Manufacturing Woes for Indonesia’s Garment and Textile Sector

Manufacturing Woes for Indonesia’s Garment and Textile Sector

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The Gross Domestic Product (GDP) of the Textile and Garment sector has suffered a contraction, or negative growth of 6.1% last year. This figure represents the worst GDP growth rate within the entire manufacturing industry, which stood at 4.3%, as well as the growth of Indonesia’s total GDP of 4.7%.

Despite the recent turmoil in the industry Indonesia has seen the return of investment in the sector and brands are returning to the market after having experienced supply and quality issues in lower cost markets. The Indonesian Textile Association (API) has indicated that 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 2015. Companies' obligation to cover health costs under the government's new BPJS health scheme also weighed heavily on textile companies. Despite these challenges, Indonesia offers significant advantages as an integrated textile manufacturing base for the global market.

Most 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 USD, making it vulnerable to a weak rupiah and economic tremors. Rising interest rates in the U.S. and slower Chinese growth present similar concerns for Indonesia.

Annual increases in minimum wages in West Java and Jakarta have squeezed an already-tough margin. 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 lost their jobs.

Over the long term, Indonesia's ability to boost manufacturing and create productive jobs for its swelling workforce will require more than just channelling 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.

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 night-time 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. It seems that Government involvement is needed to aid in the woes faced by the textile industry.