Introduction
Indonesia has established itself as one of the world’s largest producers of furniture and handicrafts not only in the Asian region but also globally. Since 2006, the country has ranked among the top 10 exporters of furniture with countries such as China, Canada, Mexico, Italy, Taiwan Vietnam and Malaysia (Trade Research & Development Agency, 2008). The country has abundant natural resources required to sustain production of furniture. It is the world’s largest producer of Rattan (a type of climbing palm used to make furniture) (Trade Research & Development Agency, 2008). There are also several varieties of wood such as teak and hardwood varieties that have supported the Indonesian furniture industry for many years. The industry supports a huge portion of Indonesia’s economy. In 2011 and 2012 Indonesian furniture exports amounted $2.2 billion and $2.7 billion respectively (The Indonesian Furniture Industry and Handicraft Association). The country also has a huge domestic market with domestic sales amounting to $700 million annually. Both the international and domestic markets continue to expand because Indonesia has competitive labor wages, skilled carpenters and wood carvers besides the abundance of wood varieties (Carpenter & Backus, 2009). This paper presents an analysis of the Indonesian furniture industry with an emphasis on marketing. The paper examines the competing firms in the industry, regulation, local financing and the overall attractiveness of the industry for both domestic or export production.
Competing firms
Competition among Indonesian furniture producers is intense. There are more than 4,000 major furniture companies in Indonesia (Trade Research & Development Agency, 2008). The major production where competition is high are Java, Bali, Jepara, Kalimantan, Sulawesi and Papua. Wood furniture clusters, panel Furniture clusters and Rattan furniture clusters are mainly found in the largest of Indonesia’s 17,000 Islands- Java Island which also holds more than 58% of Indonesia’s 274 million people (Carpenter & Backus, 2009). The city of Jepara in Java Island has a vibrant and competitive furniture industry. Jepara has about 15, 271 furniture businesses of varying sizes. 92% (14,091) of these are small industries (Carpenter & Backus, 2009). These industries are focused on traditional handcraft and rattan furniture mainly for the domestic market. The low cost and mass production companies such as Ace Hardware, Olympic Furniture and Informa form the largest furniture companies with nationwide retail branches. 6% (871) are medium-sized companies while 2% (309) are large companies (Roda, et al, 2007). The main companies are Wisanka Indonesia Furniture, Aulia Jati Furniture, Indonesia Handicraft, Indonesia Elements, Teak Garden Indonesia, Kusuma Furniture, Kayu Lama, Antique Rattan, Giant Chess Furniture and Arhauss Mobel among several others (Trade Research and Development Agency, 2008).
The production and competition in the furniture industry has been diversified by having different levels of production. Furniture enterprises are categorized into three groups: integrated enterprises, first stage processing industries and industries involved in further processing stages (Indarti, 2010). The first group produces essentially finished or prefinished products from an input of unprocessed round wood. The second group comprises of sawmills and log parks which specialize in the initial processing of raw material to produce simple sawn timber. The third group comprises of workshops which obtain sawn timber and sets of products at various stages of production and assemble them into finished products (Indarti, 2010).
The table below shows the percentages of enterprises in each stage.
(Roda et al, 2007)
The more the companies in a given stage, the higher is the competition and as such competition is intense among the companies that deal with the final production stage. Nurrochmat and Hadiyati (2010) explain that this is so because there is less labor required and cost of production involved is also low although there is the challenge of marketing. The companies at this stage compete for the local market as well as the export market. The profit margins are considerably high at this stage and hence the intense competition.
Regulatory environment
The importance of the Indonesian furniture industry to the economy of the country has necessitated the presence of a strong and effective regulatory environment. The ministry of Forestry and that of Trade are at the heart of almost all the regulations that affect the furniture industry. The Ministry of Trade controls the licensing, and regulation of furniture businesses in the country. The Ministry of Forestry regulates the licensing of loggers and saw millers in the trading (Nurrochmat & Hadiyati, 2010).
The Ministry of Forestry has a regulation dubbed Regulation P.55/Menhut-II/2006 which replaced the legal authorization for logging and transportation (SKSHH) as the official document required for log transportation using log invoice (FAKB) and processed wood invoice (FAKO) (Nurrochmat & Hadiyati, 2010). However, there are complaints that the new regulation does not eliminate obstacles of wood and wood product distribution. According to Carpenter and Ruckus (2009), the main problems set to be overcome by the regulation are smuggling of wood and the cutting of immature trees leading to destruction of the environment and therefore lack of sustainability of the furniture industry.
The ASMINDO (Indonesian Furniture and Handicrafts Association) is the chief body that unites and sets regulations to govern the marketing of furniture from the county. ASMINDO requires furniture exporting companies to have a certificate from the three regulators; the Sustainable Forest Management (SFM), the Chain of Custody (CoC) and the Verification of Legal Origin (VLO) (Trade Research & Development Agency, 2008). The SFM proves that the wood was legally cut from a sustainable forest while the VLO and the CoC prove the legality of wood. These regulations are enhanced jointly by the Ministry of Trade and that of Forestry through ASMINDO (Trade Research & Development Agency, 2008).
The ministry of Forestry also enforces Consumer Health and Safety to protect the interests of consumers and ensure that proper standards and furniture quality is maintained. The enforcement of Occupational Health and Safety protects the workers in the furniture industry. In 2000, the Indonesian government started Ecolebelling Regulation which affects exportation. Countries in the European Union (EU) recommend that the products exported into those countries be labeled on their friendliness to the ecosystem and the environment (Trade Research & Development Agency, 2008). This regulation has increased export volumes of Indonesian export.
The exportation of furniture and other commodities can only be conducted by companies that hold a Registered Exporter Certificate. Export of commodities is determined on a basis of the Harmonized System Code. In 2012 Indonesia banned the export of raw-rattan exports as the government seeks to benefit local furniture makers from the resources. The more the resource is regulated the more it will benefit legalized Indonesian furniture producers and improve the value if their furniture. This elimination of unnecessary competition by products made from smuggled raw materials assured the legalized businesses thrive and the industry remains sustainable.
Local financing potential
Indonesia has a vibrant financial services sector that is ready and capable of supporting its key economic sectors such as the furniture industry. The country has 120 commercial banks (117 private-owned banks and 4 state-owned ones) (Mundi, Budiarjo, Reksodiputro, 2012). The majority of banks conduct conventional banking activities based on the Syariah or Islamic principles. Indonesia has many Rural Banks and small financial service providers-Savings and Credit Cooperative Societies (SACCOs). These banks provide financial services and loans to business people from all sectors including the furniture industry. Indonesian law requires all businesses that have foreign shareholders to maintain a bank account (Mundi, Budiarjo, Reksodiputro, 2012). The bank Indonesia (which regulates the Indonesian financial services sector and the currency value) prohibits Indonesian Banks from providing loans to foreigners unless the loans are syndicated to meet a certain criteria that are set by the Bank Indonesia. If the loans do not meet the criteria set, then the foreigner investors can access loan and financing through Indonesian companies through which that may choose to apply.
There is a law that regulates and governs the provision of financial services to businesses that are involved in exporting. Mundi, Budiarjo, Reksodiputro, (2012) state that the Indonesian Export Financing Institution which is under the Ministry of Finance is the agency that ensures that exporters receive favorable financing from the established commercial banks. The financing mostly covers the provision of working capital and investment financing. Some of the functions the agency mandates financing institutions to offer include insurances (risk insurances for payment and export failure), providing guarantees to the banks that finance exporters, guaranteeing are provided to participants of tenders for projects that support export activities (Mundi, Budiarjo, Reksodiputro, 2012)..
Some of the prohibitive issues in financing include the rise in interest rates from commercial banks. The current rates stand at a least 18% which somehow hinders upcoming furniture enterprises from taking loans to expand their businesses (Mundi, Budiarjo, Reksodiputro, 2012). Some banks also rate the furniture industry as unstable due to intense competition. There are issues of Non Performing Loans among some furniture enterprises which have dented the image of the sector to local banks.
Indonesia also provides tax incentives for foreign investors and as such it would be supportive of foreigners investing in the furniture industry. The government has realized the important role the furniture industry plays in the economy through the creation of jobs for the growing population and therefore it has increased incentives to attract foreign investors.
Overall attractiveness of the furniture industry in Indonesia
The furniture industry in Indonesia is generally attractive because it is backed by a strong culture. Indonesians is a largely has a Muslim majority and people are highly cohesive and influential with each other (Indarti, 2010). The people value exquisite and stylistic lifestyles that are characterized by a sense of value for classy furniture. Notably, Indonesians are very particular with having quality furniture during Islamic holidays such as Ramadhan, Idd’ Ul Fitr and others. During such times many Indonesian families change their furniture as they prepare to host guests. This scenario is usually replicate in other Islamic countries in the region such as Malaysia. With minimal bureaucracy characterizing business within the ASEAN region, setting up a furniture business in Indonesia portends good business tidings.
The domestic market for Indonesian furniture has increased. There is a growth in the Indonesian middle class while the consumer purchasing power has also increased. This has increased the disposable income in many Indonesian families enabling them to have the luxury to purchase luxurious furniture (Indarti, 2010). The expanded domestic market offers even the new furniture companies an opportunity to make good business. The expansion of economies in the ASEAN region by countries such as Japan, Malaysia, Thailand, China, Sri Lanka, Philippines and Taiwan among others has presented Indonesian furniture with a larger market making the industry very attractive.
The expansion of the education system including technical schools that train carpentry has lead to an increase in skilled labor to service the furniture industry. The abundance of skilled labor has increased the competitiveness of labor thereby lowering the wage bills in the furniture industry (Indarti, 2010). The presence of strong regulatory bodies and associations such as the Furniture and Handicraft Association (ASMINDO), government regulation through relevant ministries
Indonesia has an attractive furniture base due to competitive wages and availability of very skilled wood carvers and carpenters. The country’s culture is also closely tied to furniture and there is a massive local market and passion for exquisite furniture. Indonesia’s biggest competitive advantage comes from the fact that its furniture industry is supported by massive creativity born out of culture. Indarti, (2010) notes that regardless of the cut-throat competition in the industry, and cheaper products from China, Indonesian furniture stand out due to its uniqueness and the ingenuity of Indonesian carpenters. Furniture making has a long history and people are passionate about it thereby taking time to update themselves on upcoming testes, preferences and designs which they artistically blend with traditional touches. The Jeparans (from the furniture-producing region of Jepara) have thrived as suppliers of high-end furniture worldwide (Roda, et al, 2007). This niche market has not been infiltrated by cheap and mass-produced furniture. In the face of high-technology furniture machining, Jeparan furniture designs have prospered. Capitalizing on the high-end niche market through uniqueness in designs is a sure way to maintain good business for Indonesian furniture makers.
There are furniture expos such as the Indonesian International Furniture Expo (IFEX), the Jakarta International Expo among others which are part of the Asian Furniture Event circuit. The exhibitions provide furniture companies with excellent opportunities to showcase their products, meet financiers, skilled workers, customers and suppliers of different materials (Indarti, 2010). The massive popularity of the furniture exhibitions is a sure way through which an entrant into the Indonesian furniture industry can establish themselves.
Conclusion
Indonesia has established itself as one of the world’s largest producers of furniture and handicrafts in the world. The furniture businesses are some of the fastest growing and most profitable. Furniture businesses is characterized by stiff competition in all levels; integrated enterprises, first stage processing industries and industries involved in further processing stages. There are more than 4,000 major furniture companies with those holding the largest market shares being Wisanka Indonesia Furniture, Aulia Jati Furniture, Indonesia Handicraft, Indonesia Elements, Teak Garden Indonesia, Kusuma Furniture and Antique Rattan among others. The regulatory environment is characterized by implementation of controls and regulations by the ministries of Trade and Forestry. Other regulations such as Sustainable Forest Management (SFM), the Chain of Custody (CoC) and the Verification of Legal Origin (VLO) are issued by the ASMINDO (Indonesian Furniture and Handicrafts Association). Potential investors into the Indonesian furniture industry can obtain financing from local banks since the country has a vibrant financial services sector that has 120 commercial banks mostly based on Syariah (Islamic principles). The financing mostly covers the provision of working capital and investment financing. Overall, the Indonesian furniture industry is worth investing because there is cheap and skilled labor, abundant raw materials (rattan and timber) while the cultural affiliation of Indonesian people to furniture makes them produce unique, high-quality furniture that us reputable across the world.
References
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