Developing Essential Oils in South-East Asia Murray Hunter School of Bioprocess Engineering Northern Malaysian University College of Engineering [email protected]Introduction The essential oil industry in Australia has been slowly declining for many years. Mid last century, the eucalyptus industry moved to Spain, South America and China. The peppermint industry failed to grow with any momentum in North-East Victoria and Central Tasmania and all the major players in the tea tree industry have ceased production, leaving only small and medium family concerns surviving. Developing an essential oil plantation in Australia is a massively expensive undertaking, due to high capital set up, maintenance and processing costs. Droughts and water regulations by local authorities have put undue burdens on those entrepreneurial enough to ‘have a go’ in this industry. New crop development in Australia has also been smeared through too many tax minimization schemes and mismanagement, which has made potential investors shy away from alternative agricultural investments. The development of essential oil and other natural product plantations, unless they are a small family affair, would appear to be daunting due to the costs involved. Australia’s potential competitive advantage in agriculture relies on product differentiation through developing innovative products for niche markets, rather than aggregate cost competitiveness. Developing niche natural products also runs into the gambit of European regulation which puts prohibitive costs in the way of gaining registration for potential new products. This article will look at essential oil development in Australia and South East Asia and examine the issues involved in developing production in the South-East Asian region, one of the most favourable places for future natural product production due to its diverse climate range, relatively low establishment and maintenances costs and proximity to the large European, US and Japanese markets, not forgetting the large market existing in the region itself. Is essential oil production a ‘sunset’ industry in Australia? Before looking at the essential oil industry in South-East Asia and its potential, it is necessary to examine the current state of the Australian industry and its directions. William McCartney estimated the production of essential oils in Australia in 2003 in the table 1 below 1 . Table 1: Estimated Current Production of Essential Oils in Australia (2003) Essential Oil Annual Production (tonnes) Major Production Centres Tea Tree 405 i New South Wales, Queensland Eucalyptus Cineole type Citronellal type 120 0.7 Victoria, Western Australia, New South Wales, Queensland Citrus Orange Lemon Mandarin 35-45 4-8 3-4 Victoria (Mildura), South Australia (Berri) Victoria (Mildura), South Australia (Berri) Victoria (Mildura), South Australia (Berri) i This figure is dramatically lower now.
Transcript
Developing Essential Oils in South-East Asia Murray Hunter School of Bioprocess Engineering Northern Malaysian University College of Engineering [email protected] Introduction The essential oil industry in Australia has been slowly declining for many years. Mid last century, the eucalyptus industry moved to Spain, South America and China. The peppermint industry failed to grow with any momentum in North-East Victoria and Central Tasmania and all the major players in the tea tree industry have ceased production, leaving only small and medium family concerns surviving. Developing an essential oil plantation in Australia is a massively expensive undertaking, due to high capital set up, maintenance and processing costs. Droughts and water regulations by local authorities have put undue burdens on those entrepreneurial enough to ‘have a go’ in this industry. New crop development in Australia has also been smeared through too many tax minimization schemes and mismanagement, which has made potential investors shy away from alternative agricultural investments. The development of essential oil and other natural product plantations, unless they are a small family affair, would appear to be daunting due to the costs involved. Australia’s potential competitive advantage in agriculture relies on product differentiation through developing innovative products for niche markets, rather than aggregate cost competitiveness. Developing niche natural products also runs into the gambit of European regulation which puts prohibitive costs in the way of gaining registration for potential new products. This article will look at essential oil development in Australia and South East Asia and examine the issues involved in developing production in the South-East Asian region, one of the most favourable places for future natural product production due to its diverse climate range, relatively low establishment and maintenances costs and proximity to the large European, US and Japanese markets, not forgetting the large market existing in the region itself.
Is essential oil production a ‘sunset’ industry in Australia? Before looking at the essential oil industry in South-East Asia and its potential, it is necessary to examine the current state of the Australian industry and its directions. William McCartney estimated the production of essential oils in Australia in 2003 in the table 1 below
1.
Table 1: Estimated Current Production of Essential Oils in Australia (2003) Essential Oil
Annual Production (tonnes)
Major Production Centres
Tea Tree 405i New South Wales, Queensland
Eucalyptus Cineole type Citronellal type
120 0.7
Victoria, Western Australia, New South Wales, Queensland
Citrus Orange Lemon Mandarin
35-45 4-8 3-4
Victoria (Mildura), South Australia (Berri) Victoria (Mildura), South Australia (Berri) Victoria (Mildura), South Australia (Berri)
i This figure is dramatically lower now.
Grapefruit 4-8 Victoria (Mildura), South Australia (Berri) Mints Peppermint Spearmint
20 Victoria, Tasmania
Sandalwood 12 Western Australia Fennel 12 Tasmania Parsley 8 Tasmania Dill 2 Tasmania Lavender Lavender Lavandin
1.5 0.5
Tasmania, Victoria, New South Wales Victoria
Lemon Myrtle 8.4 New South Wales, Queensland Leptospermum petersonni 4.3 New South Wales, Queensland Boronia 0.1 Tasmania Other Oils 2.4 In monetary terms, Australian essential oil production (farmgate) is approximately a $15.0 million per annum. This is about 1.2% of total world production. Australia’s position in production and market for each essential oil are summarized below. Eucalyptus oil production is primarily made up of Eucalyptus polybractea or Blue Mallee, which is a cineole type. There is also some production of other cineole types, including E. smithii and E. radiata. This oil competes with the lower yielding E. globules which is cultivated commercially for oil in China, Spain, Portugal and Brazil. Small quantities of Corymbia citriodora are cultivated, but the oil cannot compete internationally with production from China. Other varieties are also produced for aromatherapy and tourist products, including E. viridis, E. cneorifolia and E. dives. The eucalyptus industry is over 100 years old and enjoyed its peak production period during the 1940’s when over 1000 tonnes was produced annually. Production has declined to present levels due to the development of anti-biotics after World War II and competition from foreign producers. Today only two main producers remain. These producers (GR Davis in West Wyalong, NSW & Felton Grimwade & Brickford in Inglewood, Victoria) have switched from wild harvesting of eucalyptus to plantation style production, developed high oil yielding planting stock with universities, introduced mechanical style harvesting to decrease labour and improve cost competitiveness. Both companies also import, refine and trade in oil and other value added products
2. Another major production area is along the Western Australian wheat belt.
Current Australian production is less than 5% of total world production and is marginally profitable. The industry has been subject to a number of booms and crashes over the years
3.
Whether Australia can become a major player again will depend upon the success of developing a cost advantage over other producers, the ability and success of Australian companies in developing markets for high grade and other value added products and the prevailing market price levels in the future. Tea Tree Oil (Melaleuca alternifolia) was one of the success stories in Australian essential oil production during the mid 1980’s with prices topping $65/kg. This attracted large numbers of new growers entering the industry (in excess of 350), until production exceeded demand and prices tumbled to less than $10/kg. This has shaken out the industry and the largest producers have all ceased production, leaving small and medium sized producers to supply the market. Prices have been creeping up again this year and are reaching the $20/kg mark and still increasing, however many large customers including some of the major European and US retail chains who carried the product have discontinued it, due to lack of confidence in future supply. Likewise many major personal care companies have also switched to other natural additives in their product ranges, leaving the task ahead for producers to convince the cosmetic and retail industries to support the product again
4. This unstable period has opened the door for producers in countries like China to
step up production and compete with Australian producers.
Citrus oils are produced as a bi-product of the large citrus industry centred around the Riverland in South Australia, Murray Valley in Victoria and Riverina in New South Wales. Approximately 50-60 tonnes of citrus oils are produced annually and most of this oil is consumed domestically, which is less than 10% of domestic demand. The main oils produced include orange, lemon, grapefruit and mandarin. Citrus oil production is not internationally competitive with the US, Brazilian, Italian and Argentinean industries because of the much larger scale processing facilities in those countries, leading to better economies of scale
5.
Peppermint oil (Mentha piperita) production was established in the Derwent and Huon Valleys in Tasmania during the 1970’s and in the Ovens Valley, Victoria during the 1980’s. Approximately 20 tonnes of oil are produced annually and sold to customers in Australia and overseas. Peppermint oil is purchased on its olfactory and taste profile by confectionary manufacturers. Players in this industry have been able to develop their niche customers, through their blends of the oil. Farmers involved in the production of this oil have decreased over the years leaving only a small core of committed farmers to this crop. It doesn’t appear that this crop will be dramatically expanded over the next few years. Spearmint oil (Mentha spicata) which is cheaper than peppermint oil is also grown in very small quantities.
Peppermint harvesting in Myrtleford, Victoria
6
Sandalwood oil (Santalum spicatum) production was redeveloped during the 1990’s from scattered wild collection over the wheat belt area of Western Australia, to a planned industry, partly in response to salinity problems
7. Sandalwood tree stock is both wild and plantation based.
The industry has been able to redevelop because of over-utilised wild stocks of Santulum aibum in India, the existence of the species in Western Australia over sparse areas, the long length of growth times (50 years) of the tree, preventing other entrants, and efficient processing and extraction methods employed by the producers. Thus Western Australia controls a scarce genetic resource, which enables industry viability. Sandalwood oil is used in fine fragrance, attars and incense and is exported to Europe, Middle East, Asia and USA. Lavender oil (cultivar of Lavandula angustifolia) was first produced in Australia by C. K. Denny at the Bridestow Estate in 1921. The plantation currently produces approximately 1.5 tonnes of oil per annum which is valued by particular customers around the world for its specific olfactory profile. The remainder of the oil is sold locally and used in products sold at the estate which is a major tourist attraction in the region. A number of small scale farmers in other parts of Australia are also producing small quantities of lavender oil. Lemon Myrtle oil (Backhousia citriadora) is increasingly popular for its sharp citrus profile oil and the leaves are highly valued for the production of boutique lemon teas. The tree is difficult to propagate and develop into large scale plantations, so expansion of this industry is slow. There is
not enough oil or leaf stock to satisfy the requirements of potential major users, i.e., tea manufacturers at this point of time. Lemon tea tree (Leptospermum petersonii) is produced by a number of growers in New South Wales and Queensland for use in cosmetics and insect repellents. The essential oil is more limited for use as a flavouring material than lemon myrtle because of its citronellal content, modifying the sharpness and sweetness of the citral constituent, so the market is more limited. There is currently excess supply of this oil as demand is not increasing at the same rate of production. The Tasmanian oils. In the 1980’s a unique partnership was formed between the Government of Tasmania, University of Tasmania, Essential Oils of Tasmania (EOT) and farmers cooperatives to develop selected herb oils in current use by the flavour and fragrance industry and new local bush herbs for the international market. This initiative attracted over proportionate funding from the Rural Industries Research and Development Corporation (RIRDC) to develop this industry. The project commercialized a number of oils in existing international trade including fennel oil, parsley oil, peppermint oil and dill weed oil. An investment was made in a solvent extraction plant and boronia absolute (Boronia megastigma) and black current bud concrete were commercialized. Local plants have also been developed into essential oils and absolutes, including kunzea oil (Kunzea ambigua) and Tasmanian black pepper concrete (Tasmannia lanceolata)
8. The project had successfully developed and commercialized a number of natural
products suited for particular market niches and maximized the value of their products through application of solvent extraction technology. It will be interesting to see the future growth of this project given the specialty approach taken and the number of times the company has changed ownership in the last few years. A number of other oils for specialty markets are also produced in Australia, including a native mint (Prastanthera spp.),for dried herbs and oil (around 500 kg per annum), white cypress (Callitris glaucophylla) a hardy timber tree native to the North Coast of Queensland, where small amounts (100-200 kgs) of oil are produced as insect repellent, blue cypress (Callitris intratropica), which was heavily promoted as a therapeutic oil for cosmetic applications, but failed to gain wide acceptance due to formulation difficulties (300-600 kg), emerald cypress (Callitris columellris), around 10-30 kg per annum, other Malaleuca species, Australian nerolina (Melaleuca quinquenervia), Australian Rosalina (Melaleuca ericifolia) and Melaleuca linarifolia and dissitifolia. In most cases, the Australian essential oil industry was developed by passionate, entrepreneurial pioneers who were single minded and determined to develop their industries. These people are legends on the Australian scene and played a paramount role in making the industry what it is today. However, faced with international competition, these plantations have had to adapt to the realities of the international environment and develop strategies to cost minimize production through mechanizing maintenance, harvesting and extraction, value add production through specialty products, develop niche products and niche markets, value add their business through other activities like tourism and enter into the general trading of the oils, sourced from other producers, both locally and overseas to survive. The original businesses that exist today earn their revenue from these expanded sources, rather than basic essential oil production. In general over the last 60 years, the Australian essential oil industry has become a niche and specialty player in the international market, rather than a volume supplier supported by competitive cost advantage. International interest in things indigenous to Australia enhances the market environment for Australian niche production of essential oils. However, establishment costs with rigorous regulation and more regulatory scrutiny in the EU through REACH, the SCCP and BPD, with requirements for GMP, HACCP, ISO and other certifications makes small boutique production difficult. In many cases new essential oils will have to be almost completely financed by the individuals or companies concerned due to the reluctance of financial institutions to lend on what they see as speculative ventures due to a poor history of new crop development. Also hindering
future new oil development is the cut back in government funded research in this sector over the last few decades.
The International Essential Oil Market Before focusing on the South-East Asian region, the following is a brief summary of the segments of the international essential oil market. Flavour, fragrance and pharmaceutical applications for essential oils was the traditional market, with the major trade in the hands of relatively a few major organisations. Essential oils are not an end product, but an intermediate material used in the production of other products, therefore demand for these commodities are of a derived nature, influenced by a number of factors, that are extremely difficult to measure. For example, a citrus oil used in the fragrance for shampoo or cosmetic ultimately derives its demand from the sum of demand for the all end consumer products, containing the essential oil within the fragrance, on the market. Measuring this demand after taking into account consumer demand, changing tastes and preferences, corporate decisions as to branding and formulation are almost impossible to calculate. Over the last thirty years, the natural product revival encouraged many cosmetic companies use essential oils rather than compound fragrances directly into their products. This has become a major market where Australian tea tree oil was one of the major beneficiaries. Linked to this trend is the aromatherapy market, which has almost doubled in aggregate demand for natural materials in this category, over the last twenty years. However, future growth of the aromatherapy market is under question due to some outlandish claims made about the therapeutic benefits of essential oils, forcing regulatory authorities to heavily scrutinize in this area. Consequently, European Regulatory Authorities like REACH
ii, SCCP
iii and BPD
iv, have begun challenging the safety of
many essential oils9 and asking producers to put up a case, as why they should continue to be on
the market without safety warnings on labels. This will slow down growth in the European market, although Asian markets are growing very rapidly to compensate for this.
Another market for essential oils is as a feedstock to catalyse or isolate a pure aroma chemical for industry use. Examples of this would include the isolation of eugenol from clove oil, cineole from eucalyptus oil and terpenin-ol-4 from tea tree oil. Through new applications of biotechnology this market may grow in the near future.
Many essential oils, particularly those with anti-microbial properties are finding application in agricultural chemicals as fungicides. These products are organically certifiable and with the global growth in organic farming, markets are growing exponentially in this application. Further, new uses as plant anti-stress
10agents are being developed, which will enhance demand for a number
of essential oils. Agricultural application of essential oils is a future high growth area. Figure 1 shows the size and break-up by use sector of the international essential oil market
11.
ii Registration, Evaluation and Authorisation of Chemical
iii The Scientific Committee on Consumer Products – previously called the SCCNFP: Scientific Committee
on Cosmetic & Non Food Products) is an expert committee set up under the EC Health and Consumer
Protection DG. SCCP reports to the EC H&CP Scientific Steering Committee on matters relevant to the EC
countries in their defined area. The committee comprises a diverse range of experts in toxicology from
industry, the medical fields and tertiary institutions iv Biocidal Products Directive
World Farmgate value of Essential Oil
Production (USD)
Cosmetics, 70, 7%
Agrochemicals, 60,
6%
Aromatherapy, 180,
17%
Pharmaceutical,
120, 11%
Intermediates, 90,
8%
Flavour &
fragrance, 550, 51%
Current Essential Oil Production in the South East Asian Region The production of essential oils in the various countries of the South-East Asian region is varied in its stages of development and adopted different strategies due to different historical backgrounds, stages of development, sizes of domestic markets, awareness about the industry and bases of competitive advantage. This paper will cover Indonesia, Malaysia, Thailand, Laos, Cambodia and Vietnam. The Philippines is a negligible producer of essential oils, even though many still believe ylang ylang is actually produced there. Indonesia Indonesia is considered one of the world’s major producers of tropical essential oils, over USD $65 million per annum. Most of the essential oils produced compete on the international market with other producers, based on a competitive cost advantage, benefiting from the low labour and capital cost base that subsistence farming provides to the industry. This base also provides the industry with a very elastic supply of product according to prevailing world prices. Indonesia has been involved in the production of essential oils since early colonial times and thus has strong links with the international market and also a large domestic market which is often turned to in times of low prices. Essential oils Indonesia produces include cajuput, cananga, cassia, citronella, clove leaf, ginger, gurjun balsam, nutmeg, palmarosa, patchouli, sandalwood, vetiver oils and vanilla resinoid
12.
Some Massoia bark oil is also produced and eugenol is refined from cloveleaf oil and sold as a natural aromatic chemical. Cajuput oil is produced in the Moluccan Islands, East Java and parts of Sumatra from natural stands. Production varies according to demand and varies from 70-150 tonnes per annum
13.
There are over 160,000 Ha. of Ylang trees cultivated around East Java, producing around 120
tonnes of oil14
. Indonesia is the major world producer of cassia oil (Cinnamomum burmanii), producing over 40,000 tonnes in 2000
15. Indonesia also ranks as the largest producer of patchouli
oil from both small holder and plantation production in Sumatra, and Java. About 1,100 tonnes are produced annually. Nutmeg production in Indonesia dominates world supply with 300-500 tonnes produced annually in Sulawasi, Moloccu Islands and Aceh in Northern Sumatra. Most production is small holder enterprise. Citronella production has fallen over the last 10 years in Indonesia due to poor viability, even for small holders. Annual production is around 200 tonnes with the main production areas Sumatra and West Java. Cultivation of clove trees is extensive to supply buds for the kretek (Indonesian cigarette) industry. However clove leaf oil is still produced as a by-product of the bud production, averaging over 1000 tonnes per annum. Approximately 15 tonnes of sandalwood oil are produced in West Timor and Sumba Islands. Vetiver production is declining in West Java from competition from vegetable farming and production has slipped over the last 10 years from 1000 tonnes to 40 tonnes. Indonesia is the second largest producer of vanilla to Madagascar with the industry based in Bali. It is a very labour intensive crop and takes over 3 years for the vines to grow to fruit bearing age. Once harvested they must be stored for long periods of time to develop their fragrance. About 150 tonnes of resinoid is produced annually.
A Patchouli Still in Sumatra Malaysia Malaysia’s agriculture sector is primarily based on palm oil and rubber. The country has developed a strong competitive advantage in these crops and established a well managed estate sector. However one of the disadvantages with this success is the lack of interest in other potential new crops. Essential oil production has been a curiosity and is not attracting serious mainstream interest. One of the major hindrances of essential oil development in Malaysia is lack of international market knowledge and until the last decade the small domestic consumer market, thus making it unfeasible to develop a local market for domestically produced essential oils.
Tea Tree cultivated in Perlis, Malaysia
With renewed national interest in agriculture and the biotechnology sector, essential oils are being viewed seriously again. There is currently around 200 hectares of tea tree plantation in Malaysia, producing small commercial quantities, which is consumed in the local market. This may expand over the next few years. There is also some very minor production of patchouli, citronella and lemongrass used in the local herb and aromatherapy industries. Thailand Unlike Indonesia and Vietnam, interest in Thailand is mainly in producing herbs and traditional remedies. Essential oils are cultivated in a number of projects in small quantities for aromatherapy products and sold at retail level, thus maximizing their value and integrating cultivation and production with agro-tourism. These activities are strongly supported by the Royal family as with the Non-Commissioned Royal Project on essential oils
16. Oils produced include
Lime (Citrus aurantifolia), Lemongrass, Tangerine (Citrus reticulate), Ginger, Tuberose (Polianthes tuberose Linn.), Tumeric, Vetiver, Grapefruit (Citrus maxima var. racemosa), sweet basil, clove, citronella, Galanga (alpinia galangal), Jasmine, Kaffir Lime (Citrus hystrix), and Champaka. Many novel essential oils like Plai oil (Zingiber cassumunar) have been developed for use in herbal therapies and small quantities of oil are marketed internationally to the aromatherapy market. (insert photo 3)
Domestic sales of essential oil based cosmetics
Is a growth market in Thailand
A company (Phurua Natural Oils) is operating in the highlands of Loei Province utilizing a new solvent extraction technology developed by Dr. Peter Wilde of the UK. The benign solvent employed (HFC 134a or 1,1,1,2 - tetrafluoroethane), is a liquefied gas. It was originally developed as the "green" replacement for CFC refrigerants (the use of which was curtailed under the Montreal Convention). Because the process operates entirely at ambient temperature, the products are of unsurpassed quality, not damaged by heat (cooked) nor vacuum stripped (as is the case when attempting to remove less volatile solvents such as gasoline and alcohol) nor exposed to acids (as with SCFE CO2 products)
17. A modern plant is operating there producing
high value flower and plant extracts for the US and European markets. Products produced include Arabia Coffee Bean extract (Coffea arabica L.), Champaka Absolute (Michellia champaca),
Laos Loas is a landlocked country between Thailand, Cambodia and Vietnam. The country produces around 100 tonnes of bezoin resin, integrated with shifting agricultural practices, of which about 40 tonnes are exported to France. A variant of sassafras oil from Cinnamomum camphor is produced and exported to Vietnam and China. Agarwood is produced by some of the tribal communities in the country. This has been undertaken through wild collection. Currently plantations are being developed to step up production of agarwood.
Timber is currently a large industry in Laos
leaving large amounts of unused land available Cambodia Cambodia is a relatively new producer of essential oils with the economy rapidly developing after many years of war. Most land is idle and rural populations are looking for activities to earn a stable income. Currently three essential oils are being produced. Cajuput oil is produced from the wild in Southeast Svay Rieng province. Production of around 100 tonnes per annum is estimated, which is sold to neighbouring Vietnam. It is also estimated that between 100-200 tonnes of sassafras oil is also produced and being sold into Vietnam. Pilot production of tea tree and lemongrass oils are also being undertaken in the country
18.
A still for cajuput oil in Cambodia Vietnam The cultivation of essential oils dates back to colonial times, however this industry was destroyed during the Vietnam War. Under Government support the industry recommenced in the early 1980’s, focusing on exporting to the then Soviet Union and China. Oils developed through this era included basil, cornmint (Mentha arvensis) and citronella oils. With the Government allowing farmers to decide what to grow themselves, production of essential oils followed prices. Citronella production varies between 200-500 tonnes per annum and has taken up much of the market that Indonesian production has dropped. Sassafras oil was produced from wild growing plants in Lam Dong Province, but banned in 2000 because of depletion of the forest. Now sassafras oil is purchased from neighboring Laos and Cambodia to supply the international market. Between 20-40 tonnes of basil oil (methyl chavicol type) are produced annually and exported to France. Around 150 tonnes of cajuput oil are produced for the local medicinal market each year. Vietnam is reported to also produce star anise, cassia, Litsea cubeba, patchouli, palmarosa, tea tree, Eucalyptus citriadora, ginger and agarwood oils
19.
As mentioned at the beginning of this section, the established essential oil industry in Indonesia developed through a long history of trade links with trading companies from the country of their past colonial master. This continued to be a sustainable industry because of natural competitive cost advantage and large domestic market. However not many new essential oils are being developed and commercialized. The case is similar in Cambodia, Laos and Vietnam. Although these industries died out during political instability and war, they have been re-established under trade promoted through the now defunct communist block in the 1980s. Entrepreneurs both local and foreign are primarily responsible for the development of new essential oils in Cambodia and Laos. Malaysia’s agriculture is heavily influenced by focus on palm oil and rubber and thus has been very slow to develop essential oils and development has relied upon entrepreneurs with the passion and interest in this industry. Essential oil development in Thailand was also like Malaysia, slow, but recently focused on value adding agro-products as a market channel, seeking to develop domestic demand rather than focus on the international market. Other development in Thailand is focused on high value and specialty products.
The Potential to Develop Essential Oils in the Region Until recent times, discussion and focus on developing essential oils in the region concentrated on the international flavour and fragrance industry. The key to essential oil development in the region was seen by many experts in the flavour and fragrance industry as an exercise in competing with other producers in other countries on competitive advantage and looking for
markets where there was dramatic growth in demand20
. However demand for essential oils in the flavour and fragrance sector has dropped dramatically as a percentage, as other application sectors have grown outside the traditional market. If an enterprise rather than an economic approach is taken to developing essential oils, many new opportunities emerge for essential oil production in the region. These opportunities are strengthened more by the continuing resilient growth of local South East Asian economies and their domestic consumer markets. What we have seen from the Australian industry review is that developing essential oil production based on competitive cost advantage is difficult even with adequate research and development backing and modern planting, harvesting and processing technologies. Those successful in the Australian industry are those who value add into specialty and niche products and maintain small boutique production. Successful producers have ventured into agro-tourism and developed their own consumer products. Thursday Plantations in Northern NSW is a very good example of this. While the tea tree industry struggled to survive, Thursday Plantations just grew and prospered
21.
Although now they produce very little oil themselves, they are supporting local growers. Thai producers are following this model and growing successful businesses, while in Malaysia producers are trying to follow the extensive estate model to develop competitive cost advantage and not succeeding.
The development of new markets over the last twenty years (aromatherapy, cosmetics, agricultural applications), both in specific country domestic niches and internationally is opening a new Pandora’s box of opportunities for small scale boutique industry development, rather than traditional large scale competitive cost advantage development aimed at exporting and competing with other third world producers
22.
Developing a Project
There are many advantages of developing essential oil projects in the South-East Asian region. These advantages are primarily;
1. A large area of biodiversity where it is estimated that over 70% of the world’s flora species are located in this region
23,
2. A wide variety of climates from tropical, monsoonal and temperate, 3. Adequate water in most of the region for farming, 4. Low land and infrastructure costs (almost 1/10 of cost in Australia), 5. A growing level of natural product research and development, particularly in Indonesia,
Malaysia, Thailand and Vietnam, 6. Large tax exceptions and other positive incentives and grants available in some
countries, 7. Rapidly growing populations, disposable income levels and consumer markets, 8. Finance available through Government owned banks, International financial institutions
and venture capitalists, and scope to develop integrated projects. The rest of this paper will examine the major issues in regards to developing an essential oil project in South East Asia.
Type of Project Strategy Most recent new promoters and investors to the natural product industries (herbs and essential oils) tend to be individuals and companies with specific interest in downstream activities like cosmetic or traditional medicine. They view the project as a source of materials for their own use in marketing other products utilizing essential oils. Thus scale is small and profitable in the view of the whole enterprise. For example, United Plantations Bhd. in Malaysia produces tea tree oil for their own soap manufacture. Any excess is marketed as a material to other users. Other small plantations produce essential oils as an integrated herb and tourism project, where essential oils become an important image part of the whole project. This is very popular in Thailand. Some of these projects like the Royal Projects in Thailand and the Kelantan Womens’ Project in Malaysia
24 are community groups organized to produce essential oils and herbs for
manufacture into consumer products. Most plantations set up to cater directly for the global market have seemed to fail in commercialization, unless they are producing specialty products with demand in Europe or the US. Potential development strategies are summarized in Table 2 below; Table 2: Potential Entry Strategies for Essential Oil Production
Strategy Advantages Disadvantages
Large scale cultivation for international market
• Low cost base in Indonesia, Laos, Cambodia and Vietnam
• Low cost countries like Indonesia struggling to maintain competitive advantage
• Most projects based on this strategy in both Australia and S. E. Asia failed to be sustainable
• Competition based on price in buyers market
New Essential Oils • No or little competition in early stages
• Novelty has a marketing story behind it – cosmetics & aromatherapy
• Registration cost of new products for F&F, cosmetic and pharmaceutical industries very high
Integrated Project as part of another business/ agro-tourism/ consumer products
• Adds synergy to the business • Costs distributed across whole
business • Production becomes part of
the marketing strategy • Develop own market for
production
• Business complexity greatly increases
Community Empowerment project/small holder supply on buy back
• Low entry financial costs • Assist in providing sustainable
income for communities in poverty
• Becomes part of companies social responsibility activities
• Marketing benefits
• High organizational resources required
Reasons for Failure of Projects Before going any further it is apt to mention the major reasons for failures of projects. The type of project failure risks may differ slightly from country to country, but the general reasons are listed as follows;
1. Cultural Understanding (or misunderstanding): Each country has a unique culture with different values and those working with local Governments, companies, communities and individuals must understand the beliefs and values that are important in each country. Failure to do so can result in sometimes un-repairable misunderstandings.
2. Politics: Brian Lawrence listed politics as one of the major reasons for project failure in projects in many countries. This does not just include issues with political figures but politics and misunderstood agendas of Government agencies, corporations and individuals, one may have to deal with
25.
3. Regulation: Getting new essential oils registered requires many studies with internationally recognized monographs prepared. This may cost more than the market is worth.
4. Market: Many new ventures have failed because they did not analyse the market correctly and found when production came online there was a glut of oil and they were not able to get the projected price in the market.
5. Identifying the Wrong Essential Oils to Produce: Many projects have failed because they just produced the wrong essential oils and couldn’t sell them competitively in the marketplace.
6. Poor Weather: Many projects have failed because of poor weather, drought, unusual temperatures which are all variables outside of the control of the producer. The el nino effect is beginning to influence the region again which could lead to prolonged droughts in some areas.
7. Poor Infrastructure: Many ventures fail because infrastructure has not being completely developed such as land preparation, irrigation, efficient harvesting and processing facilities
26.
8. Finance: Some ventures run out of finance before the crop is ready for harvest and processing, a long time lag between harvest, processing and sale, or just poor estimation of project costs during planning and
9. Incorrect Chemotype: Many ventures have failed because of just selecting the incorrect chemotype of the plant species they are cultivating. This problem occurred in a basil oil project in the Ord River scheme in Western Australia during the 1980s.
Ease of Entry into South East Asia – Investment Regulations
South East Asia is a diverse region with each country having different investment regulations and modes of doing business. Each country also has differing incentives, R&D levels and available land. Table 3 summarises the different investment and business climates of each country in the region. Table 3: Summary of Investment Climates in Selected South East Asian Countries
Investment Regulation
Land Availability
Infra Costs
Finance Availability
Grants & Incentives
R&D Capability
Local Market
Size
Indonesia Up to 100% equity but
cannot own land
Cannot engage in
local market activities directly
Very limited Depend on location
Foreign Banks
5 year tax exception
Excellent R&D
Institutes
Extremely large
Malaysia Can own 100% (40%
foreign equity
eligible for financial grants)
Plentiful (can obtain
grants)
Relatively inexpensive
Local Banks &
Govt Agencies,
VC
10 year tax holiday Various financial
grants for commerciali
zation & R&D
Excellent R&D
Institutes
Moderately sized but
large herbal market
Thailand Require board of
investment permission
Very limited in private
hands
Relatively inexpensive
Local Banks & VC
N/A Excellent R&D
Institutes
Large and growing
especially herbs
Cambodia 100% equity
allowed
Plentiful (Can obtain
grants)
Require outside
assistance
Foreign Banks
Up to negotiation
Very limited Very small local
market
Laos 100% equity
allowed
Plentiful (Can obtain
grants)
Require outside
assistance
Foreign Banks
Exemption of
equipment import duties
7 year tax exception
Very limited Very Small local
market
Vietnam Up to 100% upon
approval of FIB
Plentiful (Can obtain
grants)
Relatively inexpensive
Foreign Banks
Tax incentives
Good R&D Institutes
Large market & rapidly growing
Going Alone or Finding a Partner Finding a partner may be advisable due to inexperience in operating in the chosen country. There are a number of options with advantages and disadvantages. Government agencies and semi Government organizations are common partners in South East Asian development projects in all the countries concerned. One must be very careful that your vision and objectives are the same as the agency’s. Another problem when dealing with a statutory body is personnel will be moved around from time to time and the group you negotiated with may not necessarily be the same group you work with. In South East Asia one must also be aware of individual personal agendas, which if not understood and addressed could lead to future difficulties. Government Agencies in the two socialist countries may be extremely formal and bureaucratic. Large public companies are another option and there are also a number of intracompany political dynamics that need to be looked out for. Small business and individuals are another group and building up personal relationships and clearly defining both parties roles is extremely important if misunderstandings in the future are to be avoided.
Finally cooperatives and community groups are another option and negotiating with these forms of organizations require patience and re-explaining a number of times.
The author with the Vice President of the
Lao Peoples Democratic Republic
discussing essential oil development
Communication in South East Asia is completely different than in the West. Many deals and ventures have failed to conclude and materialize because of misunderstanding the culture, values, beliefs and expressions of these. Generally Asians seek harmony with a group and prefer not to be confrontational in negotiations. Thus agreement with a nod may not mean that they are in agreement with you and your idea. Western cultures accept up front discussion, where the verbal message contains all the meaning, whereas Asian culture there is need not just to focus on the content, but the tone, expression, ambiguous language and actions to understand what is really meant
27. Many of the more conservative Chinese
businesspeople in South East Asia will toss around various ideas and scenarios over a number of meetings over a period of time, where westerners will feel they are getting no-where. This is the process building up a relationship with the one they will be working with on a long term project and this process is much more important than any future contract signed between the parties
28, as the person during this process will be continually sizing up the
other’s commitment, ideas, thoughts, honesty and vision. Without understanding the culture and in particular its values and beliefs, one will not really be able to understand what is really going on. One recent potential investor to the region commented “I feel that I am in a parallel universe….we have got nowhere”. Another important point in the selection of partners is that many people that one may meet and negotiate with may have little idea about essential oils and the concepts being conveyed and little experience in negotiating with foreigners. This will be the case with some Government agencies in Indonesia, Laos, Vietnam and even parts of Malaysia. Private businesspeople may be in the same position, so the process of negotiation will take a long period and great patience and many visits maybe required. It is normal in this region that the negotiation period could take up to two years. A lesson can be learnt from Japanese investors in South East Asia. When they come, they know the language and are quite comfortable staying long periods of time in the country concerned to expedite and finalise this process. A number of short visits to the region will not achieve much until all parties really know each other and compromise on a common vision.
The Development Process
The rest of this paper will describe the major issues involved in developing a project. It is assumed that the crops have already been selected. The following comments refer to a project between 20-100 Ha in size. It is best to develop a complete plan and budget before touching the land so that all work required is estimated and budgeted for. In addition to a financial budget, a manpower and resource budget is necessary. This means that every input required for the project must be sourced prior to requirement, so it is available when needed. This is very important during nursery, planting, maintenance, harvesting and processing work and for organic farming where bio-materials will be required to convert into mulches and fertilizers. Land Selection Site selection is a very crucial issue as the conditions and available infrastructure and access to transport and communications greatly varies across the region. Important issues are the suitability of the soil for the type of crops that are planned to be cultivated, the drainage of the land, availability of water for irrigation, access to available labour, access to transport, access to support services like engineers for building and servicing equipment and prior use of the land.
Land selection will have a crucial bearing on the cost of the project. Developing drainage, irrigation systems, land preparation and other infrastructure as fences to keep out cattle, etc., is very time consuming and costly. Soil types can vary over a single parcel of land and this must be surveyed before a plantation schematic is designed. If the project is going to be developed with agro-tourism in mind, then the project should be relatively accessible to high traffic tourist areas in the region. These areas include West Java, Central Java, Bali, Melaka, Penang, Terengganu, Kelantan, Sabah & Sarawak, Trang, Phuket, Krabbi, Hua Hin, Chang Mai, Nong Kwai, Udon Thani, Vientiene, Hue and Danang for example. Climate is very different in each area ranging from tropical, monsoonal with specific and long dry periods, sub tropical and temperate. Land Development Actual land development once the final site is selected can take up to a year before anything can be planted. Fields need to be leveled and a gradient for rain run-off established with adequate drainage to ensure fields are not water logged. Poor fertility soil patches need to be identified and corrected. Irrigation ponds are required and must be coordinated with the drainage system. Roads for workers and equipment need to be developed around the fields. A seed propagation facility and nursery needs to be established. Some sort of erosion control strategy is required. Vetivert is a good crop to use to prevent embankments eroding. A distillery and waste management area has to be build up and finally other infrastructure for storing tractors and equipment, worker housing (if necessary) and facilities for tourists.
Almost complete Nursery
Building a pilot distillery plant
Reclaiming swampy land
Genetic Stock and Propagation Crucial to the success of the project is identifying the correct genetic material to develop a plantation from. Some essential oil bearing plants have a number of chemotype variants and these must be correctly identified before increasing the population by propagation. There will
also be variances in yields and oil quality in different materials of the same species. These issues can be examined through replicated experiments in the pilot stage of production. Propagation usually is undertaken through seed, cutting and grafting, vegetative propagation or tissue culture. Propagation and the nursery activities are costly and time consuming, so the correct strategy must be selected to produce enough plants for the field at the minimum cost. It is better to develop gradually and plant incrementally so that mistakes can be identified earlier on, rather go all out for a single planting. Once the nursery has been used for initial propagation, the complex can be utilized for further experimentation of new species and variants. The nursery can become a profit centre for contract growing of herb and exotic plants, especially if agro-tourism is also being developed. Pilot Project The pilot project is also part of crop selection to monitor the performance and growth of new plants to the area. This process also enables examination of how some plants from the wild domesticate in a plantation regime. Levels of nutrient and water application can also be tested and monitored to determine the best practices needed to achieve the best quality and yield of oil from the crop. Basic questions that should be answered during this phase are; a) Will the plant grow well in this environment? b) Are there any climatic restrictions? c) Can the plant be integrated with other crops? d) What are the potential problems? e) What are the economics of the crop? f) Does the yield and quality look promising? g) Does planting time affect the growth? h) What are the optimum plant spacings? i) What is the projected yield per Ha.? j) What is the diurnal fluctuation in the oil yield? Planting & Maintenance Due to low labour costs, planting can be undertaken manually for crops that don’t require replanting for many years. This is suitable for tree crops like eucalyptus and tea tree, etc. For seasonal essential oil crops that require replanting every couple of years, small inexpensive mechanical planters can be used. Plant spacings must be designed to take account of both the area each tree requires for maximum bio-mass production and allow for mechanical harvesting.
Manual plant of kesum (Persicaria odoratum)
Small scale planter
The single most perplexing issue in South East Asia is weed control. Conventional herbicides can be used but really not conducive to the cultivation of herbs and essential oils, if we wish to maintain the persona of a natural product. This is thus a very challenging task in this region as weeds can literally grow 10 cm in 24 hours after rain. Plastic lining along the fields can be utilized, manual weeding, butane burning or the use of cover crops. The author is experimenting with a herbicide developed through enzymes. This produces as general spectrum efficacy and has proved quite successful. Field definitions, contours and drainage systems need to be maintained due to the high volume of water through rainfall during the wet seasons. Time must be allocated after each harvest to maintain the fields and drainage. Pests & Diseases Potential pest and diseases are usually identified during the pilot project, thus allowing time to develop a strategy to combat this problem. Prevention is the best form of defense and South East Asian is blessed with the neem (Azadirachra indica), which in four years of use in various areas of the region, the author has found to be much more effective than commercially available pesticides. Neem extracts can be prepared on site from both the leaves and fruits and in an aqueous solution applied to the soil under the crops. Neem extracts attack the pathology of insects in a different way to conventional insecticides, acting to disrupt the insect lifecycle, preventing multiplication, rather than outright killing them
29. The
author has observed that neem has a much longer residual effect than conventional insecticides and insects fail to develop any tolerance to the extract. By having your own trees
lining the roads and perimeter of the plantation, one can lower input costs in the maintenance periods through producing your own extract and less need to spray crops. Harvesting Every crop will require a specific method of harvesting. Where possible the harvesting system should be integrated with the distillation and processing system. There are a number of systems around the world, some fully mechanized while others still rely on traditional and manual methods. How fully mechanized the project should develop depends upon land size and economics of the crop.
Taking a harvest of tea tree to distillery Extraction Processing Distillation is an age old process and plants around the world vary in their sophistication, as some of the pictures accompanying this article denote. Most plantations start with a very simple system and over time and experience periodically upgrade their systems as they learn. The mint industry in the Ovens Valley, Victoria built three systems before they went to highly mechanized bin harvesting system. Distillation of essential oils is as much an art, learnt by experience and particular processes vary according to the crop and even factors like how much moisture is in the bio-mass. One critical issue to distillation is the fuel source to develop heat energy to produce steam for the process. Diesel is the usual choice on modern plantations, although subsistence farmers in Indonesia, Vietnam and Laos use firewood. The cost of distillation is the highest single cost in producing essential oils. Bio-fuels are an area of extensive research in the region and at Prince Songkhla University (PSU) in Thailand, a small bio-diesel conversion unit has been developed that is adequate for the production for a single farm environment, utilizing feedstocks like Jatropha curcas
30. In this situation some land should be allocated in the
project for cultivation of a bio diesel feedstock. Other possibilities could include the use of spent rice paddy husk or palm oil refuse as an energy source.
Running the distillery at night
Farm scale bio diesel plants Organic Farming Organic farming means different things to different people and it is growing in South East Asia, not for the same reasons as in the west. Organic farming in South East Asia lowers the cost of inputs and assists in creating better incomes to the farmers. In many places organic farming is still practiced as slash and burn, but this is not sustainable. Organic farming as well as a means to provide chemical free produce is a whole mindest about solving everyday problems of farmers who face the problem of maintaining sustainability of their land. Organic farming is way to maintain soil fertility and prevent soil erosion, control pests and diseases and utilize wastage back onto the farm. Organic farming methods vary greatly from location to location because of different critical issues that need to be addressed by farmers in each locality. Heavily influencing what types of practices can be used is what bio-materials and wastes are available in each location. Specific recipes for fertilisers and mulches are developed from what is available. The common theme is integration and a holistic approach to farm management with the objective of maximizing sustainability. Organic essential oils are a small market segment but have a market value up to three times of conventionally produced oils. In the aromatherapy and cosmetic markets, organically
produced oils are more important. This is an advantage for niche essential oil production in South East Asian, as input costs are less for organic farming than conventional farming.
Newly completed facilities for organic
fertilizer preparation Regulation & Approvals As a flavour and fragrance ingredient used in the international market, any new essential oils must be of the GRAS list (Generally Regarded as Safe). The EU has the REACH regulations. In Australia a new essential oil will most probably require registration under the National Industrial Chemical Notification and Assessment Scheme (NICNAS). As a cosmetic, personal care and industrial oil, the material will have to be registered under the FDA in the United States, SCCP in the EU, NICAS in Australia and with each relevant board in South East Asia. Therapeutic ingredients must have a monograph listed in a pharmacopoeia and in Australia under the Therapeutic Goods Act (TGA) and similar bodies in South East Asia. As an insecticide, veterinary or agricultural material the product would be registered under the Australian Pesticide and Veterinary Medicines Authority (APVMA) and similar authorities in South East Asia. If the oil is sold to other users in the manufacture of consumer products, they may require ISO, GMP, GAP and HACCP accreditations. Halal, Kosher and organic certifications will also be required if the relevant claims are made. Downstream Activities Tourism is one of the largest industries in the South East Asian region. Agro-tourism is developing very successfully in Thailand and these tourist centres cater more for locals than foreign tourists. Herb plantations have luxurious spas and accommodation and are very popular. Tourism has become a major source of income, up to 60% of some projects. Most places also sell their products through websites connecting their concept and theme to both the tourism aspect and use these images and goodwill to launch consumer brands. The tourism aspect of the project synergizes with the marketing of the products, thus turning the project into a totally holistic business. This is not unique to South East Asia, some Australian essential oil producers undertake this strategy, as do some of the essential oil production houses in Grasse, France.
The cosmetic manufacturer can utilize this type of project to strengthen their image to the consumer. The project is proof that the company is serious about sustainability and bringing the consumer the naturalness purported on the labels. South East Asia is a source of herb extracts and these are synergistic to essential oils in the marketplace. The emergence of bio-active products utilizing enzymes is another growth area in the industry that can utilize materials produced through the project.
Conclusion The farm-gate value of Australian essential oil production is around AUD $15.0 million, but added value is in excess of AUD $100 million with consumer products and integrated business activities like agro-tourism. As a competitive cost advantage producer, the Australian industry record has had its failures in the eucalyptus and tea tree oil industries. Indonesian production is primarily commodity based essential oil production and trading and is subject to the cyclical price trends in the market which destroys continuity of the industry. Products that are the result of wild collection of bio-mass are under threat from over-exploitation. As a competitive cost advantage producer, Indonesia is also struggling to sustain the production of a number of crops, even though it dominates some markets and exports crude oils in excess of AUD $90 million per annum. Laos, Cambodia and Vietnam are following the Indonesian strategy and those industries will prosper or suffer according to prevailing prices in the market. Thailand has developed both niche and specialty production returning to small scale production with a market they can control. This is creating empowerment for some communities, where production is by the people and for the people in community projects linked by the One Tambon One Product Program. This is a model that one would expect to be emulated more in the future by communities in other countries as we return to the philosophies of Schumacher in his revelation Small is Beautiful
31, rather than the
development economists telling the third world how to develop themselves32
. Kao et al reflects the growing move by companies being concerned about society as follows, “If serving people is the philosophy of the corporation, then the corporate value system must be the spirit that drives the individual to act for the individual’s interest and the interest of the corporation, and thereby, of society”
33.
New business models for new markets are allowing more innovation in essential oil production, which was locked into a commodity item with a commodity mentality
34. Many essential oil
plantations around the world heavily rely on tourism as a primary source of revenue. South East Asia is a very important tourist destination and there are many opportunities for projects to be developed. As a cosmetic manufacturer trying to develop an edge in image with the consumer, such projects may become very appealing where consumers want to know that the company manufacturing the products they buy is really concerned with the environment, committed to harmony with nature and helping the global community. Consumer wants for the natural and exotic will continue to be a major theme in cosmetics and personal care and essential oil production will be needed to cater for the quickly changing trends in the market – that something new that consumers want and manufacturers look for. Scaling down to boutique production through an integrated project or through communities in South East Asia would be a corporate strategy that would make sense to some people. It is also likely with 70% of all flora species in the region that new natural materials are likely to require feedstocks sourced from this region. Low cost biotechnology processes will allow small scale production of many new specialty cosmetic products, which will have some influence on the markets in the near future. South East Asia with this diversity and rapidly growing markets again after the recovery from the 1997 crash, will be the location to develop business with more holistic strategies.
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