Troubled times for Indonesia

Earthquakes apart, Indonesia has expressed concern that with the removal of quotas, its textile and apparel sector will lose US market share to other producers

The textile and apparel sector is an important part of Indonesia’s economy as the largest source of jobs and a major source of export earnings. The sector employed upwards of 1.2 million workers and accounted for 14 per cent of total exports in 2001-02. The United States is the largest market for Indonesian textile and apparel exports, accounting for an average of about 15 per cent of total exports. The Indonesian textile industry is integrated vertically through almost every phase of production. Although much of the raw cotton used by the industry is imported, there is a large synthetic fiber manufacturing industry in place.

The Indonesian industry has traditionally held a competitive advantage in terms of labor, electricity, and fuel and costs; however, these costs have increased significantly since 1999.3 Indonesia is one of the largest producers of textiles and apparel in the ASEAN region. Textile production capacity in Indonesia has been running at a high-capacity utilization rate, but equipment expansions and upgrades were generally put on hold in 2000 and 2001 because of reduced foreign direct investment (FDI), high inflation, and political instability.

Industry structure and performance

The Indonesian textile and apparel sector encompasses almost the entire textile supply chain, from the production of synthetic fibers to yarn spinning, fabric forming and finishing, and apparel manufacturing. Indonesia has approximately 8,000 manufacturers of textiles and apparel, most of which are in West Java and Jakarta. According to the Indonesian Department of Industry and Trade, more than 1,000 fabric factories are in operation, with 700 to 800 producing woven fabrics, 250 producing knit fabrics, and approximately 10 producing nonwoven fabrics. Generally, the quality of Indonesia textile products has improved and the industry has become less dependent upon imported fabrics to meet the demand of apparel manufacturers. Much of Indonesia’s capacity to produce textiles and apparel remained relatively stable during 1999-2001, increasing from a total of 5.5 million metric tons in 1999 to 6.0 million metric tons in 2000 and 2001. During 1997-2000, capacity utilization rates also increased. Indonesia’s total production of textiles and apparel grew by 18 per cent during 1999-2001, reflecting production increases of 25 per cent for fibers, 21 per cent for yarns, 16 per cent for fabrics (woven and knit), and 4 per cent for apparel.

Indonesia’s textile industry supplies most of domestic yarn demand. The primary yarn consumers are weaving and knitting mills. Excess yarn production generally is exported to South Korea, Japan, and Hong Kong.

Factors of production

Raw materials

Indonesia’s textile industry consumes cotton and manmade fibers, particularly polyester, which accounts for more than 50 per cent of total consumption. With the exception of cotton, all of the other textile fibers are produced domestically. Over the past decade, the share of polyester fibers in the total consumption of fibers has rapidly increased and captured the previously dominant position of cotton.

Labor

The Indonesian textile and apparel industry is highly labor-intensive, employing approximately 1.2 million workers directly and an additional 3.5 million workers in other textile-related areas, such as distribution. The largest share of workers are involved in the production of apparel 676,600 workers) and fabrics (355,600 workers). Manufacturing operations often are overseen by expatriate management. Indonesia’s textile industry has had one of the lowest labor costs in the region. However, there have been significant increases in the minimum wage (which is determined on a regional basis) throughout the country.

Technology

In 2001, Indonesia accounts for a large share of the installed textile capacity in the ASEAN region, accounting for 57 per cent of the region’s short-staple spindles, 31 per cent of its shuttleless looms, 31 per cent of its shuttleless looms, 67 per cent of its shuttle looms, and 40 per cent of its filament weaving looms. However, the Indonesia textile production machinery is beginning to become outdated, with 90 per cent of machinery more than 5 years old 10 and the Ministry of Trade and Industry reports that the average age of machinery in the textile industry is more than 15 years. Although older machinery currently does not appear to be affecting competitiveness, it is unlikely that new investment will materialize.

Indonesia’s textile and apparel sector has ranked among the fastest growing industries in the nation and consistently has been the largest source of non oil and gas foreign exchange. Indonesia exports textiles and apparel articles to more than 130 countries, with the primary markets being the United States and the European Union Other markets include other ASEAN and Asian nations, the nations of the Middle East, and Australia.

Of Indonesia’s total exports of textiles and apparel to the US market, an estimated 60 per cent were subject to specific quotas in 2002. EU quotas on these Indonesia products were largely filled in 2002.

With the removal of quotas, Indonesia has expressed concern that its textile and apparel sector will lose US market share to other producers subject to quotas. China is of particular concern to the Indonesian textile and apparel sector, as Chinese-made products have already taken export market share from Indonesian products. Following the September 11 terrorist attacks, a trade source reported that orders for Indonesian textile and apparel products from Western Europe and the United States were cancelled and the orders were filled by manufacturers in Vietnam and China. With rising costs of labor, energy, and raw materials, coupled with the elimination of quotas, Indonesia may lose additional market share to competitors.

Source: Texprocil