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As Fashion Giants Eye Exit From China, One Indonesian Supplier Makes Gains

Sri Rejeki Isman PT, which makes apparel for J.C. Penney Walmart and H&M, is fielding calls from other brands looking to diversify their suppliers amid the ongoing US-China trade war.
Source: Sritex Media Gallery
By
  • Bloomberg

JAKARTA, Indonesia — As the US-China trade war grinds on, an Indonesian garment maker has begun cashing in on the seismic shift in global supply chains. And the pay off could be a billion dollars or more.

Sri Rejeki Isman PT, which makes apparel for J.C. Penney Co., Guess? Inc., Walmart Inc. and other major brands such as H&M, is increasingly fielding calls from some of the biggest names in fashion looking to diversify their suppliers away from China.

“One of the biggest players in the US wants to shift in a big way. It’s close to $1 billion,” its Chief Executive Iwan Setiawan Lukminto said in an interview. He declined to share details as the discussions are confidential.

Indonesia, and specifically its textile sector, hopes to be a beneficiary as heightened trade tensions between the two superpowers force global firms to pivot production out of China, which for decades was the world’s workshop. Companies are now scrambling to secure supply lines from other locations like Taiwan, Vietnam, and Bangladesh to skirt the tariffs on US-bound goods, but Indonesia has thus far fallen behind due to its red tape and other barriers, like rigid labour laws.

Lukminto said the number of supply inquiries has jumped since last year, after US President Donald Trump slapped higher tariffs on goods produced in China. “It then exploded,” he said. “The customers are looking for who is ready for that business and who can replace China.”

The US market now accounts for 13.6 percent of Sri Rejeki’s exports, up from about 3 percent a year ago. Lukminto plans to increase the firm’s production capacity by a fifth next year to meet surging demand.

This is good news for textile makers who are emerging as a bright spot in the biggest Southeast Asian economy currently battling slowing global demand for commodities. Indonesia saw exports slump for the 10th straight month in August, while the government has pared this year’s growth projection to 5.1 percent from 5.3 percent.

The Indonesian Textile Association has been lobbying President Joko Widodo to speed up reforms to enable it to meet its export target of $14.6 billion next year, from $12.5 billion in 2017.

One of the biggest players in the US wants to shift in a big way. It's close to $1 billion.

As Widodo prepares to be sworn in for a second five-year term later this month, he’s looking to revive the manufacturing sector. The president, known as Jokowi, also received a World Bank briefing in September that showed Indonesia has struggled in comparison to regional rivals in attracting companies wanting to shift out of China.

‘Wake-Up Call’

Between June and August this year, 33 Chinese-listed companies announced plans to set up or expand production abroad, with 23 moving to Vietnam alone, according to figures presented by the World Bank to Jokowi and senior cabinet members. The others shifted to Cambodia, India, Malaysia, Mexico, Serbia and Thailand. None moved to Indonesia.

“Indonesia seems to be lagging in terms of gains from trade diversion and from investments in the new supply chains” despite its large labour force, competitive wages and ample land, said Maybank senior economist Chua Hak Bin.

“Bureaucratic regulations, protective labour laws and high trade barriers are handicapping its draw,” Chua said.

Jokowi has demanded ministers do more to lure business from China. While the trade war had been a “wake-up call for US players” that now want to increasingly relocate out of China, Lukminto said it had also been a wake-up call for the local industry and the Indonesian government.

“If they don’t listen, then we would be worried. But now they are listening,” he said.

Indonesian business groups have been asking the government to overhaul labour laws, which include some of the world’s most generous severance provisions. They also want the nation’s dense regulatory environment to be eased and rules governing foreign investment and ownership levels relaxed.

Paying Off

Some of the efforts to lure investment have begun paying off, although it might mean more competition for the local firms such as Sri Rejeki.

Taiwan-based sportswear supplier Eclat Textile Co. Ltd. plans to invest $170 million setting up a weaving and garment factory in Indonesia to diversify and reduce risks, it said in a filing last month.

Despite some positive signs that a deal could be reached in the trade war, the geopolitical face-off is far from over. US and Chinese negotiators are expected to hold a fresh round of trade talks this month.

“Everybody is now worried about how to move,” Lukminto said, referring specifically to the US textile companies that have business in China and are now looking for alternatives.

The trouble is China’s manufacturing prowess is hard to replace or replicate. It makes up 30 percent of the global market capacity, while Indonesia is only 2 percent, he said.

“We cannot absorb it all,” Lukminto said. “The big players are also asking us to expand. They need it very badly.”

By Karlis Salna; editors: Nasreen Seria, Bhuma Shrivastava and Michael S. Arnold.

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