Danantara's Big Plan To Cannibalize Indonesia's Textiles

(MENAFN- Asia Times) Indonesia's government has recently thrown a political and economic spanner into the works of the country's crucial textile industry. Through the state investment authority Daya Anagata Nusantara, or Danantara, it plans to take on an aggressively expansionist role by building a textile state-owned enterprise from scratch.

According to reports, the directive comes straight from the top, carrying an audacious mandate to create a modern, fully integrated textile giant spanning upstream and downstream operations and to restore Indonesia's former stature as a global textile powerhouse.

Danantara is said to be prepared to inject around US$6 billion, or roughly 101 trillion rupiah, in capital. The ambition is nothing short of spectacular: lifting textile export earnings from about $4 billion today to $40 billion within a decade.

In effect, the government wants this new“Goliath” to become the engine of the national textile industry, equipped with cutting-edge technology, brand-new machinery and a balance sheet unburdened by legacy problems.

In the ideal scenario, this state-owned champion would absorb hundreds of thousands of workers while simultaneously reviving the pride of Indonesia's manufacturing sector, long battered by a flood of imported cheap goods, increasingly from China.

Yet embedded in this vision is a deeply troubling irony. While the government is busy drafting blueprints for a brand-new textile SOE, it appears to be turning a blind eye to the reality that Indonesia's existing private textile industry is collapsing piece by piece.

Building a new giant while the current ecosystem is in disarray is not merely overconfident; it reflects a striking lack of empathy for firms that have struggled for decades to survive. The plan resembles administering a powerful drug to a patient gasping for air, without realizing that the treatment itself may deprive other patients of the oxygen they need.

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At its core, Danantara's move embodies a large-scale crowding-out effect. Consider a textile entrepreneur in Majalaya or Solo who has spent decades fighting to keep a factory alive.

For years, such businesses have scraped for bank loans at punishing interest rates because textiles are widely labeled a“sunset industry” carrying high risk. Then, almost overnight, the state arrives with a new competitor armed with 101 trillion rupiah in capital, cheap financing, privileged access to land and a red-carpet regulatory regime.

By any standard, this is no longer fair competition; it is a recipe for cannibalization. A new SOE endowed with extraordinary advantages will inevitably command far greater bargaining power in securing raw materials and energy.

The result is predictable: Private firms already operating on the edge will be pushed further to the margins. Rather than strengthening the industry collectively, the state risks creating an internally funded rival, financed by taxpayers, that could suffocate the local players who have long formed the backbone of Indonesia's people-based economy.

The government's claim that this SOE will focus exclusively on exports also strains credulity. In the real world of business, no company can dominate global markets without a solid domestic base to stabilize cash flow.

Sooner or later, this new giant will be forced to enter the local market to sustain operations. When that happens, small and medium-sized textile firms will be pitted against an opponent they simply cannot defeat.

A misdiagnosis

A more fundamental criticism is that the government appears to have misdiagnosed Indonesia's textile malaise. The industry's core problem is not a shortage of factories or a lack of large players. It is systemic, rooted in the very arteries of textile production: prohibitively high costs and an increasingly hostile business environment.

First, energy costs. Industrial electricity and gas prices in Indonesia are among the highest in the region, compared with competitors such as Vietnam and Bangladesh. Without decisive action to reduce these input costs, even the most sophisticated factories will struggle to compete on price in global markets.

Second, technology. Many private factories continue to rely on outdated machinery not because of resistance to innovation, but because access to capital for upgrades is severely constrained by banks' negative perception of the textile sector.

Third, and most critical, is the state's tolerance of illegal imports and porous trade policies. As long as the floodgates remain open, whether through predatory pricing on digital platforms or outright smuggling, building a textile SOE giant is akin to pouring water into a leaking bucket. Instead of fixing the leak, the government would simply be buying more water at exorbitant cost using public funds.

Indonesia's textile industry today is crushed by a double burden: soaring production costs and selling prices relentlessly undercut by unfairly dumped imports, including from China. If Danantara enters the market without addressing these structural flaws, the state will merely transfer the problem from the private sector to the public balance sheet.

Indonesia's history is already littered with SOEs launched with grand ambitions, only to end up as chronic burdens on the state budget, requiring endless capital injections to avoid collapse. The country hardly needs another“zombie SOE” in textiles – one that would only lengthen the list of state-led industrial failures.

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Supporting, not slaughtering

If the government's intention is genuinely to rescue the textile industry, the solution is not to create a new entity that hunts in the same market as private firms. Danantara should position itself as an enabler, a bridge rather than an aspiring star determined to seize center stage.

First, the 101 trillion rupiah should be redirected toward a nationwide machinery-rejuvenation financing scheme accessible to all textile players, not just a select state-owned entity.

Ultra-low-interest loans for proven private firms would allow them to modernize technology and raise efficiency. This approach would be cheaper, faster in impact and far more equitable than building new factories from the ground up.

Second, Danantara should focus on gaps in the supply chain that private players cannot easily fill, such as upstream synthetic fiber production or textile chemicals. Indonesia remains heavily dependent on imported raw materials. Strategic state intervention in these areas would support the entire industry without forcing direct competition in garments or finished products.

Third, the government must have the courage to fix the ecosystem as a whole, from ensuring predictable energy pricing to enforcing the law decisively against illegal textile imports. Only then can Indonesia hope to revive its textile industry on a sustainable footing, without sacrificing existing players in the process.

Ronny P Sasmita is senior analyst at the Indonesia Strategic and Economics Action Institution

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