JAKARTA (TheInsiderStories)—Indonesia has always factored its cheap labor as the main driver in its efforts of generating investments into its textile industry. So much it has been hyped that it has seemingly made the country too complacent and forgot other important factors.
Based on data collected by TheInsiderStories, Indonesia has cheaper labor than other textile producing countries. For example, Vietnam as one of its main competitors in ASEAN has the minimum wage at the average of US$122-176, as compared to Indonesia at the range of US$109-274.
With the factor, Indonesia’s textiles industry in the past had contributed significantly to Indonesia’s economy, representing 10.1 per cent of the total export.
In 2005, the textile industry, which employs around 1.2 million people in 4,500 factories, became the biggest net exporter with a surplus of around US$7 billion. Previously in 2004, Indonesia was the biggest textile and clothing exporters in Southeast Asia. Globally, the country reached the ninth rank among the world’s leading clothing exporters and tenth among textiles exporters.
But recently this industry has remained uncompetitive due to its high dependency on imported raw materials, high costs of energy and logistics, and market access.
In fact, during the last five years, the Indonesian textile industry has continued to decline, despite of the increasing demand at the global market. During the textile bullish market in 2016, Indonesia’s textile market share only reached 1.8 per cent of the world textile market. Now, it has further shrunk to 1.6 per cent.
Indonesia’s textile industry also lost the global competition to Bangladesh and Vietnam, as its market share is far below Vietnam at 5.0 percent and Bangladesh at 7.0 percent. Last year, Indonesia only managed to realize total textiles exports at US$12.53 billion, far lower than Vietnam which managed to reach at the total US$30 billion.
Such a condition has proven that the factor of cheap labors is not enough to lure investments and win the competition. There are other factors that cause textile investors unwilling to enter Indonesia.
There are at least four factors that make the Indonesian textile industry less competitive than other countries. The first factor is energy cost. Electricity tariff n Indonesia is more expensive than Vietnam and Bangladesh. Indonesia’s electricity tariff is about US$0.12 per kWh, much higher than Vietnam and Bangladesh which is only US$0.7 and US$0.5, respectively.
In addition, Indonesia is still dependent on imports of textile raw materials, so it cannot get cheap raw materials. The high dependence on imports has also made Indonesian textile industry highly vulnerable to the changes in the global economy.
Indonesia currently imported almost 100 per cent of cotton as Indonesia’s cotton production is only 4 per cent of the total demand. Indonesia imports more cotton from America, Brazil, and Australia.
The textile industry in Indonesia is also hampered by high logistic cost, which is the highest in Southeast Asia. Logistics cost including transport, warehousing, and inventory in Indonesia has so far accounted for 24 per cent of the country’s gross domestic product (GDP).
The country’s logistic cost-to-GDP ratio is far higher than those of neighboring countries, including Thailand and Malaysia where the ratio reached 15 per cent and 13 per cent, respectively.
Indonesia is also poorly scored in the World Bank’s 2016 Logistics Performance Index (LPI), as it got the 63rd rank out of 163 countries. Indonesia’s logistics infrastructure, international shipment, and logistics competence are elements scored the least.
Lastly, Indonesian textile exports are also hampered by market access. When exporting to the European Union, Indonesian products are still subject to import duty in the range of 11 percent. Meanwhile, Indonesia’s competitors, namely Vietnam, Bangladesh, Thailand, and Ethiopia, enjoyed 0 percent of import duty from EU.
The fact that other countries will harness the advancement of the industrial revolution 4.0 for improving their efficiency and sharpening their competitive edges at the global market should also draw serious attention from the government.
The market reality should have forced the government to address other problems, instead of only on the labor factor, in order to sharpen its competitive edge in competing with other countries at the global and regional market.