The Other Side of the Equation
March 16, 2009 The challenges of Indonesia’s textile industry are indeed plenty. Internally, the country is still struggling to recover from 1998’s economic crisis, which has caused not only financial, but also political, instability. Gone are the many incentives enjoyed by the textile industry during President Soeharto’s era (1967-1998). In the last 10 years, Indonesia has had four presidents, who would each come to office with a new or revised set of strategies and regulations. Initiatives of the former cabinets are usually abandoned. Regulations that are important for mills, such as labor and import/export procedures, are often revised. With the high level of instability, mills halt their plans for investment or expansion, and many foreign investors transfer their operations abroad. Small mills, unable to cope with interest rate as high as 59%, are forced to close their operations.
In the meantime, external competition is growing. Global apparel retailers are clothing the world with Chinese made goods. Not only has India been successful in increasing its cotton yield, but the nation is also gaining market share in garment and yarn production. Closer to home, Vietnam is luring big manufacturers to move their operations from Indonesia to Vietnam with attractive facilities and benefits.
Performance
Despite the internal and external difficulties, Indonesian spinning mills seem to weather the conditions fairly well. Indonesia’s cotton consumption has remained stable at around 2% of total world’s consumption. Moreover, Indonesia has managed to maintain its position as the leading consumer of cotton in East Asia. In 2008, a considerable increase in the number of these spinners created an unexpected 4.8% increase to the total Indonesian cotton consumption.
There are a few factors contributing to Indonesian mills’ resilience. With a population of 235 million people, Indonesia has a sizeable local market, as well as ready labor for its textile industry. The GDP per capita of Indonesia is still comparatively low and it is growing at a slower pace compared to leading East Asian textile manufacturing countries and China. This ensures a competitive labor cost to support the industry.
Moreover, the 1998 crisis sieved out the small players, leaving the industry with a handful of strong mills. This gives the existing mills important attributes to stay afloat in today’s increasingly competitive market: economies of scale, better efficiency, and a stronger bargaining power with labor unions, government and suppliers.
Other important factors often overlooked while considering Indonesia’s advantage in this industry include the strength and experience of the private mills’ owners and an emerging young generation, many of whom have earned degrees and are acquainted with modern management practices and technologies.
With these strengths and potentials, it is not odd that the Indonesian textile industry still maintains its performance despite all its challenges.
Unearthed Potentials
Apart from the presence of inhibiting factors, there are still many development possibilities yet to be explored by Indonesian mills. In the operation level, modern production techniques could be used. As with many family-owned businesses in Indonesia, management style is still very centralized around the owners. Despite the advantages of centralized management, a more open management will help Indonesian mills to be more flexible and responsive to market trends.
With the increasing production costs in China, many Chinese investors have started to look at business opportunities in Indonesia. Joint venture in the industry will bring unparallel synergy: much needed capital for rejuvenation and expansion, wider customer access, Indonesian lower labor cost, experience and know-how to survive in difficult times.
Alternatively, Indonesian mills could take advantage of the regional synergy, such as ASEAN Free Trade Agreement, by expanding their operation or moving parts of their operation to other South East Asian countries such as Vietnam and Cambodia. Despite the obvious obstacles, I believe that Indonesia’s strengths and resilience will continue to place the nation as an important player in the global textile industry.
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