Textile sector faces overlapping problems

Anissa S. Febrina The Jakarta Post/Jakarta

The already-ailing Indonesian textile sector had the ladder kicked away from it this year.

Early in 2005 it was charged with being ill-prepared to face the termination of the Multi Fabric Agreement (MFA), which 20 percent of textile manufacturers here were previously reliant upon.

The termination agreement was in fact reached a decade ago.

Without the global textile quota system, the market will indeed be freer, that is for those with high competitiveness, which currently reads, China.

With considerably rich natural materials, higher productivity and more integrated infrastructure, in the first five months of 2005, China's exports to the European Union (EU) increased by almost 50 percent while Indonesia's dropped by 12.7 percent.

Exports to the EU are among the most important for Indonesia as countries under the group absorbed some 40 percent of global textile imports, followed by the United States with 30 percent.

To give some relief, based on the Central Statistics Agency's data, Indonesia's 2005 average monthly exports to the U.S. increased to US$160 million from $130 million in 2004.

However, later in the year, those figures were strongly questioned.

And while China's strategy is clearly working, Indonesian textile and garment companies are facing more complicated challenges in increasing their competitiveness.

Let us start with surging imports from China to, not only the U.S. and EU markets, but also to the Indonesian domestic market.

Shopping in Tanah Abang, Central Jakarta -- known as Southeast Asia's largest textile market, with daily transactions amounting to Rp 150 billion (US$15.33 million) -- one cannot help but be taken aback by the predominance of made-in-China textiles and garments, rather than those produced here.

In the first quarter of the year, garment imports from China increased tenfold to $4.27 million from the same period last year, the Indonesian Textile Association (API) said.

Along with the increase in imports, exports to the U.S. in the first five months of the year also increased by 10 percent, raising suspicions of transshipment.

The API argued that such an increase was unlikely as 77 textile manufacturers had stopped operating the month before.

The Ministry of Trade then required a stricter procedure in the issuance of Country of Origin (COO) documents for exported textiles. However, illegal practices have not significantly decreased.

To make things worse for the sector, illegal imports flooding the domestic market have also been a chronic problem, both in terms of new and secondhand goods.

At Senen Market, also in Central Jakarta, three levels of kiosks sell imported secondhand garments with shirts priced at Rp 5,000 and quality suits for an unbelievable Rp 20,000.

So, that takes the biscuit for the mass lower domestic market.

Meanwhile, in the upper market, foreign brands from the U.S. or EU dominate with, once again, outsourced products from China or Vietnam.

Aside from the external problems, textile manufacturers must deal this year with increases in both power rates for industrial use and fuel prices.

State power firm PLN raised later in the year the industrial coefficient rate, and on top of that applied a kind of penalty for those using power more than the allowed quota during peak time.

API chairman Benny Soetrisno said the sector was among those operating 24 hours a day to maintain productivity and the policy to increase fuel prices would increase operating costs by at least 25 percent.

Energy costs contributed to almost 30 percent of total operating expenses.

The Oct. 1 fuel price increases -- which saw the prices of premium gasoline and diesel fuel nearly double and that of kerosene triple -- in the end also leads to higher transportation and labor costs. The two factors contributed quite significantly to the increase in expenses as the sector is labor-intensive.

In terms of company infrastructure, the productivity of manufacturers lags behind those in China since they still utilize old machinery.

The industry ministry estimated that the sector would require a $5 billion investment to revamp its production facilities.

Separately, industry players calculated that they would require at least $100 million for a first-phase rejuvenation of their machines.

This would require the support of the banking sector, which unfortunately remains reluctant to grant loans to textile companies. Not to mention the currently high interest rates.

As a result of these overlapping problems, the sector only grew by 1.1 percent in the first nine months of 2005, as compared to 4.2 percent in the corresponding period of 2004.

The industry is likely to fail to meet the targeted growth of 4.2 percent by the year end, despite the increase in total exports.

However, there is a silver lining.

According to the Investment Coordinating Board (BKPM), foreign investment in the textile industry had reached Rp 1.57 trillion as of September, with the commitment of two more foreign investors.

In November, considering the on-paper data of exports and investment, then minister of industry Andung A. Nitimihardja, before being replaced by Fahmi Idris on Dec. 7, set the 2006 exports target at $8.3 billion.

His projected exports target for 2009 was even more optimistic at $11.8 million.

Such positive thinking needs to be followed up by action.

First of all, the annual growth of the global textile and garment market is estimated at a steady 5 percent at the moment.

Indonesia will always have a large market, though it must fight for its share.

Second, the termination of the quota system could be perceived as a blessing in disguise as companies are increasing their efficiency while opportunities for increasing exports are wide open.

For the textile industry to get back on its feet, fresh investments to revamp old machinery and increase productivity are crucial.

In line with this, as generally required by other export- oriented sectors, the government must be able to built integrated infrastructure that could speed up exports and imports processes.

Those two may be easier said than done, but the jobs of 1.2 million textile and garment workers are at stake.