Bill Guerin – Indonesia's once-mighty footwear industry is in danger of collapse if urgent measures are not taken to enable it to reassert itself in a market long dominated by China. Buyers are increasingly moving to Vietnam as Indonesian shoemakers lose their competitive edge.
The Indonesian footwear producers' association last week renewed calls for the government to help the industry, warning that in the absence of concrete measures to boost their competitiveness, many shoemakers would fold.
Shoe exports peaked in 1996 at US$2.2 billion before the regional financial crisis. In the first semester of this year, exports declined by 10 percent compared to the same period last year. Exports of brand shoes from January to March this year earned only $350 million, down almost 13 percent on the same period last year.
Djimanto, secretary general of the Indonesian Footwear Association (Aprisindo), highlighted a range of issues that adversely affect the ability of Indonesia to compete with China, Vietnam and Myanmar.
The biggest barrier is price. Rising production costs due to sharp hikes in electricity and fuel costs, high interest rates from the few banks who will lend to producers, and increased labor costs have made Indonesian shoes at least 10 percent more expensive than those of its biggest rivals. Sports shoes, for example, cost $4.60 a pair to produce in Indonesia but only $4 in China and Vietnam. Brand goods fare no better. Nike, the world's largest sports-shoe maker, claims the cost of producing its brand, at $10 a pair, is also much higher than in China and Vietnam.
Nike, Reebok and Adidas do not actually own factories in Indonesia, choosing instead to contract local factories to make their goods, thus making it easier for them to shift production if problems arise. And there has been no shortage of such problems.
Police last week had to fire several warning shots to dispel an estimated 2,500 protesters who were demanding severance pay from PT Doson Indonesia, which claimed its closure in September was a direct result of the ending of its supply contract with Nike. Doson has been a Nike subcontractor for 10 years.
The island of Java is the industrial heartland of Indonesia. With its dense population and advanced infrastructure, Java was well suited as the base for footwear manufacturing area with Bandung, the capital of West Java, the main center. Production gradually shifted nearer to the Jakarta industrial belts through the 1990s, much of it to Tangerang regency.
In those days, Indonesia posed an increasing threat to Taiwanese and Korean shoemakers, some of whom entered into strategic alliances with Indonesian producers or even moved their operations.
Doson was one example of a Korean-owned manufacturer operating from Indonesia. Although Nike ended its contract with Doson, it is still using seven subcontractors in the Tangerang regency alone. These factories together employ 20,646 workers out of a total of an estimated 60,000 for all nine Indonesian shoe plants – even with Nike reducing this year orders by an estimated 40 percent.
Nike works with no less than 47 contract footwear, clothing and equipment contract factories across Indonesia, employing over 120,000 people. However, Indonesia's share of Nike worldwide shoe production has fallen from 38 percent to around 26 percent over since 1996.
In a recent report, Canton, Massachusetts-based Reebok International Ltd, the world's second-largest sports-shoe maker, also said Indonesia will remain the second-biggest recipient of its global shoe investment.
This may have appeared to be good news for the 19,700 workers Reebok employs at three Indonesian factories, but workers claimed that a Reebok move earlier in the year to stop orders from West Java-based manufacturer, PT Primarindo Asia Infrastructure, cost 5,400 jobs.
Industrial-relations problems continue to affect all industries. Workers stand to gain substantial severance pay under a Ministry of Manpower decree that changed the law two years ago. This followed pressure from increasingly militant workers and their unions.
Minister of Manpower and Transmigration Jacob Nuwa Wea, himself a onetime labor activist, issued a decree on October 1 that had the effect of permitting the company to dismiss the workers, although it obliges them to pay the severance pay and any unpaid salaries for September. They should also set up a compensation fund for housing for the laid-off workers.
However, following a suit filed by Doson against the minister's decision, the district court then ordered the company's directors and management to sell their assets so they would have enough money to pay these obligations and ordered a postponement of execution of the decree.
Productivity has also slipped in Indonesia, with factories in China and Vietnam able to turn out three times the number of shoes a day made by their Indonesian counterparts.
Djimanto said at least 100 Indonesian shoemakers had folded in the last three years, and he predicted that the country's footwear exports would decline to $1.4 billion this year, from $1.6 billion last year. All in all, total value of shoes made in Indonesia has dropped by some 25 percent since 1996.
Last year's regional autonomy had a widespread impact on production costs as bureaucrats in individual provinces sought to increase their power and incomes. The incidence of illegal fees and levies being demanded from manufacturers increased exponentially and, of course, contributed to the high cost of production.
Security and legal worries were also partly to blame for foreign buyers shifting to China and Vietnam as they were afraid orders with Indonesian producers might not be delivered. Last year, twelve shoe manufacturers "diversified" their operations to Vietnam. Many Japanese and South Korean firms are also said to be considering voting with their feet.
The chairman of the Indonesian Footwear Association (Aprisindo), Antonius Joenoes Supit, while rejecting analysts' predictions that the country's shoe industry may go belly up within the next five years, agreed it faced a major challenge to stop the relocations to other countries. Supit cited human rights, labor relations, security issues and environmental factors as combining to create an image problem that scared foreign investors.
Nike has stated that it is still committed to producing shoes in Indonesia, and not renewing the Doson contract was one result of their ongoing evaluation to develop a more versatile Indonesian manufacturing base that is compatible with its global footwear strategy.
In June, Reebok canceled orders to one of its subcontractors, Bandung-based PT Primarindo Asia Infrastructure, which then had to retrench 5,400 workers. Reebok was unhappy with the subcontractor and Hugh Hamill, Reebok's vice president for Far East Asia, said several factors contributed to the decision to withdraw from the relationship. "Reebok International found that other factories that produce Reebok shoes in Indonesia perform better than Primarindo," Hamill said.
Declining global demand for shoes, especially in the United States, has caused a slump in orders everywhere and added to the Indonesian woes. Reebok, for example, showed a 2 percent drop in sales in the second quarter this year.
One obvious problem for foreign and local producers alike is the weakness of the rupiah against the dollar and the fact that an estimated 80-90 percent of raw materials need to be imported.
In 1998, international brand shoes made up 93.93 percent of Indonesian shoe exports. There are now signs that Indonesia is fighting back against what is effectively a stranglehold by foreigners as some Indonesian shoe manufacturers may start developing their own brands instead of relying on overseas orders from industry giants. The Ministry of Trade also intends to encourage firms to increase their competitiveness and may offer to help them develop their own brands for international markets.
The government will hold talks with relevant industry bodies in an effort to improve cooperation in the export markets. Ministry spokesman Achdiat Atmawinata said this week: "We could boost our export of non-branded products to the Organization of Islamic Conference member countries or the African market under bilateral cooperation and develop the counter-trade scheme.
"Competition in obtaining orders from world outsourcing producers has become very tight, prompting us to boost the export of non-branded goods," Achdiat added.