Investing in ASEAN’s Coffee Industry
The climate and geographical location of Southeast Asia is ideal for coffee cultivation. Moreover, the region’s coffee culture and expertise in coffee production has contributed to the emergence of a thriving coffee industry in ASEAN.
Some Southeast Asian countries have become coffee exporting giants such as Vietnam, Indonesia and Laos. Thailand also continues to attract business and investment due to its increasing coffee demand. In addition, the Philippines is determined to revive its coffee industry in order to target niche markets and the growing domestic demand for specialty coffee.
In this article, we provide an overview of the coffee production and culture in these countries and their present status in the region’s coffee trade industry.
Vietnam is currently the second largest coffee exporter in the world, after Brazil. In 2017, total coffee production resulted in 29,500,000 bags of 60kg weight, followed by Indonesia with a total production of 10,902,000. Robusta and Arabica are prime coffee sources found in the southern and northern parts of Vietnam respectively.
According to global market research and consulting firm Ipsos, domestic consumption of coffee in Vietnam constitutes only about 6 percent and the rest is sold internationally which makes it one of the country’s top export commodity.Latest reports from January to November 2018 indicated that Vietnam’s export revenue would edge up to 3.3 billion dollars. Exports mainly include green beans, roasted and ground and instant coffee. Major export destinations are Germany, the US and Italy while imports come from Laos, Indonesia, Brazil and the U.S.
Both total coffee exports and imports are expected to slightly go up by 2018-19.
USDA Foreign Agricultural Service’s forecast report showed total exports at about 27.9 million bags for 2018-19 while imports are expected to slightly jump to 1.16 million bags compared with 1.06 million in 2017-18.
To augment coffee production, the government of Vietnam has targeted to have an area of 500,000 hectares under coffee plantations by 2030, with a focus on four key provinces – Dak Lak, Lam Dong, Dak Nong and Gia Lai.
Vietnam’s domestic market is facing a fierce competition because of specialist coffee franchising companies such as Starbucks, Gloria Jeans and Dunkin Donuts among others. However, local chains like Trung Nguyen, Phuc Long and Highlands remain competitive due to their own traditional coffee products which are very suitable for the Vietnamese taste.
The market share of foreign entities has surged over the past three to four years with enterprises having some level of foreign investment of about 60-65 percent of the total coffee exported each year. Because of this, the Ministry of Industry and Trade banned foreign entities from directly purchasing coffee from farmers and establishing coffee buying networks in Vietnam.
Vietnamese locals enjoy a classic coffee called “ca phe sua da” or just literally “coffee, milk, ice” combination. The strong and bitter taste of coffee created from Robusta coffee beans is balanced by sweetened condensed milk. Other popular coffee types are coffees mixed with yogurt or beaten egg yolks.
Indonesia is well-known for the most expensive coffee in the world called “kopi luwak” which comes from coffee cherries eaten and defecated by the Asian palm civet, a cat-like animal that eat only selected cherries. Kopi luwak can cost about US$700 per kg and produced mainly on the islands of Sumatra, Java, Bali and Sulawesi.
Indonesia is forecast to export 7.2 million bags for 2018-19. However, export figures for 2017-18 fell to 5.64 million bags from 8.72 million bags for 2016-17 due to poor weather conditions that affected Robusta and Arabica production. An increasing domestic demand also led to this decline. On the other hand, trade data indicated record-high green beans imports during January-March 2018, but it is expected to drop in relation to increasing domestic supplies. Meanwhile, foreign ownership in plantations including coffee is kept at 95 percent, after a proposed 30 percent cut down was withdrawn.
Coffee demand in Indonesia especially for young people is growing heavily because many Indonesians who study abroad adopt coffee habits from countries like Australia and the US. In particular, sales of Java Arabica produced largely in West Java region is rising significantly in the domestic market.
Coffee in Indonesia is brewed in a cloth pouch and is rarely washed in order to develop a distinct savory flavor. The best traditional coffee is called Kopi Tubruk which is mostly made up of Robusta beans. In a predominantly Muslim nation, coffee is the social drink of choice, replacing alcohol.
Following Vietnam and Indonesia, Laos is also a top coffee producer and exporter in Southeast Asia but distinctive for its production of higher quality Arabica. In fact, Laos is moving to produce higher-value Arabica rather than the lower-value Robusta. The Lao government plans to extend the Arabica plantations in order to score fairly with the production of Robusta.
According to the World Bank, the coffee industry is among the top 10 revenue generators in the country’s economy. In 2017, Lao coffee exports exceeded US$112 million worth value compared to 2016. Main export destinations include Thailand, Vietnam, Japan, Spain, Poland, Germany, the US, France, Belgium, and Sweden. In April 2018, Dao-Heuang Group, the top coffee producer in Laos, concluded a trade agreement with China’s Kunming Kanglin Food Import and Export Trading Co., Ltd. to expand its coffee business in China.
Laos’ coffee industry continues to flourish with increasing exports to various countries. The government expects to achieve growth in domestic sales and exports of coffee amounting to no less than 137,500 tons. The International Coffee Organization latest statistics revealed that total coffee production in Laos reached 475,000 bags of 60kg in 2017 compared to 465,000 in 2016.
Although Laos is a coffee-growing country, Lao people are more accustomed to drinking powdered or heavily sweetened coffee which is often found in instant coffees. Coffee tourism is also encouraged where visitors can walk through a coffee plantation in Paksong.
Thailand is relatively a young industry in coffee-making apart from its top neighboring exporters. Total average consumption for 2016-17 was also quite lower at 1,300,000 bags of 60kg. However, Thailand maintains a huge potential to grow high-quality coffee by means of its production processes and favorable breeding conditions.
Thailand exports only about 7 percent of its total production each year. It is basically a net importer of coffee covering a heavy import tax for as high as 81 percent outside the quota. Thai manufacturers had called on the government to waive tariff for imported coffee beans particularly from Australia, decrying that the country does not produce enough coffee and relies mostly on imports of about 50,000-60,000 tons per year. The figure is much higher than what Thailand can produce annually at 25,000 to 26,000 tons. There is a higher demand for coffee compared to supply which causes the fluctuations in Thailan’s coffee market.
Thai traditional coffee called Kafae Boran is quite similar to Vietnamese coffee except for the differences in brewing method. Kafae Boran stalls remained as a symbol of Thai culture despite the emergence of specialty coffee in the late 90s. The country intends to create more specialty products in order to improve Thailand’s competitiveness.
The Philippines is stepping up to compete in the coffee industry due to local demand. ICO data indicated that domestic consumption for 2016-17 was at 3,000,000 bags of 60kg, notably higher than Thailand (1.3 million) and Vietnam (2.4 million).In the recently held 3rd Philippine Coffee Conference, the Department of Trade & Industry together with the Department of Agriculture gathered all coffee stakeholders to revitalize the coffee industry in the country. The Philippine Coffee Industry Roadmap (2017-2022) was developed and approved in order to implement various programs associated with the coffee market.
The Philippines lies on the so-called “coffee belt” that has a favorable climate for growing all four varieties of coffee namely, Robusta, Arabica, Excelsa and Liberica. An assessment of the coffee market in the Philippines cited that the period of July-September 2017 produced about 65.2 percent Robusta, 27.1 percent Arabica, 6.9 percent Excelsa and 0.9 percent Liberica. Almost seven decades ago, this tropical country became the third largest coffee producer in the world after Brazil and Colombia.
In 2017, the country’s coffee production was 203,000 bags, lower than the previous year. Nonetheless, the government guarantees the expansion of the country’s coffee plantations in order to cut reliance on imports and allow coffee farmers to export. By 2022, coffee plantation is expected to cover 14,548 hectares with an average yield of 1 ton per hectare.
In the Philippines, the continued growth of coffee shops is seen as potential for business and investment. Many multinational companies such as Starbucks, Seattle’s Best, The Coffee Bean & Tea Leaf, Gloria Jean’s and UCC Coffee actually dominate the specialist coffee market.
Compared to other ASEAN countries, Filipino locals seldom drink tea and have a much greater preference for coffee. The traditional coffee called Barako is black coffee, normally green beans brewed and roasted fresh on the day they were bought.