This survey has been undertaken on the request of the Small and Medium
Enterprise Development Authority (SMEDA) in Pakistan. The objective of the survey is to
look into Indonesian garments Industry, evaluate the variables determining its
international competitiveness and recommend policy proposals / strategies to Pakistan's
public and private sectors. The format of this report is different from our earlier
reports on sugar, fresh fruit and vegetables, surgical instruments, tobacco and autoparts.
Those reports were focused on market development strategies. The present report on
garments is more about market intelligence i.e to provide an insight on one of our
Introduction to international trading in garments: International
trading in garments have undergoing substantial changes in recent years. Traditionally,
developing countries were suppliers of raw materials like Cotton and Silk to developed
countries and the factories in developed countries used to make fabrics and garments for
their home market as well as for export.
Due to labour intensive nature of the Industry and high labour costs,
during last thirty years the pattern of international trading in garments has changed. In
developed nations, the firms could not sustain the competitive pressure from imports and
had to resort to tariff and non-tariff barriers to protect their domestic industry. Later
on, the garments manufacturers in developed countries had to invest abroad for overseas
production to serve their home markets. Indonesia has benefited a lot from this phenomenon
of overseas production by foreign firms through joint ventures. Under WTO legal framework,
the dynamics of garments industry will undergo further substantial changes. As per WTO
agreement on textiles and clothing (ATC) the quota restrictions will be phased out. It
will create tremendous growth opportunities for developing countries. To be precise,
garments in developed countries is a dying industry. This death has been delayed by
quantitative restrictions on imports imposed by most developed countries where labour cost
are much higher.
Introduction to Indonesian garments industry: Indonesia has a
very competitive, diversified garments industry which is, capable of supplying garments to
niche market, as well as to the lowest segments at very competitive prices. Overall, the
Indonesian garments Industry has strong fundamentals. Due to its dependence on export and
strong fundamentals, the Industry survived the economic crisis relatively unscathed. The
driving force behind Indonesian Garment Industry are the Indigenous ethnic Chinese
entrepreneurs and foreign firms from countries like Japan, US, EU, and Taiwan. To avoid
the rising labour cost and quota restrictions in their own countries a lot of expansion by
the Singaporean, Korean, Hong Kong and Malaysian firms was done in Indonesia, particularly
in Indonesian Duty Free Zones. The Indonesian garments Industry consist of 900 enterprises
in the organized sector.
Labour cost: due to labour intensive nature of the garments
industry, labor costs are very critical for its international competitiveness. In
Indonesia the standard labour costs in garments industry are US $30 per worker per month
with free lunch, and one-month's bonus per year. The supervisors are paid US$ 60 per
month. The overtime rates are as follows:
For the first hour overtime rate is 25% of the daily wage.
For two hours the rate is 50% of daily wage.
For three hours and on it is 100% of daily wage.
The salaries structure of the foreign Joint Venture companies is
different. The important joint venture firms pay biweekly on piece rates basis. Their
average monthly salary is about US$60. Indonesian labour in garments industry is more
disciplined and skilled than in Pakistan. Labour strikes are very rare. During last 10
years an average of one or two days per year have been lost in labour or other strikes.
However, with democracy and economic crisis the tendency of strikes has increased and
overall labour productivity has suffered.
Many of the large Indonesian firms hire expatriate production managers.
The expatriate manager's salary ranges from US $ 3000 to 7000 with car, furnished house,
free business class air tickets, medical and educational allowances, etc.
Quality of human resources: Indonesian labour in garments
industry is hard working, disciplined and relatively more skilled than in Pakistan. In the
managerial cadre, Pakistan may have an edge. Indonesian managers are not very aggressive
in terms of initiative, innovation and creativity. The reasons may be the state controlled
education system in Indonesia.. There is relative lack of good quality private educational
institutions to produce top quality managers.
The overall entrepreneurial flair of society, except the ethnic Chinese
minority is also comparatively favourable in Pakistan. Pakistan has definite advantage in
Labor productivity: Labour productivity in garments industry
varies from company to company and product to product. For example for light ladies
jackets, productivity was 14 jackets per worker per day. In another factory for the polo
shirts, daily out put per worker as 16 shirts per day.
Besides labour, the following costs are also important in influencing
Indonesia's international competitiveness.
Input costs: Indonesian garments manufacturers get most of their
basic inputs and materials, at very competitive prices. The only serious competitive
disadvantage of Indonesia Garments Industry is their almost total dependence on imported
cotton and cotton related inputs. Although on imported raw materials, full duty draw back
is allowed for export, however due to the freight and transaction costs the Indonesian
Garments manufacture buy cotton related inputs and material at higher prices as compared
to their competitors. If Indonesia had its own cotton resources, it would have been the
most competitive economy for garments industry in the world.
Cost of capital: During last two decades both local and foreign
capital was available. The foreign capital in US$ had annual mark up of 6 to 8% while
Indonesian rupiah loan mark up was 13 to 15%. The average inflation rate was 9%. Due to
economic and political crisis during 1998, the Indonesia economic fundamentals got
disturbed, i.e. inflation during 1998 was 77% average mark-up rate was 35%, currency was
highly volatile. However, the recovery seems to be underway and the G.D.P. growth
predictions for the year 1999-2000 is 2 to 4% with 13% inflation and 15% bank mark up
Polyester Staple Fiber costs US$ 0.62 per Kg
Dyes and Chemicals: Wide varieties of local and imported dyes and
Chemicals are available.
Accessories: Wide varieties of garment accessories like buttons, zips;
Petrol per liter US$ 0.133
Diesel oil US$ 0.08 per liter
Electricity Cost per unit.
Small Household US$ 0.06
Big household US$ 0.16
Small business US$ 0.10
Big business US$ 0.09
Infrastructure is very important variable influencing the country's
international competitiveness. Following are the important infrastructure.
Telecommunication Services: Indonesia Telecom is well connected with
world markets. The rates are as follows:
Local call charges US$ 0.023 per call of three minutes.
Inter city US$ 0.28 per minute (average).
International rates at peak hours are as follows:
Europe US$ 1.42 per minute
USA US$ 1.11 per minute
Japan US$ 1.25 per minute
Market infrastructure: The networking of manufacturers, local
agents, exporters, wholesalers, suppliers of accessories and international buyers is
comparatively more developed than Pakistan.
Banking insurance, customs clearing agents:
are at par with Pakistan in cost and efficiency.
Customs department: Indonesian custom department goods clearing
practices may be less efficient. An average consignments are cleared in 48 hours. Duty
drawback claims takes 3 to 4 months to be settled.
Roads, Railways, seaports, airports,
shipping services in Indonesia are more developed and efficient than Pakistan.
Incentives for Export: All imported raw-materials which are used
as input for exported materials are exempt from duties, Value added tax (VAT) and all
other local taxes. The duty draw backs claims are normally settled with custom department
in three to four months time. Besides these incentives in Indonesia there are 7 bonded
zones which are entitled to the following Incentives:-
i. Exemption from import duty import surcharge, excise, income tax of
Article 22, Value Added Tax and Sales Tax on Luxury Goods on the importation of capital
goods and equipment including raw materials for the production process.
ii. Allowed to divert their products amounting to 1/4 of their export
(in terms of volume) to the Indonesian customs area, through normal import procedure
including payment of customs duties.
iii. Allowed to sell scrap or waste to Indonesian customs area upto the
highest tolerance of 5% of the amount of the materials used in the production process.
iv. Allowed to lend their own machinery and equipments to their
subcontractors located outside bonded zones for no longer than two years in order to
further process their own products.
v. The exemption of Value Added Tax and Sales Tax on Luxury Goods on
the delivery of products for further processing from bonded zones to their subcontractors
outside the bonded zones or the other way round as well as among companies in these areas.
Role of foreign firms
Modes of foreign collaboration: The striking difference between
Indonesia and Pakistan garments Industry is the large scale presence of foreign firms in
Indonesia in textile and garments. There are 170 foreign firms engaged in garments
manufacturing in Indonesia. However, most firms were reluctant to talk about the structure
of their joint venture with Indonesian firms. Following are the common modes of foreign
Licensing and franchising:
under this arrangement the foreign
brand owner supervises the quality and receives a premium from Indonesian company for the
Long term contractual joint venture: Under this arrangement, the
buyers and sellers have collaboration in production and marketing. Due to the ever
changing nature of fashion garments the manufacturers are focused on the production while
their buyer manages the fashion forecasting and directs production department.
100% foreign owned manufacturing: Firms from Japan, Korea,
Singapore have through foreign direct investment built their own factories.
Joint manufacturing with Indonesian company: Prestigious foreign
brands like Nike, have joint ventures with Indonesian companies. Parties did not like to
disclose the structure of joint venture.
Agents: In Indonesia the foreign and local agents have very
close relationships. Many foreign buyers have their own offices in Indonesia. The
Indonesian SMEs normally get export orders from foreign and local agents based here.
Indonesia has developed garments related soft infrastructure. The
manufacturers normally contact agents in Jakarta for their exports. In interviews, some of
the small and medium enterprises pointed out that they don't have any marketing department
and export 100% of their production through agent at 3% indenting commission.
Development of its own brands: Besides foreign brands Indonesia
is on the way to develop its own strong indigenous brands. Some of these brands are
getting recognition in Indonesia and are very competitive in quality and price with global
brands; They have also targeted South East Asia Middle East and Russia. Although global
brand building is a long process requiring great patience and persistent efforts, but
Indonesian firms have designs for global brand building. At present, however, they are
concentrating on regional brand building.
Critical success factors of Indonesian garment industry:
are the important factors, which have contributed to the growth of Indonesian Garments
i. Cheap, disciplined and relatively skilful labour, particularly the
women workers and entrepreneurs who dominate the garments industry.
ii Availability of a wide variety of fabrics and garment accessories at
iii. Due to geographic proximity with Singapore, Malaysia, Korea, Hong
Kong, Japan, it was easy for foreign firms to expand to Indonesia rather than to go to
Pakistan due to distances and cultural factor.
iv. The ethnic Chinese minority in Indonesia who are very resourceful
and hard working run 90% of the Indonesian garments industry.
v. Political Stability anal consistent investment policies: The
investment policies particularly the incentives for export processing zone have not been
changed during the last twenty years.
vi. The foreign direct investment in textile garments industry in
diverse products, ranging from simple standardized products to high fashion garments.
Product wise Competitive Analysis of Pakistan and indonesia:
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. Pakistan may not be able to compete with Indonesia in high fashion garments
under free market mechanism.
Children's garments: Indonesian children's garments industry is
very competitive. This industry does not require the sophisticated skills as high fashion
garments. Indonesia has outperformed Pakistan particularly in colours, designs, varieties
and costs. On the basis of input materials Pakistan has greater possibility to catch up
with Indonesia in children's garments.
Knitwar: Indonesia is almost 100% dependent on import of cotton.
Due to Indonesian dependence on imported cotton, Pakistan has a competitive advantage over
Indonesia in cotton knitwear. However, widespread presence of foreign brands in Indonesia
gives it an edge in high quality branded knitwear. Pakistan may compete in lower and
medium segments of the international market. Quality conscious enterprises in Pakistan
have a better chance to develop their own domestic and regional brands in cotton knitwear.
However it will require persistent efforts and minimum five to ten years time to develop
its own brand in target markets.
Comparison of Indonesia and Pakistan garments export:
1997-98, Pakistan's total garments and knitwear export was US$ 1.35 billion, while
Indonesian export was US$ 3.39 billion. In case of Pakistan, US$ 703 million was export of
knitwear. Although separate statistics on Indonesia knitwear Export are not available,
outerwear garments are the dominant export product.
Table No1: Garment exports of Indonesia and Pakistan to various
countries in 1997-98 in million dollars
Country Indonesian Exports Pakistani Exports
USA 873.13 718.44
Germany 181.50 156.61
England 155.30 118.61
France 61.95 71.95
Canada 33.50 50.70
Japan 155.97 8.86
Australia 35.70 5.15
Malaysia 28.69 0.52
Hong Kong 11.08 1.54
Taiwan 7.49 0.31
South Korea 5.22 0.31
China 0.782 -
Thailand 0.709 -
United Arab Emirates 148.29 29.45
Saudi Arabia 122.64 23.07
Kuwait 9.54 3.45
South Africa 3.200 1.20
Algeria 0.338 -
Other African Countries 92.83 -
A moot point of serious concern is that in textile quota countries
Pakistan has comparatively better performance than in non-quota countries like Japan,
Australia, UAE, Saudi Arabia, etc. In statistical terms in quota markets, Indonesian
export to US exceed Pakistan by 21.5% while in Non-quota markets, like Japan, Australia
and UAE, Indonesian exports exceed Pakistan by 1660%, 593.4% and 43.86% respectively. This
may mean that with phasing out of quota restrictions under WTO framework, Pakistan may
lose some of its market share to Indonesia. Under such circumstances, Pakistan may need to
consider taking a less aggressive stand in phasing out textile quotas in those categories
where its industry is still not geared to compete.
Conclusion: Without any doubt Indonesia is one of the most
competitive economies for garments manufacturing, and will give Pakistan very tough time
in international garments trading. Although the country's overall international
competitiveness (as per world economic forum report) lies at serial number 53, but for
garments industry its international competitiveness is among the first three i.e after
China and Thailand. Indonesia is important location for garment manufacturers. Indonesian
manufacturers are planning expansion after the quotas are phased out.
Indonesia will be Pakistan's tough competitor in each segment, whether
low quality, medium or the up market segment. Pakistan has better prospects to compete in
standardized garments which require very limited use of skills in manufacturing like Polo
Shirts, Jeans, Pants Sports wear or other casual wears. In high fashion garments Indonesia
will be a very tough competitor.
Pakistan's major problem in making its garments industry
internationally competitive lies in skills. We might have individual excellence in
designing, but overall our industry lacks collective competence. For building collective
competence, we need to generate competitive rivalries in our private sectors both at
national and at international levels. The domestic rivalries will stretch the skills of
the society and give them better shape for international competition. For that stretching
of skills, the government may work as a catalyst for generating the dynamics for
competitive environment. There is need for more competitions in textile designing,
modeling, regular fashion shows in our major cities and provincial capitals like Karachi,
Lahore, Islamabad, Peshawar, Quetta, Faisalahad, Hyderabad and Multan, etc. Medals as well
as cash awards for those competitions may be given so that the entrepreneurs take them
To upgrade the standards of the existing textile and garments related
If Pakistan wishes to be a serious player in international garments
industry, it has to upgrade its products and diversify into fashion garments. It has to
nurture its own talents and also bring in world class companies to manufacture for export.
It is a pity that despite cheap labour and cotton related input materials we could not
attract foreign firms to invest in garment industry in Pakistan. Inconsistent policies,
macro-economic instability, weak infrastructure, bureaucratic redtapism, and low skills
level are some of the erases for our dismal performance in attracting foreign direct
investments (FDI) in garments industry.