Pakistan- Indonesia Garment Industry Comparative Analysis
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 important competitors.
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 this aspect.
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 rates.
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; readily available.
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: These institutions 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.
Hard infrastructure: 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 collaborations.
Licensing and franchising: under this arrangement the foreign brand owner supervises the quality and receives a premium from Indonesian company for the brand.
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: Following are the important factors, which have contributed to the growth of Indonesian Garments Industry:-
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 competitive prices.
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: During 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 seriously.
To upgrade the standards of the existing textile and garments related institutions.
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.