It’s 11 a.m. in Boyolali, Central Java, and the chattering sewing machines at the Pan Brothers garment factory have gone quiet as workers take a break. Groups of women sit around talking and browsing on their phones.
Clients like Adidas, Lululemon, and The North Face insist on good working conditions, a manager said. To keep up with their orders, the factory is also modernizing by installing new systems to increase production.
“I was the first employee in the area 20 years ago,” said Anik Kuswandari, human resources and compliance manager at the site. “I recruited the first 100 workers.” Now, at peak season, some 10,000 work at the plant.
Indonesia’s government wants to see more businesses like Pan Brothers, which employs some 26,000 workers. In 2019, the government set the goal of Indonesia becoming one of the five biggest garment exporters in the world, up from tenth. Two subsidiaries of Pan Brothers were declared model companies as part of this program.
However, the sector in Southeast Asia’s largest economy has actually gone backwards. In 2023, Indonesia was the joint 13th largest exporter, according to the Observatory of Economic Complexity (OEC). It has even been overtaken by Cambodia—a country with about 6% of Indonesia’s labor force—as companies have closed factories or gone bankrupt, most notably Sri Rejeki Isman (Sritex), with the loss of 12,000 jobs.
Executives cite myriad factors for the sector’s woes, including a prolonged lack of government focus on manufacturing, an inconsistent and unfriendly investment climate stemming from restrictive labor laws and a harsh customs regime, as well as imports of Chinese products.
On top of that now looms the prospect of 32% tariffs from the US, by far Indonesia’s largest textile export market. In 2023, it accounted for 35% of Indonesia’s USD 13.4 billion of textile exports, 3.7 times the amount of the second destination, Japan, according to data from the OEC. And with China facing much higher US tariffs, Indonesian executives fear even more dumping and smuggling.
“This is just a spark, the reason it’s like that is because of years and years and years of neglect by consecutive governments,” said Anne Sutanto, vice-CEO of Pan Brothers, referring to the looming trade war.
Whether textiles can be revived matters. If the country is to hit President Prabowo Subianto’s 8% growth target, labor-intensive export-oriented sectors like textiles will be vital. The sector still employs 5.9 million workers, though as a proportion of the national workforce it is stagnant at under 3%. It contributed 0.99% to GDP in 2024, down from 1.32% in 2014, but still notable.
But the government faces a dilemma. Regulatory liberalization, particularly of the customs regime and labor laws, could help the industry become more competitive and solve some complaints from the administration of US President Donald Trump about unfair trade practices. But these are tough sells as companies and workers clamor for protection amid escalating global economic turmoil.
The previous administration under President Joko Widodo prioritized infrastructure and welfare schemes rather than manufacturing. Industrial strategy focused on the nickel industry, pushing miners to process ore domestically with aspirations to produce electric vehicle batteries and cars. Prabowo has promised to “downstream” other commodities.
What Indonesia’s government needs to do is copy its successful rivals and coordinate closely with the industry to improve regulations, said Sutanto. “We are competing against the world. And if the world keeps moving up, we need to be able to outpace them to be able to survive.”
In this context, Trump’s trade war is a double-edged sword. Higher tariffs would seriously hurt Indonesia’s textile industry, but the pressure could also incentivize much-needed reforms.
For now, most companies are simply worried. “We’re most afraid of high tariffs,” said the manager of a West Java textile factory that exports heavily to the US.
Domestically oriented producers fear the flood of Chinese imports, which they say began almost a decade ago, will grow as companies locked out of US markets look for alternatives. “Have you heard of Temu and Shein? Luckily those two aren’t yet here because if they arrive, it’s going to kill a lot of the industry,” said Eric Susanto, vice-director at Harvestindo Purnamatex, a small company specializing in embroidered products.
Sherly, a marketing director at her family’s midsize textile company, is more bullish. “This may be an opportunity for us,” she said of the trade war, saying companies could seek more suppliers outside of China. Major international brands including lingerie retailer Victoria’s Secret have already made approaches, she said.
Up until now, Indonesia has not been a major beneficiary of manufacturers diversifying out of China. Research by Japanese investment bank Nomura in 2024 found that Indonesia lagged India, Vietnam, Malaysia, and Mexico in attracting companies pursuing “China Plus One” strategies. Even Sherly said she was looking at Vietnam rather than Indonesia for a new factory.
Indonesia’s high tariffs and tricky customs are seen as major issues for potential investors. “If the government is like this, we have no interest to build the factory here,” Cheney Guo, regional director for Asia Continental Textiles, a Chinese company that operates factories in China and Vietnam, told Nikkei Asia.
“I think in the future Indonesia is not a better way, because if we want to [target] the American market we can build the factory in Africa or in South America.”
Indonesia’s protectionism is an old headache for companies. “I only import yarn and fabric if I need to. Mostly I do local if I can because of all the regulations for importing,” Susanto said. “If I want to import cotton, there’s a lot of paperwork.”
The system also encourages corruption. “As a factory we have our own target to achieve,” said Sherly, in relation to importing new machinery. “Sometimes they like to hold it very long [in customs], and if you want to get it fast they’re like, just give us extra money.”
Facing both calls for protection and pressure to liberalize, the government is trying to thread the needle. It has proposed tariff cuts, looser local content requirements, and finalizing a long-delayed trade deal with the European Union—but also new anti-dumping measures.
For textiles, the focus is easing entry of raw materials. “To support exports we will conduct a review regarding products that are constrained, or which we need to relax for an export orientation,” said Olvy Andrianita, head of the Center for International Trade Policy at the Ministry of Trade. However, supporting local companies—especially small and medium enterprises—so they are “kings in their own houses” remains a priority, she added.
Some observers worry protectionist lobbies may win. “As expected, the local industries have reacted, with some asking for reconsideration, as they had always benefited from protection,” said Arianto Patunru, chair of the Center for Indonesian Policy Studies. “So, I am not 100% sure the promise is credible.”
Labor is another major issue. In theory, Indonesia has a lot to offer with a 153-million strong workforce, and 12.76% of the population was either unemployed or underemployed as of February, according to official statistics. But, even after major reforms, employers complain labor laws are too strict, leaving millions stranded in the informal sector.
At Pan Brothers, Sutanto would like to see more flexibility to hire and fire workers and lower corporate tax rates for labor-intensive industries that pay large amounts in payroll taxes and social insurance.
The current wave of layoffs could push the government in the opposite direction though. Speaking to a large gathering of trade union members at a May Day rally, Prabowo promised greater worker protections. “We are not going to let our workers get fired just on the whims [of employers],” he said. “If necessary, without hesitation, the state will intervene.”
A perceived lack of desirability of factory jobs may also be an issue. In December 2024, the Pan Brother’s factory in Boyolali was short of 4,000 workers, many of them for low-skilled jobs, managers said. Some 40% of new workers apparently leave the factory before three years.
Ambitious locals prefer jobs abroad, while gender plays a role, too. Men are reluctant to sew, and women often leave after becoming pregnant. Most workers also own land so farming also offers an alternative to factory work.
To retain workers, the company has started offering incentives like health checks for pregnant women. Getting workers in Tangerang, an industrial suburb of Jakarta, is apparently easier, but the minimum wage there is also higher.
Helping companies manage these sorts of challenges should be a government priority. But some worry that the continued focus on “downstreaming” commodities may push economic policy in the wrong direction.
“Indonesia is a labor surplus economy, but industrial policy pushes the allocation of resources the wrong way: The current nickel downstreaming, for example, is very capital intensive, not labor intensive,” Patunru said. “But, unless the government can push workers out of low-productivity, informal services and into factories, Indonesia will struggle to grow at its full potential.”
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.