We're very optimistic about the footwear industry here: Adidas

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia's footwear industry appears to be showing signs of recovery, after experiencing a slump since the Asian financial crisis and losing out in competition for export production from other manufacturing countries in the region.

Some 50 global footwear firms plan to relocate their production to Indonesia from China and Vietnam, the Indonesian Footwear Industry Association (Aprisindo) has said, following stricter export quotas on the countries from the U.S. and the European Union.

This is to further contribute to the export of Indonesia's footwear, which Aprisindo estimates will rise by 20 percent in 2006, from last year's 150 million pairs of shoes worth US$1.5 billion.

Yet problems may still be looming for the industry, with the latest leading to the closure of PT Dong Joe Indonesia, PT Spotec, and PT Tong Yang Indonesia -- three suppliers of major footwear maker, the Adidas Group.

Besides raising questions on how the industry is doing, there are also concerns over the fate of some 18,000 workers employed at the factories.

The Jakarta Post spoke with Adidas head of global footwear sourcing, Duncan Scott, on the matter, as well as the group's commitment and perspective on the industry. The following are the excerpts of the interview:

Could you clarify what happened to the three suppliers, considering there are some notions that their closure was due to Adidas having stopped placing orders with them? Adidas is very committed to Indonesia, and we would have liked to continue doing business with these Indonesian suppliers, but they were unable to meet our basic business requirements.

They were confirming delivery times which were later and later, and eventually they could not confirm orders at a time that our customers could accept.

In the case of Dong Joe, we had one quality problem which brought to the surface some of the financial and management challenges that they had. In the beginning, we thought it was a cash-flow problem, but then we started to see there were really some deep-seated management issues.

They had to remake the shoes, but there was not an immediate financial burden on them, because we basically had not put in a claim for the orders yet. But then they had to refinance the materials to remake the shoes. Immediately at that point, we saw they had a problem, financially.

At that point, we took a very extraordinary step. We agreed to finance the materials for those shoes that were being remade in order to keep their cash-flow going. That helped them in the beginning, but it wasn't enough.

It was very unusual and pretty unprecedented for us to take that kind of step and actually finance materials. But we really did want to see if we could get them through the difficulties.

So it was a dead-end situation? And will Adidas now be reallocating in placing its orders to other suppliers, including in other countries? We tried to continue placing orders even after we saw their financial issues, and we had taken extraordinary measures to keep placing orders. But at that stage, we didn't see a way forward with them, and we were forced to reallocate our orders.

We had to spread some orders here in Indonesia, and some others in other countries around Asia, some in Thailand and Vietnam.

It is very unfortunate, we're very concerned about the workers, and we've been taking steps to consult with the government and with Aprisindo to see what steps can be taken to try to ease this situation for the workers.

So can you say that you're not actually connected with the problems of the suppliers? Any suggestions for the workers? The situation with the workers is not an easy one. We have an interest in making sure that we have a stable situation, and that the workers are treated fairly.

At the same time, we can't undermine the fiscal responsibilities of the actual owners of the factories. They're the ones first and foremost that have a responsibility to do right thing, to obey the labor laws, and to make sure that they are managing their businesses in a fiscally responsible way.

The legal obligation is very clear in this case for the owners of the factories to live up to their commitment. And I think Adidas is clearly doing above and beyond what normally one would expect.

So far we have been working with the trade minister and she has agreed with Aprisindo to try to take the lead in addressing the situation for the workers.

They have taken some steps already about payments that are due, and that includes looking at Jamsostek payments and Aprisindo is also using its influence to try to see if there are employment opportunities in some of the other factories.

Adidas also has taken a lead in contacting our factories, and in cases where they are expanding, given equal qualifications for the workers, and encouraging them to employ some of the displaced workers where they can.

On top of that, Adidas has already committed to covering some medical payments for a period of time, while the factory workers have been displaced and are looking for new employment.

So after this case, how do you see your future business here? Could you give a picture of how your business has been faring so far? I'll answer the question not specifically in terms of the exact numbers, but what I can tell you is that 23 percent of our global footwear orders are placed in Indonesia. That makes Indonesia our second largest source after China.

For footwear suppliers, there are a total of 12 suppliers with 56 factories, outside the three previously mentioned. Most of this production is for exports, but of course we also supply for the Indonesian market.

The Adidas brand expanded significantly in Indonesia this year. I believe it was approximately 25 percent growth in terms of revenue year-on-year in Indonesia.

So Adidas still sees good prospects for doing business in Indonesia and Indonesia's footwear industry? We still see it as being very positive, and we're very optimistic about the industry here. There are a number of important factors that make Indonesia strong.

They have some very strong factories with experienced workers. They have a relatively low turn-over rate, and that has becoming important as we move toward more modern manufacturing methods.

So in comparison with other countries, what we're seeing is a low turn-over rate actually works to the benefit of Indonesia.

The other thing that's very important is that you need a strong materials and components support.

Today Indonesia has the second best infrastructure in that regard in comparison with China. And that will be a key factor, especially for branded athletic brands like Adidas that need high-tech capabilities.
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