In addition, research conducted by Jesus Felipe in 2017 also found that the number of employees in the manufacturing sector is more crucial in the effort to scale up middle-income countries to high-income countries through income distribution. Hence, the labor-intensive manufacturing sector plays an important role in the economy.

Among the more labor-intensive sectors in manufacturing involves textiles and garments. Textiles are the most common starting grounds for countries to industrialize their economy. For example, Japan, South Korea and China used textiles as early stage manufacturing. Even China remains a strong textile and garment manufacturer until this day.

Textiles were part of Indonesia’s early manufacturing industry. Indonesia has been known as the base of Southeast Asia’s textile and garment industry since 1980. However, the industry’s share in Indonesia’s gross domestic product (GDP) is steadily declining every year.

Most of Indonesia’s textile and garment products are sold overseas, accounting for more than 70 percent of total sales. As a heavy export-oriented sector, textile and garment businesses face many obstacles, especially competition against peer countries.

In order to maintain its global market share, Indonesia should retain its competitive advantage, such as low wages. Furthermore, the revealed competitive advantages (RCA) index points out that Indonesia’s textile and garment sector still has competitive advantages, even though it is smaller than its competing counterparts abroad, such as China and Vietnam.

However, in a more specific case, Indonesia is losing its advantages to its competitors. For example, Indonesia’s share in United States’ textile and garment import declined from 4.9 percent in 2010 to 4.5 percent in 2016. On the other hand, Vietnam’s share drastically increased from 6.4 percent in 2010 to 10.1 percent in 2016.

The US is important for Indonesia and Vietnam because it is the biggest buyer of textile and garment products from both Southeast Asian countries.

What happened to Indonesia’s textile and garment sector? First of all, Indonesia faces high production costs because of outdated technology, higher energy prices and increasing wages.

Second, Indonesia is positioning itself only as textile and garment producers, not a trendsetter. Currently, brand holders earn a bigger profit compared to producers. Imagine the value added if Indonesia was also able to steer global fashion trends while also acting as a producer.

Basically, Indonesia’s textile and garment businesses must lower their production costs in order to be more competitive. At this time, West Java is the country’s center of textile and garment production as it responsible for more than 50 percent of the sector’s output.

However, West Java has gradually become less conducive for business players as some areas now offer the highest regional minimum wages in the country — which is a crucial issue for affected businesses because their biggest cost expenditure is wages. Moreover, many manufacturers in West Java admit they face additional local legal and illegal demands from various sources, such as community organizations.

The fees may be relatively low, but they add up to be very costly. Eventually, textile and garment business players claim that the total amount of money they spend on such demands is significant. Because of these reasons, many have relocated their operations to more favorable regions, such as Central Java or even overseas.

Central Java is considered more conducive region in which to run a textile and garment business because its regional minimum wage is lower than West Java’s. Additionally, some relocated manufacturers conceded that the pressure of having to pay additional fees is also lower in Central Java, which means production costs will also be lower.

However, relocating a business requires serious investments, which could be lowered if the investor was able to secure a long-term lease on land for its factory instead of buying the location.

Unfortunately, most of the industrial areas in Central Java do not rent out their land. This forces investors to relocate to a more affordable area, which means Central Java’s textile and garment sector is scattered throughout the province.

Another challenge the sector faces is that it must comply with stricter waste treatment regulations. Manufacturers are required to have an appropriate waste treatment system in their production process. And because these businesses are scattered throughout the country, they must deal with the issue individually by, among others, building their own treatment facilities or hiring a waste treatment service provider. Again, this will only lead to higher costs.

So, what can the government do? To begin with, relocating is the nature of labor-intensive industries. Therefore, we think that the government should support manufacturers that decide to relocate their operations by facilitating their rent in industrial areas through incentives.

It would be easier for the government to monitor and direct the textile and garment sector if its businesses were centralized. Building an integrated waste treatment system in the industrial area would be a viable effort in bringing down costs. This could be an alternative to the machine renewal program. When the
ecosystem has been built, it is important to maintain and protect related businesses from high costs to prevent an ineffective economy.

Additionally, the government could also open up new markets for Indonesia’s textile and garment products through bilateral agreements. Signing a Bilateral Free Trade Agreement (FTA) with the US or other potential markets could boost the competitive edge of Indonesia’s textile and garment products, because the entry barrier would be lower.

Looking at how Vietnam gradually expanded its exports through bilateral agreements, a bilateral FTA might be a viable short-term solution for Indonesian textile and garment manufacturers.

The long-term solution would be for Indonesia to establish globally renowned brands. The country can use one of two ways to do this: the acquisition strategy, such as buying a declining global brand revitalize it; or through better education by improving its design schools with innovative entrepreneurship content. Greater access should be given to design schools that teach their students how to better understand market tastes.

In addition, instead of chasing high-end foreign brands, Indonesia could focus on developing international-quality fashion lines for Muslim attire. Indonesia has the world’s biggest Muslim population and also the ability to produce high-quality garments. When the brand is big enough and the quality is good enough, creating another focus would be easier.

By taking these steps, Indonesia could reclaim its position as one of the biggest textile and garment hubs in the world.

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The writer is an industry analyst with Bank Mandiri

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