Global Business Guide Indonesia

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Manufacturing | Indonesia's Garment and Textile Sector : Remain Optimistic Amid Mounting Pressure

Indonesia’s textile industry entered 2018 with high optimism, having recorded positive growth in 2017. The sector is expected to continue its positive trend in 2018 (See Indonesia's 2019 Economic Outlook: Challenging Times amid Political Turbulence). However, the continuation of this upward trajectory is now far from certain as the trade war between China and the USA heats up and the Indonesian rupiah continues to depreciate (See Indonesia’s Garment and Textile Sector; Short Term Woes). External challenges are therefore a matter of great concern for Indonesia’s garment and textile sector and it remains to be seen whether internal improvements to increase competitiveness and efficiency through increased investment will be enough to head off such external threats.

Indonesia's Garment and Textile Sector : Remain Optimistic Amid Mounting Pressure

Indonesia must also diversify its export markets to improve its security against the economic turmoil being witnessed in China and the US

Remarkable growth

Indonesia’s domestic garment and textile industry recorded remarkable growth in 2017. The sector enjoyed a surge in exports of 6% yoy from $11.8 billion USD in 2016 to $12.4 billion USD. Its trade balance was up 1.7% from $3.67 billion USD in 2016 to $3.73 billion USD in 2017. Furthermore, investment in the textile sector soared up to 68% from that of the previous year in which domestic investment accounted for 61.4%. As a result, the employment rate in Indonesia’s textile and garment sector grew by 0.13% from 1,514,000 to 1,516,000 workers with a utilisation rate of 75%.

This upward trend continued well into the first semester of 2018 thanks to growing export and domestic demand. From January until July 2018, the shipment value of Indonesian textile products reached $7.74 billion USD and is expected to reach $13-14 billion USD by the end of the year. A similar increase occurred in domestic sales, especially during the Eid holiday season thanks to an increase in household consumption following the disbursement of festive bonus salary and the holding of simultaneous regional elections.

A further positive development in 2018 was the finalisation of the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The agreement which is expected to be signed at the end of the year will waive import duties on a number of Indonesian products including garments and textiles (See Indonesia in Free Trade Agreements). Previously, Australia imposed a 10-20% import duty on Indonesia's textile products. The Indonesian government is currently pursuing a similar agreement with the US and the European Union to make Indonesian textile products more competitive (Indonesia and the EU CEPA – Deal or No Deal?).

Same old constraints remain

Despite various positive indicators, the Indonesian garment and textile industry is still hampered by external as well as domestic problems. On the internal side, the same old constraints that have always plagued Indonesian textile companies have not been fully addressed by the government. Gas and electricity prices in Indonesia, for instance, are still one of the highest among textile producing countries (See Investment in Indonesia’s Electricity Sector; Sparks of Life). This has greatly reduced the sector's competitiveness.

Moreover, the annual increase in labour costs has further exacerbated the issue. Indonesia's labour wages, especially in West Java and Jakarta have risen considerably in the last several years (See The Minimum Wage and Labour Competitiveness in Indonesia). This has prompted global and regional investors to increase automation in order to reduce the number of workers or relocate their factories to cheaper provinces and in some cases other countries.

Ageing machinery and equipment which lead to lower productivity and efficiency continue to be used, particularly by more traditional and small-scale players in the sector. Currently, 30% of textile factories in Indonesia use equipment that is over 25 years old. It is estimated that the revitalisation of the technology used across the textile and garment sector would amount to 400 billion IDR a year. Since 2007, the Indonesian government has provided incentives to buy new machinery, however, the allocated fund is inadequate to replace the equipment in use across the entire industry. Furthermore, a recent incentive offered to Indonesia’s textile sector was an income tax cut of 30% for six years through the issuance of the Regulation of the Ministry of Industry No 1 of 2018.

External issues

The influx of illegal Chinese textile products also continues to place pressure on Indonesian textile manufacturers. In 2017, there were 310,000 tonnes of illegally imported textile from China in Indonesia.

On the external side, the plunge of the rupiah exchange rate which has fallen by around 10% to nearly 15,000 to the USD since the beginning of 2018 has significantly increased production costs (See Indonesia’s Fragility & The Fed). This is due to the fact that a significant portion of Indonesia’s textile sector’s raw materials, such as cotton, are imported which are priced in US dollars. According to the Association of Indonesian Textile Manufacturers (API), raw material prices have increased by 5-6% since the beginning of the year. The rupiah depreciation has made matters worse because it caused some prices to soar up to 50%.

Small and medium textile companies that cater mainly to the domestic Indonesian market are among the hardest hit because they buy in US dollars and sell in rupiah. In contrast, larger scale companies that sell their products to overseas markets are benefitting from the stronger US dollar as it boosts their revenues. If the current currency situation continues, many small and medium companies will be forced to lay off their workers or reduce shifts or even close their factories altogether.

Through the lens of the global textile and garment industry, Indonesia is gradually being overtaken by its competitors, particularly Vietnam, Bangladesh and Cambodia. In the last few years, these three countries have recorded higher export growth than Indonesia. Vietnam is benefitting from its close ties with Europe and the US. The country enjoys 0% import duty on its textile products to the two markets, while Indonesia is liable to 5-20% import duty.

A further threat is the ongoing trade war between two of Indonesia's biggest textile importers; China and the United States (See What China’s Slowdown Means for Indonesia: A Trade Perspective). The war, which has stemmed from Trump's protectionist policies, has begun to take its toll on emerging economies, including Indonesia (See The US Presidential Elections and What it Means for Indonesia).

Jakarta is also seen as a target as the US as it experienced a trade deficit of $4.119 billion USD as of June 2018. The Trump administration has taken a number of steps to tackle this issue including reviewing the eligibility of 124 Indonesian products included in the generalized system of preference (GSP) as well as asking WTO to impose a fine of $350 million USD for import restriction policy against its products. 

Indonesia’s domestic garment and textile industry will be severely hit if the US removes Indonesia from the list of the GSP countries. The imposition of higher import duties on Indonesia's textile products would serve to further reduce its competitiveness.

Improve and diversify

Despite the aforementioned challenges, the Indonesian government is still optimistic that the garment and textile sector will continue to show growth in 2019. The Ministry of Industry expects textile exports to soar to $15 billion USD and help create 424,261 new jobs in Indonesia. Production capacity is estimated to increase to 1,638 thousand tonnes per annum with an investment value of 81.45 trillion IDR.

In order to achieve this, the Indonesian government must enhance its support to the garment industry. This includes improving law enforcement to curb illegal textile imports, accelerating industrial area development outside of Java to reduce logistics costs, and establishing vocational schools to prepare skilled human resources who are able to utilize new technology in the sector such as 3D printing.

Moreover, Indonesia must also diversify its export markets to improve its security against the economic turmoil being witnessed in China and the US. Currently, a number of textile manufacturers have already tapped into new, potential overseas markets such as Australia, New Zealand, Japan, and South Korea which show great potential for the future.

Global Business Guide Indonesia - 2018

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Indonesia Manufacturing Snapshot

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.