Indonesia: Driving Ahead

The Republic of Indonesia — whose name is derived from the Greek words Indós and nésos, meaning
“Indian islands” — comprises 17,508 islands that stretch across Southeast Asia and Oceania between
the Indian Ocean and the Pacific Ocean. The country has a well-established, vertically integrated
textile industry that is involved in almost every sector of the textile supply chain — from the
production of man-made fibers, particularly polyester, nylon and rayon; man-made and cotton yarn
spinning; and weaving and knitting; to dyeing, printing and finishing; and apparel and other
finished textile products manufacturing. According to Indotextiles, an Indonesian textile and
apparel community information source, the textile and apparel sector consisted of 2,994 enterprises
in 2012. The majority of those companies are located in the region of Java. As the largest employer
in Indonesia’s industrial and manufacturing sector, the textile and apparel industry in 2012
employed approximately 1.5 million workers, Indotextiles reports.


Textile Machinery Investments

According to the 2012 International Textile Machinery Shipment Statistics report of the
Switzerland-based International Textile Manufacturers Federation (ITMF), Indonesia was the
third-largest importer globally in 2012 of short-staple spindles, with 594,288 or 5.7 percent of
the total; the third-largest importer of shuttleless looms, with 3,727 or 4.3 percent; and also the
third-largest importer of large circular knitting machines, with 1,350 or 3.7 percent.

The German Engineering Federation (VDMA) Textile Machinery Association reports that German
exports of textile machinery and accessories to Indonesia increased significantly in 2012 over
2011. In 2012, German finishing machinery exports to Indonesia increased 747 percent over 2011
exports to total 34.2 million euros in value; knitting and hosiery machinery exports increased 88
percent to total 14.7 million euros; spinning machinery exports increased 83 percent to total 67.5
million euros; and weaving machinery exports increased 55 percent to total 4.6 million euros.

According to the Association of Italian Textile Machinery Manufacturers (ACIMIT), Italian
exports of textile machinery and accessories to Indonesia in 2012 totaled 38 million euros,
representing a 30-percent increase over exports to that country in 2011.

Finishing machinery accounted for 35 percent of all Italian machinery Indonesia imported in
2012, and weaving machinery accounted for 32 percent. During the first six months of 2013, Italian
textile machinery exports to Indonesia totaled more than 18 million euros, with spinning machinery
comprising 40 percent of the total and finishing machinery comprising 29 percent. ACIMIT reports
that Indonesia is one of its primary export destinations and one of its fastest-growing markets,
with Italian machinery exports to that country over the last five years increasing an average of 30
percent annually.

On top of all this investment, Indonesia’s Ministry of Industry (MOI) said in 2012 that the
textile industry was in need of at least 500 new pieces of textile equipment in order for it to
increase efficiency and production capacity and therefore remain competitive. Much of the
Indonesian textile industry’s machinery is outdated and has been in use for more than 20 years.
However, the government is aiming to reduce the Indonesian textile industry’s dependence on
imported textile machinery and is encouraging it instead to purchase domestically produced
machinery. In 2013, the government offered tax incentives to Indonesian textile machinery producers
as well as stimulus funds to textile plant owners to upgrade their machinery.

Exports & Imports

Globally, Indonesia currently ranks 12th among leading textile and apparel exporters and
captures 1.8 percent of total market share, the Indonesian Textile Association (API) reports. The
country’s textile and apparel exports in 2012 were valued at US$12.56 billion, representing a
5-percent decrease from 2011 exports valued at US$13.25 billion, Indotextiles reports; and its
textile and apparel imports in 2012 were valued at US$7.93 billion, representing a 7-percent
decrease from 2011 exports valued at US$8.53 billion.

The United States is Indonesia’s largest importer of textiles and apparel, accounting for 36
percent of the country’s total textile/apparel exports, followed by the European Union, 16 percent;
and Japan, 5 percent.

Indonesia continues to be a leading textile and apparel producer in the Association of
Southeast Asian Nations (ASEAN) region. However, in contrast to several other ASEAN countries,
Indonesia has not signed any trade agreements that allow for its textile exports to enter the U.S.
or EU at special tariff rates, a circumstance that has affected the industry’s competitiveness
globally. Indonesia is pushing for a Comprehensive Economic Partnership Agreement (CEPA) with the
EU that would reduce or eliminate trade barriers such as import tariffs. CEPA negotiations have not
yet commenced.

In addition, Indonesian textile exporters have pleaded with the Indonesian government to
lobby the U.S. for an extension of the Generalized System of Preferences (GSP), which greatly
benefited Indonesia’s textile industry by giving preferential treatment to its exports to the U.S.
The GSP program expired in July 2013, and Indonesian textile exporters are concerned that their
exports to the U.S. might rapidly decline if they no longer receive preferential treatment. API
also notes that Indonesia will be unable to compete with nearby textile giant Vietnam once the
Trans-Pacific Partnership (TPP) goes into effect, as the agreement would remove trade barriers and
eliminate import tariffs for Vietnam and other TPP member countries.

API has noted that it’s important for Indonesia’s textile industry to increase its
competitiveness so that it can withstand competition once the ASEAN Economic Community (AEC) is
established in 2015. The AEC is intended to create a single market and production base and a highly
competitive economic region with equitable economic development and which is fully integrated into
the global economy.


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Facing Challenges

Indonesia boasts the largest economy in Southeast Asia and one of the fastest-growing
economies in the world. The country also has the lowest minimum wages in the ASEAN region.
Recently, thousands of workers have taken to the streets to demand higher wages. Union leaders are
demanding pay raises for Indonesian workers as inflation, fuel prices and the overall cost of
living rise. Minimum wages in the Jakarta area have increased in the last year by 44 percent, and
wages in other areas also have risen substantially. However, wages in Jakarta will rise only by 11
percent in 2014.

There is fear that higher wages could affect the competitiveness of Indonesia’s textile and
apparel sector. API reports that 60 textile and apparel production companies have been forced to
relocate from Jakarta to other areas of the country, such as Java, where wages are lower. In
addition, approximately 60,000 employees have been laid off as factories look to cut costs.

The textile industry, which consumes a significant amount of fuel and electricity, is also
dealing with the effects of rising energy costs. Fuel prices and electricity rates both have
increased in 2013 — by 44 percent and 15 percent, respectively — thereby significantly increasing
the industry’s production costs. This, in turn, has caused textile and apparel prices to increase,
which could cause domestic sales to decline.

Domestic sales also may decrease because of the recent influx of textile and apparel imports,
particularly from China. According to API, imports of Chinese fabric during 2007-2011 rose by
almost 82.3 percent to US$4.45 billion; and imports of Chinese garments during the same period rose
by 34.4 percent to $350,000.

Looking Ahead

Despite these challenges, the MOI reports that dozens of textile firms — particularly from
China, South Korea, and Thailand — are interested in setting up textile manufacturing in Indonesia,
and specifically in Central Java, because of its favorable business climate, low wages and
convenient access to major ports.

API has high hopes for the industry’s 2013 performance. The organization has predicted that
Indonesian textile exports will rise by more than 6 percent this year to US$13.4 billion. API
expects this increase will be prompted mainly by an increase in demand from the U.S. and Japan. For
example, textile exports to the U.S. are expected to increase 4 percent, from US$5 billion in 2012
to US$5.2 billion in 2013. In addition, API notes that exports to Japan in the first 11 months of
2012 rose 16.3 percent to US$1.05 billion. API also points out that Indonesian textile exports to
Japan have increased 70 percent since the Japan-Indonesia Economic Partnership Agreement was
implemented in 2008.

The textile and apparel industry continues to play a major role in Indonesia’s economy,
contributing significantly to the country’s gross domestic product growth and its foreign exchange
earnings. The Indonesian government is hopeful that Indonesia’s export share in the world market
will increase from 1.8 percent currently to 4 or 5 percent in the next 10 years. The MOI has
committed to keeping up its support of the Indonesian textile industry through fiscal incentives to
help the industry stay competitive on the global market.


October/November/December 2013