VZCZCXRO0828
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2759/01 2711015
ZNR UUUUU ZZH
R 281015Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6501
INFO RUCPDOC/USDOC WASHDC 1507
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZS/ASEAN COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 4358

UNCLAS SECTION 01 OF 02 JAKARTA 002759 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/IET AND EB/TPP/ABT 
DEPT PASS USTR BWEISEL; KATZ; CMILLER 
USDOC FOR SBERLINGETTE/4430 
USDOC FOR ITA/OTEXA MARIA D?ANDREA 
 
E.O. 12958: N/A 
TAGS: ECON KTEX ETRD EINV ID
SUBJECT: RESTRICTIONS ON CHINA BOOST TEXTILE EXPORTS 
 
Ref: State 114799 
 
¶1. (SBU) Summary:  Indonesia?s textile and apparel sector 
registered 10% export growth over the last year despite slow- 
moving progress on national investment climate reforms.  Much of 
the growth is accredited to U.S. safeguard measures against 
China as buyers look to Indonesia for geographic diversity.  New 
investment in factories is restrained however by electricity 
shortages, labor rigidities and other investment climate issues. 
Meanwhile cheap imports from China continue to adversely impact 
the domestic market.  End summary. 
 
Benefiting from China + 1 Strategy 
---------------------------------- 
 
¶2.  (U) Indonesia has all the ingredients to be one of the 
winners in the post-Multi Fiber Agreement world.  It has a 
large, well-established, vertically integrated industry, 
including mills, garment factories and laundries.  It has cheap 
and abundant labor, a large domestic market, and a proven 
capacity to produce quality mid to high-end textiles and 
garments for export.  Buyers tell us that mid to high-end U.S. 
and European buyers are looking to Indonesia for geographic 
diversity to hedge against continuation of safeguards imposed on 
China (the ?China plus one? strategy). 
 
Exports Still Going Strong 
-------------------------- 
 
¶3.  (U) Indonesia?s textile and apparel export performance has 
increased steadily over the last five years, despite a 
challenging investment climate.  Textile and garment exports 
reached $9.5 billion in 2006, an increase of 10.5% from $8.6 
billion 2005 year-on-year (YoY).  Meanwhile employment in the 
sector remained stable.  Industry contacts tell us the growth 
reflects the direct benefits of U.S. product specific safeguard 
quotas imposed on China.  Indonesia?s textile exports to the US 
and EU increased by 27% and 3% respectively in 2006.  According 
to API, exports to the U.S. and EU will remain robust as long as 
the safeguard measures imposed on China remain in effect. 
 
Domestic Market Woes 
--------------------- 
 
¶4.  (U) The domestic market for textiles and apparel has not 
fared as well as Indonesia?s export markets.  This is 
particularly true for ready-made garments and fabric.  The 
domestic market continues to suffer from the influx of less 
expensive Chinese products, both legal and illegal.  Small- and 
medium-sized enterprises in the textile and apparel sectors have 
been affected most severely.  Local producers complain they 
simply cannot compete on price with low-end imports.  Ministry 
of Trade data shows that, in spite of a 2002 Textile Decree 
forbidding the resale of textile imports locally, legal imports 
of textiles from China jumped from 340,549 to 675,300 kilograms 
between 2003 and 2004. 
 
Factors Limiting Growth 
----------------------- 
 
¶5.  (U) There is relatively little new investment in the textile 
and apparel sector due to slow progress on domestic investment 
climate issues, which continue to deter investment.  Three 
issues that directly impact sector growth include: financing, 
infrastructure and labor. 
 
      -- (U) Financing: Manufacturers complain of a credit crunch 
caused by Bank Indonesia (BI) risk management guidelines for 
bank lending to sectors with higher than average rates of non- 
performing loans (NPLs).  The textile and garment sectors fall 
into this category, with estimated NPLs of 8-9 percent in 2004. 
Manufacturers want banks to consider lending decisions on a 
company-by-company basis.  With greater access to cheap capital, 
manufacturers say they could upgrade their textile and garment 
machines, which are 10 years old on average.  New machinery in 
turn would improve quality and productivity and also enable 
Indonesia to maintain its competitive edge over China in mid- to 
high-end products. 
 
      -- (U) Infrastructure: Access to reliable and cost- 
effective energy for industrial production remains problematic. 
In October 2005, the state-owned electricity company PLN 
launched a ?dayamax plus? program restricting industrial 
production at peak-hours.  Manufacturers complain of a 
subsequent 15 to 20 percent increase in electricity costs. 
 
JAKARTA 00002759  002 OF 002 
 
 
Manufacturers also see a lack of long-term investment in 
Indonesia's power sector and anticipate that ?rolling blackouts? 
across Java will become even more frequent and disruptive. 
 
      -- (SBU) Labor: The labor law provides on average nine 
months severance to dismissed workers, the highest rate in the 
region.  Coupled with provisions against contract workers and 
outsourcing, the severance pay requirements encourage investors 
to establish factories for less than three years, close them 
down, and then reopen employing new workers.  Manufacturers also 
seek more rational calculations for provincial minimum wage 
rates, with increases linked to inflation.  Although not 
enthused with such reforms, some labor union leaders including 
Helmy Salim, the Secretary General for the Textile, Garment and 
Leather division of SPSI, said they were willing to cooperate 
with the government and industry to encourage greater 
investment. 
 
2006 Data 
--------- 
 
¶6. (U) Both the Ministry of Trade and the Indonesian Textile 
Association (API) record textile data and employment on a yearly 
basis.  However, the publication of their statistic is often 
delayed.  API was unable to provide volume amounts for 2006. 
 
-- Total Textile and Apparel Production: 
 
         Volume (ton)    Value (US$ billion) 
-------------------------------------------- 
2005     4,103,000       14.1 
2006        N/A          14.7 
 
-- Textile and Apparel?s Share of Non-oil/Gas Indonesia 
Imports and Export: (in US$ billion) 
 
         2005   Percent    2006   Percent 
----------------------------------------- 
Export   8.6    12.9       9.5    11.9 
Import   1.6     3.9       1.6     3.8 
 
-- Exports in Textiles and Apparel to the U.S. 
           Value (in US$ billion) 
   2005    3.08 
   2006    3.93 
 
-- Total Manufacturing Employment: 
 
   2005    11,507,000 workers 
   2006    11,394,000 workers 
 
-- Total Textile and Apparel Employment: 
 
   2005    1,841,520 workers 
   2006    1,839,869 workers 
 
HEFFERN