Indonesia is ranked among the top ten largest textile producing countries.

The textile and garment industry is one of Indonesia's oldest industries

and - being labor intensive - a large source for jobs. However, the nation is
far away from threatening China's dominant position. Whereas China
controls about 35 percent of global textile markets, Indonesia controls
only about 2 percent. 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.
However, Indonesia is facing several challenges: the upstream sector is
largely inadequate (causing a reliance on imports of raw materials) and
requires an injection of investment, technology and expertise, while
competition from other textile producing nations in Southeast Asia
(Cambodia, Vietnam as well as Myanmar) is rising.
Although China is the clear world leader in terms of textile and garment
production, rising minimum wages in the world's second-largest economy
should give an opportunity to Indonesia to present itself as a more
attractive production hub for global fashion brands. However, this is not
that easy because the labor-intensive textile industry of Indonesia also
has to cope with rising minimum wages, as well as higher electricity
tariffs, and competition from cheap textile products imported from China
(particularly after the implementation of the ASEAN China Free Trade
Agreement [ACFTA] in January 2010).

Increased government support and ongoing trade negotiations with the EU

are expected to underpin growth in Indonesias textiles industry.
In August Airlangga Hartarto, minister of industry, announced that the
government was developing a number of incentives including extending
tax breaks and lowering gas prices in a bid to boost the competitiveness
of the countrys textile industry.

Materials in the raw

As part of the incentive package, the government has proposed removing

value-added taxes on raw materials produced locally, a move that could
cut production costs by making domestic materials more competitive and
encourage increased investment in the upstream segment.

Any measure to support the expansion of the raw materials link in

Indonesias production chain will be welcome, expanding access to local
raw materials will also result in reduced costs and new products.

To Becoming stay competitive, Indonesia need to replace foreign imports

with domestic raw materials in order to create a better supply chain,
including integrating upstream manufacturing of rayon and polyester, and
creating value-added products that meet the demands of the industry.
Hopes Pinned On Trade Agreement

Indonesias textile producers are also looking to the government to help

boost exports by striking a trade deal with the EU, an agreement that
could help increase the countrys competitiveness among regional rivals,
notably China and Vietnam.

To this end, in mid-July, Jakarta opened bilateral trade talks with the
European bloc, with President Joko Widodo saying he expected a
Comprehensive Economic Partnership Agreement (CEPA) to be in place by
2018.

The trade talks with the EU are expected to positively impact Indonesias
textiles industry, with local and foreign investors already beginning to look
at what Indonesian facilities can offer in terms of infrastructure, labour
laws and connectivity to ports.

Currently, the EU which is Indonesias fourth-largest trading partner

imposes duties of between 11% and 30% on Indonesian textile
imports, putting the country at a disadvantage when compared to regional
producers such as Vietnam, which already has a CEPA with the EU, and is
therefore, not subject to import duties.
In 2015 Indonesias overall textile exports were valued at
$12.3bn, accounting for 1.2% of GDP. Exports are predicted to reach the
same level this year, after first-quarter exports totalled $2.6bn, according
to a statement made by Ade Sudrajat, chairman of the Indonesian Textile
Association, in July.
The government has said it wants to see Indonesia become one of the
top-five global textile exporters in the medium term, up from its present
ranking of tenth, currently controlling a market share of 1.8%.

Manufacturing slowdown

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 Indonesias 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 Indonesias
total GDP of 4.7%.
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 Indonesias 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 Chinas 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.

The Rising of production Cost

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.