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Indonesia Battles to Keep its Textile Sector Afloat

Indonesia is facing a trifecta of problems in its textile sector: economic growth is slowing with no signs of turnaround, demand is declining and exports are weak because of slow economic growth in the markets that get their goods.

So it comes as no surprise that the textile industry’s performance was poor in the first quarter of the year—growth in the sector contracted 0.98% year-on-year, whereas Indonesia’s GDP saw 4.71% growth, according to the Jakarta Post.

Ade Sudrajat, chairman of the Indonesian Textile Association (API), said the goal for the textile industry this year is to reach $12.6 billion though the target is well off from the $2.3 billion in exports the country saw in the first quarter, which was already $2.5 billion less than exports in the prior year first quarter.

Because exports account for 63 percent of the textile industry’s total sales, the Jakarta Post said the sector there will be greatly influenced by global economic conditions, namely in the U.S. and Europe where most of its exports go.

Indonesia exported $2.18 billion worth of textiles and apparel products to the U.S. in the first five months of the year, a 1.2% decline over the same period in 2014.

“In 2015, the U.S. economy is expected to improve. However, its impact on the recovery of Indonesian TPT [textile and textile products] exports will not be immediately significant and perhaps won’t be felt this year,” the Post reported.

Indonesia is also battling slow loading and unloading, or dwell times, at its ports, and the fluctuation in raw material prices, like cotton, owed to the rupiah depreciation against the dollar. The country still imports roughly 95 percent of the cotton used for textiles as the quality of its domestic version is “far below standard,” and supply can’t be guaranteed, the Post noted.

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Cotton for Indonesia’s textile sector is largely gotten through intermediaries, meaning manufacturers have to buy cotton from brokers at high prices. Sixty percent of the cotton comes from abroad, according to API, 30 percent from warehouses in Malaysia and the remaining 10 percent from retailers who import the fiber to resell it.

To combat the higher cotton costs, API has urged the relocation of Malaysia’s cotton warehouses to Indonesia.

Imports from China and Korea are also cutting into Indonesia’s competitiveness. Rising energy prices have fueled higher costs in the country’s textile sector and imports can be as much as 20 percent cheaper than domestic goods.

Indonesia’s Industry Ministry is encouraging an uptick in textile and footwear export sales by offering incentives like lowering government-borne duties on raw materials and textile products and by providing better access to financing for textile facilities.

The Ministry will also coordinate with other local ministries to promote domestic trade and work toward free trade agreements with countries that buy Indonesian garments to benefit the national industry.