With Idul Fitri in May 2020 on the horizon, businesses in the Indonesian textile and textile products (TPT) industry should be anticipating a busy start to the year to meet the expected growth in demand ahead of the biggest annual Muslim festive period.

But the prolonged and complex pressures faced by the labor and capital intensive TPT industry may result in a different story this year. The industry — centered mostly in the densely populated provinces of West and East Java — has seen an increasing number of business closures.

Expected growth in unemployment is one serious short-term impact. But what will happen to this distressed industry, which contributes 1.3 percent of the country’s gross domestic product, in the longer term? Why is Indonesia — listed as one of the world’s top 10 textile and apparel producers — facing such challenges in its TPT sector, despite recent positive indicators? Exports in 2019 are estimated to be worth about US$15 billion, up from $13.2 billion the previous year.

How is Vietnam, a relative newcomer to the sector, forging ahead with its exports expected to be worth $40 billion in the same period? Why is the Indonesian textile market flooded with cheap garments, curtains, scarves or even bed sheets from other countries? What makes our production costs so high? How come only one-third of the 3.1-million-ton national capacity is utilized?

Concerned with this situation, President Joko “Jokowi” Widodo has over the last two months held two meetings, in September and November, with the two main TPT industry associations — the Indonesian Textile Association (API) and the Association of Indonesian Filament Yarn and Fiber Manufacturers (APSyFI). His questions were straightforward: What are the critical challenges faced by the industry? What are the recommendations? What and how can the government help?

Some actions have been quickly executed by his ministers as a follow-up. After a recent inspection at a bonded logistics center (PLB), Finance Minister Sri Mulyani Indrawati found irregular practices at the site and revoked dozens of licenses of TPT importers. These irregular practices at PLBs are considered to be among the main contributing factors causing a flood of imported cheap materials into the domestic market.

The finance minister also issued temporary safeguard measures on several TPT commodities. Related ministries and agencies, including the Investment Coordinating Board (BKPM), are expected to follow suit with longer-term strategic plans to rescue the industry.

Ups and downs

As a key textile market and exporter, the Indonesian TPT industry has had its share of turbulence over the years. During the honeymoon period in the 1980s, the industry enjoyed strong support from the government, to a point where then-president Soeharto was able to inaugurate 192 TPT factories at a single ceremony in 1982.

But the onset of the 1997 financial crisis, followed by the 1998 Reformasi, saw the industry enter one of its darkest periods. Debt, decentralization, stringent regulations, numerous licenses and labor costs hindered the development of the sector, limited investment and, consequently, lowered productivity.

Business owners gradually shifted their investments to garments, or other appealing sectors like property. While other TPT producers, like China, Vietnam, Bangladesh and India, aggressively reformed, Indonesia’s TPT sector stagnated and lost its competitive edge. A few years later, the sector was further hit with an influx of goods from overseas following the implementation of the ASEAN-China Free Trade Agreement in early 2010.

Now, with the current global economy slowing down, the United States-China trade war, aging and inefficient textile machines, a growing number of regulations, minimal investment, high electricity prices and labor issues have all become even bigger contributing factors behind the sluggish development of the textile sector.

Opportunities and priorities

The growing world population, together with rapid urbanization, rising income levels and increasing numbers of retail outlets and online markets in developing countries, is expected to drive the global textile market up to $1.23 trillion in 2025 from about $860 billion in 2019. Meanwhile, the Indonesian government has set a target to increase Indonesia’s share of the global TPT market from its current level below 2 percent to 5 percent, with a total value of $75 billion, in 2030.

The good news is domestic demand is still promising. According to API, Indonesia’s revenue from the apparel market is to grow annually by a compound annual growth rate of 5.4 percent in 2019 to 2023. In 2019, it is expected to reach $18.1 billion. Learning from the success of other textile producing countries, Indonesia under the current administration has a great chance to survive and win. But timing is paramount, as some experts have described the current status as a do-or-die situation.

Among the top priorities of the President and his Cabinet, in terms of revitalizing the TPT sector, are the establishment of textile parks, simplification of regulations and licenses, curtailing the growing number of illegal imported TPT products, microcredit schemes for small and medium-sized textile businesses, addressing the alleged misuse of PLBs, the issuance of inland free trade agreements and controlling imports of raw materials.

Actions for Businesses

Businesses, together with industry experts, have responded with a range of recommendations, including control over imports of raw materials, subsidized electricity prices, the presence of the government’s TPT-focused agency and the establishment of more textile research and education facilities, as part of a massive overhaul program to transform the industry.

In terms of solutions, there are some broad areas that businesses and the government can focus on. First, working together with the government is critical in order to tackle the issues head on. The industry also needs to form strategic collaborations with brands, retailers, fashion designers, fashion editors and design school students.

Second, the domestic market should be protected to allow the industry to revamp and expand. Opportunities to streamline regulations to support growing local market demand and rising exports should be considered. Once Indonesia signs the Comprehensive Economic Partnership Agreement with the European Union, which is anticipated in early 2020, exports are expected to rise significantly.

Third, the government needs to consider how to best optimize upstream capability. Textiles, together with four other industries (food and beverages, electronics, petrochemicals and automotive), has been listed by President Jokowi as one of the government’s top industry priorities in the Making Indonesia 4.0 road map.

But a high dependency on imported raw materials could continue to weaken Indonesia’s position in the global TPT industry.

The risks of this kind of dependency were evident this year in India, another major global TPT producer. Over 2019, India recorded a massive 200 percent increase in its viscose staple fiber (VSF) yarn imports, forcing domestic yarn manufacturers in India to lower prices. This in turn led to financial difficulties for local producers. The national textile association sought to address the issue by requesting an increase of import duty on VSF yarn from 5 percent to at least 10 percent.

Fourth, businesses and the government should consider global eco-conscious fashion trends. The United Nations Alliance for Sustainable Fashion, established in March 2019, is targeting the private sector, UN member states, NGOs and other relevant stakeholders to create a unified movement for a more sustainable fashion industry in line with sustainable practices and ensuring traceability, sustainable sourcing, responsible manufacturing and labor rights.

Part of the solution almost certainly lies in viscose rayon. Less well known than other alternative fibers like cotton, the global production of viscose rayon rose from 2 million tons in 1990 to 5.6 million tons in 2018, with an expected increase to 8.6 million tons in 2020. The forecast growth is estimated at 4.27 percent per annum from 2019 to 2024.

Indonesia is currently one of the world's largest producers of rayon with a total capacity of 800,000 tons per year. With domestic consumption ranging between 350,000 and 400,000 tons per year, the production of viscose rayon has abundant potential to boost local demand and reduce imports.

In conclusion, 2020 may be another challenging period for Indonesia’s TPT industry. Immediate and far-reaching solutions and partnerships are critical to support the government in addressing these issues, but viscose rayon certainly represents a significant opportunity for progress. One thing is for sure: The status quo is not an option.

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