The pulp and paper industry is one of the most successful sectors in Indonesia. It has been growing steadily since the late 1980s, generates almost $6bn in exports, accounts for about 1% of the country’s GDP and employs about a quarter of a million people. The sector has been a vital part of the Indonesian success story, in particular because of how well it was able to weather the 2008 global downturn. It is also the target of a great deal of criticism for its logging practices, so much so that last year the Walt Disney Company boycotted all paper products from the country. As a resource-based business, its performance comes at a price, and its role is not at all straightforward.

The industry’s growth over the past 20-plus years has been impressive. Pulp production capacity grew from 606,000 tonnes to 7.9m tonnes between 1988 and 2010, and paper processing capacity went from 1.2m tonnes to 12.2m tonnes in that time. In terms of production, paper went from 368,000 to 7m tonnes in the period, and paper rose from 930,000 to 10.5m tonnes. From 2005, as the Asia Pacific economies boomed, exports have more than doubled.

CONSERVATION: The industry has also worked to meet its obligations to harvest trees responsibly. It has sought to undertake its work in a manner that is good for the environment and acceptable to international buyers. The Timber Legality Verification System (SVLK) is used to ensure that all products going to the mills are legal wood and exports are traceable to their origins. After years of negotiations, the SVLK has been accepted by the EU as proof of legal sourcing, and thus Indonesian products entering the union will be allowed to move freely within it. Indonesia is the only country in Asia to get this level of approval within the EU. Private companies are also making their own promises and assurances. Asia Pulp & Paper (APP), for example, said it plans to source 100% of its raw materials from plantations by 2015 and put a moratorium on natural forest clearance in 2012. It also said it would extend the moratorium to its subcontractors by 2014.

The push for conservation comes from the highest levels. Indonesian President Susilo Bambang Yudhoyono has been a leader in setting conservation and environmental goals. He has called for reducing greenhouse emissions by 26% by 2020, while maintaining 7% growth, and signed a two-year moratorium in 2011 on new logging concessions on 63m acres of primary forest. In all, Indonesia seems to be getting the balance right, allowing the industry to expand enough to help the economy, while placing a focus on sustainability and conservation to make sure its resources last and its products are accepted internationally.

VALUE CHAIN: But the industry, like many in Indonesia, is still in need of quite a bit of work. For pulp and paper, as with other resources, the emphasis is on selling rather than adding value, and the concern is that this leaves most of the profit to foreign companies and exposes Indonesia to the full brunt of the commodity cycle. The industry is indeed big, but quite shallow. As it stands now, for example, all equipment used is being imported. One of the world’s most significant producers of pulp and paper has not taken the opportunity to get involved in the production of the machines used in the business.

“The key for Indonesia to become a true world player will be the level of success achieved in encouraging companies to add value and move down the value chain in every natural-resource-based sector. The country cannot just rely on the population bonus and its natural resources. We need an industrialisation process backed by an improvement of the country’s overall productivity,” said Herwanto Sutanto, the president director of paper company Alkindo Naratama.

GROWTH VS FORESTS: The most severe criticism still concerns the environment. While pulp and paper companies may have made great strides in meeting international requirements, questions remain. The rapid growth alone, critics contend, is enough to raise doubts. Simple math suggests that the industry needs more wood than can be provided by sustainable forests. The plantations just cannot meet demand, and that has and will require the harvesting of natural forest. The country is in a box. If the industry is to provide as much growth as is wanted and needed, environmental compromises are going to be made.

These critics add that the state directly and indirectly supports these firms. It allows them to acquire resources at very low prices and keeps other regulations lax in support of logging.

Local governments are particularly weak in the face of these pulp and paper companies. It is estimated that 60% of the population lives in areas where forestry or agriculture dominate, so the maintenance of logging is vital to local economies and livelihoods. And it seems as though the gap between demand for and supply of land will only increase over time. The National Long-Term Forestry Development Plan calls for 14.5m ha of timber plantations by 2025, while seven new pulp mills are scheduled to be put into service by 2017. It also appears as though the government is targeting Papua, suggesting that more natural forest will come under threat.

The industry has also been accused of dumping. In 2006 the US said Indonesia, China and India were selling some kinds of lined school paper supplies at prices that were considered predatory. Countervailing duties were assessed at between 97.85% and 118.63% and exports of this paper stopped, dropping in terms of Indonesia-US trade from $98.5m to zero from 2005 to 2006. While the duties were lifted in 2012, the experience highlighted the vulnerability of the industry and the complexity of its economics.

PROGRESS: The industry argues that it is making progress and suggests putting its activities in perspective. The country is 58% forested, and 27% of the total is conservation land. About 31% is used for production. APP says it only sources from about 1.31% of the country’s total land mass.

Indeed, over time, concerns about sustainability and conservation may begin to recede. The major companies know that to sell in the largest markets of the world, they need to meet global standards.

For that reason, the problems of the industry are very much typical of the problems that face all Indonesian companies, especially those that have been successful. Blessed with abundant natural resources and a massive domestic market, they have been slow to adapt and innovate and are not particularly competitive on the world stage.

To assure their long-term viability, these local companies have to begin to think outside their home market and consider what is happening elsewhere. They are up against a debilitating lack of transportation and logistics, and this will also serve to keep them cornered in their home market.

“Despite good prospects for local pulp and paper products, local players are reluctant to look extensively into international markets. Firstly, because of the attractiveness and remarkable growth of the domestic market, and second, due to very high freight costs and other infrastructure burdens,” said Sutanto.