Indonesian T&A industry looking forward to get momentum

Akhi Akter       
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The Textile and Apparel (T&C) industry in Indonesia is playing a vital role in the country’s economy. It is the largest source of manufacturing employment and a biggest export earner. According to Indonesia’s Industry Ministry, the textiles and textile product sector contributed USD $11.87 billion in terms of foreign exchange earnings which was 8.2 percent of Indonesia’s total export earnings in 2016. The world’s fourth most populated country not only exports T&A, but also imports huge amount of T&A from different countries. Indonesia imports value for T&A was worth 8.566 US$ billion in 2014, according to WITS. However, investment in this sector is increasing and reached above USD $567 million in 2016.

T&A industry’s contribution to the Indonesian economy

Figure 1: Showing Textile and Apparel (T&C) industry's contribution to Indonesian economy.
Figure 1: Showing Textile and Apparel (T&C) industry’s contribution to Indonesian economy.

The industry is implicated in almost every sector of the textile supply chain including yarn production, weaving, knitting, dyeing, printing and finishing and clothing manufacture including a large man-made fiber industry. The domestic market for the sector has been expanding significantly in recent years as capital has risen and spread, and it seems set for further growth. However, these developments have made the domestic market an attractive goal for foreign suppliers. On the other hand, the government is encouraging foreign investment, and has set targets to increase the industry’s share of global textile and clothing trade market.

Figure 2: Showing global position of Indonesia and Indonesian (T&A) industry.
Figure 2: Showing global position of Indonesia and Indonesian (T&A) industry.

Export scenario 

Though Indonesia has a position in top ten world largest T&A producers list but it controls only about 2 percent of global textile markets, whereas China controls about 35 percent and Bangladesh controls 6.63 percent. However, the Indonesian government targets to increase the nation’s value of exported textiles and garments to USD $75 billion by the year 2030, implying that this industry would contribute around 5 percent to global exports.

Table 1: Indonesian T&A’s export trend 2010-2016
Year Value (US$ Billions)
2010 11.224
2011 13.256
2012 12.461
2013 12.679
2014 12.740
2015 10.2
2016 11.87
1st half of 2017 7.00
Source: World Integrated Trade Solution (WITS) and Indonesian Textile Association (API).

According to table 1 and figure 3, trend of T&A exports from Indonesia in 2010 to 2016 is showing a situation of ups and downs. The Indonesian Textile Association (API) is hopeful to expand the growth and they expect the growth at least remain stable this year at $11.87 billion, the figure achieved in 2016. In 2016, apparel exports from the country declined 3.2 percent due to several challenges including high logistics costs, and gas and power tariffs being higher than other competitor countries, said API Chairman Ade Sudrajat. Their target is going to be achieved as in the first half of 2017, the sector’s growth rate increased by 1.92 per cent to $7 billion year on year and the industry ministry estimates that textile exports will reach $12.09 billion by 2017 end.

Figure 3: Showing the Indonesian T&C’s export trend 2010-2016.
Figure 3: Showing the Indonesian T&C’s export trend 2010-2016.

Ade Sudrajat said, Indonesia’s downstream textile manufacturers were actually pleased with this result as it exceeds expectations amid bleak textile demand from various countries. The setting up of dozens of bonded warehouses in recent months and establishment of additional cargo lines from Gedebage in West Java to Tanjung Priok Port in Jakarta has helped to increase exports.

Table 2: Top export destinations of Indonesian textile and apparel.

USA

JAPAN

Turkey

Germany

Republic of Korea

However, Indonesian textile exports to key markets have declined, according to API. Shipments to the USA, the largest clothing importer from Indonesia, fell 3.6 percent (y/y), to the European Union by 4.0 percent (y/y), and to Japan by nearly 5 percent (y) in the January-June 2017 period.

Challenges

Every industry faces some challenges as opportunities lie ahead of challenges.  The T&A industry of Indonesia is facing several problems, some of them are noted below:

  • Rising costs of production due to increase of gas and electricity rates.
  • Local textile producers depend almost entirely on imported cotton, since domestic farmers are unable to satisfy even 1% of national demand. This makes yarn spinners vulnerable to the fluctuating global prices and has forced a number of small businesses to close.
  • Indonesian textile and clothing companies are under strong pressure with cheap textile and apparel products from Vietnam and China in both global and domestic markets.
  • Domestic manufacturers are dealing with rising labor costs.
  • Lack of investment and technology

Opportunities

Some initiatives from the country’s government could be great opportunities for the sector. The country’s Ministry of Industry has categorized textiles and clothing as a strategic industrial sector. The foreign investment in the sector is growing and there are various government incentives to attract foreign investors towards the sector. Foreigners are permitted to own property in special economic zones, and firms there are able to import raw materials without paying value-added tax.

Indonesia offers tax holidays of up to 25 years and relax restrictions on foreign investment in its special economic zones. The Indonesian government provides tax breaks for enterprises exporting a minimum of 30% of their production. Such firms are not required to meet minimum invested capital or number of employee requirements to qualify for the tax breaks.

Recently Indonesian President Joko Widodo offers a new incentive to entrepreneurs in Indonesia’s footwear and textile (and textile products) sectors that employ at least 2,000 workers and export 50 percent of their total sales. Authorities give a 50 percent discount on income tax to those workers that earn a maximum IDR 50 million (approx. USD $3,850) per year. Both Indonesia’s footwear and textile sectors have been plagued in recent years by slowing economic growth, the weak rupiah and rising minimum wages.

FDI in T&A industry

This a good sign that the investment in T&A industry has increased since 2015. According to the Investment Coordinating Board (BKPM), which records investment plans in textile industry, investment were valued more than 500 million in 2015, up 68% over the previous year and investment in this sector is reached above USD $567 million in 2016.

Chinese investor Jiangsu Dongqun Investment Holding Group Co., Ltd confirmed its plan to invest US$100 million in the development of textile industry and textile products in Indonesia in 2017. Sixteen companies from Singapore, Malaysia and Japan are investing in Indonesia. The combined investment portfolio amounts to roughly US$244 million in Indonesia in different sectors (including textile and apparel sector) in 2016.

Conclusion

Over the last three decades, the Indonesian T&A industry has grown significantly and become a major contributor to the country’s total industrial revenue. However, to develop the sector more, the industry is urging the government to reach an agreement with the European Union (EU) for the establishment of the Indonesia-EU Comprehensive Economic Partnership Agreement (Indonesia-EU CEPA). It will play a significant role to improve the trading of textile products between two regions as the deal offers the reduction of trade barriers and liberalization of government procurement. On the other hand, the Indonesian Textile Association’s Chairman Sudrajat said, “The government should lobby with the new US administration to expand its Generalized System of Preferences (GSP) to include more Indonesian apparel and accessories. This would facilitate the entry of more Indonesian products into the US at lower tariffs.”

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