Dependency on Imported Raw Materials : Untangling Twisted Yarn of Indonesian Fashion Export

Dependency on Imported Raw Materials : Untangling Twisted Yarn of Indonesian Fashion Export

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Textile product is one of the top Indonesia export commodities. It has shown upward and downward trends in recent years. In addition, this writing aims to explain about the contribution of products to country’s GDP and how competitive are those both in domestic and international market through various tools of analysis. The performance of textile products (TPT) and its derivatives have to deal with challenges, government policies, supply chain, and competition. Somehow, It faces formidable challenges while the upstream sector is largely inadequate (causing a reliance on imports of raw materials, such as yarn, cotton, dyes, and fabrics) and requires an injection of investment, technology, and expertise. In this case, Indonesia textile industry is still considered vulnerable due to the highest reliance on imported goods. Moreover, market share also play a dominant role in succeeding Indonesia TPT product sector. The main competitor is China textile industry which participates 35% of global market share. Lack of technologies, quality of human resources, supply chain effect Indonesia TPT competitiveness in recent years.  

However, positive news come from some of derivative products that still show highest number of export, such as HS 5509 which consist of yarn of synthetic staple fibers (excluding sewing thread and yarn put up for retail sale), HS 6203 consist of men's or boys' suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches, HS 6204 consist of women's or girls' suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers.

Therefore, choosen variety of tools to analyze the trend and perfomance in terms of TPT produucts and its derivatives included index herfindahl, quality margin, decomposition growth of export, and extensive margin etc.  Index herfindahl is used to size how concentrated are exports in a narrow range of products or markets. Diversification of products, number of exporting countries, and how much those are concentrated will be explained  in this context. Furthermore, quality margin with PRODY method is used to demonstrate export products sophistication, linked to high, medium, or low technology used in the production process. Decomposition growth of export diagram represents death margin, new product margin, and intensive margin. Hence, trade performance against four determinants of trade competitiveness –the intensive margin (export levels, growth and market share); the extensive margin (diversification); the quality margin (sophistication and quality); and the sustainability margin (firm participation and export survival) are considered important to sie Indonesia TPT competitiveness. The last, government policies related on incentives, quotas, import duties also play significant role regarding to this issue.

1. Indonesia’s Textile Products Sector Export Level: A Global Trade Perspective

Indonesia textile industry is one of the prominent commodities for country’s economy. Producer of Indonesia textile industry is dominated by domestic and foreign private companies or locally produced in particular region. The garment and textile industry are also important sources of formal sector employment for Indonesian women, who accounted for 49.75% of the population in 2013. Meanwhile, the vast majority of textile and garment companies are located on the island of Java. The garment industry is concentrated in West Java, Greater Jakarta, and Batam (Fairwear, n.d). Also, according to Indonesia Textile Association (API), 80% of global suits are produced domestically (BKPM,n.d). Country’s textile industry encompasses the production of garments, fabric, apparel, and leatherwear. Leading countries destination of exports is European Union, United States, China, and Japan (Indonesia Investments, 2016a).

Figure 1 : Indonesia’s Textile Global Export by Value (US Dollar Thousand) and Quantity (Tons) 2012-2016

Figure 1 : Indonesia’s Textile Global Export by Value (US Dollar Thousand) and Quantity (Tons) 2012-2016

 Source: ITC, n.d.b (processed)

The decrease of textile export value on 2012-2016 period was affected by the fluctuation of global prices. Indonesian Textile Association (API) reported that the textile industry started to slow down in 2014 following the decline in the global oil price, and the increase in gas and electricity rates in January 2015 exacerbated the issue (Global Business Indonesia Guide, 2016). However, the data above demonstrates that the number of Indonesia textile export markedly plunged during 2012-2016. According to Indonesia Trade Ministry statistics, the performance of the TPT industry during 2012-2016 was relatively poor, suffering a contraction with total growth of -7% (Kementerian Perdagangan, n.d).

Indonesia is facing formidable challenges to develop textile and textile products (TPT) while the upstream sector is largely inadequate (causing a reliance on imports of raw materials, such as yarn, cotton, dyes, and fabrics) and requires an injection of investment, technology, and expertise (Indonesia Investments, n.d.a). In this case, Indonesia textile industry is still considered vulnerable due to the highest reliance on imported goods, for instance, weakening rupiah against US dollar will leave a ‘thorn’ of domestic textile production cost. Indonesian TPT exports are also facing various local constraints such as the length of the loading and unloading process at ports, known as dwelling time. Another constraint is the paucity of free trade agreements in place with the major export destinations, such as the US and the EU, with whom Indonesia's major textiles competitors, such as Vietnam and Malaysia, already have free trade agreements (The Jakarta Post, 2015). Hence, in this context, the better improvement of trade facilitation is significantly important.

Indonesia’s biggest competitor of the textile industry itself is China accounted for 35% global textile market, while Indonesia controls only 5%. In the region, a rival from other textile producing nation in Southeast Asia is Vietnam. Vietnam textile industry is currently rising, in 2016 export value of Indonesia textile products only reached 11.9 billion US dollars, whereas Vietnam reached 30 billion US dollars (Kompas,2017).

Figure 2 : China’s Textile Global Export by Value (US Dollar Thousand) and Quantity (Tons) 2012-2016

Figure 2 : China’s Textile Global Export by Value (US Dollar Thousand) and Quantity (Tons) 2012-2016

Source: ITC, n.d.g (processed)

China’s success to dominate global textile market can’t be separated from the role of government policies. Chinese government focuses on the improvement of textile industry performance through a variety of incentives, for instance, investment and guarantees the capacity of the textile supply chain. In the upcoming years, the Chinese government is planning Xinjiang as the hotbed of textile and apparel manufacturing. It is expected that China's northwest region will become the country's largest textile production base by 2030, with a clear focus on sustainable development and intelligent manufacturing. China is also planning investments to the tune of 56.24 billion yuan (US$ 8.43 billion) in setting up Korla economic and technological development zone in Xinjiang Uygur autonomous region, which was founded in 2000. Xinjiang is a large part of cotton production. Bayingolin Mongol Autonomous Prefecture (after Bazhou) is one of the three largest cotton producing areas in Xinjiang. Bazhou is an important textile industry base in Xinjiang (Textile Excellence, 2016a). The zone was named a new industrialization textile industry demonstration base by the Chinese Ministry of Industry and Information Technology in 2013. Over 95% of these investments are towards the development of the textile and clothing manufacturing capacity in the area. The government's blueprint itself is to build a textile and garment city, to transform the local cotton resource advantages into economic (Textile Excellence, 2016b)

Meanwhile, another Indonesia textile’s rival, Vietnam currently attracts a large number of foreign investors which have shown keen interest investing in the Vietnamese textile industry, especially after the country signed some Free Trade Agreements. However, almost same compared to Indonesia, Vietnam has not fully developed an end-to-end supply chain for textile and garment. The country still depends on imported raw materials from China, Korea, and Taiwan and only offers one-part services such as cut-make-trim to transform fabric into clothes (Bdg Vietnam, 2016).

As a result, the Indonesia government roles are needed to encourage textile factories to boost the use of domestic upstream products such as yarn, cotton, dyes, and fabrics. It will gradually lower the cost of the production process, to attract investment both domestic and foreign investment, and to maximize free trade deal with biggest importing countries (e.g., Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA), and Japan-Indonesia Economic Partnership Agreement) through improvement of trade facilitation. So that, Indonesia textile products will be more potential to cope with the global market.

2. The Challenge of Indonesian Textile Products Exports Growth : Low Production and Market Share

The textile industry absorbs labor up to 17.03% of all workforce in the manufacturing industry (Barus, 2017). The textile industry also contributes significantly to Gross Domestic Product (GDP). However, in  figure three it appears that there is a decrease in the contribution of textile and apparel industries to GDP. In 2011, the sector accounted for 1.38% of GDP. The decline occurred in 2015 to 1.21%.

Figure 3 : Contribution of Textile and Product Textile to GDP (in %)

Source : Kementerian Perindustrian RI, n.d.a  (processed)

Indonesian textile exports are quite high in some types of textile products. As in HS 5509 consisting of Yarn of synthetic staple fibres (excluding sewing thread and yarn put up for retail sale), Indonesia became the second highest exporter in the world. Exports of HS 5509 continue to increase until a peak in 2014. Total exports in 2014 reached 364151 tons. However, the export quantity decreased slightly, until in 2016 the total export of HS 5509 was 364119 tons.

Also, Indonesian textile products with the highest export of HS 6203 consist of Men's or boys' suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches. HS 6204 is Women's or girls' suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers. However, when compared with HS 5509, it can be said that the export quantity of these two products is much lower. In figure four shows that the export amount of these two products has not increased significantly since 2007 until 2016. The number of exports and their value continues to fluctuate throughout the year.

Figure 4 : Total Export (Tons) and Export Value (000 US$) Textile Product Indonesia

SourceITC, n.d.a; n.d.b (processed)

Data that need the attention of textile industry stakeholders is the decline in export value of HS 5509 since 2014. In 2013 the export value of HS 5509 was 953198 thousand US $ and continued to decline until the year 2016 to 701772 thousand US $. More interesting data that is the export value of HS 6204 can exceed HS 5509, though the export quantity of HS 5509 is much higher than HS 5509. The export value of HS 6204 is fluctuating, but during 2007-2016 always approaching the export value of HS 5509, even several times exceeds the export value of HS 5509. As in 2016, the export value of HS 6204 is 939974 thousand US $. While the total exports only 51552 tons or about 14% of total exports of HS 5509 in 2016.

Similarly, what happened with HS 6203 which has an export amount is low compared to HS 5509. The total export of HS 6203 is only 39986 in 2016, but the export value is 701772 thousand US $. Although the total exports are much lower than the HS 5509, the amount of the projected close to HS 5509. This phenomenon occurs because HS 6203 and HS 6204 have a much higher added value compared to HS 5509.

Figure 5 : Total Export (Ton) And Export Value (000 US$) HS 5509 Indonesia Based on Importers

SourceITC, n.d.b (processed)

In figure five shows that the market share of Indonesia for HS 5509 is quite scattered and very volatile in quantity and value of exports. Five countries are importing HS 5509 highest, namely Turkey, South Korea, Brazil, Pakistan, United States, and Japan. While the EU countries, China does not import much HS 5509, because China has the policy to limit the import of textile raw materials, to protect the domestic market (Direktorat Perdagangan Luar Negeri, 2015).

EU member states that became the largest importer of Indonesian textile products are Germany, Italy, France. The EU has the policy to regulate the import of textile products, each product must include import license and has a purpose (Direktorat Perdagangan Luar Negeri, 2015). The objectives of the policy are to conduct trade management in the EU, quota management, and implement safeguards. Thus, there are challenges for Indonesian entrepreneurs to export to the EU. Also, the EU and the United States also provide a reasonably high import duty, which is 10 to 17% (Barus, 2017).

When Indonesia faces obstacles in the form of such significant import duties, the competitor countries of Viet Nam and Bangladesh are not subject to import duty. It can be said that the import duty of both countries is 0% (Barus, 2017) because Indonesia is seen as a developed country and has joined the G20.

Figure 6 : Market Share of Textile Product 2016

Figure 6 : Market Share of Textile Product 2016

Source : ITC, n.d.c; n.d.d; n.d.e (processed)

In figure 6, four textile commodities are Indonesia's flagship, Indonesia is still inferior to Viet Nam and Bangladesh. In HS 5509 Indonesia controlled 14.5% of market share and only lost to China. However, in products such as HS 6204 and HS 6203 Indonesia lost considerably. At HS 6204, Bangladesh became the world's second-largest exporter and accounted for 6.7% of the market share. Vietnam next dominated 4.6%, while Indonesia is in the order to-15 and only control 1.5% market share. So it is with HS 6204, Indonesia is on the order of the 13 world exporters. In addition to import duty, there are also domestic challenges that affect the low number of Indonesian exports. According to the Chairman of the Indonesian Textile Association (API), Ade Sudrajat stated that high electricity tariffs hinder the production of textile production and complicate Indonesia's competition with Viet Nam and Bangladesh (Barus, 2017) because the electricity tariffs in both countries are cheaper than Indonesia. There are also low infrastructure factors resulting in the slow delivery and high cost of logistics. The challenge of increasing Indonesian exports is also due to the policy of exports. Such as Finance Ministerial Regulation Number 253 / PMK.04 / 2011 concerning Return of Import Duty Received for Import of Goods and Materials to be Processed, Assembled or Installed on Other Goods Purpose Exported and converted to PMK Number 177 / PMK / 04/2013. The regulations require employers to pay Value Added Tax (PPn) in advance, resulting in a capital disruption due to the old tax refund process.

Also, the Chairman of the API, Ade Sudrajat also complained about PMK No. 147 / PMK.04 / 2011 on Bonded Zone. The regulation makes it difficult for subcontractors to enter industrial zones (Kementerian Perindustrian RI, n.d.b). Whereas to obtain the exemption of import duties on raw materials, then the location of production must be done within the industrial area.

Figure 7 : RSCA Based on HS 6204, HS 6203, HS 5509

Source : ITC, n.d.c; n.d.d; n.d.e (processed by STATA 14)

Revealed Symmetric Comparative Advantage (RSCA) is a tool to see the comparative advantage of a commodity. A commodity of one country is said to have a comparative advantage if its value is above 0, whereas if its value is below 0 then it has no comparative advantage. In figure seven RSCA looks from three textile products. In HS 5509 it is seen that Indonesia has the highest comparative advantage, that is 0.87. Even over China has a comparative advantage of 0.34, while China became the largest exporter in the world. This shows that Indonesia has a better quality of HS 5509 compared to China and other exporting countries.

In HS 6203 the comparative advantage of Indonesia is only 0.2 and in HS 6204 it has 0.21. Although Indonesia has a comparative advantage, it is very small compared to other countries. Indonesia has benefited from both of these commodities compared to HS 5509. Therefore, it is important to pay attention to the quality and quantity of exports of HS 6204 and HS 6203. The government also needs to provide various infrastructure and supporting policies for the textile industry.

3. The Dynamics of Indonesia Textile Products Diversification: Opportunities and Challenges

Indonesia top three largest exports of textile diversification products are HS 5509 (yarn of synthetic staple fibers) , HS 6203 (men or boys suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches, and shorts), and HS 6204 (women or girl’s suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers, bib and brace overalls, breeches, and shorts). Overall, in 2015 fashion contributed to 27.9% of country’s GDP. Moreover, traditional weavings and batik are other diversified Indonesia textile products which contributed big enough for national economy with total export $151.7 million in 2016 (Kementerian Perindustrian RI, n.d.c)

Figure 8 : Index Herfindahl (2012-2016)

Source: ITC, n.d,c; n,d,d; n.d.f (processed by STATA 14)

Index herfindahl is used to size how concentrated are exports in a narrow range of products, or markets. The chart above illustrates that Indonesia diversified textile products HS 5509 were persistently concentrated during 2012-2016 period of time. However, textile products HS 6203 and HS 6204 have fluctuated during 2012-2016.

Figure 9 : HS 5509 Exports of Indonesia

Figure 9 : HS 5509 Exports of Indonesia

Source: ITC, n.d.c (processed)

Indonesia Trade Ministry listed that biggest importer of Indonesia textile products are US and Europe. Hence, the capacity of Indonesia TPT industry highly depends on global economy (Kementerian Perdagangan, n.d.). Meanwhile, in 2012-2016, the figure has shown that Turkey, Korea, Brazil, Japan, and Pakistan have been Indonesia’s traditional trade partner for mostly textile concentrated products, particularly for those categorized in HS 5509. It means that Indonesia is currently struggling to diversify its export market.

To promote various designs of textile products, mostly Indonesia designers expand independently national brand in which has been acknowledged by international market. For instance, Tex Saverio, Indonesia designer who has designed for world-class leading figures, and Dian Pelangi as Indonesia designer who works on production and design for four segments of clothing, including stylish muslim fashion (Kementerian Perdagangan, 2016).

Moreover, to improve textile diversification performance, Indonesia Ministry of Industry launched e-Smart SMEs program (e-Smart IKM) in 27 January 2017 (Kementerian Perindustrian, n.d). The goal of the program is to encourage national fashion industry players who are classified into Small Medium Enterprises (SMEs) to expand their market through marketplace and will be given various training. Indonesian Industry Ministry, Saleh Husin encourages textile industries order to develop or diversify products for fashion needs. He explained that diversification is a strategic move because of the current development of the market demand for raw material for fashion products is relatively high. Unfortunately, he added that most of the raw materials are imported. Furthermore, the development of the textile industry and textile products (TPT) in the last two years (2015-2016) have been stagnant, both in domestic and international markets and this is the result of a slowing world economy (YNFX, 2016).

According to Indonesia Ministry of Industry Regulation No. 146/M-IND/PER/12/2012, Ministry’s strategies to improve diversification of textile products and its competitiveness are the need to use local raw materials and the use of domestic products, development of industry cluster which has competitiveness to support textile industry and textile products, industry institutional structure arrangement to improve capacity of industry sector, utilization of modern technology and local wisdom to enhance competitiveness products, and enhancement of human resources quality in coping with technologies. Ministry of Industry also mentioned that the implementation of Intellectual Property Rights (IPR) becomes part of its medium term goals for textile products (2013-2017).

In addition, Intellectual Property Rights (IPR), as intangible assets, is a key factor in the competitiveness of businesses in the global economy. IPR is a primary method for securing a return on investment in innovation, and is particularly relevant to Small Medium sized Enterprises (SMEs) when they internationalize their business to international market (Jurgenson, 2016a). However, counterfeiting, piracy and other IPR infringements remain a problem for Indonesia clothing and textiles (Jurgenson, 2016b). The biggest challenge for Indonesia textile industry and SMEs is to have Intellectual Property Rights (IPR) for their products. Hence, to counter IPR problems, in 2015 the Indonesian President established an independent government agency called “Badan Ekonomi Kreatif” (Creative Economy Agency - "BEKRAF"). The agency overviews sixteen creative industry sectors including fashion and product design. Regulation of the Head of Creative Economy Agency No.1 / 2015 Article 106 explains that the Deputy for the Facilitation of Intellectual Property Rights and Regulations has responsibilities of formulating, establishing, coordinating and synchronizing policies and programs facilitation of Intellectual Property Rights and regulatory synchronization in the field of creative economy (Badan Ekonomi Kreatif Indonesia, n.d.).

As conclusion, diversifying textile products and export market is highly important to boost competitiveness of Indonesia textile industry. Indonesia needs to diversify its market to avoid highly dependent on certain country’s economy in which will affect the demands of products. Meanwhile, other challenge for products diversification comes from the implementation of Intellectual Property Rights (IPR). In this case, Indonesia government through Ministry of Industry, Ministry of Trade, and Creative Economy Agency endeavor to implement policies related to IPR in the recent years.

4. Development of Technology and Human Resources as a Strategy to Increase Quality Margin of Indonesian Textile Products

The highest export value of textile products is HS 6204, which consists of Women's or girls' suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers. The export quality of the product can see through unit values or total export in ton divided by export value in US $. Figure ten shows that the unit values of HS 6204 Indonesia are low compared to other largest exporting countries.

Figure 10 : Unit Values HS 6204 (Tons/US $)

Source : ITC, n.d.f (processed)

Italy became the country with the best export quality HS 6204 for the last three years. The countries listed in figure thirteen are the countries included in the top 10 exporters. However, unit data values for some countries are not available. Such as Bangladesh and Vietnam. Bangladesh became the country with the highest comparative advantage in HS 6204. Vietnam is a country of Indonesia's competitors in the ASEAN region.

The high unit values of European countries' export products are due to sound quality, upper-middle-class market targets, and expensive product brands. Meanwhile, Indonesian textile products are dominated by retail and small-scale retailers was stated by the Chairman of the Indonesian Textile Association, Ade Sudrajat (Jayabuana, 2017). It can say that Indonesian textile exports depend on such small-scale retailers.

Indonesia's textile industry has been sluggish over the past three months because tax officials suspect small-scale retailers as tax criminals. According to Ade Sudrajat, the problem is the turnover of the retailer less than 4.8 billion and not have NPWP (Jayabuana, 2017). That shows the need for proper communication between the government, in this case, the tax officer with business actors because the disconnection of information resulted in reduced number of Indonesian exports.

To see the sophistication of an export product the PRODY method can use. Complexity is related to the technology used in the production process, whether high, medium, or low tech. In figure fourteenth, it can see that HS 6204 Indonesia products can compete with other exporting countries such as Vietnam and Germany. While Bangladesh is one of the highest exporters of HS 6204, there is no data available.

Figure 11 : PRODY HS 6204

Source : ITC, n.d.e (processed by STATA 14)

In figure eleven it shows that China is the country with the highest PRODY. The development of textile technology in China has a negative impact on the Indonesian textile industry. According to the Chairman of the Indonesian Textile Association (API) of East Java, Sherlina Kawilarang, the textile industry in Indonesia cannot compete with China. That is because China's technology is very efficient (Vir, at.al, 2017). Coupled with the increasing global market demand for high-quality products.

Another challenge is that Indonesia has not been able to make sophisticated and efficient textile technology. As a result, Indonesia must import technology with a cost that is also expensive. Several countries compete to make the best textile machinery, namely China, Germany, Italy, Switzerland and India. China is currently the largest producer of textile machinery in the world. China has benefited enormously and continues to grow in line with the increasing demand for textile machinery. (Tot, 2014)

HS 6203 is Indonesia's second largest textile export product regarding value. The country's most active competitor is Bangladesh. Bangladesh is well known as an exporter country of textile products for many world-renowned brands. Apart from the cheap labor costs, Bangladesh also has the right technology. That can see from the high value of PRODY in figure twelve.

Figure 12 : Prody HS 6203

Source : ITC, n.d.d (processed by STATA 14)

Figure fifteenth shows the distance of the distant value of PRODY between Bangladesh and other countries. Indonesia became the country with the lowest PRODY. Even compared to Vietnam, Indonesian PRODY is lower. This is because Vietnam also has better technology and exports to European countries. Vietnam has export convenience compared to Indonesia. Vietnam and Bangladesh are also seen as underdeveloped countries and given the freedom of import duty to Europe (Jos, Et.al, 2016).

Akhmad Jayadi and Harry A. Azis conducted research published in the Journal of Applied Economics in 2016, found that Indonesia has a high comparative advantage on aspects of primary products, resource-intensive products, and unskilled labor-intensive products (Jayadi et al., 2016). That explains the highest export quantity of Indonesian textile products is HS 5509 when compared to other products while HS 5509 is a textile raw material.

Figure 13 : PRODY HS 5509

Source : ITC, n.d.c (processed by STATA 14)

Figure thirteenth shows that PRODY product HS 5509 Indonesia is highest compared to other countries. That indicates that Indonesia still lacks regarding technology-intensive products. So Indonesia needs to improve domestic technology to increase the diversification of textile products with high quality. The use of technology dramatically determines the speed of production and maintains the quality. Textile technology imports are expensive. Therefore the government needs to support by providing essential import duties.

What is more important is the government's support for the domestic textile technology industry. Indonesia is also far behind with other countries in this regard. However, it is not wrong to start to clean up and improve the technological deficiencies. Even the government can provide an ease of permit incentives for this. The Indonesian government has provided support for the purchase of textile machinery in the framework of revitalization. The Industrial Ministerial Regulation (Permenperin) RI Number 01 / M-IND / PER / 1/2014 Regarding Second Amendment to Permenperin Number 123 / M-IND / PER / 11/2010 About Revitalization Program and Industrial Growth Through Restructuring of Textile Machinery / Equipment Industry and Textile Products and Footwear Industry. The opportunity would need to be utilized optimally by the textile business. Countries like Bangladesh and Vietnam can develop the textile industry because of human resources. Both countries have low minimum wages and long labor hours. Indonesia is not possible to do so because of the provisions of Law no. 13 the Year 2003 on Manpower. Labor in Vietnam is more productive 20% than Indonesia. One is the clock factor.

So the aspect that needs to be strengthened by Indonesia is the quality of human resources. The human resources of the textile industry in Indonesia are still less than Thailand. Based on research Akhmad Jayadi and Harry A. Aziz, Thailand into a textile-producing country that has a comparative advantage in human resource density products. (Jayadi, et al., 2016). So, the government needs to support the textile industry vocational education institutions both formal and non-formal. The need for professional human resources in the textile field will continue to be required. That is because, with the massive technology of textiles in the future, the need for professionals will take precedence over human resources without certification.

5. The Continuity of Indonesia Textile Export: Analysis of Export Growth Decomposition

The highest number of export in four digit HS of Indonesia’s textile products are HS 5509 (Yarn of synthetic staple fibres (excluding sewing thread and yarn put up for retail sale), HS 6203 (Men's or boys' suits, ensembles, jackets, blazers, trousers, bib and brace overalls, breeches), HS 6204 (Women's or girls' suits, ensembles, jackets, blazers, dresses, skirts, divided skirts, trousers). Despite being a leading sector, there are some export destinations that illustrated a decline. In figure 14, export values to some countries destination such as Bangladesh, Phillippines, Taiwan, Hong Kong, China, the UK, and Australia have showed a downward trend on 2001, 2006, 2011, 2016.  HS 5509 which consists of textile raw material is actually needed in the clothing producing country. Hence, the decline in export value to Bangladesh is a challenge for Indonesia, as Bangladesh is one of the largest apparel producers in the world. The export of HS 5509 to Bangladesh accounted US $ 30,722 in 2001, however it has fallen to US $ 18,450 in 2016.

Figure 14 : Decline of Export Values HS 5509 Based on the Importing Countries

Source :  ITC, n.d.b (processed)

Indonesia's exports of HS 6203 and HS 6204 products have also decreased in some countries. In figure fourteenth and fifteenth demonstrate that decline occurs in the same region. As in the Middle East there are Saudi Arabia, United Arab Emirates (UAE), Egypt and in European countries there are the UK, Belgium, and France. Exports of HS 6203 to the UAE in 2001 accounted to US $ 44,197, dropped to US $ 10,464 in 2016. The number of export in Saudi Arabia also decreased in 2001 accounted US $ 17,256 has falled to US $ 1,046 in 2016.  The exported values to the UK also dropped from US $ 30,064 in 2001 to US $ 20,676 in 2016. Similarly, Belgium with export value of US $ 25,977 in 2001 to US $ 10.969 in 2016. These trends indicated that the decline occurred more than 50% during  2001 to 2016. 

Figure 15 : Decline of Export Values of HS 6203 Based on Importing Countries

Source:  ITC, n.d.d (processed)

In 2001 the UK became the largest importer of HS 6204 products accounted US$ 32760, but it dropped in 2016 to US $ 28116. A substantial decline also happened in France, the value accounted US$ 15429 in 2001, it rapidly fell into US $ 5203 in 2016. Moreover, in Saudi Arabia, import value is US $ 26,564 in 2001 decreased to US $ 9420 in 2016. According to the President of the Royal Jordanian Chamber of Commerce, Nael Al Kabariti, explained that Indonesian textile products are less promoted in the Middle East, whereas textiles Indonesia has good quality. This contributes to the lower export of Indonesian textile products to the Middle East.  

Figure 16 : The Decline of Export Values HS 6204

Source:  ITC, n.d.e (processed)

The continuity of export product is determined by the continuity of export relations between countries, the intensity of export products and its diversification. Acccording to ITC, acknowledged that there are number of death margin and unsustainable HS in the highest export sector of Indonesia textile. Firstly, there are two derivative products of HS 5509 which show a death margin such as yarn containing > 50% to < 85% polyester staple fibers by weight, mixed principally or solely and yarn containing predominantly, but < 85% synthetic staple fibers by weight, mixed principally. Meanwhile derivative product of this HS is only single yarn containing >= 85% synthetic staple fibers by weight (excluding sewing thread, yarn).

Figure 17 : Export Decomposition Growth HS 5509 (2003-2016)

Source: ITC, n.d.c (processed by STATA 14)

Other textile highest export product is HS 6203. Moreover, there is one unsustainable HS 6203 derivative product such as men's or boys' ensembles of wool or fine animal hair (excluding knitted or crocheted, ski ensembles). Meanwhile, there’s no other new exporting derivative product. Hence, it figures out that since 2003 to 2016 the development of HS 6203 export diversification product has not yet been done.

Figure 18 : Export Decomposition Growth of HS 6203 (2003-2016)

Source: ITC, n.d.c (processed by STATA 14)

According to the list of textile companies which are announced by Indonesia Ministry, at least there are 58 companies engage in the production of textile and its derivative (Kementerian Perindustrian RI, n.d.b). In addition, SMEs also dominated in such production. Based on Ministry of Trade through Directorate General for National Export Development in Adiswastra Nusantara Exhibition in 2014, the development of TPT products, particularly traditional clothing are dominated by SMEs ((Pusat Hubungan Masyarakat, Kementerian Perdagangan, RI, 2014). Thus, government focus on the creation of condusive investment climate by issuing policy measures for industy players. For instance, fiscal incentives in terms of tax allowance and tax holiday. In digital era, the importance of products digitalization can not be separated from government intervention. Digitalization flows considered significant as a bridge to connect factories, vendor, and SMEs in order to run effecient, faster, and cheaper business environment and to enhance textile products competitiveness both in domestic and global market  (Julianto, 2017a).

Government policies regarding to the export of TPT products which is done by companies and SMEs has been regulated in the Registered Exporters of TPT Products (ETTPT). Decree of the Minister of Trade No. 06/MPP/SK/1/1996 article 1, ETTPT is a company authorized to export TPT quotas. In this context, government export policy measures highly depend on  contries export destination’s quota policies for Indonesia TPT products. Therefore to boost the export performance, Indonesia government strengthen bilateral relation between countries and engage in Free Trade Agreement.

The performance of Indonesian textile products in the global market, especially to the main destination countries facilitated by bilateral cooperation, such as the Indonesia-European Union Comprehensive Economic Partnership Agreement (Indonesia - EU CEPA). Indonesia-EU CEPA is predicted to increase the value of national textile exports to US $ 22 billion by 2025. According to the Chairman of the Indonesian Textile Association (API), free trade agreement can increase Indonesian textile exports to the EU to 300 % (Fadli, 2017). The increase could be even higher if there is hard work from the government to fix bureaucracy and licensing for the industrial sector. So far, Indonesia's textile product exports are still constrained by dwelling time problems, causing the products to lose competitive in overseas markets. In addition, the main market share of TPT besides the EU is the US. The government through the Ministry of Industry is pushing to strengthen bilateral cooperation with the United States (US). Indonesia government encourage that the export of textiles and textile products (TPT) to be subject to 0% import duty. In this case, until February 2017 Indonesia's textile product exports are still subject to 12.5 % import duty in the US market (Julianto, 2017b).

6. Conclusion

The textile industry is one of the leading Indonesians and absorbs a lot of workforces. The competition of Indonesian textile producers with imported products is quite tight. Domestic conditions have an impact on the performance of Indonesian textile exports. In addition to the high import of textile products, Indonesia also imports textile raw materials quite high. It can say that Indonesia is quite dependent on raw materials such as yarn, cotton, dyes, and fabrics. If imports decline, there is a risk of a drastic drop in Indonesia's textile exports.

Indonesian textile products that have high export value are HS 6203 and HS 6204. When compared to HS 5509 which consists of raw materials, the export value of HS 6203 and HS 6204 is much higher. The problem is the number of exports of HS 6203, and HS 6204 is very low.

In general, the number of Indonesian exports is quite stagnant, so it needs to be improved to achieve higher profits. The potential of the textile industry in the world is vast and growing. Currently, the export destination of Indonesian textile products is quite spread to various countries. So Indonesia is not too dependent on some export markets only.

In the competition of the international textile market, Indonesia is in the middle. However, Indonesia can be said to lose with some other developing countries. Such as Bangladesh and Viet Nam. The condition is very in pity because Indonesia has the same potential as these countries but not yet lagging behind. Indonesia's RSCA textile data is still quite low on HS 6203 and 6204 products.

The export quality of Indonesian textile products is still low compared to other countries. Seen from the unit values ​​HS 6204 Indonesia is very low compared to other competing countries. The determinant of product quality is technology. Indonesia's textile production machine is still small compared to other countries such as China, Bangladesh, Germany, and even Viet Nam. This condition resulted in the low diversification of Indonesian textile products. The export growth decomposition analysis shows that the export of HS 6203 as the highest exported product but there has been no product diversification since 2003. And there is one product that stopped in export. Another challenge is the low Intellectual Property Rights (IPR) owned by Indonesian textile products. As a result, many imported textile products imitate Indonesian products' motives. Due to the above challenges, the contribution of textile products to GDP declines every year.

7. Policy Implication

  • Development Of Upstream Textile Industry

Indonesia government roles are needed to encourage textile factories to boost the use of domestic upstream products such as yarn, cotton, dyes, and fabrics. It will gradually lower the cost of the production process, to attract investment both domestic and foreign investment, and to maximize free trade deal with biggest importing countries (e.g., Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA), and Japan-Indonesia Economic Partnership Agreement) through improvement of trade facilitation. So that, Indonesia textile products will be more potential to cope with the global market.

  • Diversification of Textile Export Markets

Indonesia needs to diversify its market to avoid highly dependent on certain country’s economy in which will affect the demands of products. Meanwhile, other challenge for products diversification comes from the implementation of Intellectual Property Rights (IPR). In this case, Indonesia government through Ministry of Industry, Ministry of Trade, and Creative Economy Agency endeavor to implement policies related to IPR in the recent years.

  • Importance Of Incentives And Tax Benefits

The import duties of Indonesia to the US of America and EU markets are quite large, i.e. 10-17% while Viet Nam and Bangladesh get 0% import duty. This condition occurs because Indonesia has joined the G20 and the policy of EU quota management. There is also PMK Number 253 / PMK.04 / 2011 concerning Return of Import Duty Received on Import of Goods and Materials to Processed, Assembled or Installed on Other Goods Purposes Exported and converted to PMK No. 177 / PMK / 04/2013 which resulted from employers need to pay taxes upfront. Taxes increase the cost of production of textile products, and this will give the IKM. Though IKM dominates Indonesia's textile industry and to support IKM, it is crucial for the government to help through tax allowance and tax holiday.

  • Ease of SME Access to Machine Revitalization and Restructuring

The quality of Indonesian textiles is low compared to other countries, and this view comes from the analysis of PRODY. Therefore, the government is essential to support the development of technology and product quality. The government has begun to support through relief and revitalization relief. These efforts need to be more inclusive to be accessible to SMEs.

 

 

 

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Archita Nur Fitrian

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