Low productivity in the textile sector

Low productivity in the textile sector

Dan Kingsley, Jakarta

We have read quite a bit recently about how Indonesia's non-
oil manufacturing exports have been decreasing. In fact, there
has actually been negative investment in this sector if the
number of international trading companies (export manufacturing,
retail buyers, international investors) that have left the
country is taken into account.

Given that non-oil manufacturing exports are mostly comprised
of labor-intensive industries such as garments and furniture,
many Indonesians lost their jobs in recent years, while an
average of 2-2.5 million new job seekers are estimated to be
entering the labor market annually.
The textile and garment industry is a major labor-intensive
source of employment opportunities. It has, however, seen a
decline in international competitiveness due to rising labor
costs and other factors, including recent increases in
infrastructure costs, national autonomy measures and tight
lending policies.

It has been anticipated by many foreign buyers, branded label
companies, and manufacturing firms that the situation will only
worsen in the textile/garment sector beginning in 2005, when the
implementation of the quota free era begins. At this time the 10
year phase out period established at the Uruguay Round will end,
and quotas from 146 World Trade Organization (WTO) member
countries will expire.

Two key factors challenging the industry today -- increased
competition from lower-cost overseas producers and the imminent
end of the quota system -- are to a large extent beyond the
industry's control. Of course the second factor cannot be
controlled, as foreign buyers try to establish new sources in
countries such as China and Vietnam. In these countries higher
productivity in factory production translates into cheaper
prices.

This is not to say that the Indonesian worker is less
productive. Indonesian garment and textile worker, supervisors
and managers are very experienced in fact, and are as productive
as those in other countries given the same machinery and factory
conditions. However, due to a lack of new investment in the
industry, many workers are working in old, outdated factories and
with technologically uncompetitive machinery.

As in any manufacturing industry it is necessary to
continually update technology in order to remain competitive.

The lack of capital reinvestment in new machinery and
facilities has not been consistent with either the global
competition, or with what would be considered best business
practices.

A comprehensive survey by PT Sucofindo surveyor company of
over 4,000 companies between 2001 and 2004 revealed the fact that
to be globally competitive the industry must invest over USS500
million. The ministry of trade and industry has acknowledged
this.

Why, if labor costs are relatively cheap in Indonesia, are
producers successful under the era of quota restrictions choosing
not to re-invest in the industry as the non-quota era approaches?
These are smart businessmen, who have obviously researched the
competitive situation through their buyers, if not directly. They
know the relative costs of production in other countries, so they
obviously feel that Indonesian costs are not competitive, and
choose not to compete on a level playing field.

It comes down to productivity; costs in Indonesia are higher
because the total process of buying components, hiring labor,
producing the product and getting it to the shop or port is
higher than in other countries. This process is known as the
supply chain, and to become globally competitive the sector must
reduce these supply chain costs to levels at or below competing
nations.

It is vital that we look at all of the factors contributing to
the high cost/productivity ratio along the production chain:

Labor costs: Recent labor regulations on severance pay, and
especially Law No. 13 passed in December 2003 on manpower, have
drastically increased the costs of doing business. Foreign
competitor countries do not require the exorbitant costs incurred
through similar labor laws in their respective countries.

The supply chain: These costs will include local
transportation, local government charges and "lobbying" charges.
Each of these three components in the supply chain was estimated
to be up to 3 percent of total production cost.

There will be serious problems when honest hard working people
lose their jobs due to inefficient production. This will be
compounded by the fact that many factories will plead that they
do not have the funds for severance pay, and make the necessary
donation to the relevant authority to back them up. Then things
will really hit the fan, so to speak.

Astute measures to counter this disadvantage in the short term
have been proposed, such as signing free trade agreements with
large buying countries such as the U.S. in order to reduce
tariffs. However, the government should take a serious business
diagnose of why the costs of domestic production have been so
high.

The write is Managing Director of Trade Management and
Development Services (dkingsley@tmiconsulting.com).