Indonesia's Labor-Intensive Industry on the Brink: Can It Rise in 2025?

The Indonesian Employers' Association (Apindo) predicts that the challenges faced by Indonesia's labor-intensive industry in 2025 will remain significant. However, opportunities for growth remain open if the government can address the root causes hindering the sector's development. Labor-intensive industries, which have long been a key pillar of the national economy, face serious challenges in terms of operational costs, unfavorable policies, and international competitiveness.

Layoffs and Factory Closures

Data from the Ministry of Manpower presents a concerning picture. Throughout 2024, more than 80,000 cases of layoffs were recorded in Indonesia, with the manufacturing sector contributing the largest share at over 24,000 cases. This situation was exacerbated by the closure of approximately 60 textile factories over the past two years. These closures occurred in various regions such as Central Java, West Java, and Banten. The factories ranged from upstream sectors, like raw material production, to downstream sectors, like finished fabric manufacturing.

The closure of factories and the high number of layoffs indicate the fragility of labor-intensive industries amidst global and domestic economic pressures. Many companies struggle to survive due to high operational costs that are disproportionate to profit margins.

Rising Operational Costs

Apindo Chairperson Shinta Kamdani identified high operational costs as one of the main challenges for labor-intensive industries. "Logistics costs in Indonesia account for 23.5 percent of gross domestic product (GDP), much higher than in other countries," she explained. Additionally, government policies, including a 6.5 percent increase in provincial minimum wages, changes to value-added tax regulations, and rising interest rates, further burden entrepreneurs.

These conditions have made many investors, both domestic and foreign, reconsider investing in Indonesia. Compared to countries like Vietnam and Bangladesh, which offer lower labor costs and greater legal certainty, Indonesia is seen as less competitive.

Policy and Competitiveness Challenges

Government policies related to 2025 wage regulations are perceived to add legal uncertainty and worsen the business climate. In the long term, this could lead to deindustrialization. Data shows that the contribution of the manufacturing sector to GDP has steadily declined, from 29 percent in 2020 to only 18.5 percent in 2024.

According to Shinta, this decline serves as a wake-up call for the government to take immediate strategic action. Without intervention, labor-intensive industries risk losing their competitiveness entirely. Yet, the sector holds significant potential to create jobs and drive economic growth.

Opportunities for Revival

Despite the heavy challenges, opportunities for recovery remain. Some actionable steps include:

1. Logistics Cost ReformThe government needs to reduce logistics costs by improving infrastructure and distribution efficiency.

2. Policy CertaintyEstablishing supportive business policies, including flexible wage regulations and incentives for investors, is essential.

3. Strengthening Global CompetitivenessIndustries must focus on enhancing product quality and production efficiency to compete in international markets.

4. Technology TransformationGreater adoption of technology in production processes to reduce reliance on manual labor should also be prioritized.

   
   

Indonesia's labor-intensive industry stands at a crossroads between great challenges and opportunities for transformation. Success in navigating 2025 will depend heavily on the synergy between the government, entrepreneurs, and workers to create a healthier and more competitive business ecosystem.