Indonesia Sourcing: Leather goods 2018

Indonesia Sourcing: Leather goods 2018 Sector highlights

Indonesia Sourcing: Leather goods 2018 Suppliers & products

Products

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Bags

Fashion accessories

Footwear

Jackets

Indonesia Sourcing: Leather goods 2018 Industry overview

Indonesia footwear exports	Competitive advantages	Challenges	Industry composition
Indonesia is in the fifth-largest leather and leather goods exporter in the world. The largest sector of leather goods is footwear. The US was the top overseas market.	Having domestic access to raw materials is the main advantage of the industry. There is a strong demand for leather bags and footwear. Government initiatives help strengthen the industry's exports.	There is an insufficient supply of leather. Some suppliers find it difficult to comply with costly requirements. Makers of leather goods face intense price competition.	The latest Ministry of Industry data in 2013 shows 265 leather goods companies. Midsize companies employ up to 20 employees. Suppliers are based in Jakarta, West Java, Central Java and Yogyakarta.

Another program from the national administration is the preparation of a tax deduction policy for small and medium enterprises (SMEs), designed to engage SMEs in e-commerce. This policy will be finalized through the revision of Government Regulation (PP) No. 46 of 2013, which sets 1 percent income tax for companies with less than IDR4.8 billion annual revenue. The final tariff plan will be reduced to 0.5 percent. However, the Ministry of Industry has not announced a final date for implementation.

Designs with textile uppers accounted for 37 percent of overseas sales. Those with plastic or rubber uppers generated 11 percent.

Another recent boost for the local leather industry is the Ministry of Agriculture’s announcement that imported leather would be exempted from quarantine processes. In June 2017, the Agricultural Quarantine Agency of the Ministry of Agriculture issued the Decree No. 870/2017 on the List of Prohibited Items and/or Quarantine Restrictions on Exports and Imports. Since the leather sector imports almost 70 percent of its raw material, often resulting in high costs, this new regulation will cut logistics and administrative barriers to accelerate importing raw materials of the export-oriented leather segments in Indonesia, such as footwear.

Exports

Indonesia is in the fifth-largest leather and leather goods exporter in the world after China, India, Vietnam, and Brazil, according to a November 2017 report on Antaranews.com. The leather and leather products sectors (including footwear) are among the 10 highest-earning export commodities for Indonesia, according to statistics published by the Ministry for Industry. Leather, leather goods and footwear products contributed approximately 4.6 percent ($5 billion) in 2016 (latest available), and the number is anticipated to increase 6.5 percent annually, on average.

The leather, finished goods and footwear industries grew 7.4 percent in the first quarter of 2017 (latest available). This growth rate is higher than the non-oil and gas processing industry, which grew only 4.7 percent. The export value of leather and leather finished goods industry reached $162 million and absorbed 192,000 into the workforce.

Based on the 2016 data extracted from the DESA/UNSD, United Nations Comtrade database (latest available), the largest share of exports came from footwear, contributing about $2 billion. The Ministry of Industry also reported that leather, leather goods and footwear was among the fifth largest trade surplus sectors in February 2017, reaching $319.5 million or 20,320 tons in total.

Competitive advantages

Leather goods suppliers in Indonesia consider local availability of raw materials as the sector’s major strength. With the celebration of the Muslim annual feast day, Idul Adha, the large number of cows and goats slaughtered across the country during this event gives the country an abundant supply of leather. However, this opportunity still cannot meet the needs of domestic leather industries, so some suppliers have to import from Australia and China.

Another advantage that buoys the sector is the strong auxiliary industries such as bags and footwear. However, without any main brands, the local leather segment are highly dependent on market trends and tourism. When demand for leather bags rise, the same type of product will then be massively produced. Otherwise, if that market tends to slow, then the industry will switch to other products. For some famous tourist destinations such as Bali and Yogyakarta, this can be an advantage to build their local brands and get recognition from overseas visitors.

Support from the government also buoys the sector. The Ministry of Industry tries to meet industrial demands with workforce supply through vocational education by providing basic industry-related knowledge in classes. This concept has been implemented by a program that has a link and match system between vocational high schools and the industry. The program began in February 2017 in East Java, Central Java, Yogyakarta, West Java, and northern Sumatra, which involved 565 industries and 1,795 vocational high schools.

Challenges

The Indonesia leather goods industry faces a number of difficulties, primarily the unstable supply of raw materials, which results in high material costs. Domestic tanners can only provide 5 million sheets of bovine leather and 20 million sheets of goat leather annually, covering only 20 percent to 30 percent of the needs of the domestic industry. Consequently, around 70 percent of leather materials are imported from abroad. The insufficient supply of leather hampers the production process and results to noncompetitive prices compared with neighboring sourcing hubs.

Based on an interview with a supplier, OSTO, the domestic tannery industry still faces immense challenges due to a lack of raw materials and the means by which to process them. As a result, there is high dependence on imported raw materials, and the exchange rate is very influential on the structure of production costs.

Indonesia leather good producers also find complying with international standards and obtaining certifications challenging. Most local tannery businesses consider international standards for processed leather commodities too expensive. For example, the cost for laboratory tests to examine chemical content requires IDR10 million, which need to be updated every six months. This amount is too high for small and medium enterprises to shoulder. Only around 10% of the leather industries are able to comply with the international standard certificates needed to export goods to Europe and the US.

Price competition is another difficulty faced by the sector. Based on an interview with the OSTO, the abundance of low-cost products made of synthetic leather in Indonesia makes price competition fierce. Synthetic leather products have their own market share and keep expanding as they are considered more affordable alternatives to genuine leather goods.

Competition from neighboring sourcing hubs adds to the pressure. Leather items from China, for one, are marketed at lower quotes than locally made products.

Industry composition

The latest Ministry of Industry data (2013) show 265 companies listed under the leather industry.

Small operations are usually around 500sqm or smaller and have less than 10 employees. Monthly output of these companies usually does not exceed 100 pieces, and they generate less than $10,000 in annual export sales.

With factories ranging reaching 2,000sqm, midsize producers normally have up to 20 workers. Overseas shipments can reach up to 500 pieces and yearly foreign revenue can hit $50,000.

Larger companies, with a workforce of more than 20 and plants exceeding 2,000sqm, can manufacture more than 500 pieces monthly. Annual export sales exceed $50,000.

Supplier location map

The highlighted areas on the map show the locations of the head offices and factories of the leather goods suppliers featured in this report.

Indonesia Sourcing: Leather goods 2018 Product features

Materials & designs	Manufacturing & QC	Pricing
Cow and buffalo hide are among the top material options. Other leather types available are sheep-, horse-, snake- goat-, stingray and crocodile skin. The design team is often composed of up to two workers.	Sewing, embroidery and gluing are usually done by hand. Up to five employees perform the QC. Machines used are typically imported.	Prices vary depending mainly on design complexity. Larger models are generally more expensive. Prices are anticpated to remain the same in the next few months.

Materials & designs

Indonesia leather goods makers mainly use cow- and buffalo hide, and sheep-, horse-, snake- goat-, stingray, and crocodile skin. They are procured from Magetan, East Java, Wonogiri, Central Java, Garut, West Java, Brebes, Central Java, Banyuwangi, East Java, Jayapura, and Papua Boyolali.

According to local cowhide vendors, leather prices increase 30 percent recently, because production costs and quotes of salt used for the tanning process have increased up to 300 percent.

The design team is often composed of up to two workers who create 20 to 30 models monthly. Lead time for samples can take up to two weeks.

Manufacturing & QC

The product steps include cutting (fabric and base materials), sewing and forming, and finishing (trimming excess materials, attaching accessories if needed, labeling and packaging). Sewing, embroidery and gluing are usually done by hand. Meanwhile, cutting, pressing and stamping often utilize machines procured from Germany, China, and Japan.

Up to five employees perform the QC. Items are often checked for sizing, leather quality, cutting integrity, and coloring. Indonesia producers also have to comply with export requirements, particularly from the EU and the US.

Pricing

Quotes are influenced by complexity design, which includes embossing and weaving. Larger items will also be often priced higher than smaller ones. The raw materials used also dictate pricing, particularly imported leather. As the Indonesia leather industry still faces immense challenges due to lack of raw components, there is a high dependence on imported goods, which are more expensive.

Price guide

Indonesia Sourcing: Leather goods 2018 Supplier survey

Export markets & sales

Majority of respondents have a positive outlook on export sales for the next 12 months, with three-fourths anticipating overseas shipments to surge up to 10 percent. Most of the expected orders are repeat orders from large clients.

Product trends

Among surveyed companies, 50 percent will be focusing on simple and minimalist designs in line with international trends and buyer preferences. One-fifth of the surveyed suppliers will focus on improving durability and fit, and will be incorporating more genuine leather into their products instead of synthetic types.

Retaining skilled workers is another problem cited by surveyed companies. With the expansion of the leather industry, it is easier to find leather craftsmen than artisans. Craftsmen usually create goods for mass production based on samples, while artisans are more specialized and can produce highly customized designs.

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Indonesia Sourcing: Leather goods 2018 Supplier list