Roadmap for Textiles

Indonesia

Economic News

22 Jul 2010
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The Indonesia Textile Association (API) has announced that textile products have become the leading source of foreign currency in 2007, overtaking oil and gas.



Rather than being seen as a 'sunset' industry, past its prime, API and the Indonesian Chamber of Commerce and Industry (KADIN) have stated they believe Indonesian textile product exports could account for 5% of global production by 2025, accounting for $75.33bn.



This is a solid start to go hand-in-hand with the roadmap released in July by KADIN. This plan is for the economy's industrial sector, highlighting the textiles and garments segment as one of the major drivers of growth until 2030.



The sector is the major earner of foreign currency apart from raw materials such as oil and gas. Total textile exports are expected to reach $10.29bn in 2007, which is a 9.89% increase over 2006 levels (of $9.45bn), according to figures released last month by API.



"In order to achieve the target, textile and textile product industries at home need $5.19bn in additional investments," said Ade Sudrajat, deputy chairman of the API.



In the meantime KADIN expects textile exports to reach $13.88bn by 2010. Part of the importance of the textiles industry is its potential for creating jobs, in addition to earning foreign currency. Thus KADIN expects 2.25m new jobs to be created in the next two years.



"Textiles and garments are tremendously important foreign currency earners for Indonesia, as the country will export $10bn worth of goods in this sector in 2007," M Maniwanen, CEO of Busana Apparel Group, told OBG. "There may be some consolidation in the next years as some companies go out of business but the sector as a whole has healthy prospects."



Much of the sector remains export oriented despite vibrant domestic consumption, given the competition issues presented by illegal imports. Figures from the API reveal that in 2006, 50% of textile products on the domestic market were illegally imported, 5% were legally imported, and only 45% were locally produced. The illegal imports come mainly from Vietnam and China.



Countries such as China and India have an advantage over Indonesia in that they are cotton producers. However wages in Indonesia are 30% lower than in India and productivity is 40% higher, according to the head of one multi-national textile company.



"China and India have the advantage of being producers of cotton, however Indonesia definitely has a card to play," K K Agrawal, president director of textiles producer Bitratex, told OBG. "Whereas many textiles companies are geared towards mass production, they need to restructure in order to cater to smaller orders of particular products, and be in a position to respond to changes in market conditions. There is an opportunity for more value added production to take place in Indonesia."



However the government has lifted import duties on cotton this year and subsidised interest on loans for the upgrading of machinery. The total subsidies amount to Rp255bn ($27.5m) in 2007. This is particularly important given that many textiles and garments producers still operate machinery that is over 20 years old.



Indonesia has become relatively more attractive in the past year given the rising costs in China and imposition of quotas on Chinese textiles. Multinational companies have shifted some production to countries other than China in order to hedge the risk.



"I see a second opportunity knocking on our doors: China's advantages are being evened out," Ravi Shankar, president director of the country's only vertically integrated polyester textiles company Polysindo Eka Perkasa, told OBG. "The government needs to formulate a coherent long-term strategy for the development of the textiles and garments sector. A lot of textiles are still being imported by the garments industry and they should be produced locally. Many small and medium enterprises have collapsed due to so many imports. This will give Indonesian exports greater value addition and at the same time makes it more competitive."



Indeed while Indonesia is a net exporter of yarn and textiles, many garment companies choose to import much of their raw materials from China. Although cost explains part of this, the lag time tends to be smaller for imports from China as many textiles companies in Indonesia are geared towards mass production rather than a more flexible model of production.



"The performance of textile, leather and footwear industries dropped 3.4% in the third quarter of 2007," Faisal Basri, an independent Indonesian economist who ran for governor of Jakarta in August, said on November 29. "Last year, these industries experienced average growth of 1.2%."



Two of the major outstanding issues are the taming of costs for energy and labour.



The state-utility Perusahaan Listrik Negara has increased its tariffs by 10% to 15% this year, although businessmen argue said they were given no indication such price increases would take place. The business community is lobbying for the government to fix a band for the fluctuation of energy prices, while promoting the use of coal as a source of energy for industrial production.



The labour law has remained a roadblock in the development of labour-intensive manufacturing industries. Indonesia has one of the tightest labour markets in Asia with the regulations fixing such high severance pay that companies have no incentives to hire workers. KADIN is lobbying for the revision of the regulations and for the creation of a national minimum wage to replace the present regime where wages are locally set.



Textile industry insiders have said the mindset of businessmen and politicians in the sector must change so that textiles are no longer seen as fading business propositions. As such, the KADIN roadmap has been important in highlighting the opportunities to be grasped in the global textiles and garments market. Action is required on both sides, from government regulations and incentives for the industry to modernisation efforts by the private sector.

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