By Randy Fabi and Jonathan Thatcher
BANDUNG, Indonesia, Oct 14 (Reuters) - In PT TrisulaInternational's hangar-sized factory outside thewestern Indonesian city of Bandung, hundreds of workers stitchtogether clothes for some of the world's top brands.
Amid the clatter and hum of their machines are hopes for arenaissance that can restore Indonesia's place among Asia's bigmanufacturing economies, a status it lost in the mid-1990s.
As Southeast Asia's biggest economy slows, itscurrent-account deficit widens, and its rupiah currency tumbles,policymakers are hoping factories like this will emerge as a newexport engine.
But this year, Trisula, whose clients include Germanluxury-clothing maker Hugo Boss AG, shelved plans tobuy machinery to lift production by 25 percent, fearing a marginsqueeze from higher wages.
"A lot of people aren't expanding in a big way because theyare concerned about the rising wages," said Lalit Matai,director of marketing at Trisula.
The company's struggle to grow, as workers demand more pay,reflects a broader challenge as Indonesia tries to wean itselfoff the boom-to-bust cycle of commodity prices.
Exports of processed and unprocessed natural resources,combined with an influx of foreign investment, ignited adomestic consumption boom in the country of 250 million peopleand drove the economy along at more than 6 percent growth.
But that model is under pressure, as commodity pricesflatten or fall, inflation accelerates and the current-accountgap exposes a structural imbalance that economists say strongmanufacturers could mend.
Indonesia's current account -- the widest measure of theflow of goods, services and money in and out of the country --has suffered seven straight quarters of deficit. The biggest wasin the quarter that ended in June. At $9.8 billion it was thelargest since before the 1997/98 crisis and equivalent to 4.4percent of gross domestic product.
Today, Indonesia has Asia's worst-performing currency, withthe rupiah down 16 percent against the dollar this year.
'MIDDLE INCOME TRAP'
"We suffer from the resources curse," said Thee Kian Wie, aneconomist with the Indonesian Institute of Sciences. "We arestill like the Netherlands Indies."
Drawing parallels with the colonial economy during threecenturies of Dutch rule might seem harsh, but there is littleargument that Indonesia has reached a stage where it is indanger of falling into the 'middle income trap'.
"We cannot continue to only rely on these raw materials andthe cheap labour," Finance Minister Chatrib Basri told aregional summit last week.
"It is very hard for Indonesia to compete with Bangladeshwith cheap garments. But we can move into the next stage ofdevelopment by introducing design and fashion."
Garments and textiles are Indonesia's biggest manufacturedexport earners, and within this category clothing accounts forwell over half.
Industry executives fear Indonesian manufacturers arebecoming priced out at the bottom end of the market, and lackthe polish to compete at the high end.
While commodities account for over 60 percent of exports,manufactured exports have been stagnant at about 30 percent.Trade Minister Gita Wirjawan wants to see that change.
"Fifty-fifty would be nice, but that'll take some time,"Wirjawan said in an interview.
"The end game is to make sure that we are able to getthrough the middle income trap and that can only be done by wayof basically climbing up the value chain."
LACK OF REFORMS
While Finance Minister Basri speaks of the need to providemacroeconomic stability, a better investment climate, andstreamline regulations, manufacturers feel let down by delaysover reforms.
Government stimulus measures this year included tax breaksto companies in labour-intensive industries, such as garmentsand textiles, that export at least 30 percent of theirproduction.
Automakers, too, received a tax holiday and tax breaks toencourage more exports.
But with elections next year, few expect further significantmeasures from President Susilo Bambang Yudhoyono's government,despite its commitment to making structural changes.
"There's too much politics and not enough economics,"complained the director of a major garment company, bemoaningthe government's failure to secure bilateral trade deals which competitors have successfully sealed.
"There's no clearcut vision despite all their plans."
"WE MIGHT HAVE TO LAY OFF"
Trisula's factories, 150 km (90 miles) south of the capital,illustrate the difficulties manufacturers face as workers rallyfor massive wage hikes and companies contend with barelyfunctioning ports, endemic official corruption, a poorlyeducated workforce and fraying infrastructure.
Unions, for instance, are pressing for 50 percent wage hikesthis year. The government has yet to respond. But many industryofficials worry that with general and presidential elections duenext year, it is unlikely to take a tough line.
"If (wages in) Jakarta goes up by 40-50 percent then nearbyBandung will have to follow, and this could be catastrophic forcompanies just making a nominal profit," Matai said. "We mighthave to lay off."
Rising costs have already seen companies owned by one ofIndonesia's biggest manufacturing investors, South Korea, layoff some 60,000 local workers this year, which could rise to 10percent of its total one million workers in Indonesia by the endof the year. Many of its factories manufacture for export.
"We don't mind increases in wages. What we need ispredictability," said Korea Chamber of Commerce chairman C.K.Song.
A study by the Centre for Strategic and InternationalStudies showed that between 2000-2011, Indonesian wages rose anaverage 5.5 percent, while productivity increased just 3.4percent. Compare that to China, where a 7.2 percent wage riseover the same period was accompanied by a robust 10.1 percentgain in productivity.
Minimum wages in Indonesia in the period 2010-2013 increasedby 30 percent, far outstripping increases in regional rivals.
Shoddy infrastructure adds yet more problems.
It takes a day to move a container through the main port inneighboring Thailand. At Jakarta's main port, which handlestwo-thirds of Indonesia's international trade, it takes 10 days,according to a World Bank report issued this month.
For all the challenges, Iwan Lukminto, the chief executiveof Indonesia's biggest textile manufacturer, PT Sri Rejeki Isman, is optimistic.
His company's clients include Asia's largest clothingretailer, Fast Retailing Co's Uniqlo, along with Hennes& Mauritz AB (H&M), Guess? Inc and Wal-MartStores Inc.
With wage costs rising in China and concerns about safetystandards in Bangladesh, where 1,129 people died in amulti-storey factory collapse in April in the worst accident inthe global garment industry's history, Lukminto expectedretailers to look at Indonesia as an alternative.
"Indonesia still has the potential to get displacement fromChina and Bangladesh. Also the lower rupiah makes the garmentindustry more competitive," Lukminto told Reuters.
Regardless of all the obstacles faced by manufacturing,investors see scope for growth.
Shares in Indonesia's publicly listed manufacturers rose 19.7 percent on the Jakarta stock exchange from ayear ago, outperforming a 2.8 percent rise in the broader index.
Shares in Trisula are up about 26 percent this year. SriRejeki Isman has climbed 24 percent in the past three months.
An analysis of broker recommendations on 29 Indonesianmanufacturing companies shows that half are a "buy" or "strongbuy", one-third a "hold", and the remainder a "sell" or a"strong sell", according to data from Thomson Reuters StarMine.
Some of Indonesia's biggest manufacturers look expensive. PTUnilever Indonesia, which makes consumer products forexport to countries ranging from Japan to South Africa, tradesat 39.6 times next year's earnings - more than double theJakarta market's average of 14 times.
Indonesia's largest drug-maker PT Kalbe Farma trades at about 28 times next year's earnings following a 26percent surge in its shares this year, reflecting a governmentplan to introduce a nationwide health-care insurance program.
But many, like top cement maker PT Semen Indonesia, cigarette manufacturer PT Gudang Garam andautomaker PT Astra International, are trading belowthe market average.
"Investors still believe that there is still so much moreroom for mature manufacturing companies to grow in Indonesia,since our consumption per capita is much lower compared to otherAsian markets," said Jemmy Paul Wawointana, Head of Investmentat Sucorinvest Asset Management.
- UK International News