Robust economic growth and rising purchasing power make Indonesia – the world’s fourth most populated country – an attractive market for textiles and clothing. Both local and foreign companies are vying for market share. Rising costs are giving domestic producers a hard time as they try to fend off overseas competition， but technological modernization， improving labour skills， better infrastructure and not least the relatively low rupiah alter the picture in their favour. The need for Indonesian textile and clothing businesses to become more efficient spells opportunities for foreign companies that can offer machinery， knowhow and capital.
　　
Encompassing the production of fabric， apparel and leatherwear， Indonesia’s textile and clothing industry provided some 1.1 million jobs in 2012， according to the National Statistics Agency （BPS）， making it one of the most important elements of the country’s manufacturing sector. It accounted for almost 2% of national GDP and more than 7% of the country’s total exports in 2013. The industry is still concentrated near the capital Jakarta in the western end of Java Island， but central and eastern Java are becoming increasingly important.
　　
Local textile producers depend almost entirely on imported cotton， since domestic farmers are unable to satisfy even 1% of national demand. This makes yarn spinners vulnerable to the fluctuating global prices and has forced a number of small businesses to close up shop， though larger ones are in a stronger position thanks to their greater stockpiling ability and better access to capital. Cotton is sourced from a range of countries – led by Brazil， the US and Australia – to be spun in Indonesia and then either exported as yarn or further processed into cloth and garments. The principle buyers of yarn from Indonesia are China and Japan， while textiles and textile products go mostly to the US， the EU and Japan.
　　
Open for business with the world
　　
Even though most of Indonesia’s several thousand textile businesses sell their goods on the home market only， the lion’s share of Indonesian-made clothes is shipped abroad， with many of the larger companies producing apparel for global brands. China’s importance as a target market is growing. At the same time， China is the main source of textile products coming into Indonesia， followed by South Korea. The process of regional economic integration is set to make it easier for foreign companies to offload their garments on the Indonesian market. Batik textiles are a way for domestic companies to set themselves apart as the “authentic” producers of the traditional Indonesian cloth. However， batik represents but a niche market in the global textile industry. 　　
One of the sector’s key strengths is the rare presence of both an upstream and downstream industry， both of which are well developed. Many of Indonesia’s largest listed textile and garment manufacturers have been active in raising funds through the capital markets for investment into new plants as well as for the acquisition of companies to complement their upstream or downstream activities. Indonesian textiles companies have been quick to align themselves with international industry standards by making the necessary investments to achieve certifications such as ISO 9001 as well as gain recognition for sustainable and environmentally friendly production. This has enabled the market to attract leading global fashion brands by assurances of quality， best practices and quick response times.
　　
Machines and know-how in high demand
　　
Many domestic producers need to modernize their sometimes decades-old equipment with substantial investment. The government supports industry-wide revitalization by providing financial incentives to persuade textile and clothing businesses to invest in new machinery. It also promotes technological cooperation between local and foreign companies and the transfer of know-how.
　　
A number of major Indonesian garment makers， including leading exporters like Sri Rejeki （Sritex）， are boosting their capital expenditure to brace themselves for increasing worldwide competition. This promises attractive sales opportunities for global players that can supply machinery and expertise on sophisticated production techniques to facilitate more value added applications such as for industrial use textiles. The textile companies that lack the funds to invest in themselves， on the other hand， will become natural takeover targets. The drop-off in demand from traditional ex- port markets following the 2008 global financial crisis already saw the demise of weaker players that had failed to reposition themselves in a changed economic landscape. Industry consolidation is bound to intensify as competition gets fiercer.
　　
Funding constraints open doors for foreign investors
　　
The equipment overhaul in Indonesia’s textile and clothing industry requires good access to funding， which is something domestic banks are often reluctant to provide or only willing to grant at prohibitively high rates. This presents an opportunity for foreign companies to step into the breach. Partnerships with local companies， including joint ventures and private equity investment， can help the Indonesian industry raise its game， while affording foreign investors the chance to participate in what could become one of the leading textile and clothing markets， both for production and sales. 　　
Indonesia’s textile industry – Testing times upstream
　　
Indonesia’s textile and garment industry is enjoying growing sales at home （thanks to rising consumer spending） and abroad （thanks at least in part to the weaker rupiah）. Nevertheless， the industry faces some serious challenges amid rising competition in the ASEAN region， which is particularly true for the businesses that supply fibers， yarn and fabric. Indonesia’s upstream textile industry needs to be strengthened with capital， technology and know-how， so that it can continue to provide goods of sufficient quality and quantity to the growing apparel industry. Achieving this poses a challenge for the country and an opportunity for investors.
　　
As increasing wages are prompting China to focus its industrial development on higher-value products and services， Indonesia has successfully positioned itself as an alternative production market for global fashion brands. The government has set its sights on increasing the value of exported textiles and garments to $75 billion USD by 2030 and contributing 5% to global exports， up from less than 2% at present. At the same time， the country is moving up the value chain in garment production， with higher-value products such as suits and trousers registering faster growth than lower value items， such as t-shirts. In order to uphold this trend， it is vital that domestic garment industries can source high-quality textiles at reasonable prices on the local market.
　　
Upstream businesses not pulling their weight
　　
Indonesia is a leading textile manufacturing country. One of the strong points of its industry is the existence of a well-developed upstream and downstream business， which allows for tight vertical integration. Seeking to take advantage of this， major local garment makers have raised capital to acquire assets that would help them streamline their supply chains.
　　
Recently， though， the upstream side of the industry has been struggling to keep up， as reflected in the influx of materials for the apparel industry. Imports of fabric doubled to around 600，000 tonnes from 300，000 in 2008， according to the Indonesian Synthetic Fiber Producers Association （APSyFI）. As downstream businesses source more and more of their input materials from abroad， the domestic upstream industry has been failing to benefit from rising consumer spending according to APSyFI Secretary General Redma Gita Wirawasta. However， domestic raw material producers are entirely capable of supplying the fabric the industry needs. APSyFI has therefore been lobbying for the imposition of anti-dumping duties on yarn imports. 　　
Cost pressure and reliance on imports
　　
While gross output of upstream textile products has grown in recent years， costs have risen even faster. This is putting considerable strain on businesses. Annual investment in fixed capital at large and mediumsized companies （those employing at least 20 people） almost quadrupled from 4 trillion RP in 2008 to 15 trillion RP in 2010， but since then has fallen back by more than 50% to 6.3 trillion RP in 2013. The less than perfect shape of the upstream business also reflects in the industrial production index for the textile industry， which in contrast to most other industries has been on a declining trend since 2010.
　　
The number of large and medium-sized textile businesses has slowly but steadily declined， from 2，450 in 2008 to 2，232 in 2013， pointing to ongoing industry consolidation in the struggle for greater efficiency. Trade data shows that Indonesia's upstream textile business is becoming increasingly dependent on imports， while exports grew only moderately over the past five years.
　　
In particular， Indonesian spinners rely on the world market for almost all of their raw cotton， because domestic harvests of cotton are negligible. This makes yarn spinners vulnerable to fluctuating global prices and has forced a number of small businesses to close up shop， though larger ones are in a stronger position thanks to their greater stockpiling ability and better access to capital. Raw cotton is sourced from a range of countries – led by the US， Brazil and Australia – to be spun in Indonesia and then either exported as yarn or further processed into fabric and garments.
　　
Upstream producers struggling with foreign competition
　　
While exports of cotton yarn grew by almost 80% between 2009 and 2013 to 190，228 tonnes （Comtrade）， cotton-based woven fabrics made little headway and some types even saw decreasing shipments. Imports of both yarn and fabrics increased. As for manmade fibre products， imports of yarn and woven fabric outpaced exports over the past five years， though their absolute volume remains considerably smaller. Imports of manmade filaments and staple fibers， meanwhile， have seen particularly fast growth， as the garment industry requires growing amounts.
　　
In conclusion， the fast growth in imported yarn and fabrics （both natural and manmade） suggests that Indonesia’s upstream textile industry is struggling to fend off foreign competition. On the back of the growing dependence on imported raw materials and early-stage intermediate goods， the devaluation of the Rupiah – while a boon for garment exporters – only creates more headaches upstream. 　　
Worryingly for local producers， it is particularly higher-value products where Indonesia is falling behind. In 2013， for instance， the import value of impregnated， coated or laminated textile fabrics was more than five times as high as exports， after more than doubling since 2009， while exports of the same product class stagnated.
　　
Staying on top in a competitive market
　　
In 2016， Indonesia will be part of a single market extending across the ASEAN region， known as the ASEAN Economic Community （AEC）. Unless the country’s upstream textile industry manages to grow more efficient and at the same time move up the value chain to produce more high-cost items， local spinning mills and other upstream manufacturers will be hardpressed to take on the ever stronger competition from low-cost producer countries such as Vietnam.
　　
Numerous factors have been blamed for the lack of competitiveness in Indonesia’s upstream textile industry： first and foremost the use of inefficient technology， but also inadequate human resources. In a wider assessment， the country’s underdeveloped transportation and power infrastructure and rising energy costs also play a role. Labour costs， while one of the biggest worries for garment producers， are of lesser concern for the capital intensive upstream business. Electricity bills， however， account for around 30% of total production costs. This underlines the need for greater capital expenditure on energy efficient equipment.
　　
Investment and export opportunities
　　
Investment incentives by the government to help textile companies upgrade their machinery have produced insufficient results so far. The same is true for government-sponsored training programmes and industry clusters aimed at generating local know-how and fostering integration. The upstream industry’s lack of competitiveness jeopardises Indonesia’s hopes of taking over much of the manufacturing business that China’s maturing economy is relinquishing. And with government measures showing little effect， those hopes now rest primarily with the private sector – including foreign investors. Opportunities also exist for exporters of equipment such as spinning and weaving machinery as well as in consulting and staff training.
　　
The most convincing argument for upstream investment in Indonesia’s textile industry is the healthy and growing downstream business， with garment makers capitalizing on rising domestic and foreign demand. The AEC promises to further open the doors to neighbouring markets for producers based in Southeast Asia’s biggest economy. In addition， the country boasts a large and young labour force and is widely expected to see accelerated progress on tackling its infrastructure bottlenecks， both of which add to its attraction as a global textile production center.