Staving Off Decline

Indonesia

Economic News

22 Jul 2010
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The manufacture of footwear and textiles has long been an important and growing source of exports and employment for Indonesia. With the US and Europe on the verge of a recession, the industry is nevertheless confident that improved competitiveness and the opening up of new export markets will help mitigate any adverse affects brought about by a potential slump in demand from the country's primary exports markets.



Indonesia is currently ranked as the world's 10th largest textile producer, with the US accounting for over one-third of its entire textile exports and Indonesia being the US's third largest supplier. Europe, meanwhile, makes up an additional 15% of Indonesia's textile exports. Together, the US and Europe together account for over 60% of the country's footwear exports.



According to the Ministry of Trade, textile exports were valued at $10.06bn in 2007, making the industry the country's largest export earner outside of oil and gas. Annual growth for textile exports over the past five years has averaged around 6%, with their total export revenue over that period accounting for 12.45% of all non-oil and gas related exports. In terms of footwear exports, Indonesia is currently ranked 6th in the world, which contributed $1.7bn in export earnings in 2007.



Recorded textiles exports for the first seven months of this year have reached $6.06bn, a 6.16% growth over the same period last year. Despite high growth, it lags behind the target originally set by the government, which is aiming for $11bn in total exports by year-end - an 8% growth over last year's figure. The target for 2009 is set at $11.8bn, with an ultimate goal of $54bn in annual textiles exports to be achieved by 2025.



While decelerating growth is said to stem from a slowdown in the US and European economies, analysts believe that producers will not be able to truly gauge the impact of a slowdown until the fourth quarter of this year. Benny Sutrisno, chairman of the Indonesian Textile Producers Association (API), recently told local media that the next few months are when US and European buyers typically place their orders for the upcoming winter season, a period over which orders are usually expected to rise.



In order to mitigate the effect of declining demand brought about by a US and European slowdown, the API is encouraging its members to diversify its exports to growing markets such as Asia, the Middle East, Africa and Latin America. The country is particularly optimistic that there will be increased demand from Japan following the Indonesia-Japan Economic Partnership Agreement (EPA) that has been in effect since July. Textiles are set to be one of the main beneficiaries of the staged elimination of tariffs.



In addition, with the emergence of low-cost rivals, such as Vietnam and Bangladesh, Indonesia realises that improved productivity and efficiency is critical to remain competitive.



Ansari Bukhari, director general for metal, machinery, textile and miscellaneous industries at the Ministry of Industry, told OBG that "more than 80% of the textile machinery in the country is over 20 years old, and this leads to inefficiencies and poor energy consumption".



In an effort to help modernise the industry, the government is offering subsidised credits for the purchase of new machines as part of a factory restructuring and modernising programme launched in 2007. During 2007, some $25m in total grants was allocated, while $45m was set aside for 2008.



Many in the industry would also like to see the establishment of textile clusters in low cost areas, which ought to trigger consolidation and the emergence of larger and more integrated players.



Ravi Shankar, president director of PT Polysindo Eka Perkasa, one of the country's largest textile companies, told OBG, "It would make sense for many of the small and mid-sized companies to cluster together, so that you get the entire value chain and a wide range of producers in one place. It is crucial that the government comes up with a clear cut plan and offers the right incentives for this to happen".



Another constraint on the country's ability to compete is a shortage of electricity supply. Earlier this year, a number of factories, many of which were manufacturing textiles, were forced to temporarily shut down operations due to power disruptions across the island of Java.



While Indonesia is looking to address these issues to maintain its competitive qualities, it is also hoping to capture market share from China, the country's largest and most aggressive rival when it comes to exports.



Though China is regarded to have lower overall production costs and more advanced machinery, Indonesia is hoping to lure some buyers who may be looking to outsource elsewhere. A number of recent events have decreased China's attractiveness to foreign investors. In particular, the decision to allow the Yuan to fluctuate more widely against the US dollar has introduced currency risk. The country is also facing rising production costs as a result of both a tightening on labour legislation and rising costs in raw materials. Finally, China is currently facing various export restrictions from the EU following allegations of dumping.



Overall, with textiles a critical source of both employment and exports to the country, Indonesia is aware that in these times of increased competition and potentially decreased demand from the US and Europe, the country needs to modernise the industry and expand its export presence in emerging markets.

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