Redtape and tax on raw materials hurt shoe exports

JAKARTA (JP): Foreign investors see the prospects of Indonesia's shoe industry as gloomy unless the government takes immediate action to improve the investment climate.

Patrick K. Tang, the head of the Hong Kong delegation at the sixteenth International Footwear Conference in Bali, said over the weekend the government should simplify the procedures to import raw materials and improve custom services to attract foreign investment.

"Customs redtape, port delays and inadequate facilities at seaports often lengthens the time it takes for the delivery of imported materials from ports to factories by up to 14 days, compared to one day in China," Tang was quoted by the Bisnis Indonesia daily as saying.

He said customs clearance of imports in Indonesia took about three days, compared to one day in China.

"These delays increase the interest costs borne by shoe factories in Indonesia," he said.

He said since Indonesia's shoe industry depended largely on imported raw materials, smooth import flows were crucial for improving competitiveness in the international market.

The Director General of Light Industries, Doddy Soepardi, said the competitiveness of Indonesian shoes internationally had been weakening because of the high dependence on imported materials.

"The government is therefore preparing new rules to improve the climate for investments in industries that produce raw and intermediate materials for shoes," Soepardi said.

Tang said the biggest disadvantage to the local production of raw materials in Indonesia was the 10 percent value added tax imposed on the sale of local materials to shoe factories.

However, export-oriented shoe makers can drawback the duties and value added tax paid on their imported materials.

Tang suggested local material suppliers be exempt from the 10 percent value added tax if they sell to export-oriented shoe factories.

"If the government exempts local materials from the value added tax, more foreign investors will be attracted to invest in the shoe industry here," Tang said.

The president of PT Afa Samwoo Gemilang, a producer of leather materials for shoes, said indirect export support like value- added tax relief for local materials would also benefit local leather producers.

The chairman of the Indonesia Association of Shoe producers, Anton J. Supit, told the conference his association had long suggested such measures, but the government had done nothing.

Raw materials account for 60 percent of the cost of making shoes with labor costs making up 16 percent and overheads 24 percent.

Labor cost

Tang said the drastic rise in the minimum wage had made Indonesia less attractive to foreign investment.

"In the last four years the minimum wage had risen by about 170 percent," he said.

He warned that foreign investors might move their factories to China or Vietnam, where wages were cheaper.

He said Indonesian workers were less productive than workers in China.

A shoe factory with 15,000 workers in China could make 1.3 million pairs of shoes a month, whereas his three shoe factories in Indonesia with 17,000 workers could make only 800,000 pairs a month, he said.

He said Indonesia still had an advantage over China because China is not a member of the World Trade Organization so its shoes carry an import duty 20 percent higher than Indonesian shoes. China's shoes are also subject to import quotas in the European Union.

Indonesian shoe exports were worth US$2.1 billion last year. (das)