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Decline in the exports of shoes and other major commodities alarming. (Focus).

The country shoe making industry is facing a severe setback. First there was report of Reebok canceling order to PT Primarindo Asia Infrastructure (PAI) in June 2002. The cancellation caused a great concern as the impact could be disastrous not only for the company but more for its 5,400 workers.

The company has since 2000 operated only to serve orders from Reebok as the sole buyer for 300,000 pairs of its shoe production every month on the average. With the cancellation of order from Reebok the company could keep employing its workers. It has no choice but to lay off the workers adding to the already high unemployment rate in the country. Orders received by the company already declined gradually before the order deadline in June.

Before, the report about the misfortune befalling PT PAI began to disappear, the mass media came with a similar report that PT Dosan Indonesia, another major shoe maker, had received notice from Nike to cancel its order in November, 2002.

Indonesia has been the main supplier of Reebok and Nike shoes, accounting for around 25% of supplies of the two brands from all producers in the world. Annually, Indonesia produced and exported 19 million or 2.1 million pairs a month from four factories--PT PAI, PT Dong Ju Indonesia, PT Tong Yang and PT Golden Adi Shoes.

However, in the first half of 2002 exports dropped 10% to US$ 700 million compared to US$ 800 million in the same period last year.

A decline was reported not only in shoes but also in the exports of other major commodities. The Indonesian Association of Textile (API) has predicted that exports of textiles and textile products (TPT) will reached only US$7.2 billion this year or a 10% decline from last year's record. Exports of electronics goods and toys also are declining.

Generally the Indonesian shoe making factories are categorized only as assembling facilities producing goods on order from buyers that hold the brands abroad. As a result the impact could be disastrous for the factories any time the buyer want to stop order as they rely only on a single buyer.

Shoe factories serve only single buyers like Reebok and Nike. The same goes with many garment makers. Many garment makers serve orders from only one or two buyers. The good things about this system is the producers could focus on one customer and they do not have to spend much for marketing promotion. They need only to keep the price competitive and meet the delivery time to suit their buyers.

However, when the macro economic condition and the business climate turn sour the long established relations will be in danger of breaking. That is the situation being faced by many Indonesian companies. The only strong factors in favor of Indonesian companies are cheap labor and low production costs. When the two factors could no longer be maintained there is no more comparative advantage to be offered.

Factories with an investment of millions of dollars easily flounder and collapse as they have no strong fundament. The shoe makers after so long could not produce their own brands. They have been satisfied to serve orders as tailors for others. Favorable security and political stability have once supporting factors to attract investors to Indonesia, but now security and political situation has become the main problem discouraging investors.

When the government first took a concrete step toward industrialization and develop export oriented industries marked with investment and bank reform in 1986, comparative advantages offered by the government and business players in the country were the availability of abundant natural resources and cheap labor cost.

Natural resources both in the agricultural and mining sectors attracted foreign investors to make direct investment in the country. They enjoyed cheap labor cost and high competitiveness of their industrial products. Now the days of high profit have been over. Now even natural resource based industries like plywood industry have been in the doldrums. Sugar, of which the country was once the number one producer in the world is now a major import commodity for the country. The country's sugar industry is beseeching for protection as it has no more strength left to compete in open market. In the wake of the devastating crisis in 1997 and 1998, the only industries managing to provide significant contribution to the country's export earning are labor intensive industries like shoes, textile and household electronic industries. However, they all serve as tailor with designs, basic materials and marketing controlled by those placing the orders or the holders of brands.

The success of Reebok and Nike and other global brand owners lie on their ability to convince local factories to serve as their agents providing cheap services instead of as manufacturers of industrial goods. They exploit the services provided by local companies for their benefit.

When the global brands dominate the market it would be difficult for other producers to enter the market with their own brands as they are no match for the global powers both in finance and marketing. As a result the local companies have no choice but to accept the condition as they are. A number of local producers have tried their fortune but failed. Any desire to make a new venture has disappeared. When the shoe making industry was booming in the 1990s and in 2000 with exports recorded at US$ 1.6 billion they thought they have done the right things by staying as a good tailor.

The stake, however, is too high. When the general condition of world economy is no longer conducive, the shoe making industry is among the first to fall victim. According to the general chairman of the Indonesian Association of Shoe Making Industries (Asprindo) Anton J. Supit, shoe market in the United States is declining.

A large shoe retailer Payless Co. has been forced to close 250 of its 300 outlets. Reebok and Nike have cancelled orders for shoes not only from Indonesia but also from other producers including China and Vietnam, he said.

The cancellation of orders is fatal for local producers as they have no access to export market other than the brand owners. Stoppage of business or closure of factory is almost unavoidable.

Now as the worst has come there is no other choice but to start developing own brands It will not be easy and it will be costly, but success means lasting survival.

Actually the market is not entirely closed to new brands. Take for example the fact that in 2000, when the impact of monetary crisis was still lingering PT Unimitra Kharisma came up with a new brand to the market and it succeeded in staying in the market.

Unimitra Kharimsa launched the Piero brand amid the slump in the market of sports shoes, but in two years the brand succeeded in making itself known and breaking into the ranks of major and old brands like Eagle, Kasogi and Bata.

Piero's market target is the middle class between the market segments of Nike and or Reebok, which has the price of Rp 400,000 per pair and lower class of Rp 100,000 per pair. Piero is sold at Rp 100,000--Rp 150,000 per pairs or the market segment where it has to compete with Eagle, Converse or Spotec.

Piero came when the market leader was not expecting the appearance of a new brand. To win the battle a huge amount of fund is needed for advertisement and to establish distribution networks. The price is high to be paid. The cost, however, is proportional with the potential market up for grabs. Success on the domestic market could be one step to a bigger success in export market, certainly with an ability to see the part of the market segment left unnoticed by global brands.

Indeed, Indonesia is not the only one suffering a decline in exports. China also reported a setback. Singapore, India and Pakistan reported a 20% decline in exports. However, the current experience should serve a lesson to Indonesian industrialists to start developing strong fundament on which to establish business with long term goal.

It is time for Indonesia to look east to South Korea which has succeeded in placing its brands in the ranks of global brands like Samsung, Hyundai and LG. China is doing well in making inroad upon world market for its brands of computer and household electric appliances. The cost is high but that is the only way to survive in buyers market and get free from dependence on greedy principals that always seek to keep the market domination to themselves.
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Comment:Decline in the exports of shoes and other major commodities alarming. (Focus).
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Aug 13, 2002
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