The Jakarta Post
The textile and textile products (TPT) industry is one of the important manufacturing sectors in Indonesia, with gross domestic product (GDP) valued at Rp 172.4 billion (US$14.4 billion) in 2013. The textile, leather goods and footwear industry sub-sector made the fourth-largest contribution (9 percent) to GDP of all the non-oil and gas manufacturing industries, with an average growth of 4 percent per year during 2008-2013.
The TPT industry is also a quite significant labor-absorbing industry. According to Central Statistics Agency (BPS) data, workers absorbed by the industry from micro to large scale in 2012 were 2.9 million people, or 21.7 percent of the total labor absorption of non-oil and gas manufacturing industries.
The TPT industry continues to encounter many challenges and uncertainties in 2014. Performance of the industry will be greatly affected by global economic conditions, especially in the US and Europe as the largest Indonesian TPT export markets.
In this case, the potential recovery of the US economy as the largest Indonesian TPT export market will give rise to optimism, although the impact is not expected to be directly significant this year. Indonesian export products still have to compete with products from competitors, such as Vietnam and Bangladesh, to compete for improved opportunities in the US market.
According to the results of our sensitivity analysis, every 1 percent increase in US economic growth will result in a 1.5 percent increase in Indonesian TPT export growth to the US in the next three quarters, while every 1 percent increase in European economic growth will see a 3 percent increase in Indonesian TPT export growth to Europe in the next two quarters.
The Indonesian TPT export market share in the key markets of the US and Europe is relatively small, and even tends to decrease. In the US market, Indonesian TPT export market share in 2013 was 3.7 percent, lower than in 2009 at 4.9 percent, while in the European market it was 0.8 percent, down from 1 percent in 2009.
While the potential recovery of the US economy gives some opportunities for the Indonesian TPT export market, increases in electricity rates, wages and the rupiah's depreciation have added to cost pressure.
The increase in the minimum wage will have a more influential impact on the downstream TPT industry (labor costs of garment industry reached 27 percent, higher than those of fiber or spinning industry at 6 percent), while electricity rate increases will affect the upstream TPT industry (energy costs of fiber making industry was up to 25 percent, higher than the garment industry at about 1 percent).
In April 2014, the government gradually started removing the electricity subsidy for publically listed medium industrial customers (I-3) and large industrial customers (I-4).
The electricity rate increase for the I-3 category was 38.9 percent, while it was 7 percent for the I-4 category. The electricity rate increase will be applied gradually every two months. Not long after, on June 10, the government again increased the electricity rate for I-3 category electricity customers that are not publicly listed at an average of 11.57 percent.
In regard to this, the Indonesian Textile Association (API) stated that 48 TPT companies had been directly affected by the industrial electricity rate increases, consisting of 12 companies in the I-4 category and 36 companies in the I-3 category.
According to the API, the electricity rate increases have the potential to increase terminations of employment, decrease production by up to 20 percent and lead to rising prices of finished TPT products ranging from 7 to 10 percent.
Furthermore, rupiah fluctuations put further pressure on the TPT industry. Currently, the main raw material (cotton) is largely imported (99.5 percent). In addition to that, auxiliary materials (dyes and other chemical substances) for the TPT industry, even though purchased locally, are still widely traded in US dollars. According to our study, every 1 percent depreciation of the rupiah will cause a rise in the cost of goods sold by TPT industry issuers by 6.91 percent in the next quarter.
In 2014, the API estimates that Indonesian TPT exports will reach $12.9 billion. This figure is lower than the previous projection, which was $13.3 billion.
By type, Indonesian TPT exports were dominated by garments, such as shirts, T-shirts, dresses and skirts (HS codes 61, 62, 63) at 60.9 percent, while the remaining 39.1 percent belonged to textiles, such as fibers and yarns (HS codes 50-60).
To keep the performance of TPT exports at an optimal level, Indonesia should focus on products that have a more competitive advantage than in other countries. We have calculated the Indonesian TPT competitive advantage compared to competing countries in export destination markets using the Revealed Comparative Advantage (RCA) method for HS codes 50-63 in three major export markets of Indonesian TPT.
Competitive products are indicated by a value of RCA > 1. First, the top 10 TPT commodities with the highest competitiveness in the US market include yarn, women's clothes, babies' clothes, men's clothes, woven fabrics of cotton and other fibers.
Second, the top 10 TPT commodities with the highest competitiveness in the European market include yarn, woven fabrics, men's overcoats and gloves. Third, the top 10 TPT commodities with the highest competitiveness in the Japanese market include woven fabrics and yarn. Most of the top 10 TPT commodities with the highest RCA values in these three major export markets of Indonesian TPT tend to increase in competitiveness. This is indicated by the increase in the RCA values over the last three years.
In summary, the TPT industry is required to be more observant in determining which textile commodities have good prospects and a high competitiveness. Products with a high competitiveness are expected to win the competition with similar products from competing countries, to increase Indonesia's share in the export markets, and increase the value of Indonesian TPT exports as a whole.
The writer is an industry analyst at Bank Mandiri.
Your premium period will expire in 0 day(s)close x