Losing shine amid drop in overseas demand

Losing shine amid drop in overseas demand Still in difficult position

Hendarsyah Tarmizi The Jakarta Post Jakarta

The textile industry, once considered the economy's most promising sector, is losing its shine. Low demand, internal financial problems and a lack of efficiency have left the industry in a difficult position.

The industry has been a major engine of Indonesia's economic growth for the past several years. As one of the country's major foreign exchange earners, the textile industry has also played a critical role in providing jobs for millions of Indonesian workers.

However, recent developments have brought an end to the industry's charmed life. Although the sector remains the largest contributor to the country's non-oil exports, its leading role in raising foreign exchange is diminishing.

Low overseas demand, internal financial problems, industrial inefficiency, and non-economic factors such as security problems and increased labor disputes have made the climate difficult for the industry's major players.

"I have run out of words to describe how severe the situation being experienced by Indonesian textile and garment producers is," said Ade Sudrajat, the secretary general of the West Java- based Association of Indonesian Textile Producers (APTI).

Ade said that, in such difficult conditions, the textile companies in the province had no choice but to lay off workers in a bid to keep themselves afloat. The lay-offs are continuing, as overseas demand continues to decline, and at an increasing rate.

At least 100,000 workers in West Java, one of the country's major textile producing centers, have lost their jobs due to poor overseas demand. Lay-offs have also been initiated by textile producers in such areas as Jakarta, Central Java, East Java and Batam.

The conditions facing the industry deteriorated further following the Sept. 11 terrorist attacks on the United States.

Major buyers of textiles and garments reduced their orders out of fear that the terrorist attacks would spread worldwide, crippling the global economy in the process.

Buyers of Indonesian textile products were not immune from the anxiety, and some decided to suspend their long-term orders. For small and medium-sized companies, the suspensions were to spell the end of their operations.

Making things worse was the surge in anti-American sentiment in Indonesia following the attacks. Radical Muslims threatened to launch "sweeping" operations against American citizens in protest at the U.S. led strikes on Afghanistan, where the suspected mastermind of the WTC bombing, Osama Bin Laden, was believed to be hiding. The threats scared away foreign investors and buyers.

The fall in overseas demand in the aftermath of Sept. 11 has been just one of many problems confronting the textiles sector over the past three years.

The regional financial crisis that spilled over into Indonesia in late 1997 and brought the economy to its lowest point in recent history, posed severe problems for major Indonesian companies, most of whom had raised U.S. dollar-based loans to support their operations.

The sharp drop in the value of the rupiah against the U.S. dollar has almost tripled the rupiah cost of their U.S. dollar denominated debts.

Textile and garment producers have not been immune to such problems. Besides facing difficulties in financing their foreign debts, textile companies have also been lacking the financial support needed to cope with the surge in prices of imported materials.

Exports of garments and other related textile products, which reached $6.42 billion in 1996, fell to $5.16 billion in 1997 when producers started to feel the pinch of the crisis. Exports deteriorated further and dropped to $4.99 billion in 1998 when the financial crisis, which had led to the downfall of the authoritarian leader Soeharto after 30 years in power, reached its peak.

Exports rose again to $6.8 billion in 1999 thanks to an improvement in the political situation. The more conducive environment the following year encouraged foreign buyers to look more favorably at Indonesian goods.

In 2000, exports of textiles and garment products reached a record level of $8.23 billion. With an improvement in the level of business confidence, exporters were able to take full advantage of the weak rupiah in competing on the world market.

However, the world economic slowdown the following year reversed the trend. In 2001, Indonesia's total exports dropped by 9.8 percent -- the largest drop recorded in the last 12 years -- to $56.03 billion, partly due to a fall in non-oil exports.

According to data provided by the National Statistics Bureau (BPS), non-oil exports dropped by 9.11 percent to $43.40 billion last year.

Although the statistics agency did not reveal the combined value of textile and garment exports in 2001, the trends were not encouraging.

Existing data only cover the value of unknitted textile products, which mostly consist of fabrics and threads. Last year, exports of these products totaled $3.2 billion.

But the data show a slight increase in exports of garment and textile products to $4.77 billion in the first half of last year from $4.69 billion in the same period the previous year.

The Association of Indonesian Textile Producers (API) estimated that textile exports would decline by 25 percent in 2001.

Observers and analysts are generally skeptical about the industry's ability to sustain export levels this year. Although the rupiah remains weak against foreign currencies, the country's textile and garment products still face difficulties in competing with those from their main rivals, such as Thailand, China and Vietnam.

According to API, besides the problems related to the poor cashflow situation, and low overseas demand, the level of efficiency in the Indonesian industry is also worsening.

The association's vice chairman Lily Asdjudiredja said most of the knitting machines used by local garment producers were outdated.

With such poor production facilities, it will be difficult for the country's garment producers to compete with its Asian rivals.

He feared that the full implementation of the ASEAN Free Trade Area beginning this year would result in an influx of garment products from other ASEAN members on the local market.

Instead of benefiting from the expanded market, Indonesian textile producers could become losers on the domestic front, he said.

Under the AFTA agreement, import tariffs on goods traded among ASEAN member countries are to be cut to between 0 and 5 percent beginning this year. As most countries in the 10-member grouping produce similar goods, head-to-head competition in the region's textile market can not be avoided. As a consequence, those whose products are not competitive will be edged out, even from their own domestic markets.

On a wider scale, the slowdown in the world's economy will likely continue to affect textile and garment exports from Indonesia, which sells a majority of its products to major industrialized countries such as the United States, European nations and Japan.

The fact that buyers in the region have switched to garment products from South America has added to the woes facing Asian exporters, particularly those from Indonesia.

At least 75 percent of the world's apparel production, worth more than $135 billion per annum, is imported by the U.S., Europe and Japan. In 2001, however, apparel exports from Asia showed only a 5 percent increase, while those from South America rose by 25 percent.