Challenges in Indonesia’s FTG Industry

While being one of the country’s oldest and most important industries in terms of employment, Indonesia’s textile industry is facing immense challenges in modernising itself and thus finding its place among regional competitors. The volatility in exports to key markets such as the United States has made banks reluctant to lend and the state has had to take a leading role in bringing the sector into the 21st century and the era of intensified free trade.

Outdated machinery has long been an issue holding back productivity in textile exports with an estimated 70% of all machinery in use being classified as ‘old’ (10-25 years) according to the Ministry of Industry. The country’s textile industry faces the tough choice of either heavily investing to measure up with its global competitors or be left behind and see productivity as well as exports decline. In response to this, the government introduced a textile machinery restructuring program in 2007 that provides incentives for participants such as a 10% discount on machinery and a lower interest rate. Executed by the Directorate for Textiles and Various Industry under the Ministry of Industry, the program aims to distribute funds to the value of 177 billion RP to 200 companies in 2011. As a further measure for the industry, Ministry of Finance Decree No.80/2011 exempts textile machinery imports from custom duties.

The introduction of the China – ASEAN Free Trade Agreement (CAFTA) in January 2010 hit fibre, textile and garment (FTG) producers particularly hard with a 70% surge of Chinese exports over the year. The domestic market share of imported textiles, particularly those from China, is increasing and reached 40% of the total in 2010. It is predicted to reach 50% in 2011 according to the Indonesian Textile Association. For garments specifically, the total value of imports in 2009 stood at $99.9 million USD, acutely increasing to $126.2 million in 2010. The figures from the Ministry of Trade show that China accounted for $45.1 million of total garment imports followed by Hong Kong with $23.9 million. However, while the trade balance has widened in the immediate short term; figures show that Chinese imports of Indonesian textiles grew by 30% and fibres by 65% over 2010. Indonesia is making headway in both the local market and in China by competing as a high quality producer and will therefore see the benefits of the CAFTA in the medium term as Chinese textile consumption is growing rapidly from 12kg per capita in 2009 to 18 kg per capita in 2010.

Price wise, Indonesian textile producers are finding it difficult to compete compared to China and regional neighbours. The Ministry of Finance Decree No 241/2010 on the Setting of the Classification of Goods System and the Imposition of Import Duty on Imported Goods increased the import duty on textile raw materials such as MEG, and Caprolactam, by 5%. Textile producers have had to raise their prices in line with the import tariffs and the 18% rise in electricity costs thereby comparing unfavourably to imports at 10-15% dearer as finished garments can be imported tariff free. It is hoped that these tariffs will soon be overturned as the original regulation that covered some 2,165 products of various classes has been subject to a number of revisions due to the negative impact on many of the manufacturing sectors. New revisions regarding non food items including those related to the textile industry are yet to be signed into law by the Ministry of Finance as per June 2011.

Improving Indonesia’s stance in the global textile market will come from not only improvements to the regulatory environment and updating of machinery, but also from improving its position among its domestic market. Branding and marketing of Indonesian made textiles has been conducted poorly in the past and domestic brands have not taken a strong footing among Indonesian consumers. Foreign apparel brands have flourished in the upper end of the market as have the imports of cheap garments from China that are on trend. With a reorientation of the sector towards higher quality goods and greater focus being placed on innovation and creativity; Indonesia has a strong base for further developing its textile garment, textile and fibre industries.
Laws to be Considered:

    Ministry of Finance Decree No 241/2010 on the Setting of the Classification of Goods System and the Imposition of Import Duty on Imported Goods.
    The Ministry of Trade Regulation No 39/2010 on Importation of Finished Goods by Manufacturers allows manufacturers to import finished goods tariff free if it is in accordance with their business line and import license.
    Ministry of Trade Regulation No.45/2009 regarding import licenses that stipulates that companies must choose to hold either a General Import License (API-U) or the Producer Import License (API-P) (see Import Licenses).
    Ministry of Trade Decree 56/12/2008 places restrictions on which ports imports can be delivered to in an effort to combat illegal trade. Of the 500 products that it covers, garments and textiles are included and must be delivered to the ports of Tanjung Priok (Jakarta), Tanjung Emas (Semarang), Tanjung Perak (Surabaya), Belawan (Medan) and Soekarno-Hatta (Makassar) and subject to non automatic customs clearance.
    Customs Law 10/1995 and Customs Law 17/2006 gives authority to the Directorate General of Customs and Excise to examine inspection of all imports and decentralises authority to local government of the relevant port of entry.