Keeping up: New trade agreements are making it difficult for textiles firms to compete with international rivals

The textile industry has been struggling with a number of problems. Wage rates are increasing and competition, especially from China, is rising dramatically. Furthermore, Indonesia’s main markets in the West are weak as the recession drags on in some places and consumers cut back. And the US has given preferential rights to some of Indonesia’s rivals – Bangladesh, Sri Lanka and Vietnam – making it much tough to sell in the world’s largest consumer market.

Textile activity is the largest industrial subsector, employing about 1.4m people (about 10% of the manufacturing workforce), generating about $5bn of net foreign exchange earnings and about 2% of the GDP and representing about 8% of the manufacturing industry. But it has been in a difficult spot for years, as its growth has been much slower than the GDP, and the industry contracted in 2007 and 2008 and barely grew in 2009. It is progressively becoming a smaller part of the GDP. Most worrying is the fact that exports have been dropping. In 2012 exports of textiles and related products fell by 6% from $13.2bn to $12.6bn.

TRADE ISSUES: The Asian financial crisis of 1997-98 and the crash’s aftermath made it difficult for firms to finance investments in plants, equipment and technology. A poor economy, high interest rates and poor infrastructure have made it tough to build the sector and set up efficient logistics networks.

The end of the Multi-Fibre Arrangement in 2005 exposed Indonesia to more direct competition from other low-cost manufacturers also seeking markets in the West. Less developed economies in Asia, such as Bangladesh and Vietnam, are getting favourable tariff rates from the US. Most damaging perhaps is the free trade agreement with China, which has exposed it fully to the world’s export powerhouse.

The average tariff of Chinese goods imported to Indonesia fell from 10.6% to 0.5% when the agreement went into effect in 2010. At the same time, China was finding it difficult to sell its goods in the West because of slow economic growth, and it has been looking for other markets to target. Indonesia has been one of the destinations for its goods. China now accounts for about 60% of Indonesia’s total textile imports. The sense in Indonesia is that it is a victim of efforts by an overly aggressive trading partner and that it is being flooded by cut-rate goods from an industry that benefits unfairly from government policy. “That is the problem, so many imported garments,” said E G Ismy, the secretary-general of the Indonesian Textile Association.

CAPITAL ISSUES: While there is an element of truth to the criticism in that China does support some of its industries and this may give it an unfair advantage, issues on the Indonesian side also weigh on the industry. Deficiencies in the market and on the part of manufacturers are at least partly to blame.

The main weakness lies in the state of the machinery. Textile companies have not made the capital investments necessary to stay competitive, instead relying on the low cost of labour. In a 2005 study by the Ministry of Industry and Trade, it was found that 64% of spinning machines, 82% of weaving machines, 84% of knitting machines, 93% of finishing machines and 78% of garment machines were more than 20 years old.

MACHINERY PROGRAMME: In an effort to close the gap between local manufacturers and their international competitors, the Ministry of Industry and Trade has been providing support for the purchase of new equipment in the form of reimbursements worth 10% of the equipment purchased as part of the Indonesian Textile Restructuring programme. Soft loans and training have also been offered to producers.

The ministry was careful to limit subsidies to under 2% of sales to keep compliant with World Trade Organisation commitments. In 2007-10, the ministry distributed Rp783bn ($78.3m) to support the purchase of Rp7.72trn ($772m) of equipment. “Around 80% of the machines were over 20 years old, so our competitiveness is low,” Andi Susanto of the ministry’s Directorate of Textile and Multifarious Industry said. “So we are trying to upgrade our competitiveness.”

According to the ministry, during the period in question, the industry has improved significantly. It employed 61,000 more people, production increased more than 10%, energy savings was more than 10% and productivity increased by as much as 9%. Most of the investment went into buying new fabric machines (27.7%).

COSTS: The industry has been hit by rising costs. In September 2012 the House of Representatives Committee VII, in charge of setting electricity rates, approved an average 15% rate increase for 2013. The hike was made to give the Perusahaan Listrik Negara, the state utility, the funding to expand its network. The textile industry has said the added costs would be hard to digest. However, the biggest threat to the industry is the increase in the minimum wage in 2013 from Rp1.5m ($150) to Rp2.2m ($220). Garment makers will be especially hard hit, as they are particularly labour intensive. Some say it is not the increase that bothers them, but rather the attitude and stance of organised labour. “For me the big problem for manufacturing in Indonesia is every year the minimum wage goes up. Next year, the unions will demand more,” said Baari La Inggi, an analyst at the Indonesian Textile Association, “There must be a solution to end this. You can see from the last three years, this is a big problem.”

The textile industry argues that for wage rises to make sense, there must also be higher output. What is needed, they continue, is a system that rewards efficiency. However, the state’s decreasing involvement appears to be a promising development. Anne Patricia Sutanto, the vice-president director of garment manufacturer Pan Brothers, told OBG, “Both labour unions and companies seem happy that the government will not take part in any future minimum salary negotiations. The government’s new role will be to act as mere facilitators, intervening in the absence of agreement.”

COMPENSATING FACTORS: But as domestic textile manufacturers face difficulties, several factors compensate for the losses experienced. To a certain extent, foreign investment will help solve the industry’s problems. While Chinese firms are taking away some business, they are also investing. “The sector is always open to new international partnerships, especially if they bring innovation and technology,” Dedie Suherlan, president director of Trisula International, told OBG.

And to a certain extent, the changes that are taking place are actually part of a healthy transition. As wages rise, Indonesia is starting to move up the value chain and make products that are more advanced and less labour intensive. The textile business may indeed shrink, but if it does, it will be replaced by more productive and automated industries. Already, the country is seeing major investments in the auto sector and in electronics manufacturing and the rise in wages will only accelerate this. The main driver for economic growth now is not low cost exports, but the rise of the middle class, and for that reason, the eclipse of the textile industry should be seen as a sign of more positive changes.

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The Report: Indonesia 2013

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