High Noon for Labor Intensive Sector

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Labor-intensive manufacturers may have to settle with modest export growth targets next year as they grapple with unfavorable market conditions brought on by the escalating global economic turmoil and higher labor costs.

Indonesian Footwear Producers Association (Aprisindo) head Eddy Widjanarko said domestic footwear manufacturers anticipated 10 percent growth next year from the US$3.2 billion estimated this year, which was a 27.94% increase from last year. As of October, footwear exports stood at $2.6 billion, according to Aprisindo.

“The European recession will surely affect us. Ten percent growth is already good under such circumstances,” he said recently.

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Eddy said that higher output to push up sales would be partly expected from new investments in the industry, which had been poured in by 11 shoemakers from various countries, including Vietnam, Australia, Taiwan, China, South Korea, Italy and the Netherlands, until the first half of this year.

“The export market is very large and by reaching $3.2 billion in export value, we’ll still grab a less than 2% share of the world market,” Eddy explained, adding that even though several shoemakers might reduce production, optimism was there as big buyers, such as global brands Nike and Adidas, had committed to continuing with their purchase orders.

He said that to mitigate the impacts of the current crisis, a number of footwear-makers had stepped up diversification efforts to reach new buyers in countries in the Middle East and Africa.

During last month’s Trade Expo Indonesia, the country’s biggest trade exhibition, a significant number of potential buyers from the two regions looked into sourcing shoes from new suppliers in Indonesia instead of shoemakers in China, their traditional suppliers.

Along with textiles and garments, footwear is a major Indonesian export to the European Union and the United States. As of August, footwear exports reached $2.19 billion, while textile exports reached $9.16 billion, contributing 2.04% and 8.53% respectively to the total non-oil and gas exports of $107.4 billion in the January-August period, according to the Trade Ministry.

Last year, about 42% of the country’s footwear exports went to the European Union, while around 22.6% went to the US. The US and European markets accounted for 41.44% and 13.81% shares respectively of the nation’s total textile exports in the past year.

Indonesian Textile Association (API) chairman Ade Sudrajat shared a similar concern over the gloomy prospects, saying that textile-makers had cut their export growth targets due to the worldwide economic slowdown. “In the past two years, we have enjoyed growth of around 20 percent. But due to the crisis, we predict exports will only expand in single digits of around 5 percent next year,” he said.

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This year, textile-makers aim to achieve overall export earnings of $13.1 billion, a 16.96 percent rise from last year’s $11.2 billion. Recently, API cut its growth target by around 4 percent to $13.1 billion due to the crisis.

Despite the worsening situation, Ade expected that exports to the US would still grow thanks to the generalized system preferences recently renewed by the US President Barrack Obama administration. Under the scheme, Indonesian goods, including textiles, will pay zero percent import duty upon entering the country, and thus enjoy a more competitive edge there.

“Apart from that, we will encourage exports of our textile products to Brazil, China and Korea,” he said, adding that despite the crisis, Japan would still be one of the key markets for Indonesia’s textile exports with a 60% increase expected this year to $600 million from last year.

According to the Central Statistics Agency, overseas demand for Indonesian goods and commodities rose 37.5% in the first nine months of this year to $152.5 billion from the same period last year, but exports to the ailing US and Europe slowed in September.

Aside from the global economic slowdown, an expected increase in minimum wages next year will also put more pressure on companies.

The administrations of eight provinces home to a number of labor-intensive industries have agreed to raise monthly minimum provincial wages by as much as 17%, potentially harming business prospects. The eight provinces are West Sumatra, Banten, South Kalimantan, Central Kalimantan, Maluku, Southeast Sulawesi, Central Sulawesi and West Papua.

Several other provinces that host labor-intensive industries such as West Java, Central Java, East Java, Jakarta, North Sumatra and Riau Islands have yet to announce their figures.

Ade said the wage increase would significantly affect textile companies, as wages were one of the biggest components of production costs, at between 15 and 20%. Textile manufacturers directly employ around 1.5 million workers while footwear companies employ 2.5 million.

Indonesia, Southeast Asia’s largest economy, has for the past three years enjoyed new investments and orders for textiles, garments and footwear, as many foreign companies have relocated their plants from Vietnam and China following the steep increases in labor costs there. (Linda Yulisman, The Jakarta Post)

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