The regulatory framework has resulted in the lion share of international brand garments being manufactured locally. Apart from some global clothing firms such as Adidas and Levi that currently operate through their own subsidiaries in Indonesia, the majority of international brands cooperate with Indonesian firms through licensing in compliance with Indonesian law. In fact, fieldwork evidence suggests that these licensed products and a wide range of Indonesian brands are the two main competitors in the domestic consumer market. This creates distinct commodity chain coordinations that are different from those Indonesian firms serving global markets (see Dicken & Hassler, 2000; Hassler, 2004b for an analysis of these export-oriented firms).

 

Institutionalized business practices play a significant role in defining the structures in which clothing firms operate in the Indonesian domestic market, on both the supply and the demand sides of the chain. On the supply side, manufacturing has an integral function in all clothing firms dealing with the domestic market, whether licensees or brand-owners. On the demand side, Indonesia is quite unique in the way clothing distribution and retailing are organized. Although franchised retailers have a significant role in distributing imported garments, the retailing of domestically manufactured clothing products is largely organized within the clothing firm's own retail outlets or within department stores (Hassler, 2004c). The case of clothing firms establishing their own retail outlets leads to an entirely integrated clothing commodity chain. The case of retail organization in department stores is only marginally different. Because practically all department stores operate with a consignment-based retail system, the clothing firm remains the owner of the garment until it is finally purchased. The transfer of ownership occurs at the very end of the chain. In this sense, this consignment system leads to a fully integrated clothing firm that owns its manufactured products at both the production and distribution stages of the commodity chain. While these two instances illustrate the claim that national origins of firms and domestic institutional frameworks have a major impact on how commodity chains are coordinated, there are still other differences between firms marketing licensed products and firms marketing products under their own brands.

Brand-name licensing in Indonesia 

 

Brand licensing, the most important way of doing business in Indonesia for international brand-owners, is a form of cooperation between an international brand and a local manufacturer and involves a certain form of risk-sharing in the development and penetration of new markets. The licensor or brand-owner enjoys the advantage of relatively easy and low-investment access to unknown market environments and the Indonesian partner, who has institutional knowledge of the market, organizes distribution and carries all the major investments. Typically, product and marketing specifications are supplied by an international brand-owner while the local partner organizes material procurement, production and marketing management, which in the case of Indonesia includes retail distribution (Figure 2). The Indonesian firm financially compensates its international partner for the use of the brand label, with royalties per garment sold, as well as for its provision of marketing materials – a form of fixed costs irrespective of the volume of final sales. The more garments sold, the lower the relative share of these fixed costs for the licensee. Marketplaces are geographically defined and must not overlap with markets directly served by the brand-owner or other licensees. Branded clothing distributed through this form of licensing in Indonesia includes Nike, Triumph, Kenzo, Arrow, Cerruti, O'Neil and Lee Jeans.

Great River, the company with the longest involvement in licensing within Indonesia, was by 1998 dealing with more than 50 international brands:

 

It is easy for them [licensors]. It is just like collecting money for them. They just own the name and manage it. It is good for our licensors to use us for the Indonesian market because the product is always in the same hands – sample making, production, marketing and retailing. The licensor has to deal only with one firm (field interview, Great River, Jakarta, 1998).

 

Operating on this basis since 1976, Great River had emerged as the largest domestic clothing company in Indonesia with a fully integrated production chain and extensive experience in retail distribution, which has made it especially attractive to international brands.

 

As demonstrated in Figure 2, licensees often operate their own retail network. Indeed, Great River has developed and established a significant network of its own retail outlets, also the result of it being the first company to cooperate with licensors and having a favourable position in the 1970s and 1980s to work with international brand-name owners. Its accumulated market expertise left little space for local competitors to find appropriate international partners to serve the Indonesian market in this segment. However, during those two decades, Indonesian clothing companies were mainly interested in penetrating export markets rather than serving the domestic market. Thus, Great River was endowed with an almost monopolistic position as a local provider of international brands and the protective measures for the clothing industry priced imports at the very top end of the market. As the initial competitive pressure in the domestic market was low, the company could afford not only to expand extensively but also to use its well entrenched business networks in international fashion brands to obtain brand-name licenses for other countries, including Singapore, Malaysia, Hong Kong, Japan and Australia. Great River even vertically expanded its own retail distribution network into Singapore and Malaysia exclusively for its manufacturers of licensed branded products.

 

Since the early 1990s, however, several newer market entrants have used a similar strategy for domestic market penetration. In particular, companies belonging to the largest Indonesian clothing manufacturers having established export-manufacturing production networks with brand-owners. While that still remains their key business, the growing potential of the local market increasingly has been a major draw for these licensees.

 

Fieldwork suggests that companies involved in this form of international business have a strong tendency to use local inputs. Raw materials are procured domestically where possible in accordance with licensor specifications. Great River, for example, has established several joint ventures in textile manufacturing to secure supplies of quality inputs. The huge demand for raw materials in the company's internal production chain makes cooperative ventures with Great River very attractive to potential international partners. Therefore, the amount of raw materials procured internationally is rather limited.

 

International licensing cooperation is specified in legal terms between the licensor and the licensee, often for a specific duration. International brands with subsidiaries currently in Indonesia started their market penetration on the basis of licensing. The changing institutional framework for direct investments and the growing domestic market have resulted, for example, in Levi ending the partnership with its Indonesian licensee to take full control of its marketing operation in Indonesia. The licensee had introduced the brand to the market and developed the distribution system. However, Levi saw a great market opportunity to internalize this business at an organizational level, while retaining the ex-licensee as franchised retailer for Levi's products.