Textiles

Indonesia has the world’s fourth largest population and is the largest economy in Southeast Asia. The development of the country and its efforts to position itself more globally make Indonesia a highly interesting market in many areas. In the textile industry in particular, Indonesia is an attractive target market for the application of more sophisticated technologies and production methods. The size of the domestic market makes an important contribution to the production of the textile industry, which ranks 6th in a global comparison.  

In the ranking of the most important export nations for textiles, Indonesia ranks 12th. The USA, the EU and the Middle East are among the most important export destinations. As the largest Muslim nation, Indonesia is striving to expand its market share in Muslim textiles and are opening up new export markets. Accordingly, trade missions are increasingly going to predominantly Muslim countries in Africa and the Middle East. Significant growth has already been recorded in this area in the recent past and the country aims to become the global center of the Muslim fashion industry. 

Contrary to the structure of many other industries in Indonesia, the textile industry is vertically integrated. The nation hosts companies along the entire value chain of textile production. At around 30%, a relatively large part of Indonesian textile production is destined for the domestic market. Domestic demand is constantly growing thanks to the growing purchasing power of large sections of the population, a strong penchant for new fashion trends, the increasing spread of online trade and a growing distribution infrastructure. Muslim clothing and textiles are also playing a growing role in the domestic market. About 80% of all production destined for Muslim customers is sold domestically. Accordingly, only 20% has been sold abroad so far. Therefore, there is great potential for development in this sub-sector. 

In the first quarter of 2022, the Indonesian textile sector showed very significant growth. With the increase in domestic sales accelerating in line with the Eid al-Fitr celebrations after Ramadhan, which was followed by an expansion of production capacities at all stages of production, the performance of the textile and textile products industry recorded positive quarterly growth of 3.33% and an annual growth of up to 12.45% (yoy). The development of the industry's performance is expected to continue to grow in line with the recovery of the global economy. 

In Indonesia, around 5,000 large and medium-sized companies and another 500,000 small and micro-enterprises are active in the textile industry. About two thirds of all employees in the textile industry are employed in small and micro-enterprises. The focus of the Indonesian textile industry is, among other things, on the production steps of spinning, weaving and manufacturing/finishing. 

With increasing digitization and changes in production, the Indonesian government has announced the vision “Making Indonesia 4.0” as a goal for the year 2030, which emphasizes technological development in five key industries, including the textile sector. Through this vision, the textile sector together with four other industries (electronics, automotive, food and chemicals) should generate 60% of Indonesia's GDP in the future and make the country one of the strongest economies in the world by 2030. In 2022, Indonesia's textile industry is expected to grow by 5%, in line with the country's continued economic growth. 

HIGHLIGHT

Indonesia Textile Industry Overview and Performance (2021)

Source: USDA, Dept. Of Agriculture – April 2022 

According to the Indonesian Ministry of Industry, there are currently about 22 yarn producers, 300 spinning mills and 1,400 sewing companies that have great development potential and whose performance can be further improved. Fabrics account for a large part of the total textile production in Indonesia, totaling 28% of the total production volume and 40% of the revenue.

Source: Ministry of Industry, 2021

Source: UN Comtrade

The import value of textile machinery fluctuated between $800 million and $940 million in the years 2014 to 2019. As sales of textile products shrank in 2020, numerous textile manufacturers were unable to invest in re-equipping machines. Due to this, the import of textile machinery in 2020 collapsed by 36% compared to the previous year and the value of machinery imports reached only $559 million. 

On the other hand, imports of Chinese machines have increased over the past ten years. Around 41% of all imports now come from China. The dominant position of Chinese products is also reflected in the individual processing sectors. In general, Asian countries dominate the Indonesian textile machinery market, such as South Korea or Japan.

CHALLENGES

Currently, the textile industry is struggling to recover from the pressures of the pandemic that has slowed its growth. The Ministry of Industry stated that the textile sector contributed 6.08% to the manufacturing GDP in the third quarter of 2021 and the industrial growth recorded an increase of 4.27% (QoQ). In the second quarter of 2022, growth was only 0.48%. 

Nevertheless, Indonesia's production was already weakening in regional comparison to Bangladesh, Cambodia and Vietnam even before the pandemic began. While the exports of the regional competitors grew continuously in the years 2014 to 2019, Indonesian exports remained at a constant level. From January to August 2020, textile export volume fell by -16.7% compared to the same period of the previous year. 

The structural difficulties that the Indonesian market struggles with include, for example, significantly longer manufacturing and delivery times compared to other countries in the region. Increasing competitive pressure on international markets and in Indonesia itself is also making the Indonesian textile industry weak. Indonesian textile manufacturers are heavily dependent on imports of primary products. A large proportion of Indonesian companies do not have sufficient financial resources to operate production facilities for primary products.  

Another difficulty of the Indonesian textile industry is outdated production machines, which reduce the productivity and efficiency of the sector. Compared to other ASEAN countries, such as Thailand or the Philippines, the productivity in the clothing industry in Indonesia is lower. According to a study by the International Labor Organization (ILO) on the productivity of textile manufacturers in Asia, productivity in Indonesia fell by an average of -8.2% annually in the years 2010-2015. Indonesia thus recorded the strongest decline of all the countries examined. 

In Indonesia, obsolete production machines are not a new problem as, in 2012, the Ministry of Industry estimated that around 70% of the machines belonged to the “old” (10-25 years) category. Despite various government incentives such as subsidizing machines or import duty reductions, the machines were only slowly replaced. Instead, investment in the construction of new buildings has been preferred in the last decade. According to the Indonesian investment authority BKPM, 80% of the production machines are currently obsolete and more than 25 years old. For example, 5 million of the approximately 7.8 million spinning machines in operation were installed more than 20 years ago. In some production sub-sectors, the proportion of obsolete machines is significantly higher. For example, around 82% of the machines in the case of weaving machines and around 93% of the machines in the finishing industry are considered obsolete. Overall, the number of existing machines is estimated at around 8.38 million pieces. To be able to successively replace the outdated machines, it has been estimated that investments in the amount of Rp 44 trillion, or roughly $2.93 billion, will be needed. 

Local Value Added (TKDN) requirements is another key restriction foreign companies face in Indonesia. Local value creation demands have recently been extended to an increasingly broad spectrum of economic sectors. TKDN policy is to boost national industry productivity and competitiveness amid more restrictive global trade conditions. One consequence of this is that the opportunities for foreign companies in some sectors are hampered by overly strict local content requirements. 

Intellectual property protection is a key factor in competitiveness. Indonesia remains on the Priority Watch List in the Special 301 Report 2020. Foreign exporters and companies planning to do business in Indonesia should be aware of widespread copyright and trademark piracy both online and in physical markets. Patents, copyrights, trademarks and industrial designs are protected by Indonesian law and the implementation of the laws conforms to international standards. 

Foreign companies and exporters should also be aware of the additional testing, certification and product registration requirements that apply to a wide range of products. The foreign exporter has to pay an Indonesian certification body to conduct shipping inspections. This additional requirement increases the overall cost of bringing goods to market. 

Despite the current difficulties, the Indonesian government is attempting to reform the sector and solve the structural problems through various projects and investment programs. The forecast compound annual growth rate of Indonesia's garment industry in 2022-2026 is 5.87%. With this growth, imports of textile machinery are also expected to increase. 

CONCLUSION

Indonesia as the fourth largest nation with a population of more than 270 million people, supported by political stability and positive economic development, holds enormous potential for textile products. The government's pledge to make Indonesia the 10th largest economy by 2030 through the vision "Making Indonesia 4.0" encourages the textile industry to develop further. Ambitious investment and development goals are to be achieved by emphasizing the competitiveness of the textile industry. 

At first, entering the Indonesian market can be challenging for foreign companies. The complex bureaucracy and regulations that sometimes overlap between stakeholders are confusing. Despite this, Indonesia is open to foreign companies and in many areas is even highly dependent on imported products. This also applies to the textile industry, which depends on machines from abroad in order to be internationally competitive. High-tech machines supported by good product image and quality are preferred by the Indonesian market. The initial investment required may be relatively high, but the great potential of the market opens up good opportunities for companies to do business in Indonesia. 

In view of the age of the textile machines in general use, modernization with machines from abroad is urgently needed. Companies in Indonesia are primarily in competition with producers from China, Japan and South Korea. In addition, the industry's dependence on imported products is increasingly perceived as a threat to the local market. As a result, efforts are made and incentives are created for local manufacturers to reduce the use of imported products. Therefore, entering the market and doing business successfully in the long term require greater effort and a well thought-out strategy. 

For market entry, it is expressly preferable to work with a local buyer/dealer/agent who will assist with product registration, import permits, and logistics for importing and distributing the machines in the local market. In order to gain market share, companies can primarily rely on innovation, quality, safety, increased productivity, energy efficiency and after-sales service. It is also crucial to demonstrate the technologies and solutions offered, help with machine installation and maintenance, and demonstrate the benefits and return on investment to potential Indonesian customers. Such competitive advantages and unique selling points are decisive factors in being able to compete with cheap products from competitors.