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Global Business Guide Indonesia

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Manufacturing | Indonesia’s Furniture Industry: Competitive Advantages Hampered by Bureaucracy

Indonesia has long been known as one of the world's leading furniture manufacturers. Its teak and rattan products are sought after in both the local and international markets. However, despite its natural competitive advantages in terms of raw materials, various bureaucratic hurdles have hampered the growth of the furniture sector. Indonesia is currently ranked fourth in ASEAN in terms of export value despite its extensive timber resources.

Indonesia’s Furniture Industry: Competitive Advantages Hampered by Bureaucracy
Should Indonesian furniture producers rise to the challenge, the local market offers a ready and growing pool of customers with increasing levels of disposable income for furniture products
 

The Indonesian government needs to resolve various impending regulatory requirements before the furniture industry is able to achieve the export value target set by the Jokowi administration of $5 billion USD by 2019.

Stilted growth

Indonesia's furniture industry managed to record positive growth again in 2017 after experiencing a setback in 2016. According to the Association of Indonesian Furniture and Handicraft Industries (HIMKI), the value of Indonesian furniture exports in 2017 was $1,627 billion USD or a slight increase by 1% from that recorded in 2016 of $1,607 billion USD.

This is far below the target of $2 billion USD and still far behind the achievement in 2015 of $1.93 billion USD. That being said, the Indonesian government under President Joko Widodo (Jokowi) set a target to increase the country’s furniture export value to $5 billion USD by 2019 soon after taking office. This target is exceptionally high given the fact that the industry's export value has failed to exceed the $2 billion USD mark since 2006.

Based on data from the Ministry of Industry in 2015, there were 139,544 business units in Indonesia engaged in the furniture sector employing 436,764 workers with an investment value of 5,8 trillion IDR. Indonesia’s Furniture industry has been designated as a priority sector for the country due to it being a labour-intensive industry. In addition, the sector has the scope for significant added value and a multiplier effect on the economy as it is able to generate 500,000 new jobs for each $1 billion USD of investment.

HIMKI remains optimistic that the prospects for the furniture industry in Indonesia are still bright. In fact, the association has set a target to grow the industry by 12% - 16% in 2018 with a proposed export value of $2 billion USD.

The traditional markets for Indonesia's furniture products are the United States, Europe, and China (See What China’s Slowdown Means for Indonesia: A Trade Perspective ). In recent years, the furniture industry has begun to tap into non-traditional markets too such as Africa, the Middle East, and Eastern Europe.

In addition to the U.S., the Netherlands and Germany are among the biggest importers of Indonesian furniture (See Indonesia and the EU CEPA – Deal or No Deal?). Other promising markets are France, Australia, Belgium, South Korea, Taiwan, Japan, Italia, and the United Arab Emirates (UAE).

According to the Centre for Industrial Study (CSIL), the global trade value of furniture in 2017 reached $141 billion USD. The largest furniture exporting countries in Asia are China with an export value of $52.7 billion USD followed by Vietnam with an export value of $6.7 billion USD. The biggest importer of furniture products made in the two aforementioned countries was the U.S which accounted for 31% and 52% of their total furniture exports in 2017, respectively.

Indonesia is currently lagging behind Vietnam, Malaysia, and the Philippines in terms of furniture export value, and is only narrowly ahead of Singapore (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?). With the country’s natural advantages in natural resources for materials such as rattan and timber, the main culprit behind the sluggish growth of the Indonesian furniture industry is bureaucracy. Other constraints are the legality of raw material supply, overlapping regulations, complicated permits, a lack of talented craftsmen, high-interest rates and import duties, as well as uncompetitive wages and work hours (See Indonesia Moves to Address Minimum Wage Woes).

Bureaucratic hurdles

Bureaucratic hurdles are one of the greatest constraints hampering Indonesia’s domestic furniture industry. There are a number of foreign furniture manufacturers who have relocated their factories and operations to Vietnam due to permit constraints and complicated regulations.

Permit simplification is crucial to improve the furniture industry's competitiveness and attractiveness for foreign as well as local investment. Currently, furniture makers need 110 different licenses to start their business. In total, there are more than 40,000 permits at a national and local level that complicate and hamper the industry.

Another challenge faced by Indonesia’s domestic furniture industry is the legality of raw material supply. Indonesian furniture manufacturers are required to provide proof that their wood supply is harvested and sourced legally based on the Timber Legality Verification System (SVLK) scheme. Unfortunately, the system is considered as time-consuming, complex, and costly as furniture companies are obliged to pass legality verification both at the upstream and downstream level (See Trading Timber: Business Insights into the Indonesia-EU VPA).

A further constraint on Indonesia’s local furniture sector is the lack of talented craftsmen as well as poor research and development. Innovation in design and materials is crucial to staying ahead and remaining competitive in furniture sales; particularly in the added value market.

More government support needed

Concrete supporting measures in terms of permit simplification, promotion and marketing facilitation, as well as financing, is needed to revamp Indonesia’s furniture industry and help it regain its competitiveness. In addition, the Indonesian government must also improve coordination among government ministries and agencies as well as between the government and the furniture industry (See Indonesia’s 12th Economic Policy Package is Unveiled to the Benefit of SMEs).

Recently, the Ministry of Industry launched the “E-Smart IKM” programme to help promote and market local furniture products. This is a promotional effort through an online marketplace aimed at domestic customers.

To tackle logistical and delivery issues due to weight and size, the Ministry has partnered with PT Pos Indonesia. Currently, there are 1,625 furniture makers who have joined E-Smart IKM and 20% of them have successfully generated sales from the online market platform (See E-commerce Incoming; An Industry on the Rise).

Meanwhile, as part of a concerted effort to deal with increased competition, the Indonesian government is exploring the opportunity to invite China's furniture makers, especially those engaged in rattan products, to relocate their factories to Indonesia where raw material supply is abundant. That way, Indonesia will benefit from the growth of the Chinese furniture industry in the same way that Vietnam does which hosts a significant number of China's furniture companies after the US imposed anti-dumping duties on China's wooden bed products in 2005 (See What China’s Slowdown Means for Indonesia: A Trade Perspective).

Domestic market: The untapped potential

Criticism of the Indonesian furniture industry centres on its uneven focus on the export market and overlooking of the potential of Indonesia’s domestic market. As a result, the local market is flooded with imported furniture products which occupy a significant market share in the country; especially in the middle-up segment.

Our widespread local network of partners obliges us to assist our SME partners by equipping them with knowledge on financing, product packaging and design, product marketing, and business operations

Increased competition

In fact, the potential for locally manufactured furniture products in Indonesia is extensive, in line with the rapid development of apartments, office buildings, and hotels across the country. ASMINDO has announced plans to partner with construction companies and developers to supply furniture products for their properties (See Indonesia’s Commercial Property Sector: Oversupply and Slow Demand Affects Growth).

It falls on local Indonesian furniture manufacturers to adjust their production and marketing strategies to cater to market demand in areas such as product design, material selection, pricing, and promotion. This means adapting their product lines from the tastes of the international market to Indonesian consumer tastes which can differ significantly. However, should Indonesian furniture producers rise to the challenge, the local market offers a ready and growing pool of customers with increasing levels of disposable income for furniture products.

Global Business Guide Indonesia - 2018

Indonesia Manufacturing Snapshot

Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.