Thomas Leonides Written Essay Assignment Essay

Indonesia’s Textile Industry

Economics for Managers

Professor Ben Freyens

Name: Thomas Leonides

Nationality: Indonesia

Student ID: U3196011

Word Count: 1126 words

Introduction of Indonesia

Indonesia is an island country, with more than seventeen thousand islands. Its population in 2014 was 253 million people. Its labor force was 120 million people, where 38.9% of it is in Agricultural Sector, 13.2% of it in Industrial Sector, and 47.9% of it in Services Sector. The Gross Domestic Product (GDP) in 2013 was $867,500 million, growing 5.3% from 2012.

Textile Industry Overview

Indonesia is ranked among the top ten largest textile producing countries.

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From long time ago, the textile industry has played a major role in contributing to Indonesia’s economy. Being a major contributor, it creates a large job opportunities for the local workers. Indonesia’s government aims to increase its nation’s value of contribution to the world to 5% by the year 2030.

The Structure in the Industry

There are four basic types of Market Structures. Firstly, Perfect Competition. Perfect Competition is where a large number of small firms compete against each other.

There is not a firm that have a significant market power. It also produces and sells completely identical goods. Secondly, Monopolistic Competition. Monopolistic Competition is similar to Perfect Competition, but the firms produces and sells similar but slightly differentiated products. Thirdly, Oligopolistic Competition. The market structure of oligopolistic competition is dominated only by small number of firms, typically consists around 3 to 5 dominant firms. Lastly, Monopoly Competition. Monopoly Competition refers to a market structure where only one single firm controls the entire market.

In Indonesia, there is an association called Textile Association of Indonesia. The members of the association consists of 5 categories, which are Garment with 23 firms, Spinning with 19 firms, Weaving with 10 firms, Accessories with 1 firm, and Trading with 10 firms. With a total of 63 firms in one association, we can assume that the market structure of the textile industry in Indonesia is Monopolistic Competition.

In addition, the textile industry in Indonesia is Monopolistic Competition because it follows the assumptions, which are all firms wants to maximize profits, they produces and sells differentiated products, there is free entry and exit to the market, and consumers may prefer one product over the other.

The Performance of Indonesia’s Textile Industry

Here are some tables to analyze the Performance of Textile Industry in Indonesia.

Performance (000 Ton)  2015 2016 2017

Fiber (Polyester, Viskose, Cotton) Capacity 1300 1390 1390

Production 1090 1063 1075

Utilization 83.8% 76.5% 77.3%

Export 396 394 400

Import 994 996 1077

Local Product Sales 694 669 675

Consumption 1688 1665 1752

Local Market Share 41.1% 40.2% 38.5%

 Performance (000 Ton)  2015 2016 2017

Spun & Filament Yarn Capacity 2733 2733 2733

Production 2159 2095 2199

Utilization 79.0% 76.7% 80.5%

Export 990 1002 1001

Import 209 230 239

Local Product Sales 1169 1093 1198

Consumption 1378 1323 1437

Local Market Share 84.8% 82.6% 83.4%

 Performance (000 Ton)  2015 2016 2017

Woven, Knitted Fabric and Non-Woven Capacity 2742 2742 2742

Production 1493 1443 1567

Utilization 54.4% 52.6% 57.1%

Export 314 216 262

Import 654 724 777

Local Product Sales 1179 1227 1305

Consumption 1833 1951 2082

Local Market Share 64.3% 62.9% 62.7%

 Performance (000 Ton)  2015 2016 2017

Garment and Other Product Capacity 2420 2450 2450

Production 1833 1951 2082

Utilization 75.70% 79.60% 85%

Export 547 550 525

Import 119 151 155

Local Product Sales 1286 1401 1557

Consumption 1878 1878 2021

Local Market Share 68.5% 74.6% 77%

Source: BPS, Bank Indonesia, MOI, APSyFI processed by IndotextilesAs we can see from the tables, the Textile Industry in Indonesia is relatively good in utilizing its technologies to process raw materials and produce goods. Most categories are between 75% and 85% of Utilization level, but not in Woven, Knitted Fabric and Non-Woven category. The Utilization level on Woven category is much lower compared to the other, but still it is in improving trend.

The Consumption level in year 2016 was slightly dropped, but it quickly increases again in year 2017.

  2015 2016 2017

Total Export 2247 2162 2188

Total Import 1976 2101 2248

Balance of Trade 271 61 -60

From the table above, the Balance of Trade of Indonesia in Textile Industry is decreasing every year. In year 2015, the Balance of Trade was 271 tons, and it decreases to 61 tons in year 2016. Moreover, it keeps decreasing to minus 60 tons in year 2017. The Balance of Trade of Indonesia was in Surplus and it stops in year 2016. Indonesia experienced a Trade Deficit in year 2017.

Government Intervention in the Industry

Government plays a major role in developing the textile industry in Indonesia. Government body that mostly contribute to the development is the Ministry of Industry. Ministry of Industry handles the other industries as well. They do focus on the textile industry as it is one of the oldest industry, and contributes the most to Indonesia’s economy growth.

Recently, in order to push the textile industry, Ministry of Industry has proposed a program called Energy Refund Program. This proposal will be coordinated with the Ministry of Finance, and will be discussed with the Ministry of Economic Coordination.

“We review the allocation of this Energy Refund Project to improve the Export Value. Textile and Textile Product Industry will be the brain of this project,” said the General Director of Ministry of Industry, Harjanto. In this project, he explains that the electricity cost charged to the firms will be reimbursed back.

The electricity cost in Indonesia is relatively higher compared to its competitor countries. Ade Sudrajat, Chairman of Textile Association of Indonesia said that high electricity cost is a main problem in the textile industry. It costs US$0.010, 5/kWh in Indonesia, compared to US$0.06/kWh in South Korea and Vietnam. “Our cost is higher compared to the other,” he said.

By doing so, the government is trying to push out the Production Possibility Frontiers (PPF) by removing the cost of electricity, and allows the firms to allocate the unused money to produce more units. Furthermore, after producing more units there will be greater quantity in market for sell and some of it will be sold to the other countries, resulting in an increase in exports.

Conclusion

To sum up, the textile industry in Indonesia is a senior industry. Being one of the oldest industry, it has contributed a lot to Indonesia’s economy. The market structure in the textile industry is Monopolistic Competition as it follows all the assumptions of a Monopolistic Competition.

For the past recent years, the textile industry in Indonesia keeps having a decrease in its Balance of Trade. In order to prevent further deficit, the Ministry of Industry has taken an action by proposing a program called Energy Refund Program. The main aim is to decrease the manufacturing cost and allows firms to allocate this reimbursed fund to produce more quantities.

References

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