System Dynamic of Lubricant Demand in Marine Industry in Indonesia
Devi Arnita, Reza Ashari Nasution
School of Business and Management
Institut Teknologi Bandung
Bandung, Indonesia
Abstract: This study is applied to one of Indonesia’s biggest stated owned lubricant company, PT. Pertamina Lubricants. In the last two years, sales volumes of Pertamina Lubricants for industrial lubricants in marine industry were declined. The dynamics affects lubricant demand of Pertamina Lubricants’ marine industrial segments, which requires strategic decisions about the future existence of Pertamina Lubricants. To draw the appropriate strategies and tactical actions, a system dynamic model for the evaluation of the demand of industrial lubricant of Pertamina Lubricants in marine industry is conducted. System dynamic using Causal Loop Diagram and Stock Flow Diagram is carried out as a proper method to understand and analyze the interactions of various key driving force components via feedback structure. The key driving force components are lubricant export, technology advancement, ship population and lubricant supply. The objective of the paper is to investigate dynamic lubricant demand of Pertamina Lubricants in Indonesia. The research was conducted by doing in-depth interview, literature study and acquiring and analyzing secondary data.
Keywords: marine lubricant; lubricant demand; Pertamina Lubricants; system dynamics.
Referenceto this paper should be made as follows: Arnita, D. And Nasution, R. A. (2017) ‘System Dynamic of Lubricant Demand in Marine Industry in Indonesia ’, J. Global Business Advancement, Vol. X, No. Y4, pp.000–000.
Biographical notes:
1Introduction
In the industrial sector, lubricant plays a very important role because of the use of appropriate lubricants can prolong the lifespan of a machine. Lubricant reduces friction and wear of engines that can extend the life of engine components and keeps the quality of the machine components in optimal conditions (Mang & Dresel, 2017). Besides, the lubricant also serves as a coolant in contact surfaces, carries debris that form on the contact area and improves the efficiency of an engine machine.
PT. Pertamina Lubricants is one of Indonesia’s stated owned enterprises which play a significant role for the economy of Indonesia. The company is also the largest lubricant producers in Indonesia. As part of the downstream business of PT. Pertamina, Pertamina Lubricants has experience in producing and marketing its lubricant products for more than 30 years. Therefore, there was an urgent need to maintain the business sustainability of Pertamina Lubricants.
Lubricants market in Indonesia consists of two major segments, namely consumer or retail segment and industry segment. Consumer segment serves the retail lubricant marketing for automotive sector like vehicle trucks, passenger cars and motorcycles. Meanwhile, industrial segment serves for lubricant demand in industries which are used in a wide variety of applications (Pertamina Lubricants, 2015). PT. Pertamina Lubricants intend to become the top 20 ranking of world-class lubricants company by 2018 by strengthening domination in the domestic market and expansion abroad. Following the goal, this company always seeks to make improvements and innovations to its products in order to meet the needs and demands of consumers in terms of both competitive quality and price.
Nowadays, PT. Pertamina Lubricants established its position as the market leader of lubricants with a market share of 59,09% in the domestic market (Pertamina Lubricants, 2015), with approximately 55% market share in the industrial lubricants and 50% market share in consumer lubricants (Kline & Company Inc., 2016). The industrial sector contributes significantly to the company’s revenue. Recently, PT Pertamina Lubricants’ efforts in expanding the market and maintaining its business continuity are faced with the challenge coming from its target industries. The unstable economy makes the growth of PT. Pertamina Lubricants in industrial market sectors disrupted. The slowdown economy that happened in the global eventually affected the growth of some of Indonesia’s industrial market sectors. The existence of competitors in Indonesia lubricant market, especially world-class competitors such as Shell and Total, are increasingly affecting the sales of the company. Intense competition resulted in decreased sales of industrial lubricants for PT. Pertamina Lubricants. The overall situation inevitably gives impact to PT. Pertamina Lubricants’ decline sales volume for industrial lubricants. As seen from the Figure 1 since 2015, sales of industrial lubricants of Pertamina Lubricants have been decreasing (Pertamina Lubricants, 2015). In fact, sales volume in 2016 has dropped to more than 30% compare to last year (Pertamina Lubricants, 2016).
Figure 1 Sales Volume of Industrial Lubricants of Pertamina Lubricants, 2014-2016
Source: Internal Pertamina Lubricants, 2016
There are five industrial market sectors which are considered as the main target market of PT. Pertamina Lubricants for its industrial lubricant products, namely Mining Industry, Marine Industry, Agro-based Industry, Power Generation Industry and Oil and Gas Industry. This paper will only focus on marine industry as this industry contributes the most market size to the company. Figure 2 indicates the decline in sales volume of marine lubricant since 2015. The dynamics will affect the attractiveness of marine industry that requires a strategic decision about the future existence of PT. Pertamina Lubricants in those industries. The company believed that the situation may force the Pertamina Lubricants’ sales volume, particularly for marine lubricants, to drop again to a severe position in the next years.
Figure 2 Sales Volume of Industrial Lubricants of Pertamina Lubricants in Marine Industry, 2010-2016
Source: Internal Pertamina Lubricants, 2016
Therefore, Pertamina Lubricants seeks to maintain its market share and their main focus is the industrial lubricant, this is due to the sales volume contribution of industrial lubricants is larger than consumer lubricant (Pertamina Lubricants, 2015). Industrial lubricant market share could be reduced if Pertamina Lubricant not immediately formulates strategic steps to defend it. This strategic decision also could help Pertamina Lubricant to prevent sales falling further in the future. Accordingly, business problem is formulated in what are the key driving forces and system dynamic of lubricant demand of PT. Pertamina Lubricants in marine industry. The system dynamic approach is used and recommended as this system is able to demonstrate the nonlinear behaviour of a complex system over time which makes easy to understand. The system has been widely used to solve various business problems from different areas. The research also has scientific and practical merit for evaluating and identifying the demand for lubricant in marine industry in Indonesia.
2Literature Review
- Lubricant and Industry Demand towards Lubricant
Lubricant is a blend of base oils and performance-enhancing additives as required by engine to use to reduce the friction between two surfaces thus is able to extend the life of equipment. Specifically, marine lubricants help in operating various kind of machinery in performing the equipment’s machine functions smoothly. Lubricant consumers in marine industry are Cargo Ships, Tankers, Container Ships, and Passenger vessel. Barges, speed boats, small ships, tankers, big ships, and submarines, are operated on many kinds of fuels, such as high speed diesel, light diesel oil (LDO), and residual fuel oil (FO). Small vehicles operate straightly on fuels utilizing reciprocating engines while bigger vehicles require turbines. Nowadays, modern cargo ships and crude tankers are operated on electricity empowered by their own power plant fuelled by furnace oil or LDO. Hence, the requirements of lubricants differ which depend on the types of vehicles (Chaudhuri, 2011; Srivastava, 2014). Marine industry lubricant is categorized based on oil types, namely mineral oil, synthetic oil, and grease. Meanwhile lubricant market which categorized based on its application types consist of diesel engine oil, gear oil, compressor oil, transmission oil, hydraulic fluids, turbine oil and heat transfer fluid. Marine engine oil represents the largest proportion of the total industrial engine oil than other types of industrial engine oils.
ASEAN has become the opportunity for the lubricant market development, backed by its vast area of 4.4 million square kilometers and enormous population of 601 million people. Furthermore, in 2019, the projection of lubricant demand in Southeast Asia market will reach three billion liters, reflecting on the continued growth of the automotive market and the industrial market in several ASEAN countries. Researches even claimed that lubricant consumption in the Asia Pacific to reach 38% of the lubricant market worldwide, and will continue to grow significantly in the future. ASEAN Free Trade Area (AFTA) and the ASEAN Economic Community (AEC) are the opportunities for the Company to carry out its global strategy.
With a growing number of Indonesia’s population to a quarter of a billion people and a rising in middle class as well as relatively stable political and economic situation, Indonesia has become a promising market for lubricants business. This is evident from the growing number of manufacturers and distributors of lubricants making investments in Indonesia and the variety of lubricant products being sold. In the next few years, lubricant consumption will likely to grow. This is a result of thriving business sectors, ranging from industry, and transport to infrastructure that continue to need lubricants to support their engines. Therefore, PT Pertamina Lubricants continues to increase its production capacity in order to support domestic demand, and continues to penetrate the global market.
PT Pertamina Lubricants believes that lubricants, grease, specialties products and base oil market will continue to grow, both domestic and overseas. With proper preparation, PT Pertamina Lubricants is optimistic in running the domestic and global lubricants business in the future. The success of both markets will ensure the sustainability of PT Pertamina Lubricants in the future.
2.2.Pertamina Lubricants
Pertamina is a state owned oil & gas company that was first established on 10 December 1957, under the name of PT Permina. The company then changed its name to PN Permina in 1961 and changed it again into PN Pertamina in 1968 after merging with PN Permina. With the enactment of Law 8 of 1971, the company became Pertamina. This name persisted until after Pertamina changed its legal status to PT Pertamina (PERSERO) on October 9, 2003.
Initially, Pertamina Lubricants is one of the business units under the Directorate of Marketing and Business PT. Pertamina (Persero). On September 23, 2013 PT Pertamina Persero decided to do a spin off its lubricants business unit to become a separate business entity as its subsidiary, namely PT. Pertamina Lubricants. PT Pertamina Lubricants establishment was the implementation of the mandate of the Law No. 22 of 2001 on Oil and Gas (Undang-Undang No. 22 Tahun 2001 Tentang Minyak dan Gas); with role as part of the downstream activities in producing and distributing lubricant in Indonesian market. Since then it has been responsible for independently fulfilling its operational needs and also to reach the target of shareholders for lubricants industry. Pertamina Lubricants scope of business consists of producing, exporting and importing, distributing, marketing, providing service and other business activities of lubricants, grease, specialties products and base oil products as well as raw materials of lubricants, grease, specialties products and base oil (Pertamina Lubricants, 2015).
2.3.Driving Force
Driving Force is the factor of the business that is unique to a company and is the key determinant for the cause of changes in an industry and competitive conditions (Thompson, Gamble, & Strickland, III, 2005). The determination of driving forces will help in identifying and drawing a strategy for the future of a company in facing over its competitors. Possible driving forces are identified systematically and regularly by examining the environment of the industry and other external factors. Based on this, the most important driving forces are determined according to their importance of influence and major impacts on their company. These factors can be more than one and be obtained through the business actor and secondary data.
2.4.Causal Loop Diagram
The causal diagram illustrates the relationship between key driving force components which shows the cause and effect of the system structure (Bala, Mohamed, Arshad, & Noh, 2017). The causal loop diagram provides beneficiary to modeling the system structures. From each arrow indicates the cause or effect of the relationship between two components. The (+) sign gives an understanding of the positive effect or increment on the intended components. Signs (-) give an understanding of the negative influence or decrease in the intended component.
2.5.System Dynamic
System dynamic is a methodology whereby complex interdependent components which enables the strategic modeling of dynamic behavior and nonlinear interactions that can be understood and analyzed (Richardson & A.L. Pugh, 1986). This collection of complex components is continually interact over time forming a unified whole which called a system (Halbower, 1994). The pattern of interaction among the components in the system is the system’s structure.Dynamic refers to the system’s change in behavior over time.
The Stock Flow Diagram is used to analyze the system dynamic in this paper in order to model the marine lubricant demand. It has four basic building blocks, they are:
- Stocks (levels) represent anything that accumulates or drains.
- Flows (rates) represent a rate of change of a stock.
- Connectors (arrows) represent the causal relationship between two variables in the model which carry information from one component to another component; the direction of the arrow shows the dependency relationships.
- Converters transform input into output.
1.Methodology
The objective of the research is to develop dynamic model of Indonesia’s lubricant demand in marine industry to show the behavior. As illustrated in Fig. 2. the study will adopt System Dynamic model to understand the key driving forces for the demand of marine lubricant market in Indonesia.The conceptualization of the model is done on the basis of a defined problem. It begins with the identification of key driving force components involved in modeling. The model of marine lubricant demand incorporates several key driving force components that are interconnected with defined dynamic problems; they are marine industry growth, foreign ships, technology advancement. Furthermore, the components’ inter relationships between each other are then determined by using causal loop diagram. The conceptualization of this model is aimed to help in giving a better and deeper understanding of the system.
The research methodology involves a combination of both desk research and field research. Desk research is used to examine and analyze the given data of country lubricant market and sales and volume record. Field research is used to complement the data from desk research. The authors also interviewed and discussed with key decision makers in Pertamina Lubricants in order to determine the key driving forces of marine lubricant demand of Pertamina Lubricants.
2.System Modeling
Lubricant demand of Pertamina Lubricant in marine industry is influenced by several interdependent driving forces. They are lubricant export, technology advancement, ship population and lubricant supply. These factors are chosen because of their major influence and impact to the demand of marine lubricant in Indonesia. The determination of key driving forces are based on interview with key decision maker in Pertamina Lubricants and literature study.
2.1Ship Population
In supporting the development of shipping industry in Indonesia as the implementation of The Global Maritime Fulcrum program, a road map in 2012-2025 has been established by the ministry of industry. One of the goals is, in 2020, the national shipping industry cluster is expected to be able to produce ships with a capacity of 200 thousand dead weight tonnage (DWT). Special area's shipbuilding industry will also be developed to attract local and foreign investors. Currently, the number of national shipbuilding industry has reached 250 companies, with a potential production capacity of 700 thousand DWT. Meanwhile the reparation segment has actually been able to serve ships of up to a capacity of 10 million DWT. Furthermore, Indonesian Government will enhance ship design and engineering capabilities to support the maritime industry through the development of Pusat Desain dan Rekayasa Kapal Nasional (PDRKN). The utilization of local raw materials and components as well as the enhancement of human resources skills in shipbuilding will be developed consistently. The government will also secure and optimize the utilization of the domestic market as a base load for the development of the shipbuilding industry.
The population of sea transportation or ships in Indonesia has been increasing each year over the period of 2011-2015. In 2011, the population of the national fleet reached 9.255 units, and in 2015 the population reached 15.688 units (Kementerian Perhubungan, 2016). For more details, population of ships in Indonesia can be seen in the following table.
Table 1 Number of Ships by Type of Shipping, 2011-2015
Type of Shipping / 2011 / 2012 / 2013 / 2014 / 2015Shipping / 7.880 / 10.147 / 11.426 / 12.300 / 14.231
Traditional Fleet / 1.314 / 1.329 / 1.340 / 1.357 / 1.371
Pioneer / 61 / 67 / 80 / 84 / 86
Total / 9.255 / 11.543 / 12.846 / 13.741 / 15.688
Source: Statistik Perhubungan, 2016
Figure 3 Numbers of Ships by Type of Shipping in Indonesia, 2011-2015
Source: Statistik Perhubungan, 2016
It is clearly seen from Figure 3 that shipping investment will continue to grow, especially because of the increasing demand in the offshore sector. Moreover, 70% of Indonesia’s oil and gas activities are exist in the sea.
Seaborne Trade
Seaborne trade is trade activity of goods which is transported by ship over the sea. Seaborne trade is a major determinant of the growth of marine industry. An rise or a fall in seaborne trade volume will lead to a change in the demand for sea transport or ship. The maritime industry has largely contributed the import and export of goods on the large-scale quantity worldwide. There are around 18,000 islands in Indonesia. Moreover, Indonesia is the largest archipelago in the world with a sea area of 5.4 million square kilometers, and a coastline that reaches 95.181 km. Strait of Malacca and Indonesia Archipelagic Sea Lanes (Alur Laut Kepulauan Indonesia or ALKI) is the strategic maritime trade route for worldwide trade, with trade volume reaching 45% of the total trading value worldwide (Badan Pusat Statistik, 2016). Indonesia’s dependence on maritime transportation holds a major role in order to facilitate its domestic as well as international trade (90% of Indonesia’s export commodities are delivered via water transportation). Seaborne trade is affected by marine industry growth, seaborne trade supporting government programme and free trade agreement.