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Marketing chains

Production of natural rubber (NR) is regionally concentrated in South and South East Asia; yet the bulk of consumption occurs in North America, Europe, Japan, and China. The marketing network for NR has thus the crucial role of linking the regional concentration of producers on the one hand and consumers on the other. It entails a multitude of dealers, selling and buying agents, brokers and exporters, who perform discrete but related functions at various stages of the chain.The overall marketing chain may be examined by considering the internal and external marketing separately.

Internal marketing: Estates v. smallholdings
External marketing: Open v. direct trading
Marketing structures in Malaysia, Indonesia, and Thailand

Internal marketing: Estates v. smallholdings

Rubber production is carried on in both estates and smallholdings. These two NR producing sectors possess discrete organisational structures and marketing channels.

Marketing of estate rubber

NR production and processing is fully integrated in most of the bigger estates. Moreover, a few large estates have moved downstream into rubber goods manufacturing and other activities. Some major players in the rubber plantation industry are now diversified industrial conglomerates which derive a small share of their income from production of the raw product (consider, for example, the Guthrie group in Malaysia).

Marketing structures vary greatly between and within different geographical locations.

A few large estates have direct links to consumers and, in such cases, direct sales are carried out. There may be either direct consignment to selling agents in consuming countries (as done by agency houses) or sales to consumers' buying agents who operate locally.

The balance of estate NR is handled through open trading. Essentially in this structure, estates rely on dealers and brokers operating both locally (primary market) and in consuming countries (terminal markets). Estates usually retain ownership over the product until the final stage. Moreover, large estates normally sell forward.

Marketing channels for smallholders' rubber

The arrangements in the marketing of smallholders' NR depend largely on the size of the holding and its integration into group schemes.

Marketing of smallholders rubber

Source: UNCTAD secretariat (adapted from Rubber Research Institute of Malaysia, Rubber Owners' Manual)

Traditionally, the flow of NR from producers to consumers has involved a chain of intermediaries operating at different levels: local rubber dealers (village level), middle dealers (town level), remillers, packers, and exporters (international). Under this system, the village dealer, often a shopkeeper and a moneylender in addition to being a rubber dealer, often represents the smallholder's only link in the marketing chain. The point has been made that this set-up may lead to monopsonistic and monopolistic situations.

First level traders and their agents collect rubber in sheet (most often unsmoked sheets) and crepe forms from smallholders, sort and sometimes smoke it, and sell it to "middle" dealers. From the middle dealers the rubber is delivered to wholesale dealers and exporters, who sort, grade and pack it before shipment against f.o.b. or c.i.f. contracts.

Strategies for the development of the smallholder sector included processing via group processing centres (GPCs). The GPC's members are able to benefit from an increase in scale and sophistication in rubber processing. They tend to produce better quality sheets, which are then sold to the middle- and upper-level network of traders (bulk sales through tenders).

External marketing: Open and direct trading

Rubber commodity markets provide a channel of supply from producers to final consumers via dealers and brokers (open trading). In addition, a few large producers may have direct links to consumers and, in such cases, direct sales are carried out (direct trading).

Marketing channels (NB: bad printed quality)

Source: UNCTAD secretariat (adapted from Rubber Research Institute of Malaysia, Rubber Owners' Manual)

Open trading

In the earlier structure of NR trading, dealers and brokers openly traded rubber through "primary markets" in Kuala Lumpur and Singapore. Rubber from these primary markets was then forwarded to counterpart "terminal markets" in London, New York, Shanghai, Amsterdam, Hamburg, Paris, and Tokyo. Primary and terminal markets perform an important function in matching supply and demand and discovering prices. Two types of trading strategies occur in these markets: spot or cash transactions involving trade in physical commodities and futures trading.

The primary markets in Kuala Lumpur and Singapore are regulated and administered by the Malaysian Rubber Board (MRB) and the Rubber Association of Singapore (RAS), respectively. Singapore is primarily an "entrepôt" market (storage and re-packaging): it imports rubber for re-export in consuming countries. Primary markets provide services related to the transfer of ownership and the physical flow of rubber from producers to the port of shipment.

Terminal markets located in Hamburg, Shanghai, Amsterdam, Paris, and Tokyo are basically import markets supplying the local needs. Similarly, New York is largely a domestic market to supply the needs of the United States (to a lesser extent it imports for re-export to Canada and Latin America). By contrast, the London market is primarily an "entrepôt" market, in addition to supplying domestic requirements, national rubber can also be re-exported.

NR handled through open trading notably involves less specialist grades (e.g., TSR 20, RSS1 and RSS3) and crops from less developed regions, particularly in Africa.
The few dealers transacting most of the rubber on open markets are actually subsidiaries of large companies. Major trading firms in the London market included Symington and Son. Ltd. (along with Symington Italia Gomma Lattice of Rome, part of the Guthrie group which controls large plantations in Malaysia) and Cargill plc (a subsidiary of the giant grain marketing company, with trading offices in Singapore and Tokyo).

Direct trading

Direct trading between producers and consumers (especially tyre-making consumers) has been encouraged by further developments in the rubber industry (notably, requirements for better consistency and tailoring to consumer needs and the growth of rubber goods manufacture in East Asia).

Direct trading may occur via sales to consumers' buying agents operating in producing countries (for example, the rubber-buying offices set up in Singapore by most of the international tyre companies). Yet there are also other direct outlets. In particular, a few large estate companies and smallholder group organisations have deepened and extended their marketing links with particular consumers, sometimes operating through selling agents in consuming countries.

NR direct trading between big suppliers and consumers typically entails long-term contracts of up to 18 months. Direct trading arrangements often involve specialty rubbers tailored to consumer needs.

Marketing structures in
Malaysia, Indonesia, and Thailand

Malaysia

The two NR producing sectors, i.e. estates and smallholdings, are largely mingled in location (unlike Indonesia, where estates and smallholdings tend to have distinct locations). Throughout history, Malaysia has exhibited relatively higher labour and land costs in NR production than Indonesia and Thailand. The organisational structure of NR production in Malaysia well reflects the above conceptual outline (twofold producing sector -estates v. smallholders; external marketing by way of direct sales and open trading).

Following progressive concentration, the estate sector is dominated by a few large companies supplemented by smaller estate business (a few medium-sized foreign firms and a network of smaller domestic units, often performing service activities). The largest estate companies are incorporated as a public limited company and listed on the Kuala Lumpur and Singapore stock exchanges. The Malaysian government maintain substantial interests in major plantation companies previously owned by foreign (chiefly British) interests.

Plantations in Malaysia

Source: Guthrie's corporate website

Estate companies have developed into major corporate conglomerate with substantial interests in various sectors of the Malaysian economy. A few of them entail overseas operations and distribution centres in consuming countries. Most companies have developed close links with international concerns, which still prominently feature in downstream rubber goods manufacturing (foreign investors include Goodyear in tire manufacturing and Safeskin Corporation for the manufacturing of latex concentrates into dipped goods).

Selected Major Malaysian plantation companies

Source: UNCTAD secretariat

The organisational structure of the Guthrie group well illustrates the extent to which Malaysian estate companies have moved downstream and diversified horizontally. Only a small share of income is currently derived from rubber plantations.

The Guthrie conglomerate

Source: Guthries Industries Malaysia Sdn Bhd

In the smallholding sector, government programmes have involved establishing group smallholdings through the public agency Federal Land Development Authority (FELDA). In addition to implementing land development programs throughout the country, FELDA is itself a major estate company with downstream involvement in rubber processing and trading (through a hub of wholly and majority owned subsidiaries). The Malaysian Rubber Development Corporation (MARDEC) traditionally processed natural rubber from Malaysian smallholders into various commodities. The figure below details the marketing structures for Malaysian smallholders rubber.

Marketing channels for smallholders' rubber in Malaysia

Source: UNCTAD secretariat (adapted from Rubber Research Institute of Malaysia, Rubber Owners' Manual)

Today, Mardec is a major diversified corporate group with downstream linkages and a trading arm. In addition to factories that produce various categories and grades of natural rubber, Mardec subsidiaries custom-make a wide range of value-added rubber and plastic products that meet customers' specifications. R1 International, the Singapore-based Mardec's marketing and trading arm, deals with local and foreign traders. Direct trading links are also established by accredited Mardec agents in consumer countries all round the world. Mardec is the local partner in joint-venture companies such as with Ansell of Australia (rubber gloves) Fillatice of Italy (latex thread) and Cabot of Australia (carbon black). More information is available on MARDEC's corporate website.

Indonesia

Sumatra is the chief natural rubber area. Significant further cultivation districts are located in western and central Kalimantan.

Unlike Malaysia, smallholders are largely confined to remote areas, especially in the key NR growing area of northern Sumatra. There is a persistence of traditional production technologies, as reflected in relatively low yields. The marketing of smallholders' rubber is still largely carried out through a chain of dealers who often enjoy monopsonistic positions vis-à-vis individual smallholders.

Efforts have nonetheless been made to group together smallholdings. For example, under the Nucleus Estate Scheme smallholders were provided with small plots of high yielding tree crops. Participating farmers in a determined location shared the benefits of centralised technological and managerial assistance.

Indonesian estates include large publicly owned plantations and private estates. As in Malaysia, most estates also grow oil palm and other crops. Although increasing involvement in downstream rubber processing, there is still relatively little rubber goods manufacturing (dominated by Bridgestone and Goodyear).

Plantations in Indonesia

Source: Guthrie's corporate website

Publicly owned plantations (the "PTP" plantations) were based on Dutch concerns that were nationalised in the late 1950s and early 1960s. Initially structured as public entities, they were subsequently incorporated under private law as limited liability companies, although publicly owned. Some estate companies still combine private and public attributes. In 1996 the three PTP companies were consolidated into the State-owned enterprise "PT. Perkebunan Nusantara III" (Persero). Persero is a vertically integrated concern with core activities in palm oil, rubber, and cocoa production and processing. It owns 4 rubber processing facilities (rubber thread factory, dipping process factory, rubber article factory, and cyclized rubber resin factory) and entertains direct sale linkages with foreign consumers, notably through overseas marketing offices.
Private estates comprise both Indonesian companies and foreign concerns.

Thailand

Contrasting with Malaysia and Indonesia, a real estate sector is absent in Thailand, who has always been independent from colonial power. Virtually all NR is produced on smallholdings.

Thai farmers tend to engage in more diversified activities than their Indonesian and Malaysian counterparts. Furthermore, they exhibit on average relatively high levels of management and technical skills.