Global Business Guide Indonesia

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Manufacturing | Indonesia's Textile Industry – Testing Times Upstream

Indonesia's textiles and garments industry is enjoying growing sales at home (thanks to rising consumer spending) and abroad (thanks at least in part to the weaker rupiah). Nevertheless, the industry faces some serious challenges amid rising competition in the ASEAN region, which is particularly true for the businesses that supply fibres, yarn and fabric. Indonesia's upstream textile industry needs to be strengthened with capital, technology and know-how, so that it can continue to provide goods of sufficient quality and quantity to the growing apparel industry. Achieving this poses a challenge for the country and an opportunity for investors.

Indonesia's Textile Industry – Testing Times Upstream
The most convincing argument for upstream investment in Indonesia's textile industry is the healthy and growing downstream business, with garment makers capitalizing on rising domestic and foreign demand

As increasing wages are prompting China to focus its industrial development on higher-value products and services, Indonesia has successfully positioned itself as an alternative production market for global fashion brands. The government has set its sights on increasing the value of exported textiles and garments to $75 billion USD by 2030 and contributing 5% to global exports, up from less than 2% at present. At the same time, the country is moving up the value chain in garment production, with higher-value products such as suits and trousers registering faster growth than lower value items, such as t-shirts. In order to uphold this trend, it is vital that domestic garment industries can source high-quality textiles at reasonable prices on the local market.

Upstream businesses not pulling their weight

Indonesia is a leading textile manufacturing country. One of the strong points of its industry is the existence of a well-developed upstream and downstream business, which allows for tight vertical integration (See Overview of Fibre, Textiles & Garments). Seeking to take advantage of this, major local garment makers have raised capital to acquire assets that would help them streamline their supply chains.

Recently, though, the upstream side of the industry has been struggling to keep up, as reflected in the influx of materials for the apparel industry. Imports of fabric doubled to around 600,000 tonnes from 300,000 in 2008, according to the Indonesian Synthetic Fiber Producers Association (APSyFI). As downstream businesses source more and more of their input materials from abroad, the domestic upstream industry has been failing to benefit from rising consumer spending according to APSyFI Secretary General Redma Gita Wirawasta. However, domestic raw material producers are entirely capable of supplying the fabric the industry needs. APSyFi has therefore been lobbying for the imposition of anti-dumping duties on yarn imports.

Cost pressure and reliance on imports

While gross output of upstream textile products has grown in recent years, costs have risen even faster. This is putting considerable strain on businesses. Annual investment in fixed capital at large and medium-sized companies (those employing at least 20 people) almost quadrupled from 4 trillion RP in 2008 to 15 trillion RP in 2010, but since then has fallen back by more than 50% to 6.3 trillion RP in 2013. The less than perfect shape of the upstream business also reflects in the industrial production index for the textile industry, which in contrast to most other industries has been on a declining trend since 2010.

Large and medium-sized textile businesses: output, costs, fixed-capital investment (Trillion Rupiah):

Large and medium-sized textile businesses: output, costs, fixed-capital investment (Trillion Rupiah)

Source: Statistics Indonesia (BPS)

Number of large and medium-sized textile businesses (20 or more employees):

Number of large and medium-sized textile businesses (20 or more employees)

Source: Statistics Indonesia (BPS)

The number of large and medium-sized textile businesses has slowly but steadily declined, from 2,450 in 2008 to 2,232 in 2013, pointing to ongoing industry consolidation in the struggle for greater efficiency. Trade data shows that Indonesia's upstream textile business is becoming increasingly dependent on imports, while exports grew only moderately over the past five years.

In particular, Indonesian spinners rely on the world market for almost all of their raw cotton, because domestic harvests of cotton are negligible. This makes yarn spinners vulnerable to 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. Raw cotton is sourced from a range of countries – led by the US, Brazil and Australia – to be spun in Indonesia and then either exported as yarn or further processed into fabric and garments.

Upstream producers struggling with foreign competition

While exports of cotton yarn grew by almost 80% between 2009 and 2013 to 190,228 tonnes (Comtrade), cotton-based woven fabrics made little headway and some types even saw decreasing shipments. Imports of both yarn and fabrics increased. As for manmade fibre products, imports of yarn and woven fabric outpaced exports over the past five years, though their absolute volume remains considerably smaller. Imports of manmade filaments and staple fibres, meanwhile, have seen particularly fast growth, as the garment industry requires growing amounts.

In conclusion, the fast growth in imported yarn and fabrics (both natural and manmade) suggests that Indonesia's upstream textile industry is struggling to fend off foreign competition. On the back of the growing dependence on imported raw materials and early-stage intermediate goods, the devaluation of the Rupiah – while a boon for garment exporters – only creates more headaches upstream.

Worryingly for local producers, it is particularly higher-value products where Indonesia is falling behind. In 2013, for instance, the import value of impregnated, coated or laminated textile fabrics was more than five times as high as exports, after more than doubling since 2009, while exports of the same product class stagnated.

Indonesian trade of upstream textiles – HS commodity codes 50 to 56; 58 to 60 (Billion US dollars):

Indonesian trade of upstream textiles – HS commodity codes 50 to 56; 58 to 60 (Billion US dollars):

Source: : International Trade Centre (ITC), based on UN Comtrade data

Staying on top in a competitive market

In 2016, Indonesia will be part of a single market extending across the ASEAN region, known as the ASEAN Economic Community (AEC). Unless the country's upstream textile industry manages to grow more efficient and at the same time move up the value chain to produce more high-cost items, local spinning mills and other upstream manufacturers will be hard-pressed to take on the ever stronger competition from low-cost producer countries such as Vietnam.

Numerous factors have been blamed for the lack of competitiveness in Indonesia's upstream textile industry: first and foremost the use of inefficient technology, but also inadequate human resources. In a wider assessment, the country's underdeveloped transportation and power infrastructure and rising energy costs also play a role. Labour costs, while one of the biggest worries for garment producers (See Indonesia’s Textile and Clothing Industry), are of lesser concern for the capital intensive upstream business. Electricity bills, however, account for around 30% of total production costs. This underlines the need for greater capital expenditure on energy efficient equipment.

Investment and export opportunities

Investment incentives by the government to help textile companies upgrade their machinery have produced insufficient results so far. The same is true for government-sponsored training programmes and industry clusters aimed at generating local know-how and fostering integration. The upstream industry's lack of competitiveness jeopardises Indonesia's hopes of taking over much of the manufacturing business that China's maturing economy is relinquishing. And with government measures showing little effect, those hopes now rest primarily with the private sector – including foreign investors. Opportunities also exist for exporters of equipment such as spinning and weaving machinery as well as in consulting and staff training.

The most convincing argument for upstream investment in Indonesia's textile industry is the healthy and growing downstream business, with garment makers capitalizing on rising domestic and foreign demand. The AEC promises to further open the doors to neighbouring markets for producers based in Southeast Asia's biggest economy. In addition, the country boasts a large and young labour force and is widely expected to see accelerated progress on tackling its infrastructure bottlenecks (See Indonesian Infrastructure: Tremendous PPP Opportunities), both of which add to its attraction as a global textile production centre.

Global Business Guide Indonesia - 2015

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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.