Global Business Guide Indonesia

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Manufacturing | Indonesia’s Garment and Textile Sector; Short Term Woes

The economic slowdown in 2015 in Indonesia is still having a painful impact on several industries. One of these is the textile and textile products sector (TPT). The performance of this industry is expected to remain sluggish throughout 2016 due to a lack of positive sentiment that might lift it out of its mire. The performance of Indonesia’s textile products sector as of October 2015 was far from satisfactory. The Gross Domestic Product (GDP) of the sector has suffered a contraction, or negative growth of 6.1% compared to the same period the previous year. This figure represents a worse GDP growth rate than that of the manufacturing industry as a whole, which stood at 4.3%, or the growth of Indonesia’s total GDP of 4.7%.

Indonesia’s Garment and Textile Sector; Short Term Woes
Despite the recent turmoil in the industry as a whole, Indonesia has seen the return of investment in the sector and brands coming back to the market after having experienced supply and quality issues in lower cost markets

According to the Indonesian Textile Association (API), the textile industry started to slow down in 2014 following the decline of the global oil price, and the increase of gas and electricity rates in January 2015 exacerbated the issue. Companies' obligation to cover health costs under the government's new BPJS health scheme also weighed on textile companies (See Indonesia’s Healthcare Industry; Showing Strong Vital Signs). Smaller-sized players have felt the squeeze with many closing down operations or shedding considerable portions of their workforce. That being said, Indonesia does offer significant advantages as an integrated textile manufacturing base and despite the recent turmoil in the industry as a whole, Indonesia has seen the return of investment in the sector and brands coming back to the market after having experienced supply and quality issues in lower cost markets.

Fraying threads

Many of the risks and opportunities in Indonesia's economy this year can indeed be seen in the fraying threads of the archipelago's garment and textiles trade. The labour-intensive business is dependent on imported cotton priced in dollars, making it vulnerable to a weak rupiah and economic tremors in Beijing (See What China’s Slowdown Means for Indonesia: A Trade Perspective). Rising interest rates in the U.S. and slower Chinese growth present similar concerns for Indonesia.

But Indonesia's labour-intensive textile companies are facing other problems. In recent years they have struggled with higher electricity rates, rising labour costs and price pressures from cheaper Chinese imports. Garment exports from Cambodia and Vietnam expanded in 2015; Indonesia's apparel shipments fell by 10.9% from 2014, according to government data.

Ms Michelle Tjokrosaputro
PT Dan Liris
Ms Michelle Tjokrosaputro
Textiles & Garments
Indonesia’s textile industry is facing a big challenge because production costs continue to rise. I do not expect the trend to change anytime soon due to a couple of factors; the cost of labour and electricity.
See Interview Learn more about PT Dan Liris

Annual increases in minimum wages in West Java and Jakarta have squeezed already-tough margins. Many garment and textile companies have responded by laying off workers and reducing the number of shifts. Last September, the jobs of around 36,000 textile and garment employees were under threat from weak sales, adding to the 45,000 workers who the Confederation of All Indonesia Workers’ Union (KSPSI) said had already been let go from factories.

On top of this problem, a fall in the external value of the rupiah last year imposed new risks on businesses buying raw materials in dollars and selling to the domestic market in rupiah. The rupiah depreciated by 11% in 2015, imposing punitive costs on small and medium sized businesses and adding to the risks faced by larger companies. The Indonesian rupiah started the year with a strong rally after a surge of capital inflows however it remains uncertain how the future will unfold and whether the rupiah can maintain its recently found stability.

Over the longer term Indonesia's ability to boost manufacturing and create productive jobs for its swelling workforce will require more than just channeling public money at the problem. Vietnam's rise as an efficient regional manufacturing hub and Myanmar's possible emergence as a low-cost alternative threaten to place Indonesia in an awkward neither-here-nor-there situation as the archipelago seeks to boost its garment and textile exports.

For Indonesia's exporters, market access issues remain uncertain. Vietnam's inclusion in the recently agreed Trans-Pacific Partnership – a U.S.-led trade agreement between 12 countries (See Indonesia and the Trans-Pacific Partnership – Worth the Membership?) – will mean it has preferential tariffs, while Indonesian textile companies will be liable to around 40% duties. According to the API, import duties for garments and textiles from Indonesia range from 11% to 30% while Vietnam's will gradually fall to zero.

Future revitalisation

The Ministry of Industry plans greater onshore warehousing of cotton and is promoting the Central Java province as a new textile hub, with a dedicated industrial estate planned on its northern coast. The economy ministry is overseeing a programme of policy tweaks targeting special economic zones, new tax holidays, lower nighttime electricity costs, and incentives to buy new machinery. Out of more than 4,100 textile companies, at least 774 companies need to replace their old machinery. The Indonesian textile industry is now in a quandary situation, whether to allow it to shrivel, or try to revitalise it by restructuring and reinvesting. Now indeed there are some re-modernisation plans coming up but all plans are waiting for the government's financing. It is predicted that between $5 billion USD to $6 billion USD is required to update the existing machinery and equipment.

Foreign direct investment is slowly ticking up, and consumer confidence increased in January 2016, although the latest Nikkei Manufacturing Purchasing Managers' Index for Indonesia showed that manufacturing activity contracted for the 16th successive month. This increase in investment should be further boosted by the anticipated half-billion dollar investment from Decathlon, a French 40-year old sporting goods and apparel retailer that sells several of its own brands and has more than 1,000 stores worldwide.

Siding with this more positive perspective, it is instructive to look to the Investment Coordinating Board (BKPM), which records investment plans, both foreign and domestic, in the textile sector. According to the BKPM, there was a significant increase in investment plans throughout 2015, leading to a positive assessment as to how this might encourage labour-intensive investment in 2016. As to the realisation of investments across all textile sub-sectors during the first semester of 2015, positive growth was very much in evidence. For example, the textile fiber processing industry posted growth of 213% by as much as 2.4 trillion IDR ($176 million USD) from 82 projects, the textile weaving industry posted growth of 613% amounting to 163 billion IDR from 25 projects, the garment industry recorded growth of 16%, by as much as 941 billion IDR and the clothing accessories industry recorded growth of 563% amounting to 216 billion IDR from 15 projects.

Investment plans, as recorded in the number of principle licenses obtained from the textile sector during 2015, were valued at 13.1 trillion IDR, up 68% over the previous year. According to the BKPM, this investment figure in the textile sector included plans for the employment of 101,000 workers. The realisation of these investment plans is expected to contribute positively toward the creation of the 2 million jobs targeted by the government in 2016.

Global Business Guide Indonesia - 2016

icone share

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.