Indonesian Textile,Sunset Industry, Textile Machinery, Indonesian Apparel Industry

Significance:

The Indonesian apparel industry has performed betterthan expected since the global system of quotas ended. Growth in shipments tothe United States, the largest import market in the world, is higher than for anyother non-preferential supplier except China since 2004. Underlying thisperformance has been a shift towards higher value products that do not necessarilycompete with Chinese products. Another factor is the imposition of restrictionson China starting in late 2005 that has created space for Indonesian productsthat do compete with those of China.

Shipments to the EU picked up in 2005- 6,leading to an increase in market share. Indonesia has benefited from safeguardson shipments from China that were imposed by both the US and EU. The safeguard quotas are progressively being loosened and will end this year inthe EU and in 2008 in the US. In order to secure market access gains, Indonesia will need to implement trade and investment reforms to take advantage ofcompetitive strengths in the Asian region, particularly by reducing oreliminating measures that restrict access to intermediate inputs and thatinhibit development of regional production networks.

Analysis:

Conventional wisdom is that China will dominate global markets. Analysts often wrongly assume that suppliers from othercountries are unable to compete on the basis of variety and quality ofproducts. Access to quality inputs at world prices, particularly yarn, fabricand accessories is also a source of competitiveness in the Asian region. Gains forAsian suppliers also arise from increased productivity resulting from largeinvestments in textile and apparel machinery and through development of efficientproduction networks capable of turning out a large variety of differentiatedproducts that consumers demand on a timely basis. Losses are largely at theexpense of preferential suppliers that are constrained by restrictive rules oforigin requiring use of high-cost inputs and former large quota holders thatare uncompetitive.

Increasing demand in major markets is creating opportunitiesfor Indonesia.

World trade in clothing grew steadily by about6% annually between 1995 and 2005, leading to a near doubling of the value ofclothing trade over the period of 1994 to 2005 (Figure 1). This majorstructural development in the world market has been caused by the elimination ofquotas, technical change and lower trading costs. This market access expansionhas provided competitive suppliers of clothing with significant opportunities forgrowth and employment.

Indonesian clothing exports had performedrelatively poorly but began to recover in 2004 while growing rapidly since theabolition of quotas thereafter. Exports increased by 15% in 2005 and topped $5billion. Over 50% went to the US market alone. In 2006, Indonesian clothing shipmentsto the US reached $3,670 million, an increase of almost 28% over those of 2005.Significantly, the growth in value terms has been more rapid than in volume terms,reflecting an increase in unit prices. Unit prices rose by 3.7% in 2006 and anestimated 6% in 2007. Indonesian firms have responded to the end of quotas byshifting production towards higher quality garments that fetch far higherprices per unit than do those of lower cost producers such as China and Bangladesh. This reflects a supply response by Indonesian exporters and the product differentiationthat characterizes consumer markets in the US and EU.

Trans-shipment concerns are overblown.

Press reports claim Indonesian shipments are inflated by the illegal transshipment of Chinese products using false certificates of origin. The economic logic of transshipment is rarely considered and evidence for widespread transshipment is scant. Transshipment of products that are not under quantitative restriction would presumably be to evade tariff s and would therefore seek to enter the US market from a country that has preferential access. Indonesia has no such access and transshipment of non-restricted products can be ruled out on that basis. Transshipment would therefore be limited to the items on which China is restricted. Volumes of shipments to the US would be rising faster than values in the China restricted items, reflecting the decline in unit prices. However, data on China-restricted clothing products indicate that Indonesian unit prices have increased rather than decreased on average since the restrictions were imposed. In contrast, unit prices fell in Cambodia, Hong Kong, Malaysia, the Philippines and Thailand.

Trends in world wide investment in textile machinery are indicative of Asias competitiveness.

Investment in yarn spinning and in fabric weaving and knitting machinery in anticipation of the removal of quotas has expanded within the Asian regionparticularly in China. These investments have helped Asian suppliers to significantly increase their share of global yarn production capacity and of global fabric weaving capacity the latter increased from 26% to nearly 50% over the period 2000 and 2005. Asian suppliers are dominant in knit fabric capacity as well.

Indonesian yarn spinners and fabric weavers have responded by reducing capacity in outmoded machinery (short staple spindles, shuttle looms, single-heater texturing machines) and have added capacity in new more technically advanced machinery such as open-end rotors, shuttle-less looms and double-heater texturing machines. In some particular types of advanced machinery growth has been even higher than in most Asian countries. As Table 1 shows, Indonesias 61% growth in installed capacity of open-end rotors during 2000-5 is second only to China (86%) in the region. But in other investments in modern machinery, Indonesia is lagging behind: its 7% growth in shuttle-less looms over the period is significantly lower than that for the major Asian suppliers as a group (137%) and for China (279%). Indonesia has upgraded its technology in yarn spinning and weaving as well as in knitting although it has lagged somewhat in investment in filament fiber weaving used to produce synthetic fabrics.

Understanding the performance in the US market is of crucial importance for Indonesia to secure gains in world markets.

The share of Indonesian clothing products in the US import market has continued to expand since 2004 in value and volume terms (Figures 2 & 3). These gains in market share in clothing are explained by:

Availability of textile and sewing machinery at competitive prices;
Domestic capacity to produce yarns and fabrics at competitive prices responding to the competition from imports of yarns and fabrics from low-cost suppliers within the region;
Shifting product mix into higher value products such as womens intimate wear, blouses and slacks, which means Indonesian products do not have to compete directly with Chinese products that are aimed at the low-end of the market;
Being able to expand shipments in items that China faces restrictions;
Allowing clothing exporters to import fabrics and accessories that are exempt from duty and VAT for firms in bonded and other designated zones;
Shifting production to locations in Central and East Java with lower labor costs than in West Java;
Improvements in telecommunications and information technologies that enable firms to respond rapidly to buyers orders and to trends in consumer markets. This has also allowed Indonesian firms to attract outward processing arrangements from garment companies in Malaysia and Singapore.

Indonesia faces several threats that could make it lose its market access gains:

The phasing out of US and EU restrictions on China will lead to intensive competition and may reverse gains in unit prices;
Some otherwise uncompetitive suppliers may benefit from duty-free access to the US market with new free trade agreements;
The appreciation of the rupiah relative to the dollar and other currencies could undermine competitiveness;
Poor infrastructure, port and customs procedures, including high incidence of illicit payments;
Indonesias non-tariff measures undermine the ability of firms to improve productivity through development of production networks.

The Road Ahead: Regional Integration in Textiles and Apparel

Indonesia can prepare itself for future competition by unilaterally adopting reforms. It can also champion regional integration within Asia through trade facilitation and the removal of remaining tariff and non-tariff measures which inhibit ASEAN integration in textiles and apparel, particularly through outward-processing arrangements (OPA). The development of Asian-wide production networks will go a long way to helping Asian suppliers, including in Indonesia, to secure market access gains in major world markets.

To remain competitive, Indonesia needs to complement these measures with policies that improve its firms productivity and that reduce their trade costs. Possible policies are those that promote investments in machinery, reduce high transactions costs and lower currently high transportation costs. One way of promoting the upgrade of Indonesias aging fabric weaving machinery is to permit accelerated depreciation allowances for investments in textile and sewing machinery that reduce tax burdens and help cash flows to producers as recommended by FIAS (2006). Indonesia also needs to reduce its production and distribution costs by strengthening its weak legal system and by improving credit market conditions thus stimulating the supply of credit to the industry. Additional ways to reduce transaction costs in the textile sector should also be considered, like permitting cotton quarantine to take place at the factory.

References:

Anson, Robin and Guillaume Brocklehurst, 2006a. World Markets for Textile Machinery: Part 1 Yarn Manufacture, 2006 edition. Textiles Intelligence, Ltd. Wilmslow, UK, September.

Anson, Robin and Guillaume Brocklehurst, 2006b. World Markets for Textile Machinery: Part 2 Fabric Manufacture. Textiles Intelligence, Ltd. Wilmslow, UK, December.

Foreign Investment Advisory Services [FIAS] (2006). Improving Indonesian Competitiveness: Case Study of Textiles and Farmed-Shrimp Industries, The World Bank, Washington, D.C., September.

James, William E. (2007a). Technical Report on Investment in Textile Yarn and Fabric Machinery and Equipment: Indonesias Position and Asian Dominance, The World Bank, Jakarta, April.

James, William E. (2007b). Technical Report on Transshipment of Apparel to the United States under Product-Specifi c Safeguard Quotas, The World Bank, Jakarta, June.

United States International Trade Commission (USITC), 2004. Textiles and Apparel: An Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market (Vol. I),Washington,0% D.C.: Publication 3671, January.

Disclaimer: This note reflects the views of the author and not necessarily of the World Bank

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