When speaking of Indonesian textile, one speaks of batik, the country’s world famous and traditional way of processing fabrics with a technique of wax-resistant dyeing, creating a broad range of colors of patterns. It started in Java, after which many regions developed their own recognizable styles. Batik was recognized by UNESCO as a World Cultural Heritage in 2009. However, it is not the only textile manufacturing in Indonesia and, in terms of exports, is rather insignificant.
In 2016, the total export value of textiles coming from Indonesia exceeded USD12 billion, making the country a global top 10 producer of fabrics and clothes. The current administration is ambitious about driving this industry and sees potential to reach a total export value of USD75 billion by 2030.
In an interview with TBY, the Chairman of the Indonesian Textile Association Ade Sudrajat laid out the primary challenges that the industry faces, and how the organization and the Ministry of Industry and Commerce are striving to overcome these.
“The main problem is our market access to the EU and the US. This is why Indonesia is working to sign an FTA with the EU. We have been negotiating for three years and hope the negotiations will be completed soon,“ explained Sudrajat. Currently, Indonesian exporters pay a tax of 13-20%, as opposed to, for example Vietnam, which after finalization of its FTA with the EU pays 0%. Indonesian textile still has good quality recognition in Europe; meaning, there is just the regulatory fix needed to boost trade. Trade estimates after signing of the FTA are up to 9% YoY growth of exports.
In 2010, when there was a global peak of countries updating FTAs, Indonesia signed an FTA with China, which was in retrospect not beneficial for the Indonesian textile industry. China is the world’s leading producer, and with its economies of scale, it was able to take a considerable market share also in Indonesia. Thus, the FTA has not led to an increase of Indonesia’s exports to China. The FTA with Japan, also negotiated in 2010, worked out better, and Indonesia exports to Japan have increased 30% YoY—doubling exports after just four years.
Total exports fluctuated heavily, with the highest figure in 2011 at USD13.2 billion, falling gradually to USD12.2 billion in 2016, losing nearly USD1 billion of business in these six years. Expectations for 2017 are set at an increase of 4%. The production base in central Java is already completed, and the government has started programs for vocational training to boost productivity levels in the sector.
Speaking on domestic challenges, Sudrajat commented on the issues of higher production costs in Indonesia compared to neighbors. First, the minimum wage rose around 60-80%, which had an effect on the maturing textile industries. The wage increases are now capped in accordance with the GDP growth and inflation figures. Also, electricity prices in Indonesia are comparatively higher than other textile-producing nations in the region. In addition, the government has adopted a VAT of 10%, including local purchases. In opposition, companies can offset VAT on imports, which implies a red carpet treatment for imports but not such favorable treatment for local industry.
That said, the sector has seen significant investment from both local players and foreign parties that set up their facilities in Indonesia, primarily in Central Java. This was exemplified by the establishment of a large-scale production facility, worth USD345 million, through investment from Hong Kong. To move up in the value chain, the sector is exploring new avenues of production, and there is potential to become a global leader in viscose fiber, since an Austrian firm invested USD560 million in the world’s largest viscose fiber plant to be located in West Java.
The cap on minimum wage growth and increased attraction to the industry could put Indonesia on the textile map for both large-scale export and artisan batik.