Robust economic growth and rising purchasing power make Indonesia – the world’s fourth most populated country – an attractive market for textiles and clothing. Both local and foreign companies are vying for market share. Rising costs are giving domestic producers a hard time as they try to fend off overseas competition, but technological modernization, improving labour skills, better infrastructure and not least the relatively low rupiah alter the picture in their favour. The need for Indonesian textile and clothing businesses to become more efficient spells opportunities for foreign companies that can offer machinery, knowhow and capital.
Encompassing the production of fabric, apparel and leatherwear, Indonesia’s textile and clothing industry provided some 1.1 million jobs in 2012, according to the National Statistics Agency (BPS), making it one of the most important elements of the country’s manufacturing sector. It accounted for almost 2% of national GDP and more than 7% of the country’s total exports in 2013. The industry is still concentrated near the capital Jakarta in the western end of Java Island, but central and eastern Java are becoming increasingly important.
Textiles, garments, leather products and footwear:
Sources: Bank Indonesia; Ministry of Trade (*preliminary figures)
Local textile producers depend almost entirely on imported cotton, since domestic farmers are unable to satisfy even 1% of national demand. This makes yarn spinners vulnerable to the fluctuating global prices and has forced a number of small businesses to close up shop, though larger ones are in a stronger position thanks to their greater stockpiling ability and better access to capital. Cotton is sourced from a range of countries – led by Brazil, the US and Australia – to be spun in Indonesia and then either exported as yarn or further processed into cloth and garments. The principle buyers of yarn from Indonesia are China and Japan, while textiles and textile products go mostly to the US, the EU and Japan.
Even though most of Indonesia’s several thousand textile businesses sell their goods on the home market only, the lion's share of Indonesian-made clothes is shipped abroad, with many of the larger companies producing apparel for global brands. China’s importance as a target market is growing. At the same time, China is the main source of textile products coming into Indonesia, followed by South Korea. The process of regional economic integration is set to make it easier for foreign companies to offload their garments on the Indonesian market. Batik textiles are a way for domestic companies to set themselves apart as the ‘authentic’ producers of the traditional Indonesian cloth. However, batik represents but a niche market in the global textile industry.
One of the sector’s key strengths is the rare presence of both an upstream and downstream industry, both of which are well developed. Many of Indonesia’s largest listed textile and garment manufacturers have been active in raising funds through the capital markets for investment into new plants as well as for the acquisition of companies to complement their upstream or downstream activities. Indonesian textiles companies have been quick to align themselves with international industry standards by making the necessary investments to achieve certifications such as ISO 9001 as well as gain recognition for sustainable and environmentally friendly production. This has enabled the market to attract leading global fashion brands by assurances of quality, best practices and quick response times.
Indonesian textile and clothing companies are under intense pressure from what are often cheaper Chinese products of comparable quality. At the same time, domestic manufacturers are dealing with rising electricity tariffs and labour costs. Steep hikes to minimum wages went into effect in 2013 and 2014. According to news reports, more than 60 textile companies had decided to relocate their operations from the industrial estates around the capital (See Indonesia’s Industrial Property Market) to areas of Java where the cost of labour is lower. Some firms were reportedly looking to turn their back on Indonesia altogether, and their number could grow if minimum wages continue to rise at rates that look excessive when compared to productivity gains. Strikes and worker rallies halted operations a few times in 2012, raising alarm bells among investors. The government must seek to reconcile employers and employees in the textile and other labour-intensive manufacturing industries and use its public voice to contain unrealistic wage expectations. Otherwise Indonesia could lose its wage advantage, the very factor that attracts companies from higher-cost countries such as China.
Infrastructure inadequacies also hurt the competitiveness of Indonesia’s textile industry. Many overland routes are in poor condition, while seaborne transportation within the archipelago complicates logistics (See Indonesia’s Logistics Sector). Shaky power supply in some areas can disrupt production.
Against the backdrop of lower growth and higher inflation at home and continued fiscal restructuring in Europe, the Indonesian Textile Association (API) expected the industry to make little headway in 2014. Weak domestic or overseas demand, however, is only a temporary concern. In the medium term, the country’s sound economic fundamentals, its young population and its location in a region of rapid economic development spell good prospects for sales of textiles and clothing. By 2030, a survey by HSBC forecasts, textiles will become Indonesia’s biggest export sector, thanks – interestingly – to the country’s large, low-cost labour force.
To capitalize on these prospects, however, many domestic producers need to modernize their sometimes decades-old equipment with substantial investment. The government supports industry-wide revitalization by providing financial incentives to persuade textile and clothing businesses to invest in new machinery. It also promotes technological cooperation between local and foreign companies and the transfer of knowhow.
A number of major Indonesian garment makers, including leading exporters like Sri Rejeki (Sritex), are boosting their capital expenditure to brace themselves for increasing worldwide competition. This promises attractive sales opportunities for global players that can supply machinery and expertise on sophisticated production techniques to facilitate more value added applications such as for industrial use textiles. The textile companies that lack the funds to invest in themselves, on the other hand, will become natural takeover targets. The drop-off in demand from traditional export markets following the 2008 global financial crisis already saw the demise of weaker players that had failed to reposition themselves in a changed economic landscape. Industry consolidation is bound to intensify as competition gets fiercer.
The equipment overhaul in Indonesia’s textile and clothing industry requires good access to funding, which is something domestic banks are often reluctant to provide or only willing to grant at prohibitively high rates. This presents an opportunity for foreign companies to step into the breach. Partnerships with local companies, including joint ventures and private equity investment, can help the Indonesian industry raise its game, while affording foreign investors the chance to participate in what could become one of the leading textile and clothing markets, both for production and sales.
Global Business Guide Indonesia - 2014
Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.
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