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Will Electricity Price Hikes Kill Indonesia’s Apparel Industry?

Indonesia’s much anticipated emergence as an apparel manufacturing power has been sometimes halted by its recurrent electricity shortages. Now a government plan to substantially raise electricity tariffs has many concerned about the fallout for its garment manufacturing industry.

In attempt to assuage these anxieties, Asep Setiaharja, vice secretary general of the Indonesian Textile Association (API), said, “ The increase of electricity tariffs mostly hits upstream industries such as man-made fiber manufacturers and spinners who are more energy intensive than their colleagues of fabric and garment manufacturers.”

But many others remain worried. According to Benny Soestrino, chairman of the advisory board of the Indonesian Textile Association (API), the move threatens to undermine attempts to increase the industry’s competitiveness.

As Soestrino sees it, newly revised electricity tariffs could potentially affect textile production costs, already on the rise, by as much as 3 to 4 percent. The Indonesian government hiked electricity tariffs by 15 percent in 2013, a source of tempestuous debate among the nation’s commercial leaders. The government has also withdrawn power subsidies from four economically key groups: medium-sized businesses, large businesses, large households and medium-sized government offices.

Some say tariff increases and the elimination of subsidies comes during a fragile time of transition for Indonesia’s textile industry, which is simultaneously trying to assert itself as a viable manufacturing alternative to Bangladesh and China while also struggling with its own host of domestic challenges. While its massive supply of low-cost labor has been a point of attraction for Western retailers, low wages have ignited civil unrest, with workers taking to the streets in huge numbers protesting their alleged exploitation. Only months ago, twelve province governors were compelled to increase minimum wages by an average of 19 percent in response to persistent strikes that were stymieing business. In 2012, there was a similar adjustment of the salary structure, raising the minimum wage by as much as 40 percent, depending upon the province in question. This pegs the minimum wage somewhere between $80 and $160 dollars per month in Indonesia, compared to $75 in Cambodia, a fierce competitor.

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Indonesia also faces stiff competition from China and rival ASEAN nations, and has found China’s fiber, textiles and garment exports particularly difficult to counter, especially after the passage of CAFTA. These disadvantages have only been exacerbated by inadequate sovereign marketing. According to the Global Business Guide of Indonesia: “Branding and marketing of Indonesian made textiles has been conducted poorly in the past and domestic brands have not taken a strong footing among Indonesian consumers. Foreign apparel brands have flourished in the upper end of the market as have the imports of cheap garments from China that are on trend. With a reorientation of the sector toward higher quality goods and greater focus being placed on innovation and creativity; Indonesia has a strong base for further developing its textile garment, textile and fibre industries.”

Finally, Indonesia’s breakneck growth has made it difficult for its textile machinery and technology to keep pace with prevailing manufacturing standards. Some industry experts estimate that more than 70 percent of its textile machinery is technologically outdated. The problem has become so widespread the government initiated an ambitious textile machinery restoration program intended to modernize its aging technology.

Currently, the government intends to raise electricity prices by a startling 38.9% for all businesses that use medium-voltage power, which includes apparel and footwear producers. The price hike should go into effect on May 1.

The potential for Indonesia, despite considerable hurdles to still clear,  is undeniable, though, especially considering its 260 million people, investment-friendly business environment and laser-like focus on textile and garment production. The government has also demonstrated a twin commitment to political reform and infrastructural modernization. While it doesn’t want to be pigeonholed as an alternative to Bangladesh, there are certainly new opportunities in the wake of the Rana Plaza tragedy for it to assert itself on the global economic stage.