Indonesia is an attractive market for textiles and clothing because of its steady economic growth, as well as the world’s fourth most populated country. Both local and global fashion companies are vying for market share.
Based on data from CNBC Indonesia (2019), the development of the fashion industry can contribute around 18.01% or IDR 116 trillion. In other words, fashion is also a cohort for Indonesia’s economy and its wages regulation and policy significantly affect employment and its GDP for sure. The Creative Economy Agency (BEKRAF) also continues to make efforts to strengthen the ecosystem and encourage growth in this sub-sector.
Textiles, garments, leather products and footwear:
The core problem and opportunities for global fashion companies
However, domestic producers through a hard time due to rising costs as they try to fend off overseas competition, but the technological modernization, improving labor skills, better infrastructure and the relatively low rupiah alter the picture in their favor. The opportunity for global fashion companies to enter into Indonesian textile and clothing businesses is wide open as they can offer machinery, know-how and capital.
Global fashion companies can start tapping the Indonesian market with the right strategies and tactics, one of which is by cooperating with franchise partners in Indonesia. The choice of franchise partner will depend on several factors:
- Interest — genuine interest to collaborate with the company
- Business network and financial muscle — number of stores, POS and mainly influence
- Manufacturing capability — this is due to high import taxes
- Favorable economic policies — influenced by the present-day government (the general election is important for that reason)
Local economic factors such as currency fluctuation, import duties and cultural festivals also play an important role in how businesses are run in Indonesia.
Currency fluctuations are a norm in Indonesia and typically businesses can expect a 5% to 8% variation in a year. In case of changes in the political landscape, turmoil, or change in the United States interest regime, Indonesia is affected directly. For example, changes in the price of oil directly affect businesses since a large part of the government budget goes towards fuel subsidy. This is important to keep in mind since most local distributors will keep a buffer of 5% to 10% in pricing for these exchange fluctuations.
Import duty and taxes when importing into Indonesia
Import duty and taxes are due when importing goods into Indonesia whether by a private individual or a commercial entity. The valuation method is CIF (Cost, Insurance and Freight), which means that the import duty and taxes payable are calculated on the complete shipping value, which includes the cost of the imported goods, the cost of freight, and the cost of insurance. However, the duties of some products can be charged based on a unit of measure. In addition to duty, imports are also subject to sales tax, and in some cases to excise and STLG (Sales Tax on Luxury Goods). Duty rates in Indonesia vary from 0% to 40%, with the average duty rate at 10.89%.
In general imports of foreign clothing brands are levied duties ranging from 30% to 40% and this was substantiated by all the potential partners the global fashion companies have met with. This encourages the need to seek a partner with local manufacturing capabilities.
For further information on duty, taxes, import declaration procedures and import restrictions refer to the Indonesian customs website http://www.beacukai.go.id.
In Indonesia, retailers experience a rise in their sales during three periods, namely the month of Ramadan which is the fasting month before Idul Fitri (Eid Festival), back to school promotions (beginning of the academic year in July) and end the year Christmas and New Year.
The national General Election is also a period where local and international companies with business interests in Indonesia are watchful of. As stated above, most companies will delay decision making until after the General Election results are announced. This is a local business norm as regime changes do affect local politics and businesses drastically. Global fashion companies should be aware of this.
Determining global fashion companies competitors
The two aspects that we focused on to determine global fashion companies competitors are market positioning in terms of the target consumer segment, product offering and price points. Indonesia is a price-sensitive market, similar to India and establishing the right price point for Indonesia will ensure successful market entry; among factors.
We need to perform a price check exercise taking into account brands that compete with global fashion companies in other global markets and have a presence in Indonesia.
It is a well-known fact that Indonesian companies usually do not make commitments closing an election fearing policies that are not favorable with the change of government and with good reason. Indonesia has undergone several of such regime changes where the political and economic landscape witnessed drastic changes.
This is something to keep in mind regarding future expansion to cities outside Greater Jakarta.
The top 5 notable cities are:
- Surabaya (5 million people), the second-largest city and business hub for eastern Indonesia
- Bandung (4 million people), the tourism and education hub 150 km south of Jakarta
- Yogyakarta (2.5 million people), second-largest tourism destination after Bali, second largest education hub and the cultural capital of Java
- Medan (4 million people), the largest city in Sumatra and the business hub for northwestern Indonesia
- Denpasar/Bali (4.5 million people), the most popular Indonesia’s tourist destination as well as the business hub for the lesser Sunda’s island including East Timor
The 6 minor cities to be considered are:
- Pekanbaru (1.5 million people), the capital Riau province, one of the oil cities and a hub for the palm oil plantation industry
- Makassar (2 million people), the largest city in Sulawesi and another trading hub for eastern Indonesia
- Pontianak (1.5 million people), the capital of West Kalimantan and a well-known hub for the palm oil plantation industry
- Palembang (1.5 million people), the capital of South Sumatra Province and largest trading hub in the southern part of Sumatera
- Semarang (2.5 million people), the capital of Central Java where the major industries are located. Most notably known for Kendal Industrial Park, a large industrial park jointly built by Singapore and the Indonesian government
- Balikpapan (1 million people), the oil city in east Kalimantan also supported by large coal and palm oil industry
The cost of inbound logistics is expensive in Indonesia due to poor infrastructure, facilities and government inefficiencies. Piggybacking on a partner with extensive reach across the country will greatly help in time to go to the market.
BRIGHT Indonesia as a solution
In the end, Indonesia’s textile and clothing industry requires good access to funding to meet equipment overhaul, which is something domestic banks are often reluctant to provide or only willing to grant at prohibitively high rates. Global fashion companies can take this opportunity to step into the breach — partnerships with local companies, including joint ventures and private equity investment, can help the Indonesian fashion industry raise its game while affording foreign investors the chance to participate in the leading textile and clothing markets, both for production and sales.
BRIGHT Indonesia provides several services such as comprehensive market research regarding the fashion industry, arranging partnerships in local industry, and creating sales programs based on market research.
Our Market Insight Research, Business Partnership Engagement, and Business Registration and Establishment services that can help you in expanding and developing your business, register and establish your products and company, as well as obtain the work and stay permit in Indonesia (expatriates utilization plan (RPTKA), expatriates utilization permit (IMTA), limited stay permit (KITAS)) easier.
Our strategy consulting services domain focuses on supporting private sector clients with comprehensive and specialize development regarding the company’s needs and also on the public sector for a broader scope . For more information, email to email@example.com.