Indonesia is an attractive market for clothing and fashion because of its steady economic growth, as well as the world’s fourth most populated country. Both local and global fashion companies are vying for market share.
Based on data from CNBC Indonesia (2019), the development of the fashion industry can contribute around 18.01% or IDR 116 trillion to its creative economy. In other words, fashion is also a cohort for Indonesia’s economy and its wage regulation and policy significantly affect employment and its GDP for sure. The Creative Economy Agency (BEKRAF) also continues to make efforts to strengthen the ecosystem and encourage growth in this sub-sector. Let’s break down the clothing and fashion industry in Indonesia.
Problem and Opportunities For Global Fashion Companies
However, domestic producers through a hard time due to rising costs as they try to fend off overseas competition. Thus, the opportunity for global fashion companies to enter into Indonesian clothing and fashion businesses is wide open as they can offer machinery, know-how, and capital.
Global fashion companies can start tapping the Indonesian market with the right strategies and tactics, one of which is by cooperating with franchise partners in Indonesia. The choice of franchise partner will depend on several factors :
- Interest — genuine interest in collaborating with the company
- Business network and financial muscle — number of stores, POS, and mainly influence
- Manufacturing capability — this is due to high import taxes
- Favorable economic policies — influenced by the present-day government (the general election is important for that reason)
Local economic factors such as currency fluctuation, import duties, and cultural festivals also play an important role in how businesses are run in Indonesia.
1. Currency Fluctuations
Currency fluctuations are a norm in Indonesia and typically businesses can expect a 5% to 8% variation in a year. In case of changes in the political landscape, turmoil, or change in the United States interest regime, Indonesia is affected directly. For example, changes in the price of oil directly affect businesses since a large part of the government budget goes towards fuel subsidies. This is important to keep in mind since most local distributors will keep a buffer of 5% to 10% in pricing for these exchange fluctuations.
2. Local Festivals or Seasons
In Indonesia, retailers experience a rise in their sales during three periods, namely the month of Ramadan which is the fasting month before Idul Fitri (Eid Festival), back-to-school promotions (beginning of the academic year in July) and the end of the year Christmas and New Year.
The national General Election is also a period where local and international companies with business interests in Indonesia are watchful. As stated above, most companies will delay decision-making until after the General Election results are announced. This is a local business norm as regime changes do affect local politics and businesses drastically. Global clothing and fashion companies should be aware of this.
3. Import Duty and Taxes When Importing into Indonesia
Import duty and taxes are due when importing goods into Indonesia whether by a private individual or a commercial entity. The valuation method is CIF (Cost, Insurance and Freight), which means that the import duty and taxes payable are calculated on the complete shipping value, which includes the cost of the imported goods, the cost of freight, and the cost of insurance. However, the duties of some products can be charged based on a unit of measure. In addition to duty, imports are also subject to sales tax, and in some cases to excise and STLG (Sales Tax on Luxury Goods). Duty rates in Indonesia vary from 0% to 40%, with the average duty rate at 10.89%.
In general imports of foreign clothing brands are levied duties ranging from 30% to 40% and this was substantiated by all the potential partners the global clothing and fashion companies have met with. This encourages the need to seek a partner with local manufacturing capabilities.
Determining Global Fashion Companies Competitors
The two aspects that we focused on to determine global clothing and fashion companies’ competitors are market positioning in terms of the target consumer segment, product offering, and price points. Indonesia is a price-sensitive market, similar to India, and establishing the right price point for Indonesia will ensure successful market entry; among factors.
We need to perform a price check exercise taking into account brands that compete with global clothing and fashion companies in other global markets and have a presence in Indonesia.
It is a well-known fact that Indonesian companies usually do not make commitments to closing an election fearing policies that are not favorable to the change of government and with good reason. Indonesia has undergone several such regime changes where the political and economic landscape witnessed drastic changes.
Future Expansion to Entry Fashion Industry in Indonesia
This is something to keep in mind regarding future expansion to cities outside Greater Jakarta.
The top 5 cities are :
- Surabaya (5 million people), the second-largest city and business hub for eastern Indonesia
- Bandung (4 million people), the tourism and education hub 150 km south of Jakarta
- Yogyakarta (2.5 million people), the second-largest tourism destination after Bali, second largest education hub, and the cultural capital of Java
- Medan (4 million people), the largest city in Sumatra and the business hub for northwestern Indonesia
- Denpasar (4.5 million people), the most popular Indonesia tourist destination as well as the business hub for the lesser Sunda’s islands including East Timor
The 6 minor cities to be considered are :
- Pekanbaru (1.5 million people), the capital of Riau province, is one of the oil cities and a hub for the palm oil plantation industry
- Makassar (2 million people), the largest city in Sulawesi and another trading hub for eastern Indonesia
- Pontianak (1.5 million people), the capital of West Kalimantan and a well-known hub for the palm oil plantation industry
- Palembang (1.5 million people), the capital of South Sumatra Province and largest trading hub in the southern part of Sumatera
- Semarang (2.5 million people), is the capital of Central Java where the major industries are located. Most notably known for Kendal Industrial Park, a large industrial park jointly built by Singapore and the Indonesian government
- Balikpapan (1 million people), the oil city in east Kalimantan also supported by large coal and palm oil industry
The cost of inbound logistics is expensive in Indonesia due to poor infrastructure, facilities and government inefficiencies. Piggybacking on a partner with extensive reach across the country will greatly help in time to go to the market.
AsiaCommerce is a Trusted Partner in Exploring Your Brand Opportunities in Indonesia
In the end, Indonesia’s clothing and fashion industry requires good access to funding to meet equipment overhaul, which is something domestic banks are often reluctant to provide or only willing to grant at prohibitively high rates. Global clothing and fashion companies can take this opportunity to step into the breach — partnerships with local companies, including joint ventures and private equity investment, can help the Indonesian fashion industry raise its game while affording foreign investors the chance to participate in the leading clothing and fashion markets, both for production and sales.
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If you’re interested in exploring clothing and fashion opportunities in Indonesia, visit our service page for more information. Our team will work with you every step of the way, from finding a supplier, shipping door-to-door, and handling import documents to ensure your success in importing from Indonesia.