Between 10 and 15 new footwear factories will become operational in Indonesia this year. The majority of these new plants, which require a combined investment value of USD $1.5 billion, involve foreign investors from China, South Korea, and Taiwan. Harijanto, Advisory Council Head of the Indonesian Footwear Association (Aprisindo), said these factories will have a large production capacity at an average of between 10 - 15 million pairs of shoes per year and are all export-oriented. Moreover, the plants will provide employment opportunities to some 100,000 local workers.
Harijanto said that output of these new footwear factories, which have been under construction since 2015, will be exported to the USA, Europe and other parts of Asia. If the plants are indeed completed before the year-end their output should still be able to support Indonesia's footwear exports this year. Aprisindo estimates that Indonesia's footwear exports will reach a value of USD $5 billion in 2016, up 11 percent (y/y) from USD $4.5 billion worth of shoe exports in the preceding year.
However, despite the positive news of foreign investment and the optimistic outlook in terms of exports, there remain several challenges in Indonesia's footwear industry. Firstly, investors (particularly foreign investors) are discouraged by Indonesia's sharply rising minimum wages. In 2015 it was reported that about a dozen of South Korean and Japanese investors cancelled their plans to construct footwear factories in Indonesia due to rapidly rising minimum wages.
Meanwhile, with minimum wages in the Greater Jakarta region rising particularly fast, dozens of footwear manufacturers reportedly moved their plants to East Java or to other ASEAN member countries that offer more competitive wages (for example Cambodia and Vietnam). Indeed, around presidential and parliamentary elections there tends to be a surge in minimum wages for political reasons.
However, in the 4th economic policy package (released on 15 October 2015) the government introduced a fixed formula to determine increases in labour wages in order to make it easier for investors to calculate potential earnings more accurately prior to deciding to invest in Indonesia.
Another obstacle is that there is yet to be reached an agreement on the establishment of the Indonesia-European Union (EU) Comprehensive Economic Partnership Agreement (CEPA). This trade deal would make Indonesia's footwear exports much more competitive in the 28-member European trading block markets. Similarly, if Indonesia would decide to join the Trans-Pacific Partnership (TPP) deal then its footwear exports would become more competitive in countries like the USA and Japan. Stakeholders in Indonesia's footwear industry are highly supportive of Indonesia joining these free-trade deals.
Domestic demand for shoes in Indonesia was relatively weak during the past Ramadan and Idul Fitri celebrations (while this actually should be a period characterized by increased consumer spending). Therefore, footwear manufacturers had to offer great discounts - up to 50 percent - to get rid of their existing stocks.
Eddy Widjanarko, Chairman of the Aprisindo, said domestic demand for shoes in Indonesia has been weakish, in line with the overall macroeconomy that has had a negative effect on people's purchasing power. While domestic sales were weak, Indonesian exports of footwear has in fact shown a rising trend, supported by the weakening rupiah between 2013 and 2015 (making Indonesian exports more competitive).
Indonesian Footwear/Shoe Exports 2010-2016:
Source: Indonesian Trade Ministry
Indonesia is ranked among the world's top six of largest footwear exporters and therefore this sector is an important asset to Indonesia's manufacturing industry (generating foreign exchange earnings and providing employment to part of the population). Big global players, such as Nike Inc as well as several companies from China and South Korea, all have production facilities in Indonesia as the country's labour costs are relatively low (but have risen sharply in recent years).
Another problem is that Indonesia needs to import several raw materials (leather and rubber) for the production of shoes. Despite being a major rubber producer Indonesia still needs to import rubber for the manufacturing of shoes as the country lacks domestic processing facilities.