Global Business Guide Indonesia

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Manufacturing | Indonesia’s Upstream Textile Sector; On the Rise After a Slump

Indonesia has long been known as one of the world's largest textile manufacturers. Its steadily expanding population of over 250 million people and established reputation among international textile and garment manufacturers guarantees steady domestic and export demand for the country’s textile and garment products.

Despite these highly promising attributes, Indonesia’s upstream textile sector is still plagued by a wide array of problems. These include high operating costs, operational inefficiencies, lack of competitiveness and poor marketing. Efforts have been made in recent years by the government to overhaul the sector by introducing a set of policies which are expected to help the industry compete on par with its more aggressive neighbours and competitors; especially Vietnam.

Indonesia’s Upstream Textile Sector; On the Rise After A Slump
The Indonesian government has set a target to increase the export value of textiles and garments to $75 billion USD by 2030 to contribute 5% to global exports which will put the country among the top five global textile manufacturers
 

Back on track again

After taking a nosedive in the last couple of years, Indonesia’s textile sector managed to record positive growth again in the first and second quarters of 2017 (See Overview of Fibre, Textiles & Garments). According to the data published by Statistics Indonesia, the country’s textile industry grew by 3.65% in Q2 2017. This surpassed the growth in the previous quarter of 0.16%.

In term of demand, however, the Indonesian Textile Association (API) reported that the sector recorded a disappointing 30% decline in Q2 which marked its worst Eid holiday season sales in years (See Indonesia’s Textile and Clothing Industry). Sluggish household spending and the flood of cheap imported Chinese products were largely blamed for the decline.

The Indonesian textile industry has been experiencing a slowdown since 2014, following the decline in global oil prices, and the increase in gas and electricity rates. That year, Indonesia’s textile export value reached $12.74 billion USD or accounted for 7.2% of total exports. A year later, in 2015, that figure fell to $12.26 billion USD.

The downward trend continued well into 2016 when the sector’s export value plunged to $11.87 billion USD with an investment value of 7.5 trillion IDR. The same holds true for the upstream sector. Indonesia’s yarn exports in 2015 were only 4.3 billion USD.

This trend began to reverse in 2017; the overall textile export value from January-May 2017 reached $5.11 billion USD or up 3.4% compared to the same period in the previous year. Meanwhile, according to the Investment Coordinating Board (BKPM), investment realisation in the first semester of 2017 reached 7.47 trillion IDR. This consists of domestic investment of 5.02 trillion IDR and foreign investment of 2.45 trillion IDR.

Understandably, Indonesia’s Ministry of Industry is optimistic that the textile sector will grow by 7% in 2017. Similarly, the API expects the sector to record a surplus of $5 billion USD, up from $4.6 billion USD in 2016.

The sluggish growth in the textile sector was also felt by textile focused issuers on the Indonesian Stock Exchange. At least three textile companies reported a reduced profit in the first quarter of 2017. PT Pan Brothers Tbk’s net profit shrank by 35.31% to $2.18 million USD during the period. The net profit of PT Eratex Djaja Tbk was slashed by nearly double to $319,757 USD and that of PT Trisula International Tbk was reduced by nearly triple to 3.33 billion IDR. Meanwhile, Asia Pacific Fibers Tbk reported an increase in net loss by 50.59% to $6.34 million USD.

A lot of homework to do

High energy prices

There are various factors inhibiting the growth of the upstream textile sector in Indonesia (See Indonesia’s Garment and Textile Sector; Short Term Woes). The first and foremost reason is the price of energy, i.e. electricity and natural gas, which accounts for 24-30% of the sector’s production cost. According to the API, the electricity rate in Indonesia of $10.5 cent USD per kWh is much higher than that of its competitors such as Vietnam with US$7 cent USD per kWh and Bangladesh with $6 cent USD per kWh (See Investment in Indonesia’s Electricity Sector; Sparks of Life).

The same holds true for gas prices. Industrial gas prices in Indonesia are currently around $8.3-$9.3 USD per mmbtu, far higher than that of Vietnam with $7.5 USD per mmbtu, the Philippines of $5.43 USD per mmbtu, and Malaysia of $4.47 USD per mmbtu (See Overview: Indonesia’s Downstream Oil and Gas Sector).

Lack of trade diplomacy

Another drawback that hampers the Indonesian textile sector is the country’s lack of trade diplomacy in the form of free trade agreements (FTA). The government is still negotiating bilateral trade agreements with the United States and the European Union (Indonesia-EU Comprehensive Economic Partnership Agreement/CEPA) to boost the industry’s export growth (See Indonesia and the EU CEPA – Deal or No Deal?). Currently, the US and the EU impose import duties of 12.5% and 16% on Indonesian textile products. Meanwhile, Vietnam can export the same products to the US and UE without having to pay import duty which makes its products significantly more competitive.

Highly dependent on raw material imports

An additional issue is the sector’s strong reliance on imports. Currently, 99.2% of Indonesia’s raw cotton needs are met by imports, particularly from the US, Brazil, and Australia, which makes the country one of the world’s largest cotton importers.  Moreover, nearly 80% of other raw materials such as dye, yarn, silk fabric still have to be imported, mainly from China. This makes the country’s upstream textile industry, particulatly yarn spinners, vulnerable to fluctuating global prices. In 2015, for instance, Indonesian textile industry spent $8 billion USD to import raw materials (See Indonesia's Textile Industry – Testing Times Upstream).

Inefficient and ageing technology

A major weakness of the Indonesian textile industry is that most of its manufacturers still use old, inefficient machinery and technology which further reduce their competitiveness. Of more than 4,100 textile companies, at least 774 companies need to replace their old machinery. It is predicted that between $5 billion USD to $6 billion USD is required to rejuvenate existing machinery and equipment.

The flood of cheap imported products

The flood of Chinese imports which increased dramatically following the implementation of the ASEAN China Free Trade Agreement (ACFTA) in January 2010 (See What China’s Slowdown Means for Indonesia: A Trade Perspective) is further complicating the rejuvenation of the sector. According to the Association of Indonesian Filament Yarn and Fiber Manufacturers (APSyFI), the country still relies on imports to meet 50% of its fabric needs. This was exacerbated by the revocation of the Minister of Trade Regulation No.85 of 2015 on the Provisions of Textile and Textile Product Imports which caused raw material imports to soar by up to 300%. The lack of factual verification was allegedly used by some importers to import more raw material than their needs and to be sold illegally in the local market.

This practice has hit Indonesia’s local upstream textile sector as imported textile products are 25% cheaper than locally made products. As a result, the utilisation rate of domestic yarn, polyesther and fabric industry dropped to below 50%. Meanwhile, in the first semester of 2016, its utilisation rate was still at 70%.

Increased competition

Vietnam has been agressively developing its textile industry over the last decade. The country now occupies 3.62% of global textile market share or more than double of that of Indonesia with 1.56% and approaching that of Bangladesh with 4.05%. In 2015, Vietnam’s foreign exchange revenue from textile imports reached $29.4 billion USD, far higher than that of Indonesia of $12.3 billion USD. On top of that, the country’s textile sector contributed 15% to its GDP in 2014, while that of Indonesia only accounted for 1.21% in 2015 leaving plenty of room for improvement.

Vietnam’s success is attributed to its successful trade diplomacy but there are other facts at play. The country’s efficiency and productivity in textile manufacturing are higher than Indonesia and are supported by lower energy prices, newer machiney, and longer working hours of 48 hours a week compared to that of Indonesia of 40 hours a week.

More government support needed

The Indonesian government has been focusing its attention on the sector to help the local textile industry regain its past glory as it is deemed strategic given that it employs nearly three million workers. These efforts are illustrated within the National Industry Development Master Plan (RPIN) for 2015-2035 in which the textile industry has been designated a national priority.

Since 2015, the government has introduced a number of policies to facilitate the growth of the industry. These include establishing greater onshore warehousing of cotton and promoting the Central Java province as a new textile hub with a dedicated industrial estate on its northern coast.

The relocation of the country’s textile industry to Central Java is expected to increase its competitiveness and attract more foreign investors, especially Chinese textile factories looking to relocate their production facilities overseas. The attractiveness of Central Java is due to the province’s monthly minimum wage of $103 USD which is lower than that of Vietnam of $132.1 USD and Pakistan of $105 USD.

Other measures include offering new tax holidays; capping natural gas prices at a maximum of $6 USD per mmbtu, through the Minister of Energy and Mineral Resources Regulation No. 16/2016 on the Procedures for Certain Gas Consumers to Apply for Special Gas Prices; offering 30% discounted electricity rate to industrial consumers from 11 pm until 8 am, which was included in the the third economic policy package; and incentives to buy new and secondhand machinery through Minister of Trade Regulation No. 127/2015 on Importation of Secondhand Capital Goods (See Third Time’s A Charm – Indonesia Introduces Third Economic Policy Package). Furthermore, the Indonesian government has also dramatically reduced the dwelling time in ports and improved vocational education to produce reliable factory operators through issuing Minister of Industry Regulation No. 3/2017.

Furthermore, to curb illegal textile imports, the Indonesian government has prohibited imported textile products to be shipped directly to Javanese ports. Only two ports, namely Dumai in North Sumatra and Bitung in North Sulawesi, are allowed to receive imported fabric, yarn and garments to make their supervision easier. In addition, the government also launched a series of buying missions to help promote and market Indonesian textile products abroad.

Despite the government’s efforts to facilitate the local textile industry, taxation and regulatory issues still hamper its growth. Recently, for instance, a regulation was introduced that prohibits Indonesian based textile factories from selling their products to companies that have not registered as taxable employers (PKP). This has added further difficulties as nearly 70% of the industry players in the textile sector are not PKP.

Meanwhile, the policy to exempt imported textile products for export purposes from value added tax (VAT) through the Import Facility for Export Purpose (KITE) has backfired on the domestic upstream textile industry. This is due to the fact that the downstream textile industry prefers to import cheaper raw material from abroad rather than source them locally. The upstream textile industry has thus urged the government to apply the Local Facility for Export Purposes (KLTE) instead.

Still promising

While the aforementioned obstacles are creating a strain on upstream textile players, overall, the prospects for the Indonesian textile industry, especially the upstream sector, are still very good. This is underpinned by Indonesia’s healthy and growing downstream textile sector catering to a huge domestic market and steady export demand. Indonesia is a huge market in itself and will continue to support the development of the textiles sector.

In addition, increased demand from the US and the EU are expected in the coming years following the withdrawal of the former from the Trans Pacific Partnership (TPP) and the expected signing of the free trade deal with the latter in 2019 (See Indonesia and the Trans-Pacific Partnership – Worth the Membership?). The API predicts that Indonesian textile imports will increase by 100% within four years after the signing of CEPA with the EU.

For that reason, some upstream textile players are already investing to anticipate increased demand for the future. Sritex, for example, is constructing a rayon factory to produce yarn. The company’s new facility in Central Java will have two production lines with a total annual capacity of 80,000 tonnes. Additionally, the facility will be supplemented by a steam power plant with a capacity of 30 megawatts. Going forward, the company will also open a plantation forest to supply raw material to a pulp factory which will produce rayon which will be further processed into yarn, thus creating an integrated upstream to downstream industry.

Meanwhile, Pan Brothers Tbk, another major player in the textile sector, will build two new factories for its subsidiary, PT Eco Smart Garment Indonesia, with an additional capacity of 21 million pieces per year which will increase its capacity to 48 million pieces per year. These factories will commence their commercial production in 2018. In the same year, the company will also build a new factory in Tasikmalaya under PT Teodore Pan Garmindo with an additional capacity of 6 million pieces of garments per year. This will increase the company’s overall capacity to 117 million pieces per year.

Foreign investment in Indonesia’s textile sector is also on the rise. For example, leading Austrian textile company, Lenzing AG, is exploring opportunities to increase its investment in Indonesia. The holding company of PT South Pacific Viscose (SPV) plans to double its production capacity from 325,000 tonnes to 625,000 tonnes per year. Lenzing Group plans to invest €300 million or around 4.2 trillion IDR to produce tencel — a high quality rayon fiber used as a raw material for non-woven and spun yarn.

The Indonesian government has set a target to increase the export value of textiles and garments to $75 billion USD by 2030 so that it may contribute 5% to global exports which will put the country among the top five global textile manufacturers.

Meanwhile, in the domestic market, the existing gap between the demand for upstream textile products and local production capacity offers plenty of opportunities for investors in the upstream sector. Based on data from APSyFI, Indonesia’s domestic upstream textile industry is only able to meet 1.4 million tonnes of textile raw materials from a demand of 1.86 million tonnes. The gap of 450,000 tonnes is currently met by imports; both legal and illegal which will need to be addressed to keep the sector’s momentum and sustainability going forward.

Global Business Guide Indonesia - 2017

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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.