Analysis: The textile industry: Are there opportunities this year?
The economic slowdown in 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.
A global recovery is still elusive along with a domestic economy that has yet to any show sign of improvement. The chairman of the Indonesian Textile Association ( API ), Ade Sudrajat, is pessimistic about the TPT sector seeing any increased growth in the next year.
The performance of the TPT 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 percent compared to the same period the previous year. This figure represents a worse GDP growth rate than that of manufacturing industry as a whole, which stood at 4.3 percent, or the growth of Indonesia’s total GDP of 4.7 percent.
As to the global economic situation, the International Monetary Fund ( IMF ) has cut its forecast for world economic growth to 3.4 percent from 3.6 percent in 2016. Likewise with the US, economic growth of only 2.6 percent is expected. This affects the Indonesian TPT sector because Indonesian TPT exports are strongly influenced by global economic conditions, particularly those in the US and Europe which represent the sector’s largest markets.
The share of Indonesian TPT exports to the US and Europe generally stand at 31 percent and 16 percent, respectively. This is far greater than exports to ASEAN and Japan, for example. In 2015, the value of TPT exports was estimated to reach US$12 billion, down from the previous year’s figure of $12.68 billion, a contraction of about 5.3 percent year-on-year ( yoy ).
However, as of October last year, Indonesian TPT exports only amounted to $10.2 billion, about 77 percent of the target. Part of the reason for this is that Indonesian export products have to compete with their competitors’ products, especially garments from Vietnam, in the US and European markets.
In Vietnam, production costs are relatively low as they are not unduly burdened by labor costs, which remain fairly cheap. This contrasts somewhat with Indonesia at this time. In addition to the increased cost of raw materials in Southeast Asia’s largest economy, production costs are also burdened by the ever more expensive cost of labor. Add to this the weakening of the rupiah, and it is understandable that many companies ‘ unable to withstand the pressure ‘ have gone out of business. Increasingly high production costs have led to industries, in particular the textile industry, being forced to lay off their employees.
For example, based on the observations of the API, the textile industry centered on four districts in the regency of Bandung retrenched by 6,000 workers during the period from January to May 2015. Imagine how many tens of thousands or even hundreds of thousands of workers would lose their jobs if such layoffs were to take place across the island of Java. According to the API, those industries that generally resort to provisional layoffs are downstream by nature.
In addition, the level of competitiveness of Indonesian TPT products continues to decline. According to the central statistics agency ( BPS ) data, in 2014 alone there was a drop in the level of competitiveness of Indonesian TPT products in the world market of 1.3 percent. Vietnam, by contrast, saw its level of competitiveness increase by 1.8 percent yoy. Indonesia’s competitiveness decline occurred not only in the world market, but also in the US and European markets, which saw falls of 25 percent and 3 percent, respectively.
Trade Minister Thomas T. Lembong sees Vietnam as a threat in terms of it being Indonesia’s largest competitor in the textile and footwear sector. This is especially true since Vietnam has joined the Trans-Pacific Partnership ( TPP ). Competition with Vietnam, in the minister’s view, is becoming increasingly keen as the Vietnamese have also now completed negotiations for a free trade agreement ( FTA ) with the EU. This means that Vietnam will have access to the European market, which is larger even than that of the US, consisting as it does of more than 20 countries. Minister Lembong explained that through the TPP, its 12 member states, led by the US, could soon control 40 percent of the world market. Thus, it is no wonder that Indonesia is eager to join the TPP, which it is expected to do within the next two years.
For an alternative 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 labor-intensive investment in 2016. As to the realization 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 percent by as much as Rp 2.4 trillion ( US$176 million ) from 82 projects, the textile weaving industry posted growth of 613 percent amounting to Rp 163 billion from 25 projects, the garment industry recorded growth of 16 percent, by as much as Rp 941 billion and the clothing accessories industry recorded growth of 563 percent amounting to Rp 216 billion from 15 projects.
Investment plans, as recorded in the number of principle licenses obtained from the textile sector during 2015, were valued at Rp 13.1 trillion, up 68 percent over the previous year. According to the head of the BKPM, Franky Sibarani, this investment figure in the textile sector included plans for the employment of 101,000 workers. The realization of these investment plans is expected to contribute positively toward the creation of the 2 million jobs targeted by the government in 2016.
Investment data that has been presented by the BKPM indicate that there is still hope for a recovery in the textile industry. However, the industry will recover only if accompanied by effort and support from the government such as national brand development and a logistics base for cotton, which is currently being developed to ensure the availability of the necessary raw materials, continued investment and industrial development will take place as further economic policy packages are rolled out. Moreover, industrial competitiveness as a whole is likely to strengthen, backed by declining gas, electricity and diesel prices. The government is also encouraging the improved performance of this industry, including by stepping up efforts to control imports and securing the domestic market through non-tariff policies. These policies include the compulsory application of Indonesian National Standards ( SNI ), the use of domestic products in the procurement of goods and services ( P3DN ), as well as the restructuring of machinery in the textile and footwear industry.
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