Phelim Kyne, Dow Jones/Jakarta

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.