By Randy Fabi and Jonathan Thatcher
BANDUNG, Indonesia, Oct 14 (Reuters) - In PT Trisula International's hangar-sized factory outside the western Indonesian city of Bandung, hundreds of workers stitch together clothes for some of the world's top brands.
Amid the clatter and hum of their machines are hopes for a renaissance that can restore Indonesia's place among Asia's big manufacturing economies, a status it lost in the mid-1990s.
As Southeast Asia's biggest economy slows, its current-account deficit widens, and its rupiah currency tumbles, policymakers are hoping factories like this will emerge as a new export engine.
But this year, Trisula, whose clients include German luxury-clothing maker Hugo Boss AG, shelved plans to buy machinery to lift production by 25 percent, fearing a margin squeeze from higher wages.
"A lot of people aren't expanding in a big way because they are 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 itself off the boom-to-bust cycle of commodity prices.
Exports of processed and unprocessed natural resources, combined with an influx of foreign investment, ignited a domestic consumption boom in the country of 250 million people and drove the economy along at more than 6 percent growth.
But that model is under pressure, as commodity prices flatten or fall, inflation accelerates and the current-account gap exposes a structural imbalance that economists say strong manufacturers could mend.
Indonesia's current account -- the widest measure of the flow of goods, services and money in and out of the country -- has suffered seven straight quarters of deficit. The biggest was in the quarter that ended in June. At $9.8 billion it was the largest since before the 1997/98 crisis and equivalent to 4.4 percent of gross domestic product.
Today, Indonesia has Asia's worst-performing currency, with the rupiah down 16 percent against the dollar this year.
'MIDDLE INCOME TRAP'
"We suffer from the resources curse," said Thee Kian Wie, an economist with the Indonesian Institute of Sciences. "We are still like the Netherlands Indies."
Drawing parallels with the colonial economy during three centuries of Dutch rule might seem harsh, but there is little argument that Indonesia has reached a stage where it is in danger of falling into the 'middle income trap'.
"We cannot continue to only rely on these raw materials and the cheap labour," Finance Minister Chatrib Basri told a regional summit last week.
"It is very hard for Indonesia to compete with Bangladesh with cheap garments. But we can move into the next stage of development by introducing design and fashion."
Garments and textiles are Indonesia's biggest manufactured export earners, and within this category clothing accounts for well over half.
Industry executives fear Indonesian manufacturers are becoming priced out at the bottom end of the market, and lack the 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 get through the middle income trap and that can only be done by way of basically climbing up the value chain."
LACK OF REFORMS
While Finance Minister Basri speaks of the need to provide macroeconomic stability, a better investment climate, and streamline regulations, manufacturers feel let down by delays over reforms.
Government stimulus measures this year included tax breaks to companies in labour-intensive industries, such as garments and textiles, that export at least 30 percent of their production.
Automakers, too, received a tax holiday and tax breaks to encourage more exports.
But with elections next year, few expect further significant measures 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, bemoaning the 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 rally for massive wage hikes and companies contend with barely functioning ports, endemic official corruption, a poorly educated workforce and fraying infrastructure.
Unions, for instance, are pressing for 50 percent wage hikes this year. The government has yet to respond. But many industry officials worry that with general and presidential elections due next year, it is unlikely to take a tough line.
"If (wages in) Jakarta goes up by 40-50 percent then nearby Bandung will have to follow, and this could be catastrophic for companies just making a nominal profit," Matai said. "We might have to lay off."
Rising costs have already seen companies owned by one of Indonesia's biggest manufacturing investors, South Korea, lay off some 60,000 local workers this year, which could rise to 10 percent of its total one million workers in Indonesia by the end of the year. Many of its factories manufacture for export.
"We don't mind increases in wages. What we need is predictability," said Korea Chamber of Commerce chairman C.K. Song.
A study by the Centre for Strategic and International Studies showed that between 2000-2011, Indonesian wages rose an average 5.5 percent, while productivity increased just 3.4 percent. Compare that to China, where a 7.2 percent wage rise over the same period was accompanied by a robust 10.1 percent gain in productivity.
Minimum wages in Indonesia in the period 2010-2013 increased by 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 in neighboring Thailand. At Jakarta's main port, which handles two-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 executive of Indonesia's biggest textile manufacturer, PT Sri Rejeki Isman , is optimistic.
His company's clients include Asia's largest clothing retailer, Fast Retailing Co's Uniqlo, along with Hennes & Mauritz AB (H&M), Guess? Inc and Wal-Mart Stores Inc.
With wage costs rising in China and concerns about safety standards in Bangladesh, where 1,129 people died in a multi-storey factory collapse in April in the worst accident in the global garment industry's history, Lukminto expected retailers to look at Indonesia as an alternative.
"Indonesia still has the potential to get displacement from China and Bangladesh. Also the lower rupiah makes the garment industry 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 a year ago, outperforming a 2.8 percent rise in the broader index .
Shares in Trisula are up about 26 percent this year. Sri Rejeki Isman has climbed 24 percent in the past three months.
An analysis of broker recommendations on 29 Indonesian manufacturing companies shows that half are a "buy" or "strong buy", 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. PT Unilever Indonesia, which makes consumer products for export to countries ranging from Japan to South Africa, trades at 39.6 times next year's earnings - more than double the Jakarta 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 26 percent surge in its shares this year, reflecting a government plan to introduce a nationwide health-care insurance program.
But many, like top cement maker PT Semen Indonesia , cigarette manufacturer PT Gudang Garam and automaker PT Astra International, are trading below the market average.
"Investors still believe that there is still so much more room for mature manufacturing companies to grow in Indonesia, since our consumption per capita is much lower compared to other Asian markets," said Jemmy Paul Wawointana, Head of Investment at Sucorinvest Asset Management.