks or food items that are wrapped in plastic material, there are certain chemicals that can migrate from the plastic packaging to the food products and beverages inside the package. 
   
   
2. Indonesia is the world's second-largest plastic waste producer, after China. According to a report from Science, Indonesians use about 187.2 million tons of plastic, each year. Meanwhile, Greeneration Indonesia estimates each Indonesian individual consumes 700 plastic bags per year. Generally, Indonesians have a very low awareness of the importance of a clean environment and environmental sustainability. This is why rivers are usually clogged with plastic and other thrash, particularly in the bigger cities (moreover plastics take considerable time to break down naturally). The higher price of products packed in plastic materials will discourage consumption of these products and therefore there will be less thrash that is dumped in rivers or on streets.
   
   
3. By imposing this additional excise tax, the government's tax revenue will rise. Given that Indonesia's tax revenue has been disappointing so far this year (and has been disappointing in recent years) the government is eager to find new sources that can deliver some additional state income (this is also the motive behind the tax amnesty program). Having a population that numbers over 255 million people, most of whom have the habit of eating plastic-wrapped snacks and plastic-bottled drinks, this excise tax could constitute a great source of revenue (although critics argue that due to reduces consumption, government revenue from the packaging industry will fall after the implementation of the excise).

Meanwhile, there are plenty of imported packaging products that flood the Indonesian market and therefore undermine the output and profitability of the local packaging industry. Critics say the excise tax on plastic packaging will make matters worse and reduce Indonesia's competitiveness further.

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