Competitive Advantage Of The Indonesian Textile Industry

INDONESIAN TEXTILE AND CLOTHING INDUSTRY

International trading in the textile and clothing industry has seen a significant metamorphosis in recent years. Developing countries have been suppliers of raw materials such as silk to developed countries. In the last thirty years, the characteristics of international trading in the textile and clothing industry have changed due to the labour intensive nature of the industry and high labour costs. For developed countries, firms could not cope with the competitive pressure from imports, and governments have had to introduce tariff and non-tariff barriers to watch over their domestic industries. Furthermore, the garment manufacturers in developed countries had to invest abroad to support overseas production to serve their home markets. In fact, garment production in developed countries is a dying industry. This is the case because, as we all know, labour costs in developed countries are much higher than those in developing countries.

This essay will discuss the trade theory of competitive advantage with implications for the textile and clothing industry in my home country, Indonesia. Indonesia has a very competitive garments industry, which means that this country has a competitive advantage with regard to this industry compared to other countries. The objective of the essay is to look into the Indonesian garments industry, in order to evaluate the variables that determine its international competitiveness.

Indonesia is an important global resource for this industry. Over the last three decades, the Indonesian garment industry has grown from being a small sector to becoming a major contributor to the country’s total industrial revenue. The country’s Ministry of Industry has categorized textiles and clothing as a strategic industrial sector. In 2004, Indonesia ranked tenth among the world’s leading exporters of textiles (excluding Hong Kong) and ninth among clothing exporters (including Hong Kong). Within Asean (the Association of Southeast Asian Nations), it is the number one exporter in terms of both textiles and clothing. The textile and clothing industry is also important to Indonesia as it contributes significantly to the country’s economy. In 2005, the sector was the country’s biggest net exporter with a surplus of around US$7 billion, which represent 10.1% of the country’s total exports. Furthermore, textile and clothing exports in 2005 were 13.4% higher than in 2004. The official employment estimate is 1.2 million people, spread over 4,500 factories.

In the following section, we will discuss the variable that determines the competitive advantage. Labour wages are very critical for its international competitiveness. In Indonesia, the standard labour wage in the garments industry is US$30 per worker per month, with free lunch and one month’s bonus per year, usually during Ramadan, or at Christmas. The supervisors are paid twice as much as shop-floor workers, at about US$60 per month. There are also overtime costs, which are 25% of the daily wage for the first hour’s overtime, 50% of the daily wage for two hours, and 100% of the daily wage for three hours and over. There are also salaries paid by IS THIS WHAT YOU MEAN? foreign Joint Venture companies. Joint venture firms pay twice per week on agreed rates. As we know, a joint venture (JV) is an entity formed between two or more parties to undertake economic activity together. There are 170 foreign firms engaged in textile manufacturing in Indonesia. For example, well-known sports clothing firms like Nike have joint ventures with Indonesian companies. On average, they pay a salary of US$60 per month. Many large Indonesian firms hire expatriate production managers. The expatriate manager’s salary ranges from US$3,000 to 7,000. They also get incentives such as cars and medical insurance.

Besides wages, labour productivity in the garments industry is really important. This varies from firm to firm and from product to product. For example, for ladies’ sweaters, productivity is 15 sweaters per worker per day. In another factory producing tee shirts, the daily output per worker is 20 shirts per day.

There are other costs that are also important in terms of influencing Indonesia’s international competitiveness. First, input costs. Many Indonesian garments manufacturers get their basic inputs and materials at very competitive prices. The only serious competitive disadvantage from the point of view of Indonesia’s garments industry is its almost total dependence on imported cotton and cotton related inputs. Indonesia has to import cotton in a large scale every year. In 1993, Indonesia imported 414,000 tonnes of cotton which was above 96% of their needs since Indonesia can only produce less than 4% of its national needs with regard to cotton. If Indonesia had its own cotton resources, it would be the most competitive economy for the garments industry in the world. Second, cost of capital. The average inflation rate is 9%. Due to economic and political crisis of 1998, inflation in Indonesia rose to 77% with an average mark-up rate of 35% and with a highly volatile currency. Third, energy costs. The oil and electricity costs per unit are very low. For example, for big business, electricity cost US$0.09 per unit.

Another variable that is also important with regard to influencing the international competitiveness of Indonesia is its infrastructure. The soft infrastructure includes telecommunication services, and the market infrastructure with a network of manufacturers, local agents, exporters, wholesalers, suppliers of accessories and international buyers. Normally, manufacturers contact local agents in Jakarta to deal with their exports. The hard infrastructure includes roads, railways, seaports, airports, and shipping services which have been developed in Indonesia in order to make exports to other countries easier in terms of transportation.

Now, we can conclude the critical success factors with regard to the Indonesian garment industry are as follows:

Very low cost labour.

Availability of a variety of fabrics and garment accessories at competitive prices.

Strategic region or area.

The ethnic Chinese who are well known as a hard working people, are very resourceful and run almost 90% of the garments industry.

Consistency in investment policy.

The FDI (Foreign Direct Investment) in textile clothing industry is responsible for a diverse range of products. For example, firms from Singapore, Korea, and Japan have, through FDI, built their own factories in Indonesia.

Conclusion

Indonesia is one of the most competitive economies for textile and clothing manufacturing. However, Indonesia still has a very tough time when it comes to competing with China and Thailand, which are the two main competitive countries with regard to the garments industry. These two countries are Indonesia’s toughest competitors in every segment, whether the low quality, the medium or the up-market segment. The important issue here is that Indonesia has the best geographical location for garment manufacturing. When the crisis hit Indonesia in mid-1997, there were a lot of garment firms which ceased production. In fact, the industries that were affected as a result of the monetary crisis were, firstly, the automotive sector, secondly the electronic production sector, thirdly, the textile sector. Of these three industries, the garment industry absorbed the most labour. The only difficulty is that Indonesia still has to import cotton, and it is really hard to increase cotton production domestically. But Indonesia has a way of solving this problem. To alleviate its dependency on cotton which is the main material used in the textile industry, they use another raw material that comes from the “rami” plant and has the same characteristics as cotton. That is why, even though Indonesia has to import the basic raw materials in the garments industry, it still has a competitive advantage and is still also an important global centre for the textile and clothing industry.