Increased government support and ongoing trade negotiations with the EU are expected to underpin growth in Indonesia’s textiles industry.
In August Airlangga Hartarto, minister of industry, announced that the government was developing a number of incentives – including extending tax breaks and lowering gas prices – in a bid to boost the competitiveness of the country’s textile industry.
Materials in the raw
As part of the incentive package, the government has proposed removing value-added taxes on raw materials produced locally, a move that could cut production costs by making domestic materials more competitive and encourage increased investment in the upstream segment.
Any measure to support the expansion of the raw materials link in Indonesia’s production chain will be welcome, according to Iwan Setiawan Lukminto, president of Sri Rejeki Isman (Sritex), an Indonesia-based textile and garment manufacturer.
“As Indonesia’s textile industry continues to grow, it is becoming increasingly important to source raw materials locally, and as an archipelago, we have the land to do so, but we need to back this with investment and technology,” he told OBG.
According to Ravi Shankar, president director of polyester manufacturing company Asia Pacific Fibres, expanding access to local raw materials will also result in reduced costs and new products.
“To stay competitive, we need to replace foreign imports with domestic raw materials in order to create a better supply chain, including integrating upstream manufacturing of rayon and polyester, and creating value-added products that meet the demands of the industry,” he told OBG.
Hopes pinned on trade agreement
Indonesia’s textile producers are also looking to the government to help boost exports by striking a trade deal with the EU, an agreement that could help increase the country’s competitiveness among regional rivals, notably China and Vietnam.
To this end, in mid-July, Jakarta opened bilateral trade talks with the European bloc, with President Joko Widodo saying he expected a Comprehensive Economic Partnership Agreement (CEPA) to be in place by 2018.
The trade talks with the EU are expected to positively impact Indonesia’s textiles industry, with local and foreign investors already beginning to look at what Indonesian facilities can offer in terms of infrastructure, labour laws and connectivity to ports.
Currently, the EU – which is Indonesia’s fourth-largest trading partner – imposes duties of between 11% and 30% on Indonesian textile imports, putting the country at a disadvantage when compared to regional producers such as Vietnam, which already has a CEPA with the EU, and is therefore, not subject to import duties.
In 2015 Indonesia’s overall textile exports were valued at $12.3bn, accounting for 1.2% of GDP. Exports are predicted to reach the same level this year, after first-quarter exports totalled $2.6bn, according to a statement made by Ade Sudrajat, chairman of the Indonesian Textile Association, in July.
The government has said it wants to see Indonesia become one of the top-five global textile exporters in the medium term, up from its present ranking of tenth, currently controlling a market share of 1.8%.
Growth in the textiles industry should also go some way to helping Indonesia’s broader manufacturing sector – which has seen its contribution to GDP slip over the past seven years, from 26.4% in 2009 to 20.8% last year – with foreign investment often directed towards capital-intensive industries, rather than labour-intensive industries.
Manufacturing growth is also lagging behind that of the wider economy: in the first quarter of the year, the sector expanded by 4.1% year-on-year (y-o-y), compared to overall economic growth of 4.9% y-o-y.
The textiles and apparel sector ranks fifth in terms of contribution to Indonesia’s manufacturing industry, accounting for 6.7% of total production value, after food and beverage (30.8%); metal goods, electronics and electrical equipment (10.8%); transport equipment (10.5%) and chemicals, pharmaceuticals and traditional medicines (10%).
Last year the textile industry’s contribution to GDP was Rp139.4trn ($10.2bn), according to data published by the Bank Indonesia.
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