Low productivity in the textile sector<\/p>\n
Dan Kingsley, Jakarta<\/p>\n
We have read quite a bit recently about how Indonesia's non-
\noil manufacturing exports have been decreasing. In fact, there
\nhas actually been negative investment in this sector if the
\nnumber of international trading companies (export manufacturing,
\nretail buyers, international investors) that have left the
\ncountry is taken into account.<\/p>\n
Given that non-oil manufacturing exports are mostly comprised
\nof labor-intensive industries such as garments and furniture,
\nmany Indonesians lost their jobs in recent years, while an
\naverage of 2-2.5 million new job seekers are estimated to be
\nentering the labor market annually.
\n The textile and garment industry is a major labor-intensive
\nsource of employment opportunities. It has, however, seen a
\ndecline in international competitiveness due to rising labor
\ncosts and other factors, including recent increases in
\ninfrastructure costs, national autonomy measures and tight
\nlending policies.<\/p>\n
It has been anticipated by many foreign buyers, branded label
\ncompanies, and manufacturing firms that the situation will only
\nworsen in the textile\/garment sector beginning in 2005, when the
\nimplementation of the quota free era begins. At this time the 10
\nyear phase out period established at the Uruguay Round will end,
\nand quotas from 146 World Trade Organization (WTO) member
\ncountries will expire.<\/p>\n
Two key factors challenging the industry today -- increased
\ncompetition from lower-cost overseas producers and the imminent
\nend of the quota system -- are to a large extent beyond the
\nindustry's control. Of course the second factor cannot be
\ncontrolled, as foreign buyers try to establish new sources in
\ncountries such as China and Vietnam. In these countries higher
\nproductivity in factory production translates into cheaper
\nprices.<\/p>\n
This is not to say that the Indonesian worker is less
\nproductive. Indonesian garment and textile worker, supervisors
\nand managers are very experienced in fact, and are as productive
\nas those in other countries given the same machinery and factory
\nconditions. However, due to a lack of new investment in the
\nindustry, many workers are working in old, outdated factories and
\nwith technologically uncompetitive machinery.<\/p>\n
As in any manufacturing industry it is necessary to
\ncontinually update technology in order to remain competitive.<\/p>\n
The lack of capital reinvestment in new machinery and
\nfacilities has not been consistent with either the global
\ncompetition, or with what would be considered best business
\npractices.<\/p>\n
A comprehensive survey by PT Sucofindo surveyor company of
\nover 4,000 companies between 2001 and 2004 revealed the fact that
\nto be globally competitive the industry must invest over USS500
\nmillion. The ministry of trade and industry has acknowledged
\nthis.<\/p>\n
Why, if labor costs are relatively cheap in Indonesia, are
\nproducers successful under the era of quota restrictions choosing
\nnot to re-invest in the industry as the non-quota era approaches?
\nThese are smart businessmen, who have obviously researched the
\ncompetitive situation through their buyers, if not directly. They
\nknow the relative costs of production in other countries, so they
\nobviously feel that Indonesian costs are not competitive, and
\nchoose not to compete on a level playing field.<\/p>\n
It comes down to productivity; costs in Indonesia are higher
\nbecause the total process of buying components, hiring labor,
\nproducing the product and getting it to the shop or port is
\nhigher than in other countries. This process is known as the
\nsupply chain, and to become globally competitive the sector must
\nreduce these supply chain costs to levels at or below competing
\nnations.<\/p>\n
It is vital that we look at all of the factors contributing to
\nthe high cost\/productivity ratio along the production chain:<\/p>\n
Labor costs: Recent labor regulations on severance pay, and
\nespecially Law No. 13 passed in December 2003 on manpower, have
\ndrastically increased the costs of doing business. Foreign
\ncompetitor countries do not require the exorbitant costs incurred
\nthrough similar labor laws in their respective countries.<\/p>\n
The supply chain: These costs will include local
\ntransportation, local government charges and \"lobbying\" charges.
\nEach of these three components in the supply chain was estimated
\nto be up to 3 percent of total production cost.<\/p>\n
There will be serious problems when honest hard working people
\nlose their jobs due to inefficient production. This will be
\ncompounded by the fact that many factories will plead that they
\ndo not have the funds for severance pay, and make the necessary
\ndonation to the relevant authority to back them up. Then things
\nwill really hit the fan, so to speak.<\/p>\n
Astute measures to counter this disadvantage in the short term
\nhave been proposed, such as signing free trade agreements with
\nlarge buying countries such as the U.S. in order to reduce
\ntariffs. However, the government should take a serious business
\ndiagnose of why the costs of domestic production have been so
\nhigh.<\/p>\n
The write is Managing Director of Trade Management and
\nDevelopment Services (dkingsley@tmiconsulting.com).<\/p>",
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