Exploring the Links Between

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Exploring the Links Between International
Business and Poverty Reduction A Case Study of
Unilever in Indonesia
Presentation by Jason Clay, principal author
An Oxfam GB, Novib, Unilever and Unilever
Indonesia joint research project
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What is the report?

• A learning project, not an audit.
• The goal, to help understand the positive and
  negative impact of a MNCs local operating
  company in a developing country on people living
  in poverty
• A look at UIs value chain from small-scale
  producers to low-income consumers to understand
  the leverage points to reduce poverty.

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Why did Oxfam Unilever do this project?
to understand the
nuances of pro-poor strategies
in the private sector, in order
to engage more effectively with companies
to increase understanding of the impact
of the operations of a business
like ours on the lives of poor
people
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Indonesia in Context

• Population 213 million (2002)
• An economy in development
• 1997-98 economic crisis
• Unemployment is 9.7 and has increased since
  1994
• Half the population live on US2 or less a day

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Unilever Indonesia in Context

• Unilever Indonesia founded in 1933
• Listed on the Jakarta stock exchange 9.2 million
  shares held locally (15 of the total)
• Home and personal care products 84 of total
  sales
• Food products 16 of total, but growing twice
  as fast as home and personal care products
• 95 of Indonesians use at least one Unilever
  product
• UI Employs around 3,000 people directly
• UI has impacts through its local production units
  as well as through its local supply and
  distribution chains

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Four Areas of Research

• UIs macro-economic level impacts
• UIs employment impacts
• The value chain from supply to distribution
• Low-income consumers in the marketplace

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The UI Business
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UI - A Growing BusinessUIs sales revenue
(1999-2003)
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Foreign Exchange and Trade
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UIs Distribution of Profits
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UI Employment Impacts

• UI employs 5,000 people 60 direct employees
  40 contract workers
• 300,000 people make their livelihoods in UIs
  value chain (calculated as FTEs)
• Pay, benefits conditions for UIs employees
  exceed what is required by law in the top
  quartile of Indonesian companies
• Contracting out employment may reduce a companys
  ability to monitor contract workers or
  suppliers employees situation
• UI labour-supply companies to observe legal
  requirements to transfer temporary employees to
  permanent contracts to address the concerns of
  female contract workers over loss of employment
  if ill or pregnant
• The closer workers are linked to UI the more they
  benefit directly

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UI Employees and Wages
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Value Chain Impacts Insights

• Aim To quantify the distribution of employment
  and value generation in the value chain
• Upstream - the supply chain
• direct suppliers
• producers of raw materials
• Downstream - the distribution chain
• distributors
• retailers

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The Supply Chain

• Direct suppliers
• UI had 334 suppliers, spending approx Rp 3,591
  billion (US 419m)
• 80 of suppliers are domestic, 20 are
  international
• Top 10 suppliers by value are all Indonesian and
  account for 34 of purchases
• Domestic suppliers provided 84 of goods and
  services
• All UI suppliers required to observe Unilevers
  Code of Business Principles
• UI maintains basic standards through
  negotiations, on-going dialogue, and a rolling
  three-year audit programme to determine preferred
  suppliers
• UI supplier companies exceed legal regulations
  governing wages and benefits in Indonesia but pay
  and employment conditions for suppliers
  employees and contract workers were lower than
  those for UIs direct workforce

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The Supply Chain (cont.)

• Producers of raw materials
• UI products are made from raw materials sourced
  mainly from Indonesian producers, traders and
  processors
• Producers growing agricultural products are among
  the poorest people in UIs value chain
• Five agricultural raw materials entering UIs
  local supply chain stand out in this regardtea,
  palm oil, cassava, coconut sugar, and black
  soybean
• Where there is a business case for alternative
  supply chains, these can have positive impacts
  for poor producers

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The Kecap Bango Case Study

• Kecap Bango is a sweet soy sauce made from
  coconut sugar sourced on the open market and
  black soy-beans sourced from Indonesian producers
• UI bought the brand in 2001 and wanted to roll it
  out nationally
• To do this it needed UI a steady supply of
  high-quality black soybeans
• It started to work directly with a group of
  producers (400 by 2003), offering them technical
  assistance, improved seed, credit and a market
  for their product.
• Despite some initial problems, both UI and the
  farmers benefit from this arrangement and the
  number of participating farmers is growing
• This is just one example, however, and each
  commodity will have to be addressed differently

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The Distribution Chain

• UIs distribution chain creates twice as many
  jobs (62.5) as the supply chain side (27.1)
• This includes thousands of jobs among an
  estimated 1.8 million small stores and vendors
• This employment is often overlooked as a
  contributor to economic development and poverty
  reduction
• The closer to UI that distributors and retailers
  are in the chain, the more likely they are to
  gain skills and knowledge, negotiate better
  prices and conditions, experience higher
  employment standards and incomes, and be able to
  build their assets

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Value Chain Insights

• Employment
• More than 300,000 people (FTEs) make their
  livelihoods in UIs value chain
• More than half this employment is found in the
  distribution and retail chain
• Value
• Total value generated along the chain was
  estimated at US633m 1/3 UI 2/3 in the chain
  the government receives (from UI alone) 26 of
  the total value generated
• The value created by poorer people working at
  either end of the value chain is much lower than
  the value captured by those who are in direct
  interaction with UI

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Estimated employment linked to UI value chain
(2003)
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Estimated distribution of value generated along
UIs value chain (2003)
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Low-income Consumers in the Marketplace

• 90 of poor Indonesians use at least one UI
  product each week
• The average low-income family spends 5.7 of its
  monthly expenses on UI products
• Advertising is key to UIs market penetration
• UI markets many of its products in small sachets.
  Although the unit cost is higher, sachets are
  more affordable for low-income consumers with
  limited cash
• There are increasing concerns about sachet
  packaging wastes

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Low-income Consumers Key Insights

• Marketing to people living in poverty can serve
  their interests if
• it gives them access to higher-quality products
  that are good for health or well-being
• it improves the value of their limited disposable
  income
• product choice and competition lead to lower
  prices, or consumers are provided with better
  information about products
• it increases economic opportunities by creating
  jobs in the distribution network or supply chain
  in particular, jobs that generate working capital
  or new skills and opportunities
• it spreads new technology or product ideas that
  local producers can adapt and use
• However, there is a lot we dont know about this
  issue and there are many assumptions and world
  views that cloud discussionthis was the most
  contentious issue in all the research

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Conclusions

• This research helped Oxfam GB, Novib and Unilever
  understand better the impacts of businessalbeit
  one business in one countryon poverty reduction
• It highlighted the extent to which the business
  value chain can have a major multiplier effect on
  jobs and value creation
• It highlights the need for more organisations to
  do research into the business contribution to
  sustainable poverty reduction
• There is much more to do to develop a methodology
  that makes poor people a visible and integral
  part of the analysis of the net impacts of a
  companys operations
• This project was just a first small stepwe hope
  it inspires others is a stepping stone to
  increased insights on these issues

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For Information or Copies of the Full Report

• oxfam_at_oxfam.org.uk (for hard copies)
• www.unilever.com (for download)
• www.oxfam.org.uk (for download)
• jason.clay_at_wwfus.org (for information about this
  and upcoming research)
• Thank you!