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Cablegate: Restrictions On China Boost Textile Exports

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

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