Since the beginning of the 1970s’, the ethnic Chinese in Indonesia shifted their investment from business to manufacturing, textile and garment industry was one of their focus, now
90% of the Indonesian textile and garments industry are run by the ethnic Chinese in Indonesia. This paper intends to probe the Indonesia’s textile and garment industry entitled “Analysis on Indonesia’s
Textile and Garment industry: Current Situation, challenges, Government’s Policies and Prospects”.
The paper is divided into three parts: 1, Profile of Indonesian Textile and Garment industry; 2, the reasons why Indonesian textile and garment industry facing difficulties; and 3, Indonesia government’s policies towards textile industry and prospects.

Textile and Garment industry is one of the most significant sectors that give directly
Contribution to the economic growth in Indonesia. The Textile and Garment industry is not only absorbing many workers but also giving the biggest foreign exchange compared with other sectors.
According to the data from Department of Industry and Trade that the number of textile and
Garment industry in Indonesia was about 88 companies in 1987, and over 2000 in 1992, in
2003, it reached to 2654.the geographical distribution of the Indonesian textile industry is highly concentrated on the island of Java, and in particular in West Java. Almost 90% of the textile industry is located in Java, and 54.8% are concentrated in West Java alone. For the garment industry, high
Concentration is to be found in West Java, Jakarta and Bantam Island, the latter being a free
Trade zone.
About half of the country's textile production goes into the world market. The textile and
Garment industry as a whole counted as the single leading foreign exchange earner in non-oil and gas exports, reaching US$ 6.5 billion in 1997, and a tremendous increase from US$ 559 million in 1985.Since early of 1990s’, about 16% of the total value of Indonesian manufacturing export came from Clothing and Garment sector. In 2000, Indonesia achieved a record US$8.2 billion in exports and was ranked 10th among the largest producing countries.
The figure was US$7.6 billion in 2001 and US$7 billion in 2002. In 2003, Indonesia has already earned US$7.03 billion from exporting textile and textile products, but Indonesia’s rank position was down to 17th, and accounted for only 2.15% of the US$500 billion global garment trade. The government estimates that textile and apparel exports to increase to
US$7.5 billion this year (2004)

According to data from the Ministry of Trade and Industry, by 2010 2,654 textile companies across the country employed more than 1.18 million people. In 2004, Indonesia's textile industry employs about 1.5 million people, and the sector employs about 3.5 million people directly and indirectly. In 2002 and 2003 were the very difficult years for the textile businessmen. In those years many Clothing and Garment factories went bankrupt. Bandung, the provincial capital of West Java, and once the main textile and footwear production belt for exports and the local market, has been closed more than 100 factories over the past two years. This sector’s capacity utilization is now only about 65 percent.

On January 1, 2005, a quota system designed to protect the industrial interests of the United
States and the European Union from a flood of cheap imports were abolished. Although meant to be in the spirit of a new era of free trade and the drive for liberalization, the move put the jobs of more than 10 million workers across the developing world at risk, including thousands in Indonesia's fading textile industry. Textile producers in Indonesia have been able to continue exporting, despite rising competition, because of the quota system.

The country's textile industry was plagued by a couple of problems, including labor disputes, rising labor and energy costs and ageing machinery. In addition, many textile companies had either gone bankrupt or are producing below capacity, over the years. Following are the important factors, which have contributed to the difficulties of Indonesian Garments Industry:
The great problem of the Indonesian textile industry is the fierce competition coming from
India, China, Pakistan, Bangladesh, Turkey, Mexico, and even Vietnam and Thailand. In the past a few years, these countries have all been investing in a big way in new machines and technologies, to position strategically, by scaling up, so as to become the new dominant powers in the international market. When the quotas end, those nations, especially China and
India will benefit most from the massive US and European markets, those two countries could be the largest suppliers to the EU and US markets in the post-quota era. According to a recent
WTO report, China’s share of garment export to the U.S. will rise to 50% after the quota system ends from 16% in 2002. In Europe, China’s share will reach 29% in 2005, up from 20% three years earlier. The second-biggest winner will be India, whose share of U.S. market will jump from 4% in 2002 to 15% in 2005; India’s share of European market will rise from 5%to 9%. But Indonesia will lose share of U.S market, from 4% in 2002 to 2% in 2005, the WTO predicts. So the removal of the quota barrier is expected to make it increasingly difficult for the Indonesian textile industry.

The industry is now ageing, 57 per cent of the machines of textile and garment factories in Indonesia are 15 years old, 18 per cent are 10-15 years old, 18 per cent are 5-10 years old and 7 per cent aged below 5 years(2). The technology is obsolete, short of productivity, efficiency, and quality, not least material and energy, environment conservation. Out of more than 4,100 textile companies, at least 774 companies need to replace their old machinery. In one word, Indonesia textile industry is now a dilemma situation, whether to allow it withers, or try to revitalize it by restructuring and reinvesting.

Now indeed there are some re-modernization plans in the pipeline, say Argo group, Apac, etc, but all plans are waiting for government’s financing. It is predicted that between US$5.0 billion to US$6.0 billion is required to update the existing machine and equipment.
Costs of production are escalating remarkably. Indonesian doesn’t grow cotton at domestic, so the serious competitive disadvantage of Indonesia Garments Industry is their almost total dependence on imported cotton and cotton related inputs. The textile industry still imports more than 80% of its raw material, cotton, used to produce textile products. The Rupiah depreciation has resulted in a dramatic rise in the cost of imported cotton, and the importers have to pay a 10% import duty, all those have forced producers to increase price to remain in business. Domestic demand consequently decreased in response to these higher prices. On the other hand, this industry imports about 90%of its cotton needs from Australia and USA, Due to the freight and transaction costs, the Indonesian Garments manufacture buys cotton related inputs and material at higher prices as compared to their competitors. Some businessmen say if Indonesia had its own cotton resources, it would make Indonesia the most competitive economy for garments industry in the world.

Poor investment climate caused the foreign investors to withdraw their capital from
Indonesia. Investment, especially offshore, has been lagging in Indonesia as compared with neighboring countries, mostly due to the adverse investment climate here. Before the crisis, investment was one of the country's main economic growth drivers. At present, however, it accounts for less than 15 percent of growth in the country's gross domestic product this is an indicator of economic growth, with domestic consumption contributing more than 75 percent.
Investors have been complaining about various conditions that are detrimental to investment, including a lack of legal certainty, widespread corruption, inefficient bureaucracy and labor disputes. For Foreign investors, who invest mostly in the manufacturing sector, tax-related issues have also become a problem. In the past two years, many foreign companies coming from Japan and South Korean have shifted to China and Vietnam, where they can enjoy the better investment environment, lower wages and higher productivity. For this reason, many economists advice the Indonesian government should take a good step to improve the business and investment environment, and the government will host a series of discussion on matters concerning the textile and garment industry, with a search for ways to improve the investment climate in this country likely to be high on the agenda.

Banks refuse to cooperate make the situation worse. For the past couple of years, local banks have generally avoided lending to the textile industry due to high risks. Textile industrialists complained about bank reluctance to extend new credits to textile and garment industries as many banks believed the country's textile industry is no longer competitive. The bankers argued that textile and garment industries at home overdependence on quota system and American market, if textile and garment industrialists can make progress in exploiting non-traditional export market, the banks are willing to resume their credits to this sector.

The textile industry is expected to remain as a major contributor to Indonesia’s economy. One of the leading reasons is that Indonesia still has a comparative advantage for labor-intensive industries and the sizable domestic market, given the nation’s 220 million population. The
Indonesian Government is taking measures as fellows: Limiting the importation to protect local textile producers. The Ministry of Industry and Trade has issued a decree to limit textile imports in an effort to help the local industry, which has been severely hurt by massive quantities of cheap imports. This was signed by minister Rini MS Soewandi in 2002, stipulates that the importation of textile products can only be done by local textile producers.

The government has asked the textile industry to lessen the importation of textile raw materials, particularly cotton. Indonesia government warned that if Indonesia over depend on cotton, that cannot be produced in Indonesia, for the textile raw materials, this will further lessen our competitive ability in the international marketplace. As compensation, the government is trying to urge the industry to make use of local raw materials, such as flax and pineapple fiber. In order to the government has been conducting a project to process flax into flax fibers that is ready to be twined into textile, which is in an effort to improve the use of flax fiber. This project, firstly developed in Wonosobo, Central Java, in 2003, has started to show progress. Indonesia is encouraging the marketing of this product into the international market. Collect funds to help firms to update their machinery. Indonesia government is expecting the domestic textile industry to buy new machines and equipment’s so that it would be modernized and more efficient. Many companies could not replace their aging machinery as they had been saddled with huge debts and poor cash flows. Now the government is trying to collect funds to support the replacement program.

Urge local banks to resume their credit to this sector and some local banks had expressed interest in providing loans for the replacement program. It is reported that at least 14 local banks have expressed interest in financing in the industry. The Indonesia government is seeking the help of China in restructuring its textile industry, Director General of Metal, Machinery, Electronics and Miscellaneous Industries Sebago said the government hoped the Chinese government could provide export credit facilities to China-based textile machinery makers to sell their products to Indonesia to replace the old machinery of local textile companies. Now China and Indonesia governments have agreed to form a committee to further study the possibility. Also they have sent delegations to South Africa, Russia and Middle East to tap the non-traditional market.
Holding exhibition in East Europe to expand Indonesia market. East Europe Export Push continues. As a part of its move to boost trade with non-traditional markets, Indonesia hold an exhibit at the Romanian Consumer Goods Trade Fair in July, 2004. Participation in the expo was a significant part of Indonesia's efforts to promote its export products in the international market, especially in Eastern Europe. The exhibition attracts buyers from across Eastern Europe. Products that were exhibited include furniture, food products, jewelry, handicrafts, toys and garments. Practice new incentives, encouraging FDI to return Indonesia.

Despite the doom and gloom, however, the textile export industry in Indonesia is going to survive. Though export levels are well down from the record $8.26 billion at the end of the 1990s, the industry is still the largest contributor of foreign exchange among the country's non-oil and gas sectors. There are a couple of factors contributing to explain it: The total textile production in Indonesia is valued at more than $15 billion, and only about a third of textile exports will be affected by the quota system’s remove, according to Benny Soetrisno, head of the Indonesia Textile Association (API). Non-quota countries still account for 68% of the country's exports. So the prospects for the industry were still good, though producers of textiles and garments would have to cut their selling prices by 10-15% to remain competitive in the international market. As the global market becomes more challenging, Indonesia should also benefit from the integration of the regional market starting with the launch of the ASEAN (Association of Southeast Asian Nations) Free Trade Agreement (AFTA) last year. This free-market area will further expand in 2010 with the inclusion of South Korea, China and Japan. Also in 2010, the Asia-Pacific Economic Cooperation group will lower tariffs on goods exported by low-income APEC members.

API has pressed the government commitment to finalize its plan to develop Bantam into a free-trade zone so that all textiles for export could be shipped from there, and not Singapore as is often the case. The move would make it considerably cheaper for producers, and the
Riau provincial administration would enjoy the tax and ensuing economic developments.
According to Indonesia government, there will never be a ’sunset’ in Indonesian textile industry as Indonesia is a country of 220 million people how could the industry die? In the post quota system era, Indonesia may reposition its production direction such as making clothes for Moslems and those with ethnic designs could help boost the country's textile industry. Moslem clothes mostly produced by small and medium enterprises, draw the interest of many countries, not only in the ASEAN region but also in the Middle East, Indonesian thus need the government to push designers to create Moslem clothes that could penetrate foreign markets, even though there is a huge demand in the domestic market. High fashion ladies garments: Indonesia has a differential advantage in high fashion ladies garments. The availability of a wide variety of fabrics, garments accessories, fashion schools, regular fashion shows, fashion models competitions and a substantial domestic market (young and middle age Indonesian men and women wear western dresses) are important factors in growth of high fashion garments industry in Indonesia. This is why I think it would be a good invest to invest in the textile market in Indonesia

(1) Far eastern Economic Review, September 9, 2004, p32.
(2) Jawa Pos Group: International Daily News, Aug 19, 2004.
(3) Indonesia Textile magazine, July 2004, p29