Phelim Kyne

Phelim Kyne
Dow Jones/Jakarta

Garments smuggled from China are flooding the Indonesian market
and hurting the sales of a local unit of Japan's Toray Industries
Inc., a senior company executive said recently.

Smuggled garments undercut the prices of products of local
factories which buy polyester materials from PT Indonesia Toray
Synthetics, Indonesia Toray Group chief executive representative
Yukihiro Sugimoto told Dow Jones Newswires.

"It's said that over 60 percent of the garments in the
Indonesian market is imported goods, mostly smuggled and that's
mostly coming from mainland China," Sugimoto said.

"That's very much damaging local demand (for our products)."

Indonesia has become a destination for a steadily increasing
flow of smuggled garments from China over the past three years
that have created a "serious problem" for Indonesia Toray's
bottom line, Sugimoto said, without elaborating.

Toray Industries is Japan's biggest synthetic fiber producer
and a major supplier of components for Boeing Co.'s new 787
Dreamliner jetliner.

PT Indonesia Toray Synthetics is the only one of the company's
five Indonesia-based manufacturers that produces primarily for
the domestic market. The four other firms export 80 percent of
their output.

Sugimoto spoke on the sidelines of a meeting between
representatives of the Indonesian Synthetic Fiber Makers
Association (APSYFI) and Indonesia's Minister of Industry Andung
A. Nitimihardja.

APSYFI data indicate that synthetic fiber producers
contributed about US$1 billion of the total $7.2 billion of
Indonesia's garment and textile exports in 2004.

Andung told APSYFI representatives that Indonesia's current
regulatory barrier against smuggled goods "isn't good enough" and
that his ministry would work to bolster official anti-smuggling
efforts.

The impact of smuggling on Indonesia Toray's operations
reflects both inadequate official action to limit the entry of
illegally-shipped goods into Indonesia as well as China's
ascension as a global garment and textile export powerhouse.

Textile and garment exporters in China have invested billions
in recent years to upgrade their facilities and expand capacity.
That investment, together with highly-productive and low-cost
labor will in the long term help to deliver the bulk of global
market share to the country, analysts say.

China recorded a 14 percent on year increase in overall
textile and garment exports to $3.74 million in January, despite
export duties imposed by the Ministry of Commerce on 148 textile
and apparel items starting Jan. 1 designed to slow a massive
export jump. The China Securities Journal said in March that the
country's garment and textile exports to the U.S. and European
Union in January rose a much stronger 70 percent on year.

Those increases are linked to the end-2004 expiry of the
global Multifiber Agreement, or MFA, that allowed the U.S. and
the E.U. to support the development of textile industries
throughout the developing world through the issuance of annual
export quotas. In the post-quota environment, China's cost and
production advantages are allowing the country to control a
progressively larger piece of the global garment and textile
export market.

The possibility of U.S. and E.U. import tariffs to slow the
growth in China's garment exports is helping to fuel smuggling of
garments for sale in neighboring Asian countries, local producers
complain.

Smuggling is compounding the aversion of foreign investors to
funnel funds into Indonesia, Sugimoto said. Indonesia recorded a
26 percent decline in approved foreign investment to $10.3
billion in 2004 due to concerns about rampant corruption, poor
infrastructure and an unpredictable judiciary.

"Mainland China is the number one country to invest in or to
buy from or manufacture products in (and) I think Indonesia
should be the second country (for foreign investment), but
because of some reasons including smuggling...it's not the second
country yet," Sugimoto said.