Country Report Anna Suhr FASM 420 Global Sourcing Spring 2017
Table of Contents 01 Country Overview 02 History & Country Traits 03 Country Stability 04 STEEP Analysis 05 State of the Apparel Industry 06 Trade Agreements
07 Transportation 08 Suppliers 09 Lead Time of Production 10 Business Practices 11 Risks and Benefits 12 References
Country Overview
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This report is conducted for Savannah College of Art and Design’s course, Global Sourcing. In this country report, the advantages and disadvantages of trade with Indonesia will be evaluated through extensive research including various analyses of the country’s trade, stability, and business practices. Indonesia proposes an incredible opportunity for international future investment, but certain risks raise questions and concern for companies contemplating this venture.
History & Country Traits
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Location Southeast Asia and Oceania Government Republic, President Joko Widodo Population and Size 263.51 million people 735,358 square miles Ethnicities Javanese 40.1% and Sundanese 15.5% with 300+ other distinct native groups Religion World’s largest Muslim population Muslims 87.2%, Protestants 7.0%, Roman Catholics 2.9%, and Hindus 1.7% Language and Education Indonesian with 742+ other different languages and dialects $34.16 billion education budget 93.9% literacy rate Gender and Age 101.42 males per 100 females Median age of 29.9 years
Industries Petroleum and natural gas, textiles and apparel, mining, cement, footwear, plywood, rubber, chemical fertilizers, and tourism Trade Exports: $192.28 billion, 20.19% of GDP Imports: $193.36 billion, 20.30% of GDP Economic Breakdown GDP: $940.953 billion GDP average growth rate: 4.79% Budget deficit: 2.59% of GDP Unemployment rate: 5.99% Exchange: 1 IDR (Indonesian rupiah) = 0.000075 USD
Country Stability
03 | Political Stability
Relations with the United States
As Joko Widodo took office in October of 2014, the country experienced a shift in international relations. The President’s plans align with a more unilateral structure with little international focus, both in trade and other foreign policy. The shift allows Indonesia to become stronger as an independent country while also damaging external relations. Seeking new trade ventures is not on the list of priorities for Widodo.
Traditionally, the United States and Indonesia have had strong ties as both countries have favoring governments and recognize the benefits in retaining a positive relationship. 62% of Indonesia’s people view Americans favorably. This stems from a history of reliability as the United States assisted in Indonesia earning independence in the 1940s and continues programs under the United States Agency for International Development (USAID). There is a common goal of peace and stability within each of their country’s objectives.
Socio-Economic Stability Indonesia has made significant progress within the last decade to reduce the poverty levels and inequality through government programs. By growing more independent, the country has established a sense of healthy competition between regions to produce more and become more efficient. The technological adaption and innovation in Indonesia has aided in this economic boost of production. Although its technology is on the rise, the country is still far behind on a global scale.
@america @america is an American initiative that reaches young Indonesians by providing a platform for the global youth to express their thoughts and feelings about America through a technological venture. Screen-filled locations excite young Indonesians and allow them to express themselves in a new way that they would typically not have access to.
STEEP Analysis
04 | Social
Technological
Indonesia is making significant changes and implementing programs to raise their standard of living. The poverty level has been reduced from 23.4% in 1999 to 11.3% for the period of 1999–2014. Cash transfer programs and lowering poverty rates fall under the country’s strengths in the social realm while poor social development indicators and inter-regional disparity are some of its weaknesses. Indonesia is ranked 110th out of 188 countries in the 2015 Human Development Index published by the United Nations. The disparity derives from the governments efforts to decentralize between 2001 and 2005. With the rebuilding of a new social system, there is opportunity to implement a new universal social security system. This program was implemented in 2014 and will provide a universal healthcare system by 2019. The largest future risk comes from religious intolerance. Politics and religion often mix creating unrest for religious minorities and lead to violence among religious groups.
Indonesia was ranked 41st on the Global Competitiveness Index in 2016–17 out of 138 economies. This is a 14 rank improvement from its previous evaluation. Technology exports still sit at an incredible low of 6.97% largely due to poor R&D spending. Contrary to other areas of technology, the country’s aviation industry is expected to boom in the near future and become one of the country’s top future prospects for growth. The greatest risk facing technological growth comes from software piracy with a commercial value of $1,445 million in illegal pirated software. Economic The economic strengths include prudent fiscal management with its current fiscal cushion allowing spending in areas, such as education, poverty alleviation, health and infrastructure. Due to price decline of exports and fluctuating currency, there is still slowing economic growth. The World Bank reported that the country has declined more than 1%
of additional GDP growth per year due to underinvestment in infrastructure, primarily in transportation. Another large weakness to the growth of Indonesia’s economy is problems in funding for emerging companies like startups. The undeveloped financial market fails to encourage growth or entrepreneurship among young business minds. The expansion and repositioning of American giants, such as General Motors, CocaCola, and Chevron, is the key to future growth for Indonesia’s economy as they explore new investment in diverse areas. An Ernst and Young study survey revealed that the 35 largest US-based investors in Indonesia plan to invest around $61 billion in the next 3–5 years. Environmental Indonesia is rich in biodiversity being one of the top five in plant diversity with falling pollution levels. Deforestation appears to be the largest concern with a gradually increasing rate of 2 million hectares per year. The lowland tropical forests, its greatest timber resource, appears to be the most at
risk. As the leading producer in palm oil, its production is attributing to forest clearings, river pollution, and increasing pests. The country has implemented a ten year plan to conserve its environment and climate. Future risks to environmental security include highly distorted energy prices and lack of innovation in energy sources. Political The transition to democracy has strengthened the country’s government and its defense cooperation policy. Corruption and increasing distance with ASEAN allies appear to be the largest threats to the otherwise positive growth of the new political system. Its future prospects of improving ties with India and Singapore are attributed to the new political power of Joko Widodo, as well as a rebuilding of a previously souring relationship with Australia. The counter-terrorism unit is faced with terrorism threats and backlash for releasing of over 100 convicted criminals which strongly hinders the long-term stability and safety of the government.
State of the Apparel Industry
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Overview
Labor
As Indonesia strengthens its presence in the global marketplace, the garment industry will be its area for the most potential growth. With fluctuating cost of imported fibers, rising cost of labor, relocation of companies and factories, and growing global competition, Indonesia finds itself in the difficult, early stages of a manufacturing revolution. Despite this phase of difficulty, Indonesia provides great opportunity for investment for foreign investors.
Indonesia’s garment and textile industry provide nearly 1.1 million jobs as states by the National Statistics Agency (BPS). The companies are under extreme pressures as Chinese products lower in cost for comparable quality. More than 60 textile companies have expressed need to move away from the capital to areas of cheaper labor. With minimum wage on the rise, companies worry about cost and consider leaving Indonesia altogether. Protests and rallies halted labor multiple times in 2012 giving companies more reason to worry. The HSBC survey forecasts that in 2030, Indonesia’s biggest export sector will be textiles due to low cost labor oddly enough. As the global competition strengthens, Indonesian companies are looking to make investments in technology to stay on the cutting edge of the textile and garment industry. Domestic banks are reluctant to provide the funding needed, but this proposes a good opportunity for foreign investors to participate in a growing industry.
Imports and Exports Textile exports accounted for almost 2% of the national GDP and almost 2% of the total exports in Indonesia. With concentration near its western capital, Jakarta, there is focus on expanding to the central and eastern areas. Imported cotton, mostly from Brazil, the United States, and Australia, fuels the textile production as nationally grown cotton only provides 1% of the demand. This leads to lack of control on cost with fluctuating pricing on resources. With little fiber production, the primary textile exports are yarns, cloth, and garments. China and Japan are the main importers of Indonesian yarn while the United States, the EU, and Japan are the biggest textile and textile product importers. China is emerging as a target market while also exporting the most textile goods and products to Indonesia. Strengths Although it is a niche market, Indonesia is set apart as being the authentic producers of the traditional Indonesian textile, Batik cloth. The industry has a consistent presence of upstream and downstream in the industry, raising funds to build new plants and acquisition of plants into companies.
Minimum Wage 3.35 IDR million / month Top Apparel Categories Woven clothing, underwear, and knitted or crocheted clothing Producing apparel for more than 170 foreign brands Garment Industry 1.3 million employees 2,980 factories % of GDP: 1.56% % of export: 6% Value garment export: 12.1 billion USD % of world garment market: 2.9%
Trade Agreements
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U.S.-ASEAN Trade and Investment Arrangement (TIFA) Concluding agreements in 2006, the United States and the Association of Southeast Asian Nations work closely to build upon U.S.-ASEAN trade and investment. ASEAN countries include Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam. TIFA represents a trade agreement to establish order for increasing trade and resolving issues between participating countries. These agreements are a crucial step in the progression towards Free Trade. In 2009, the United States proposed initiatives in order to reach a new level of efficiency and production through focusing on areas, such as trade facilitation, logistics, digital economy, trade financing, and trade’s effect on the environment. Traded goods and services between the U.S. and Indonesia total $29 billion with $10 billion in exports and $18 billion in imports. The trade deficit of U.S. goods and services with Indonesia totals $8 billion. The United States foreign direct investment (FDI) in Indonesia is $13.5 billion and focuses primarily on the mining industry.
Transportation
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Sea Port of Tanjung Priok in Tanjung Priok, North Jakarta to Java (factories) Transportation to Los Angeles • $947 / 40’ full shipping container • 7,197.19 miles • 1 month 2 hours Transportation to Savannah • $5852 / 40’ full shipping container • 9,291.31 miles • 1 month 6 days Shipping Companies • HAPAG-LLOYD • CMA CGM • Wanhai Air • 50 minutes from Java (factories) to port • Over 230 airports among the 13,466 islands of the Republic of Indonesia • Soekarno–Hatta International Airport in Greater Jakarta region • Ngurah Rai International Airport south of Denpasar • Juanda International Airport in greater Surabaya metropolitan area Land • 9 hours 55 minutes from Java to port • Main highways: AH2 and AH25 highways • 213,649 km of paved highways • 154,711 km of unpaved highways • Majority of railways are located in Java
Suppliers
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Sri Rejeki (Sritex) Fashion / corporate / industry clothing Location: Central Java (62-271) 593188 www.sritex.co.id Companies: J. C. Penney, Guess, H&M, Walmart, and Sears Mitraguna Sahabatutam Menswear / womenswear / childrenswear Location: Jakarta (6221) 5841889 mitrguna@indonet.net.id Companies: Walmart USA and Canada, K-Mart, and Dollar General Ei Lee Garment Apparel / knitwear / childrenswear Location: Jakarta 62 (6221) 7824677 Companies: Star Ride Kids Inc, Pnc Bank Na Trade, and Kidz Concepts Llc, and Leonard A Feinberg Inc
Lead Time of Production
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Cost to import (per container) $383 USD Lead time to import 26 days Cost to export (per container) $254 USD Lead time to export 17 days According to the World Bank, Indonesia’s lead time to export is approximately 17 days on average. The process can be accelerated for additional cost. Many factors, such as social, environmental, legal, political, and economical, subject Indonesian manufacturing to lead time issues. The recent strikes over minimum wage debate caused factories to grind to a halt and delayed many orders. Also, the dramatic climate changes propose risk in manufacturing dependability. The increase in temperature and decrease in precipitation hinders the business of resources that were once available. The rising of sea levels and floods could wash away homes, factories, and materials while injuring workers. The heat wave has been a major concern for human health. The limited clean water and extreme heat are high threats for workers.
Recently, Indonesia amended the 2014 ban on unprocessed mineral exports causing shift in the mining manufacturing sector. This legal shift causes a ripple effect for other manufacturing sectors legally, environmentally, and economically. The export of concentrates of copper, zinc, lead, manganese and iron offer major financial opportunity while damaging other areas. The changing of political power and its effects on international relations creates change in an already existing model. Losing international ties and failing to strengthen global relationships isolates Indonesia’s manufacturing and increases lead time as the country will act more independently. The factories deciding to move away from the country’s capital, Java, is another shift that will cause a disruption in the manufacturing process. By moving to more rural areas, the factories are distancing themselves from major highways and easy access to resources and transportation. Building new, systematic routes will be crucial to maintain efficiency.
Business Practices
10 | Etiquette
The key to blending in is smiling and being humble. As a conservative country, it is important to treat everywhere, inside and outside of the home, like you are a guest. In bigger cities, locals are accustomed to tourists coming and going, but in smaller villages, tourists create a lot of intrigue. Do not call attention to yourself by wearing flashy or skimpy clothing. Indonesians are especially nice and welcoming people, and it is crucial that foreigners are equally as polite. When walking down the street and someone is working along side the road, the passerby should ask, “boleh?” meaning “May I?” before continuing down the street. The same is true for taking photographs of locals or their property. If welcomed into their home, it is important to bring a small gift as a sign of gratitude. Key practices to remember: • Do not use your left hand for anything. • Remove your shoes when inside • Never reveal the sole of your foot to anyone • Use your right thumb when pointing • Bend a little when greeting someone older Culture Equanimity is the overwhelming theme for Indonesian culture. Conflict is not resolved or conducted in public, and people hold in grudges or outbursts until they are in privacy. It is crucial to not embarrass someone by
raising your voice and directing a targeted comment towards another individual. The keeping of the peace derives from Eastern religious norms that have trickled into the backbone of their culture. With religion being a large part of Indonesian culture, one must understand and respect religious practices regardless of one’s individual views or beliefs. Negotiation Business cards are to be respected. When receiving a business card, read both sides before putting it away. When giving a business card, offer it with two hands or the right hand. Business attire is conservative. Communication can be difficult as Indonesians tend to speak softly and not say exactly what they mean. It is important to read between the lines and take note of tone and body language. Generally, Indonesians will say what they think the other person wants to hear and maintain a polite attitude no matter their emotions. If someone begins to act cold or angry, it is a disastrous problem. Business meetings usually involve more small talk and chatter than business. Businessmen often enter the room according to their rank of authority. Be prepared to be patient because every business matter and decision is not taken and is considered for some time before moving forward. There is a common belief that everything has its time and place so it is best to avoid pressuring or giving hard deadlines.
Risks & Benefits
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Risks Conducting business in Indonesia presents many risks. The new political environment of independence with a global interest should worry foreign investments. As it comes a more selfsufficient nation, there is a threat to international business as globalization is the key to manufacturing in this day and age. The repositioning of factories and restructuring of the national infrastructure will prevent immediate profits even though these changes are crucial to the longevity of the country’s manufacturing. With the slow business practices, there will be difficult and indirect communication for the duration of these structural changes. Benefits Although these changes are viewed as negatives for conducting business in Indonesia, there will be long term success by manufacturing in this country. By investing now and being patient with the results, there is an incredible opportunity to be a part of a very profitable future. The intimate nature and relationshipminded business in Indonesia creates a platform of strong international ties despite the viewpoint of the political power. Conclusion In conclusion, Indonesia is a solid foundation for future investment and business relationships. With a strategic location, growing workforce, strong transportation, and respectful cultural environment, this nation could be a key player in the future of global manufacturing and outsourcing.
References
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