Global Business Guide Indonesia

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Manufacturing | Indonesia’s Footwear Industry: A Preferred Production Base for Global Brands

Indonesia’s footwear industry remains a major contributor to the country’s economy thanks to its positive growth in the last five years. Despite many obstacles, ranging from labour costs and raw material availability to energy prices; the sector is still considered attractive by both foreign and domestic investors. That being said, the past two years have seen a number of footwear manufacturers closing their doors in response to weakened demand in the global as well as domestic market.

Indonesia’s Footwear Industry: A Preferred Production Base for Global Brands
Despite being one of the major rubber producers in the world, Indonesia still imports the majority of its leather and rubber raw materials due to the lack of a large-scale domestic processing industry.
 

In the face of still competition, Indonesia continues to draw in international brands which see the market’s attractiveness as both a production as well as retail base (See Indonesia’s Retail Boom is Far From Over). Going forward, Indonesia holds significant potential for the brands catering to the emerging middle-class segment who have increasing levels of disposable income; yet remain price conscious in their purchases.

Growing export markets, sluggish domestic demand

Indonesia’s footwear industry has maintained positive export growth amid the global economic slowdown. According to data from the Ministry of Industry, the country’s footwear export value in 2015 was up 9.7% to $4.5 billion USD. Indonesia ranked 6th among top global footwear exporters after China, Italy, Vietnam, Germany and Belgium with a market share of 3% or up slightly from 2.85% in 2014. In 2014, Indonesia’s footwear exports reached $4.1 billion USD or an increase of 6.44% compared to that in 2013 which equated to $3.86 billion USD. The sector accounted for 2.33% of the country’s total exports in 2014.

There are six major export destination countries for Indonesia’s footwear industry, namely the United States, Belgium, Germany, United Kingdom, Japan, and China. The US accounts for 28.2% of Indonesia’s footwear exports, while exports of footwear products to China have seen an uptick in recent years. In 2013, Indonesia’s footwear exports to China totaled $104 million USD. A year later, its value had increased to $126 million USD and accounted for 3% of the country’s total footwear exports. This figure doubled to 7% in 2015 due to increased demand and a reduction of 50% in import fees to China.

Footwear sales in the domestic market have been unable to keep pace with the growth of export markets. According to the Indonesian Footwear Manufacturers Association (Aprisindo), footwear sales in the Indonesian domestic market fell by 20% from 2015 until the first semester of 2016. Due to weakened economic growth, domestic consumers have been holding off purchases of footwear products. Even the holiday season during Eid al-Fitr was unable to boost domestic footwear sales despite discounts of up to 50% being made available. Instead of hiring additional workers to keep pace with the soaring demand that is normal during the holiday season, footwear manufacturers were compelled to lay off a portion of their workforce and preferred to sell their existing stock rather than developing new products. By September 2015, some 36,000 workers were laid off and 70 factories from a total of 365 had been closed; illustrative of the severity of the slowdown.

Vietnam and Thailand are two of the bigger markets in the region with similar consumer profiles as Indonesia. The challenge in entering these markets is finding strong distribution channels and identifying the right partners to work with in this regard.

Labour and energy costs remain challenging

Labour intensive industries including footwear manufacturing in Indonesia remain hampered by various challenges which see them placed in a disadvantaged position against competitors in markets such as Vietnam and China. Indonesia’s footwear exports only grew three-fold from $1.36 billion USD in 2000 to $4.1 billion USD in 2014. Meanwhile, Vietnam’s footwear exports grew ten-fold from $1 billion USD in 2000 to $10.3 billion USD in 2014. China’s footwear exports grew even higher to $53.8 billion USD in 2014.

Vietnam and China have managed to outpace Indonesia as many footwear manufacturers have relocated their production bases to these two countries. Soaring and unpredictable labour costs (See Labour Pains in Indonesia) coupled with complex bureaucracy and slow licensing procedures, particularly in regions outside of West Java, have put investors off the country in the past. Moreover, despite being one of the major rubber producers in the world (See Indonesia’s Rubber Industry: Increased Competition and Falling Prices), Indonesia still imports the majority of its leather and rubber raw materials due to the lack of a large scale domestic processing industry. High energy costs due to weak electricity infrastructure further compound the problem and make the cost of production high.

The Indonesian government has strived to extend discounts on gas prices and the cost of electricity (See Investment in Indonesia’s Electricity Sector; Sparks of Life), yet this has not been significant enough to counter other issues. The Presidential Regulation No. 40 /2016 on the Determination of Natural Gas Prices and the Regulation of Energy Minister No. 16/2016 on the Procedures for Certain Gas Consumers to Apply for Special Gas Prices has capped the industrial gas price at a maximum of $6 USD per mmbtu. Furthermore, industry bodies have demanded that the Indonesian government lower gas price to $4 USD per mmbtu or equal to gas prices sold in Japan and China (See Will Indonesia Become a Net Importer of Natural Gas by 2020?). They also requested that the policy apply to other industries as it is currently limited to the fertiliser, petrochemical, oleochemical, steel, ceramic, glass, and glove industries. Energy costs account for some 23% of total production costs and thus a decrease in the price could bring about a significant boost to export competitiveness. A discount on the electricity price was included in Jokowi’s third economic policy package (See Third Time’s A Charm – Indonesia Introduces Third Economic Policy Package), however given that it applies only during certain hours and for excess rather than regular usage; uptake of the discount offer has been sparse. 

A preferred production base for global brands

Despite various constraints, foreign investors, especially from China, South Korea, and Taiwan, have maintained interest in investing their funds in Indonesia. Footwear investments in the country in 2014 reached 11.3 trillion IDR. In 2015, some 10-15 new footwear factories were established  and will be operational in 2016. Most of them are large-scale and export-oriented factories owned by foreign investors with a total investment of $1.5 billion USD (19.67 trillion IDR) or around  $50-100 millíon USD per factory. The average installed production capacity of these factories is 10-15 million pairs per year  and are employing up to 100,000 workers.

One of the new aforementioned factories is owned by Pou Yuen Indonesia in Cianjur, West Java, which will employ 13,000 workers over the next five years. The production capacity for its Adidas sport shoes is 10 million pairs per year (See Sportswear to be a Winner in Indonesia). Another new addition is a facility owned by KMK Global Sports which manufactures shoes and sandals for famous brands such as Nike, Converse, and Hunter. The factory produces 15.6 million pairs of shoes per year and 2 million pairs of sport sandals every year.

As Indonesia’s economic trajectory improves and domestic demand picks up again, the country will once again become a highly-attractive market as both a retail and manufacturing base. The country’s growing middle-class is increasingly seeking out brands that offer quality and comfort in addition to being competitively-priced. This will open up opportunities for global brands as well as the emergence of further local brands that can match up with the preferences and demands of the Indonesian consumer.

Global Business Guide Indonesia - 26th September 2016

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Indonesia Manufacturing Snapshot

Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 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.