Indonesia securing trade deals and shifting its industrial offerings towards diverse and high-quality

Indonesia has a rich tradition of textile production and a technical mastery of the industry. As business professionals in other countries across the region abandon traditional clothing in favour of Western-style business wear, many Indonesians today still primarily prefer to wear the unique, colourful patterned clothing style known as batik.

Much has changed in the hundreds of years since the distinctive local style was first adopted, but one constant that has persevered is the significant role the textile industry has played in the country, first in supplying goods for the local market, and now as a global exporter.

Central Player 

In its current state, the textile business, one of the oldest industries in the country, remains a significant driver of Southeast Asia’s largest economy. Moreover, this labour intensive sector creates employment opportunities for tens of millions of Indonesians.

Even in the face of increasing international competition, the textile industry has continued to expand over the past decade. The sector’s contribution to GDP has increased from Rp96.3trn ($7bn) in 2010 to Rp139.4trn ($10.2bn) in 2015, according to data published by the Bank Indonesia (BI). Highlighting its importance, the government has included textiles as one of its 10 priority industry groups designated for further support in the government’s new Master Plan of National Industry Development 2015-35.

Strong Global Competition 

Ever since China overtook Europe as the world’s leading producer of clothing, it has continued to exert increasing pressure on other textile producers around the world, particularly in Asia.

Mobilising its unrivalled labour pool, modern infrastructure and supply chains capable of rapidly producing and shipping whatever customers want, China has methodically taken over market share, often at the expense of its regional competitors, including Indonesia. In addition to the sheer industrial mass of China, greater competition is also heating up in other developing countries within Asia, such as Vietnam, Bangladesh and Myanmar, all of which are angling to expand their own emerging economies by utilising their respective inexpensive labour pools.

In spite of these challenges, the Indonesian textile market continues to survive by focusing on producing quality offerings as well as increasing its competitiveness in exports through establishing comprehensive trade agreements with some of its largest customer markets. “Indonesia should not rely on labour costs as a primary differentiator,” Iwan Lukminto, president director of textile and garment manufacturer Sri Rejeki Isman (Sritex), told OBG. “We have heavily invested in uplifting labour skills. Today’s retailers will look to quality and capability to produce over cost.”

Trade Agreements 

Indonesian textile manufacturers were able to take advantage of favourable trade agreements, such as the generalised system of preferences (GSP) with the US up until it lapsed in 2012, helping to forge a trade relationship that reached an all-time high that year, when the country imported an estimated $4.1bn worth of Indonesian textiles, nearly quadruple that of the next-largest purchaser Japan, which purchased $1.1bn worth of textiles.

Since this agreement expired, shipments to the US have declined slightly on an annual basis, slipping by a few million dollars in 2013 before dropping off to $3.9bn in 2014 and $3.3bn through the first 10 months of 2015. “The Indonesian textile industry needs in some way to maintain its competitiveness in the important markets of the US and the EU,” Ade Sudrajat, chairman of the Indonesian Textiles Association, told OBG. “For this reason we are keen to have free trade agreements with these two blocs in order to remain competitive and keep the industry alive.”

To access the US market, the industry has been lobbying the Indonesian government to push for an extension of the GSP, as well as inclusion in the proposed Trans-Pacific Partnership agreement. If Indonesia misses out on the preferential treatment afforded by these trade accords, local exporters will be hard pressed to keep pace with other regional competitors.

Access To Europe 

Similar to the situation with the US market, until new deals can be struck up with EU representatives, Indonesia’s textile exports to Europe are subject to import duties in the range of 11-30%, while competitors such as Vietnam are able to export their textile products to the bloc at much more favourable rates. Vietnam successfully secured a Comprehensive Economic Partnership Agreement with the EU in August 2015, when negotiations between the bloc and Indonesia were stalled.

Apprehensive over this disadvantageous position, domestic manufacturers are hopeful that the two respective governments can agree to terms sometime in the near future. Indeed, some progress with EU representatives has been reported in 2016, and negotiations are beginning to gather pace, with the goal of hammering out an agreement that would come into effect within two years. In addition to fostering more beneficial trade pacts with these primary import markets, Indonesian textile producers are also looking to tap into other markets that hold high growth potential, such as Turkey and Iran.

Under Pressure 

Belgium, Italy, Germany, the Netherlands and the UK are all significant importers of textiles from Indonesia, yet purchases from these five nations have declined steadily from their peak in 2011 – when the counties purchased a combined $1.89bn worth of Indonesian textiles – to $1.55bn in 2014, according to data published by the Ministry of Trade.

The textile industry as a whole has been under pressure in 2016, with exports projected to reach $12.3bn for the full year after first quarter exports totalled $2.6bn, according to a statement to the press by Sudrajat in July 2016. This compares to $12.8bn in 2014 and $13.2bn in 2011, when export levels peaked, according to BI data. In addition to the global export market, Sudrajat noted that Indonesian producers were also being challenged on their home turf, as falling purchasing power fuelled demand for cheaper imports from China and Vietnam. As a result, domestic textile producers’ domestic market share fell below 30% in 2016.

Import Levels 

Although export markets garner the most attention from the industry, imports remain equally important for local manufacturers, as the sector remains highly dependent on cotton, which is delivered from Brazil, the US and other countries, which is then spun into yarn and further processed within the country.

Indeed, many of the current challenges facing the industry arise from higher costs of production relative to regional competitors. Wages in Indonesia have been increasing in recent years, while inefficient domestic infrastructure continues to add further drag on the industry. “Around 80% of all fabric is imported from China,” Vasudevan Ravi Shankar, president director of Asia Pacific Fibers, told OBG. “Indonesia needs mills that can supply to the downstream. We need to do import substitution; take a better value chain with raw materials.”

Looking to help level the playing field, the government has been looking to grow the efficiency of logistics with new certified bonded logistics centres, such as the textile logistics centre which opened in Jakarta in early 2016. Centres such as these are intended to help reduce port traffic by centralising movements for inputs and finished exports at a single hub, complete with Customs facilities. Although the government is moving forward with these and other relief measures, such as cutting electricity tariffs for domestic labour-intensive industries, these efforts have yet to have a measurable impact on the textiles sector.

Investment 

Despite the challenges facing the industry, investment has been relatively steady in recent years. From 2011 to 2015, annual foreign direct investment averaged $515.4m, with a high of $750.7m spread over 241 projects in 2013 and a low of $422.5m over 285 projects in 2014, according to the Indonesia Investment Coordinating Board.

In addition to continued foreign investment, leading domestic textile producers are also doubling down on their Indonesian plants. A number of major Indonesian garment makers, including leading exporters like Sritex, are boosting their capital expenditure to brace themselves for increasing global competition. The country’s largest domestic manufacturer of raw textiles, Indorama Synthetics, ramped up production at its new $40m spinning mill in Purwakarta, West Java starting in February 2016. The facility, which boasts a capacity of around 10,800 tonnes and employs 270 workers, was the company’s ninth factory to open in Indonesia. The industry is still concentrated near the capital, Jakarta, at the western end of Java Island, but Central and East Java are becoming increasingly important.

Upmarket Fashion 

In addition to targeting new export markets, another strategy the sector is employing is to improve the quality of its wares to be able to compete at a different price and quality point than the cheaper goods produced by rivals. This includes replacing older machinery with new, more modern manufacturing facilities capable of producing high-quality, high-tech goods that command premium prices, particularly in more affluent markets. “We can manage to maintain quality at higher standards, and most Western markets still believe we can supply them,” Sudrajat told OBG. “Bangladesh and other countries producing at lower costs are coming on-line but they still can’t compete in terms of quality, and this is why we remain optimistic.”

With this in mind, the future of textiles in Indonesia may very well be reliant on newer applications for fabrics outside of the traditional clothing segment. New, technologically advanced products known as geotextiles are already being produced by Indonesian firms and are being used for a variety of purposes, ranging from watertight barriers designed to prevent the erosion of roadways to one-time-use hygienic products for hospitals.

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The Report: Indonesia 2017

Industry chapter from The Report: Indonesia 2017

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