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Asian Ceramics (www.asianceramics.com) looks at tableware production costs within ASEAN, and focuses on Indonesia.

In an industry where product prices are stagnant or declining in real terms, production cost profiles are substantial, and consumer markets are rapidly changing, the challenge is far greater. Under the layers of glaze, coloring, and decorative work is a product still largely the result of manual labor; labor that is increasingly become expensive in some of the Asian countries. Besides labor, tableware producers also have a complex set of regulation, heavy legacy costs, and substantial consumer changes to manage. The solution for the producers is to master the art of overall cost reduction, which is increasingly becoming difficult.


Rapid economic growth has fuelled Indonesia’s rising consumerism and created an ever-expanding rank of middle-class consumers. It has also unleashed increased demand for ceramic tableware products and created a number of opportunities for domestic producers. During the period 2009-2013, Indonesia’s production of tableware ceramics increased at a compound annual growth rate (CAGR) of 7.6%.


The country has emerged one of the largest producers of ceramic tableware in Asia. Trailing behind China, the country has several renowned and popular ceramic tableware brands and producers. Domestic as well as international producers have scaled up their operations in the country in recent years, in order to serve the domestic and export markets. Many of the producers are OEM suppliers to top global tableware brands. Currently 21 medium and large scale producers and about a dozen small scale tableware producers in Indonesia has an installed capacity to produce 1.2 billion (porcelain, bone china and stoneware all included) pieces of tableware products. West Java is home to maximum number of tableware producers and accounts for more than 40 % wares produced in the country. Second highest numbers of tableware producers are located in East Java, while Central Java has three producers. A total of seven producers are located in Bali, Pontianak (West Kalimantan), and Jakarta.


The growth in the domestic production and consumption of ceramic tableware, which was rapid during post 2004 period, started to slow down in 2009. However, post 2012 there was another shift , which led to steady growth in tableware production and consumption. Given that the per capita consumption of ceramic tableware products in Indonesia is still modest, the domestic market for such products still has a good potential to grow. However, the opportunities on the domestic market are available more for mid and low-quality products than for high-quality ones.


Tableware industry, which is operating at a cumulative capacity utilization of 85 % has gained immensely after EU imposed punitive duties on ceramic tableware imports from China. Most of the Indonesian tableware producers have either started supplying to European countries or are in the process of doing so.


So, what led to the establishment of a vibrant tableware production industry in the country? Is it the lower production cost as compared to its South East Asian peers or some other factor/s. We analyze in the course of the article.


New ceramic tile lines added in Guangdong in 2014

 

  Exports
( Number of Pieces)
Value
( In USD)
Imports
( Number of Pieces)
Value
( In USD)
2014
( Jan- June)
27,845,194 93,020,183 13,074,588 7,774,638
2013 49,129,257 165,385,638 31,199,837 16,238,548
2012 40,745,217 139,518,289 33,476,299 16,982,222
2011 36,124,576 124,991,032 31,482,219 14,638,118
2010 31,894,485 107,039,453 25,547,848 12,479,588
2009 25,775,939 79,238,576 22,817,120 10,051,891

 

Opinion forming

 

According to the Chairman of the Indonesian Ceramic Industry Association (ASAKI), Elisa Sinaga “Production of tableware ceramics has not been operating at full capacity. Utilization of the country's tableware ceramics' production capacity is currently at around 85 percent and has therefore still room for growth without needing capital investments. Particularly production facilities located in East Java can grow due to sufficient gas supplies. In the western and central part of Java, sufficient gas supplies form a problem.”


Cost factors

 

One of the main obstacles in the overall ceramic industry is that limited gas supplies in many regions of the country. This has significantly added to tableware production cost (costs of gas account for about 22-26 percent of total tableware costs in Indonesia). Ceramics producers now actually prefer to open factories in Sumatra as this island is blessed with natural gas reserves and has more available (and cheaper) land than on Java, Indonesia's most populous island.


Another factor which troubled the Indonesian tableware producers was the sharp depreciation in rupiah exchange rate in 2013 and 2014. In the steepest fall in 2013 the rupiah fell 24.1 percent against the US dollar, which caused a significant rise in tableware production costs as the gas supply is paid in US dollars but it is difficult for ceramic producers to pass on costs to consumers as they will switch over to other forms of tableware.


Aside from the aforementioned issue of energy supply, the country's inadequate transportation system puts significant strain on distribution costs in domestic as well as export markets. The anticipated acceleration in infrastructure development should gradually improve this situation. Knowing that soon ASEAN Economic Community (AEC) will come into effect - which aims to enhance regional economic integration by introducing a single market and production base characterized by a free flow of goods, services, and investments, as well as a freer flow of capital and skills – Indonesian ceramic tableware producers anticipate that Indonesia will be flooded by imported products. One of the problematic issues is that Indonesia is plagued by weak infrastructure which means that competitiveness of Indonesian tableware producers is relatively low due to high logistics costs. Therefore, it is sometimes cheaper to import foreign products than to transfer the same (domestically produced) from one point to the other within the Archipelago.


While Indonesia's topography offers most of the clay, sand and other minerals the ceramics industry needs, mining output and refining of these natural resources are often left wanting. Therefore, Indonesia relies on imports of key ingredients for the production of ceramics and glazes, such as feldspars and zirconium silicate. This puts local producers at a disadvantage versus their competitors in other Asian countries. Some minerals for ceramic production are mined in Indonesia but then exported abroad for further processing. Developing the downstream industries to supply ready-to-use goods to domestic producers – and thereby providing the missing link in the supply chain – can help Indonesian tableware producers to decrease the production cost.


Though Indonesia is one of the least labour expansive countries in Asian region, yet the skilled labour, which is needed for tableware production is on a steady rise due to employment opportunity in country’s vast tableware production industry. A key executive from PT Sango Ceramics told Asian Ceramics “Poaching of skilled technician and workers has become quite common in Indonesia. More often than not, we are forced to pay unreasonably high salaries to skilled workers on shop floor”.


A number of Indonesian ceramic tableware producers are finding it challenging to tap into the international ceramics market due to higher quality level established by Chinese companies that have extensive experience in this field. To do so, Indonesian companies need to train their workforce. Most manufacturing companies in Indonesia are located outside of Jakarta, where general education levels are lower and absorption of new ideas and processes can take longer. It can thus be difficult to train workers to become skilled in advanced manufacturing techniques.


Dumping duties

 

China has been the most dominant exporter (It accounted for as much as 70 % of total ceramic tableware exports prior to 2012) of ceramic tableware in Indonesia. Chinese producers which enjoyed economies of scale and alleged state subsidies for exports had cornered a big share of domestic market in mid and low cost tableware market.


Huge Chinese imports in the country had made many of the ceramic tableware producers uncompetitive in the domestic market. However, Chinese imports declined significantly after the imposition of anti- dumping duties by Indonesian authorities in 2012. Currently all Chinese tableware imports are levied ananti-dumping duty of 87%, which has provided a much breathing space to domestic producers.


It is noteworthy that in 2013, Chinese tableware exports to EU, South Korea and Thailand too started attracting anti-dumping duties. Chinese producers, who have a huge installed capacity started entering in Indonesian market through other entry points, but quantum of these imports is a meager 15 % as compared to pre 2012 numbers.