Case Study: Home-based Shoe Production in Asri Katon Village

• Parties interviewed

Sanny Shoe Factory
Village Chief of Asri Katon
Head of the Assembly Department at Sanny
Home-based shoe makers in Asri Katon

1. Summary of the visits

1. Business Mode of Home-based Shoe Production

Basically, the business involves three parties.
Shoe factory, who receives orders from domestic and overseas buyers, allocates part of the production processes directly to contract labours in the factory, and out-sources the rest to home-based workers through “middleman” or possibly to some partner factories.
The middleman, either be a factory employer or self-employed, after receiving an order at a certain “piece rate”, finds home-based workers to finish it in exchange of a lower price/piece rate, thus earns the price difference as profit.
During the process, there could be more than one middleman between the factory and a home-based worker.

1. Features of Shoe Factory

The Sanny shoe factory locates in Asri Katon Village. It receives manufacturing orders from Malaysia, Singapore, Germany and domestically. The investors of the factory consist of local and foreign investors (Germany and Malaysia).

The factory claimed that all the production processes are finished within the factory, and when the factory lacks the capacity to meet demands, it will outsource some of its production processes only to partner factories. This claim, however, is contradictory to what the home workers and “middleman” said, which suggests that the factory may have an inclination to conceal the fact that they hire home-based workers.

The factory also claimed it hires around 100 full time workers, and the rest are on short-term workers. However, they did not disclose the number of workers on short-term contract. Nevertheless, we met around 30 “long-term” workers that have been working in the factory for years on continuing short-term contracts subject to renewal upon expiration. As suggested by the “middleman”, each of the nine departments in the factory has its own putting-out system involving home-based workers with the raw materials and working tools provided by the factory.

1. Features of Middleman

   The middleman we visited is long term employee in the shoe factory. As head of the assembly department, he is responsible to train workers and to supervise the production process in his own department. Since eight years ago, he has taken a role as “middleman” besides his responsibility in the factory, that is, to find home-based workers to assemble shoes when the factory faces difficulties to fulfil orders on time.
  
   The middleman makes profit from the difference between the piece rate he received from the factory and that offered to home-based workers. He also checks quality of the finished products from the workers and returns those substandard, but not actively participates in supervising the production process nor in training the workers.

And along with the expansion of the factory’s business, the frequency of the outsourcing to home-based workers increases.

1. Features of Home-based shoe makers

The home-based workers receive orders for sewing shoes from the middleman who allocates orders from the factory, and will be paid based on a “piece rate” that ranges from 1900 to 2500Rupiah according to the complexity of different models. On average, each worker can sew approximately 10 to 15 pairs per day, same as their counterparts working in the factory. But their working hour fluctuates a lot due to the irregularity of the orders, and thus their income fluctuates correspondingly.

The raw materials for sewing the shoes are provided by the middleman, including needles, threads, and shoe parts. In contrary, no occupational safety measures are practiced from the order provider.

These workers are ex-workers of the shoe factory laid off years ago, and have been working as home-based worker ever since. They are mostly married women with obligation of a housewife. Although burdened with domestic work, they wish to return to the factory as formal employer, since the wage is more secured and there are also other employment benefits.

1. Position of Village Government

The village government’s duties include enforcing law; fulfilling village economic and social needs and preserving traditional customs.

Although from the village census, the government acknowledges two home-based industries, respectively the flower and the painting industry, the village government does not recognize the existence of home-based shoe production in the village. This suggests that the village government paid inadequate attention to the issue of home-based workers.

Concerning the relation between the local government and the shoe factory, the village government office does not have any regulation overseeing the operation of the factory, other than the factory must hire a certain proportion of their workforce from the local population. The village chief also asserted that the village gains no direct benefits from the factory other than being provided more local employment opportunities, so that the villagers do not need to find jobs in cities far away.

The village government has taken no active role in organizing or representing its villagers to negotiate with the shoe factory on terms of contract or other issues.
The village chief sees the factory’s decision on continuously renewing short-term contracts as a way to prevent labour riots. And he also fears that any government intervention will drive away investments attracted by loose regulations, cheap land price and convenient transport access.

1. Problems identified

1. Lack of recognition of home-based workers

Most home-based workers are not identified as “worker” either in the census or in any government statistics, largely due to the inadequate understanding of home-based working by the workers themselves, as well as by the government officials. And the operation of putting-out system makes it hard for workers to identify the initial order providers.

On the other hand, the factory inclines to conceal its involvement in the putting-out system, but at the same time, obtains the benefit of lower cost and higher flexibility by hiring home-based workers at the expense of less reward compared to formal workers, both in terms of money and of other welfares.

Moreover, although having mentioned “informal labour”, Indonesian laws fail to identify home-based workers clearly, not to mention to endow them with basic labour rights or to protect them from torts and abuses.

Suggestions:
It is possible that a large part of this problem is due to the fact that the labour law fails to define clearly the home-based workers. They do not fit into the definition of formal worker either; hence they, and their rights as workers, are not defined by the law.

For the government and businesses to recognize them, it is necessary to recognize the workers formally in the law. An unambiguous law can give recognition and protection to these workers, stating their wage rate, health benefits entitlement, and other rights, thereby will better motivate the labour and promote corporate social responsibilities. Also, an explicit law will reduce the possibility of disputes and abuses; therefore can efficiently reduce relevant social costs incurred. Moreover, stricter law enforcement is also crucial for achieving such goal.

Changing the law requires tremendous efforts and time. It is also suggested that in the short-term, raising awareness of home-based workers issues among government, legislative bodies and business communities can be done by meetings, and perhaps collective bargains.

1. Unreasonably low and much unsecured income

There is no long-term contract between the factory and home-based workers, indicating any informal working relations between the two parties are subject to termination at any moment. And the orders from the factory fluctuate a lot.

All agreements between the middleman and home-based workers with regard to terms of orders are verbal, thus leaves no evidence when disputes arise. The bad quality control due to the absence of training, instruction and supervision adds the risk of financial hardship to workers resulting from the return of substandard products.

Using an average piece rate 2200Rupiah and 13 pairs a day, the weekly income of a home-based shoe maker working five and half days per week is 157,300Rupiah. Taking into account that the workers bear some of the costs, such as electricity and electricity, by themselves, this payment level is apparently too low compared to the weekly wage, 180,000Rupiah, earned by contract workers in the factory.

Suggestions:
       We believe the most direct and efficient solution should be that the law clearly entitles the home-based workers with reasonable remuneration along with the guidance for its calculation.

However, since the formal workers and home-based workers are paid based on different systems, respectively monthly wage and piece rate, there is difficulties in calculating the reasonable pay to home-based workers. Here based on the principle that both groups should be treated equally, we suggest a possible formula under the condition that both groups participate in the work with same characteristics and same products, taking the Sanny Shoe Factory and its home-based sewing workers as example:

A formal worker in the factory works five and half days per week and produces 13 pairs of shoes per day. He gets 180,000Rupiah weekly payment while incurs no other fixed and variable costs other than his own labour. Thus his labour reward per pair of shoes is 180,000 / (5.5x13) = 2517Rupiah, which should also be the average labour reward per pair of shoes to a home-based worker doing the same job. Certainly, this average labour reward fluctuates according to the complexity of different shoe models. But since the home-based workers incur the costs of electricity, lighting, working place, supervision and quality control by themselves, these costs should be added into the piece rate. So, a reasonable piece rate in this case is equal to 2517Rupiah + work complexity adjustment + other fixed and variable costs incurred by the home-based worker.

Nevertheless, the situation varies order by order, case by case; hence the calculation can never be wholly formulated. This requires time and efforts in negotiation and written documentation before orders are accepted, so that the realization of agreements are better guaranteed and parties involved are better protected.
Besides the production side, it is also believed that consumers’ concern on labour rights add to business community’s incentive in improving labour welfare. That is why we also suggest domestic labour organizations and NGOs cooperate with their counterparts abroad, in order to advocate the idea of labour rights and fair trade.

It is also suggested that the middleman system be altered. Since the middleman obtains a share of profit from the difference between the piece rate given by the factory and that paid to the workers. As a result, the piece rate workers receive will be lower than that paid by factory. To bring these two figures in line, the middleman layer has to be eliminated. There are two possible ways; first, the middleman can receive a salary and bonus, but not a share of profit from the differences in the piece rates, and the workers will receive the piece rates given by the factory directly. Second, the factory can hire these workers as long term, formal workers. But both of these measures depend on the bargaining power of the workers.

1. Lack of social security and other welfares for the home workers

Home-based workers do not enjoy the rights and benefits of formal workers. These rights, as defined by the labour law, include a minimum wage, holidays, insurance, work hours, social security, bonuses, religious activities, and rights to organization. Home-based workers are vaguely defined in the labour law, and they are not regarded as formal workers, hence are excluded from the rights enjoyed by the formal workers.

Although there is a government social security scheme, namely Social Security Network, this scheme only aims at the poor. In addition, the process to get the qualification card for it is complicated and the execution is far less than impartial and efficient. As a result, this scheme may not effectively protect the home-based workers.

Suggestions:
As the home-based workers are not covered by the social security benefits for formal workers, a few suggestions have been made to improve the situation.

First, to prevent against unreasonably long working hours and lack of holiday, the maximum daily working hours of home-based worker should be defined by law. When setting the deadline of the orders to workers, the factory should calculate the days required based on a reasonable estimate of the average number of shoes that can be completed per day, and the time required for each shoe. The factory should also exclude national holidays as working days in calculating the date of finishing the order.

Second, a community based social security fund should be set up. It can obtain funds from three sources, the workers, the factory, and donations from NGOs. The fund serves to provide unemployment insurance, health benefits and other monetary benefits to the workers. The workers will make monthly contribution to this fund, and they can collectively bargain with the factory to request contributions, as the factory is in fact employing these workers indirectly. This fund can provide temporary relief to the lack of social security provided for the home-based workers. In the long run, the social security system must be improved, to provide more comprehensive protection to home-based workers. This requires that the law formally recognizes the home-based workers, and giving them the corresponding protection.

1. Lack of occupational safety protection

Home-based workers have inadequate occupational safety protection. They have no health insurance, and neither the shoe factory nor the middleman is obliged to provide compensation for any injuries resulting from work. The only safety precaution taken is the self-prepared plastic finger wrap, used for protecting the fingers from the thread and the needle. However, not every home-worker uses this protective gear, and even when it is used, it cannot protect fully against the needle sting.

Neither the factory nor the middleman provides the workers with basic occupational safety guidance or any supervision on the safety of their working environment. On the other hand, the home-based workers themselves don’t pay enough attention on this issue too. During our visits, we found many sewing shoes on their knees instead of sitting at a worktable, and the environment was sombre and messy. Many of them suffer backache and eye problems but don’t have an idea how to better protect themselves.

Suggestions:
The fund mentioned in the previous section can help alleviate this problem. The fund can be used to purchase protective material, such as the finger wrap, and organize occupational safety lessons to educate workers about the precautions to be taken, such as way of sitting, and relaxing the eye. However, we believe that the factory has the responsibility of offering occupational safety instructions to home-based workers, and such obligation should be stated by law explicitly.

1. Lack of bargaining power and organization

The home-based workers lack organization and bargaining power. They are large in number while scattered at their own places; they have very limited knowledge and information about the shoe factory, the industry and the market; their skills confine their work opportunities, and they do not group together in large number and bargain collectively.

The village government also lacks bargaining power against the business community. For fear of losing investments, the village government imposes loose restrictions on investors to build factory. Therefore, home-based workers are treated less favourably, as government does not bargain for the workers. However, such stance is pervasive within the Indonesian political arena, be it laws, government regulations or enforcement.

Suggestions:
We suggest three parties, respectively the workers, the local government and the NGOs take active roles in organizing the home-based workers.

To obtain recognition and greater protection, the workers will have to lobby the government and legislative bodies for a change of law, which includes requesting formal recognition for home-based workers, to stipulate the definition of who are the home-based workers, and the corresponding rights they are entitled to. As the workers are engaged in a putting out system, their work orders tend to fluctuate, and this has to be taken into consideration when defining an appropriate wage rate.

In the short-term, before a change in law can protect worker’s wage and other benefits, the workers can organize themselves, and bargain collectively with the business community for more favourable terms, such as more favourable piece rate, working hours, and contribution for the community based social security fund.

To negotiate better, it is necessary that the workers be well informed. The workers can organize themselves together, and share information they have with each other. Useful information includes the days given for completing a job, the piece rate for the job, frequency of orders, and the profit the shoe factory and the shoe producers (customer of factory) makes. With such information, the workers will know how much bargaining space they have, and make requests that improve their wellbeing.

It is possible that the workers alone are not enough to persuade the government or business community. The home workers will then have to cooperate with other labour organizations, such as labour unions, to bargain collectively. Obtaining help from NGOs could be useful too, since NGOs such as HWPRI have more information, vast membership and broader connections which put it in a better position to lobby and to negotiate. Furthermore, raising awareness of home-based worker issues among the international community can help in pressing the government to improve the welfare for home-based workers. Pressure from overseas NGOs and media can have a substantial effect, especially to multi-national companies and exporters, also to the legislation, which is exemplified by the minimum wage hike in1990s in response to pressure from US government.

Case Study: Palm Sugar Industry of a village in Lumajang

• Parties interviewed

1.     Chief of a village in Lumajang
2.     Facilitator
3.     Palm sugar production workers

• Summary of the visits

1.     Modes of operation of the industry
                The industry involves three parties, which are respectively:
Facilitators who grant loans to workers according to their demand and ability to return the money, collect sugar from the workers and then sell it to buyers;
Landowners who rent trees to palm sugar workers;
Workers who work to earn a living and repay the debts.
There are two modes of operation in the industry. In the first one, workers loan from a facilitator and pay the tree rents to the landowner via the facilitator. While in the other one, workers loan directly from a tree owner, who is also the facilitator, therefore pay him both the rent and return of loan. These modes of operation have been running since the 1950s.

• Features of facilitators

Most of them are wealthy, enabling them to obtain loans easily from banks, and then lend money to the sugar makers.
Though they claimed that there is no interest for the loans, they gain huge profits from loaning, as they collect sugar from palm sugar workers at a much lower price than they sell to the market.
The chief of the village revealed that the twenty money lenders in the village collude and set prices that are favourable to them.

• Features of workers

Palm sugar workers do not have adequate capital to start their own business. They have very low credit rating, making it hard for them to obtain loans from banks. They also prefer borrowing money which is “interest-free” from facilitators, not seeing the high implicit interest rate.
They only borrow enough to meet their basic needs, and cannot save enough capital to set up their own business. Thus they have no choice but have to continue borrowing from the facilitators to get enough capital for production and sustenance.
The working environment of the workers is poor. They have to climb trees to get palm sugar nectar, which is dangerous. Also, the ventilation in the hut is poor when they boil nectar.

• Views of the village chief

The village chief thinks that this system is reasonable, as the workers can cover their daily expenses with the loan obtained and the modest profit they make.
The village chief hopes that a corporation in the palm sugar industry could be set up in the village. But until now, there has been no such interest form the business sector.
Problems and solutions
1.     High return of facilitators relative to the low income of the palm sugar workers:
The facilitators earn a lot from lending money to workers. Most of the revenues from producing sugar go to the facilitators, making the workers do not receive what they deserve.
In one of the cases, two families work as a production unit. The following is the estimation of the return of the facilitator from lending money to the production unit.
 

The facilitator we have interviewed has 50 families working for him. Their revenue from lending money is huge.

Moreover, their claim of not receiving interest is contradictory to the Rp. 6,855,000 of direct interest in the above computation.

From the above illustration, the market price of the sugar is Rp. 45,500 per 7.5 kg, but only Rp 3,300 goes to the workers while most money goes to the facilitators. The amount is only enough for the workers to maintain their basic expenditures. They should receive more.
 
On the other hand, the mode of operation of the industry is a vicious cycle for the workers. As previously mentioned, the loans only provide fundamental need to the workers, they have to work to earn a living and repay the debt. Some of them have to borrow again before they fully repay the loan, making the debt grow bigger. In one of the visits, an old lady revealed that she still owed a debt of Rp. 6 million, which is very difficult for her to fully repay the debt in the future.

Solutions:

• Inadequate capital is the root of the problem. With enough capital, they can start their own business and sell the sugar directly without borrowing from the facilitators. One of the possible solutions to help with the capital is setting up a micro-loan fund within the village, which is financed by the villagers. Workers can borrow from the loan at a low interest rate to fulfil their sustenance and start their own business. The micro-loan system can also help with their urgent needs like education expenses and medical expenses. For details, please refer to later sections.
• To receive a higher selling price that the workers deserve, it is hoped that they can set up a cooperative among themselves to organize their products and sell the sugar directly to the market. The corporative can serve as a mean to avoid exploitation from the facilitators and strengthen the bargaining power of the workers.

2.     Dangerous working environment
The workers do not pay much attention to the safety issues in the production process. Tree climbing to collect palm sugar nectar is very dangerous as they do not have any safety measure to protect themselves. In one of the visits, a worker said that her husband fell from a tree a week before and broke his ankle, losing the ability to work. The poor ventilation in the house when boiling sugar is unfavourable to the workers. The facilitators do not provide any medical allowance for the workers.
Solutions:
i.      It is necessary to promote occupational safety to the workers. For example, it would be much safer if a safety robe is hanged from a palm tree so that they can apply when climbing up trees to get palm sugar nectar. This prevents them from falling trees. For poor ventilation, it is advised to install more windows in the huts if possible.
ii.      Health fund scheme, which is one of the schemes under the micro-loan fund concept in Indonesia, can help the workers with basic medical treatments in cases of illness and accidents. For details, please see later parts related to micro-loan fund.

3.     The palm sugar workers lack basic financial sense. The workers do not keep account for their production. In an interview with an old lady, she even ignores the repayment period, but repays the facilitator until the facilitator deems unnecessary. This would be difficult for them to have their own savings. Also, facilitators can cheat on them easily and ask for more than they should pay.
Solution:
It is suggested to provide basic financial training to home-based sugar workers so that they can keep a simple financial record for their business. They should keep records of their unit production costs, sales quantities and prices of their products. This helps prevent them from being cheated by the facilitators. The financial records also provide them evidence when negotiating with facilitators in cases like facilitators in an attempt to squeeze the workers. They can also observe if there is any fluctuation in price or quantity demanded so as to better plan their production.
(D)           Conclusion

• Workers lack capital.
• Facilitators unfairly gain huge profits from granting loans to workers.
• Palm sugar workers earn less than they deserve.
• The borrowing process of workers is a vicious cycle in nature.
• Setting up various micro-loan funds is able to help with the capital problem and provide the workers with basic medical treatments when necessary
• Workers need to pay more attention to safety issues.
• Basic financial training should be provided to workers.

Case Study: Embroidery & Garment Industry in East Java

• Parties interviewed

1.   Mengelo (“Muslim Hat & Tunic Producer”) in Mojerkerto
2.   Ex- Village Chief (Home based Industry Employer) in Malang
3.   Ex- Village Chief’s Home Based Employee in Malang
4.   “Faiz Bordir” - Large Scale Embroidery & Garment Industry in Surabaya

• Summary of the visits

• Features of Mengelo (“Muslim Hat & Tunic Producer”)

Nature of work

• The business makes Muslim Baju, i.e. prayer tunics, as well as head scarves.
• Production includes making the garments and embroidering intricate thread and bead designs

Price Fixing

• No negotiation takes place and the lady consciously sells below ‘market price’,
• The buyer gives her an estimate ‘market price’, and the lady consciously sells below this market price.
• She has a fixed profit margin of 2,500 Rp per item

Business Strategy

• Sell product to market stalls or workers in big companies who sell to co-workers

Production Rate

• 1 Baju / 1.5 days

• Features of Ex-Village Chief (Home based Industry Employer)

Personal Profile of Business owner:

• Ex-Village Chief, opened the business after obtaining a 10 Million Rp. loan from the Social Department, due to connections.

Size of Business Labour:

• 10 Full Time employees
• 10 Part time employees
• 2 Full time employees on site

Why set up business?

• To Create local employment for women, after many were let off by the factories.

Clientele?

• Recieves orders exclusively from 2 local department stores: ‘Sandang Muah’  and ‘Arjuna’

Production Rate

• 3,000 to 4,000 pieces per month
• Each employee produces between 35-40 Muslim Prayer Tunics / week
• To fulfill 4,000 pieces per month, requires all 20 workers. Any additional orders are fulfilled by outsourcing.

Production Cost & Revenue

• Features of Ex-Village Chief’s Home Based Employee

Personal Profile

• Young housewife, married to a Mason, with young children
• Acquired Embroidery skills from a course by another lady
• Previously employed in a Candy Factory

Term of Employment

• Employed for 3 years

Why joined Embroidery/ Garment Industry?

• Occupation by majority of women in her neighbourhood

Business Operation

• Receives outsource orders from 4 different employers, including Bu Rosdiah
• Works using her own sewing machine, purchased using personal savings.
• Receives thread from employers

Job Satisfaction

• Content with employment, mentioned that ‘if receive orders everyday enough to cover expenses and make a living’

• Features of “Faiz Bordir”

Faiz Yunianti’s Personal Profile

• Owner of Textile Business
• First operated as a home based industry in 1997 with 1-2 workers.

How established business?

• First expansion in 1999 using 20 million Rp 2 year loan obtained from the Industrial Trade Bureau.
• Opened first showroom in 2003

Size of Business

• Currently has 2 showrooms in Surabaya (including in Galaxy Mall) and 1 in Singosari.

Employees

• Currently employs 75 workers both onsite and home based workers.
• All home based workers were previously employed as full time on site workers for more than 3 years. She has an open door policy by allowing home based workers to return.

 Training & Development

• Trains workers by herself and lends sewing machine to home based workers.

Key Business Strategies

• Innovative personal designs
• Advertising
• Networking
• Down payment
• Treating employees well

• Problems Identified and proposed solutions
• Pricing and Profit

• Lack of Negotiation

Home based workers (HBW) and the owners of home based industries (HBI) are reluctant to negotiate with buyer. They are compliant to accept whatever price the buyer offers.

This phenomenon is due to the unequal bargaining power between buyer and producer. Given the abundance of competition within the embroidery and garment industry, producers fear that buyer will go elsewhere if they negotiate the price and terms of business. Furthermore, the local culture encourages home based workers, who are predominantly women, to be submissive and non-confrontational. Unfortunately the lack of negotiation allows buyers to press prices low and exploit the producers.

Solutions:

• Home based workers and owners of home based industries should be encouraged to negotiate with the buyer to obtain better piece rates and reduce exploitation. Negotiation also increases the communication and clarifies the terms and conditions of business for both parties.

• Both workers and owners should perform market research independent of the buyer, such as investigating the retail price of the goods. With such knowledge, these parties can have more informed negotiations to seek fair return for their production.

Basic market research can be performed quite simply by finding the price of comparable products in the market place, shops and department stores.

At a more advanced stage, they may wish to observe the types of consumers who purchase their goods to find their target market. Such information will help them better adapt their product to the consumer needs. 

• Profit Margin

Solutions:

• Contract

It is a common practice for parties to evidence their business transactions in written documents, known as a written contract. The aim is to provide better security to both parties and clearly list the terms of their agreement to avoid any confusion. However, it is recognized across the world and in Indonesia that unwritten contracts may also be sued upon for breach e.g. failure to perform. 

Contrary to common practice, the concept of contract (both written and non-written) is not popular amongst the East Java embroidery and garment home based industry and its workers.

• Home based workers

Contracting could be a tool to protect the home based workers by binding the employers or middle men to them. However, it appears that contracts have minimal impact on home based workers as the law is ineffective in practice and legislation.

Legal Classification of Contract

There is some difficulty in appropriately classifying what type of contractual relations exist between the home based workers and those who they receive orders from (either directly from the business owner or the middle men). Research into Indonesian labour law , indicates they are not protected by ‘Working Contracts ’ in the (Labour) Law No. 13/2003, due to a lack of formal and direct ‘working relations ’ with the employer .  The employee needs to receive jobs provided from the employer and be supervised by him or her. Academics argue that the element of supervision is lacking in home based workers relations with the business owners or middle man, to nullify any ‘Working Contract’ . This is because the employer is not present during production and only examines the final product.

It is argued that the relations are better classified as “Work Contract Agreements ”. This is where two parties contract, providing work and payment respectively within a fixed time. If the parties show intention to make similar contracts and do make such contracts, the law may treat them as one long term contract , which would provide more long term security for the workers. Yet this is still considered unsatisfactory. The “Work Contract Agreement” does not give home based workers social benefits e.g. health insurance or holidays, nor does it stipulate minimum wage should be paid. Thus it provides less protection than the “Working contracts” between formal workers and the employer.

Unfortunately, the limited protections that exist under the “Work Contract Agreement” may exist more in theory than in practice. The essence of a contract is that the contracting parties can freely negotiate the terms. Yet in the case of home based workers, they have a much lower bargaining power than the employer or middleman, and thus limited ability to negotiate fair terms. The lack bargaining power is caused by several factors such as fierce competition in the industry or inability to directly access the market. Furthermore, home based workers may have relatively lower education levels, and face difficulties drafting contracts.

The process of drafting contracts is generally timely. Normally home based workers only receive short term orders, sometimes only day to day orders, making it not cost effective to sign contracts. But above all, the greatest disincentives preventing home based workers from contracting are the difficulties in enforcing the contracts. Presuming that the Indonesian courts are fair to workers and employers, the process is nonetheless timely and expensive. This means that workers have no incentive to sue the other party for breach of contract.

• Embroidery and Garment Businesses

To a large extent, small scale embroidery and garment businesses face the same difficulties as home based workers. Given their small scale, they also lack the bargaining power and expertise to negotiate, draft and enforce business contracts. By reverse logic, one might assume that larger embroidery and garment businesses would contract more often as they have better ability to negotiate fair terms. In addition, they have the capacity to receiver larger orders which are worth more capital. Thus there is an increased need for the protection of contract by both parties.

Whilst the larger businesses interviewed were more likely to contract, it is not always practiced or the preferred practice. The general finding was that foreign buyers will normally request a contract be signed. However, when very large orders are involved the large scale embroidery and garment business may actually prefer not to contract. This is to the extent that Faiz Yunianti, owner of Faiza Bordir, is willing to drop the order to avoid contracting. She expressed concerns that her business would be sued for late delivery of the garments. This is especially as the production rate fluctuates when embroidering garments with non-computerized sewing machines.

As an alternative to contracting, Faiz Yunianti requests a down payment from her buyer to bind them. The down payment is worth anywhere from 25% to 50% of the total price of the garment.

Solutions:
Based on the above findings, it is apparent that formal written contract is seldom used and may provide little protection to home based workers, both small and large scale embroidery and garment businesses. Whilst it may be hard to change the structural defects, such as the unequal bargaining power and incompleteness of the legal system there are some small steps which may be taken to adapt to the situation.

• Both home workers and the businesses should not be hesitant to negotiate or ask questions to clarify the terms of the condition. It is also advised to make a written memorandum of the terms for reference in case a dispute arises.

• Instead of contracting, it is recommended that the workers and businesses   consider requesting a down payment i.e. part of the price paid in advance. The amount to be paid as down payment maybe determined by the individual, or subject to negotiations.

Where the worker/ business is able to contract, there are still some advantages in the practice, such as certainty of terms. It may still be difficult for the individuals to sue for damages if the contract is broken. Thus it is hoped that NGOs such as Indonesia Legal Aid Foundation (YLBHI) or Surabaya Legal Aid Institute (Indonesia), may be of assistance. It is understood that there are undoubtedly too many cases for these NGOs to help individually, however, their assistance may be sought in terms of advocacy to better inform workers of their rights.

• Raising Capital

Many of the individuals and businesses interviewed expressed the need for more capital to help expand their production and earning capacity or simply for cash flow in the short term.  Surprisingly, these parties often work on such tight cash flow which limits their production rate and earning capacity. For instance, some businesses mentioned they had to turn down large orders as they did not have sufficient capital to purchase enough embroidery thread to complete the jobs.

In the status quo, there are primarily three means of financing; however each has its own advantages and limitations which are discussed below.

• “Koperasi” (Community lending institutions i.e. co-operatives)

The Koperasi is a community based institution which lends small amounts of money to its members, amongst its other functions as a community store. The requirements for a loan are far less stringent. As lender is only required to give a copy of their ID, their address and pay a monthly fee in addition to their interest. The ease in lending is certainly a large advantage, as unlike banks no collateral and less documentation is required. Sometimes, mere personal reputation may be enough to secure a loan. The relative simplicity of the system makes it highly popular with the lower classes.

Limitations of lending from the Koperasi are that loans are generally small, capped at 4-5 million, depending on the familiarity with the Koperasi. Whilst some interviewees claimed the interest rates are far more favorable than banks, others have suggested they are still too high and unaffordable at an interest rate of 10% over 10 months, i.e. 2% monthly.

The familiarity and informality of the Koperasi may also create some underlying dangers as the money loaners are often less alert or inquisitive when dealing with the Koperasi. For instance individuals may pay high interest rates under the mistaken belief that the community organization must already be charging most favorable rates.

• Government Loans

Some of the interviewees obtained one off loans from the Social Department and trade and Industry Department when establishing or expanding their business. The comparative advantage is that loans may be much larger in sum, for instance up to 50 million Rp. The interest rates are also lower at 6% per annum.

The government department will assess the business before making a grant, and whether or not it increases local employment is an important consideration. Limitations of the scheme are that loans are rarely granted, and those who succeeded admitted to having connections. For instance the ex-village chief mentioned she previously volunteered gathering statistics for the Social Department which granted her the loan.

• Personal Loans

Personal loans from friends or family are also relied on by small scale businesses. Generally there may be some flexibility in repaying the money however these loans are normally used for short term financing, and are repaid when the business is paid for orders. The limitations of such loans are that the money involved is minimal and it is not a reliable source of money.

• Others

All the interviewees discussed the option of lending from banks, it was made clear that they failed to obtain such loans. Another option was obtaining loans from NGOs e.g. Merdeka University, however these failed to materialize.

Solutions:

• Short term cash flow difficulties can easily be solved if business and individual workers have the practice of requiring a down payment for their work. The down payment should be required for all jobs, even if the employer provides the material. On one hand, by asking the buyer to pay an amount of money in advance it binds him/ her to the producer. Such money can be used to partially compensate the producer if the buyer fails to pay, or simply to pay for the materials required. Such capital becomes increasingly important with larger orders. For instance, many small scale businesses must turn down large orders, thus decreasing their earning capacity, as they cannot buy enough thread with exiting capital.

• Short term cash flow problems also arise as individuals or business have not yet received payment for garments that have already been produced or even delivered. It is recommended that these parties should not deliver goods until after payment in full, to avoid late payment. If they are willing to deliver goods first on credit, before payment then a formalized credit system should be established. For instance, the producer and buyer should fix a date for late payment and keep records, rather than purely relying on prompt payment by goodwill.

It is understood that the emphasis on trust and ‘face’ in Javanese culture may deter the individuals from asking for full payment before delivery or down payment. However, it must be stressed that vice versa, the buyer’s willingness to fairly pay down payments etc, are important to establish mutual trust.

• It is clear that the Korporasi will remain a trusted and popular form of financing for businesses and individuals. However, it is urged that individuals must be given proper training to be able to assess the terms of lending and make educated choices. The education recommended include, but are not limited to, basic accounting and budgeting to learn how to calculate interests and the amounts to be saved or paid. It is known that the HWPRI and MWPRI currently provide such services to members. Given the expanse of the problem, other organizations such as the government and NGOs like Oxfam Hong Kong are encouraged to provide assistance, not limited to funding.

• Outsourcing and Social Securities

The practice of outsourcing, also known as the ‘putting out’, is widely popular amongst industries in East Java, including the embroidery and garment industry. Commonly, the owner of an embroidery and garment business or a middle man will give assembling or embroidery jobs to home based workers.

Outsourcing has become such a common phenomenon out of necessity. Many of the home based workers were previously employed as formal workers in factories yet became unemployed during the economic crises. For instance in a study of home based workers in Surabaya and Bali, 70% of respondents became home based workers as no formal employment was available. The situation is exasperated as some factories also have an intentional practice of employing workers on short term contracts and replacing them when the contract is over. Thus working as home based workers in the outsourcing system has become a permanent form of employment.

In theory the outsourcing system should not be inherently disadvantageous for home based workers. There are comparative advantages as many women prefer to work at home, enabling them to rear children at the same time. The root of the problem is that home based workers and other informal workers do not receive adequate labour protection although work is similar to formal workers.

Studies by MWPRI suggest that more than 40 % of the East Javan population is home based workers, whilst national studies have found that 68% of the entire nation’s population work as informal workers. Given the sheer size of this sector, it is surprising that the Indonesia Labour law no. 13/2003 only legalizes the out-sourcing industries yet fails to provide any protection, beyond mere contract law.

The existing Indonesian labour law no. 13/2003 prescribes that only formal workers who have a working relation with the employer, e.g. direct supervision, receive labour protection. Such protection includes minimum wage, health insurance, holidays and social security. Interestingly, the law can be interpreted to include home based workers in the outsourcing system. For instance, it has been pointed out that the minimum wage payment widely covers any payment by employers according to work agreements, joint agreement or any rule of laws, thus including outsourcing contracts . Alternatively, home based workers in the outsourcing system may be covered by s.1, Cap. 14 of the Minister of Labour Regulation No. Per. 01/MEN/1999. This states that contracting workers, including outsource home based workers, should receive piece rate equivalent to the monthly minimum wage for contracts longer than 1 month . Unfortunately, such arguments are simply not addressed.

The lax attitude held by the embroidery and garment industry as well as the government, is reflected by the fact that even many formal workers do not receive their rightful protection under the law. For example businesses may be exempted from paying minimum wage upon application to the government, with agreement by the employees. Such exemption is highly problematic where there are no open criteria for assessment. Furthermore, there is no real consent from workers, as the general attitude towards workers is ‘take it or leave it’.

Even beyond social securities and minimum wage, home based workers in the outsourcing system face many difficulties. Firstly, the frequency and quantity of jobs tend to fluctuate. Some home based workers may have work daily whilst others may not receive any orders in months, thus there is limited job security.  The workers are also in a very passive position, as they are contacted by the middleman but cannot contact him vice versa. This means they cannot seek orders themselves nor chase payments if the middle man disappears without paying.

Although home workers have an advantage of more flexible working time, the reality is they often have to work equal or longer hours than formal labourers due to their low piece rate. For instance in the study on Surabaya and Bali home based workers, 62% and 58% respectively work between 7-10 hours, just to make ends meet.

Solutions:

1. Based on the huge numbers of home based workers in the outsource system and their strategic importance in the production process, the government has a need to regulate pay and benefits for informal workers. It is understood that legislation is a slow and arduous process, especially with the disputes surrounding whether or not the 2003 labour law should be abolished. However, the government should at least initiate consultation and discussion on the feasibility of informal labour protection. This would empower home based workers by at least raising awareness of their issues. Furthermore, the government credibility would increase through showing they hold not only business but ordinary civilian interests at heart.

2. In the meantime the government also needs to enforce existing labour regulations more strictly to protect formal workers. This may include have a more transparent and open system of allowing exemptions from minimum wage, or simply abolishing this system all together.

3. The long term goal should be to give informal workers in the outsourcing system commensurate pay for their work. This does not necessarily mean that all informal workers should receive the same monthly minimum wage as formal workers, as it is recognized they have more freedom and can work less than formal workers. Instead, it may be more suitable to calculate a fairer piece rate for home based workers. This may be calculated by dividing the minimum wage of formal workers / the average production rate of formal workers in the factory. It would seem that the government and NGOs should co-operate to research and calculate such this fairer piece rate to find a rate acceptable by the industry and its workers.

• Technological Challenges & Fixed Costs

The embroidery and textile industry is relatively capital intensive, requiring sewing machines, cloth, beads and thread. Such fixed and operational costs are often a large investment for small home based garment industries and home based workers.

Whilst the employer or person who makes the orders generally provides the materials and thread, home based workers have to provide their own sewing machine. The business owner clearly benefits the most in this system as they save many fixed costs. For instance, they can buy or rent smaller workshops, save electricity and need to purchase fewer sewing machines. These invisible fixed costs are paid out of the workers own pockets with compensation, consequently cutting into their earnings.

In the wider perspective workers face the technological challenge from computerized sewing machines. Computerized embroidery is smoother, faster and produces more accurate stitching. It also fetches a higher market price, even though non-computerized machine embroidery has its own comparative advantages such as better quality as threads are less likely to loosen and ruin the design.

Solutions:

1. Ideally the employer or middleman ordering the products should provide home based workers with comparable working conditions as formal workers in the factory, such as providing the sewing machines and contributing to the fixed electricity costs. However it is recognized that this may not be feasible in most cases as the outsourcing businesses themselves are of a small scale. But examples such as Faiz Yunianti, who provides her home based workers with sewing machines, are applauded.

2. In light of the technological challenge from computerized sewing machine, NGOs, businesses and or the Trade and Industry department may consider training workers to use computerized sewing machines. This would give them a greater competitive edge. However there are limitations in this approach. Firstly, training in itself may be timely and expensive. Secondly and more importantly, computerized sewing machines are even more expensive to acquire, and large scale computerization would reduce the amount of labour required.

An alternative and less capital intensive approach is that businesses and workers are given training to help them specialize and enhance both their designs and embroidery skills. More intricate and innovative designs are of higher value and are more marketable. Furthermore, it is more difficult to copy such designs by computerized sewing machine.
In addition, the businesses should actively promote the fact that their designs are of a better quality and more unique than those by computerized sewing machine to increase their market value

• Exporting

Embroidery and garment businesses can increase revenue by exporting their goods to foreign buyers who are generally willing to pay more. In light of such the Trade and Industry Department, both the East Java and Malang regency divisions, plays an active role in facilitating small to medium sized businesses to participate in exhibitions on a regional, national and international scale. These divisions revealed that they help to scout businesses with exportable goods and provide them with training for the exhibitions.

Although the East Java regional Trade and Industrial Department were unable to provide statistics, the Malang regency division noted that the exhibitions helped increase export of handicrafts and textiles etc by 3% from 7% to 10%. In addition, they explained that the exhibitions were useful in giving businesses experience in dealing with foreign buyers and identifying which goods were most exportable.

Some of the interviewed businesses also expressed that the exhibitions were useful as they got foreign orders. However, these orders ceased after the exhibition, in other words they were one-off orders and no long term relationship was built with the buyer. Thus the key question is how to build on the exhibition and develop sustainable trading relations.

Solutions:

1. The collaborative effort by business and the government to promote handicraft and textile industries at exhibitions, conventions and in galleries is useful. Participating in these exhibitions is a platform for exposure to foreign buyers; however this is just the means and not the end.  The government can be advised to better facilitate the business both pre- and post- exhibition. One method is to better utilize feedback to help businesses improve their strategies. For instance, the government requires each participating business to prepare a report and accounts after the exhibition. This may include the businesses sales rates as well as their evaluation about the success of the exhibition. This information should be analyzed to see the success rate and what improvements can be made by the government and business.

2. The businesses are also encouraged to take a more active approach in seeking out business and forging long term trading relations, as receiving the a order from a foreign buyer is only the first step. To attract customers to return, these businesses may consider enhancing their custom service or value added service. Examples of this include researching shipping and flight schedule to offer buyers the fastest and most convenient shipping arrangements. This saves the buyer time in the long run and reduces their burden, which may increase their chances of re-ordering.

Additionally, the businesses should actively keep contacts with past-buyers for instance asking them for feedback, which also helps the business improve. The businesses may even try offering the buyer goods similar to those they purchased or informing them of new goods from time to time to attract their interest.

• Occupational Safety

The work of formal and home based embroidery and garment workers are largely identical and thus occupational safety concerns are also similar. The work stations are standard with sewing machines placed on individual desks. The workers sit on stools and so posture is generally good. However, workers should be encouraged to stretch from time to time when working for many hours to prevent back and neck strain.

Perhaps the greatest occupational safety hazard is long term damage to the eyes, such as short-sightedness. Eye problems are generally caused by working in dim surroundings, and staring at objects too closely for long periods of time.

Solutions
The workers eyes can be better protected by improving the lighting in the work environments. This can be done by using brighter bulbs, more lights or opening more windows and doors. Workers should also be encouraged to look at far away objects or scenery, after 30 minutes or more of concentrating on their sewing. This action is encouraged by optometrists as it helps relax the eyeball, avoiding short sightedness from long term straining of the muscles. It is also scientifically proven that looking at green objects e.g. vegetations is useful.

• Good Practices Observed and Tips
• Networking & Organization

It is important that businesses and workers form their own networks i.e. develop contacts and connections with fellow workers or other businesses and buyers.

Home-based workers may form informal or formal networks to act as support groups and share information. For instance sharing information on prices or the credibility of employers and middle man will reduce ignorance and the chances of being cheated. It may also facilitate collective negotiation, and increase efficiency if home based workers practice division of labour. An example of this is Bu Srii and her partner, as the former assembles the clothes whilst the other is responsible for embroidering, and they are able to refer business to each other.

Given the strong sense of community, and importance of word of mouth, larger organizations would also benefit from keeping close contacts and networking with buyers and other industry people.

• Marketing & Promotion

Businesses should think consciously about their marketing and promotion. At a basic level, promotion may be simple such as a banner outside the business or placing some work stations outdoors. (In fact there are some added benefits of better lighting and ventilation.) Other basic forms of promotion include word of mouth. This should be especially useful given the importance of connections and word of mouth in small close knit communities such as in Indonesia.

On a more advanced level companies with the capital may consider marketing in mass media to generate large scale publicity. But the most important thing before any marketing is to identify the target audience, i.e. which buyer or consumers does one want to reach, and market accordingly. A good example is that of Bu Faiz Yuniati, the owner of Faiza Embroidery business, who markets her clothes at official wives meetings as her target audience is more wealthy buyers.

• Innovative Design

It is important to have innovative designs to make the businesses goods distinguishable from competitors, and more desirable. Whist creative and innovative designs are not easily mastered, business owners and workers may get inspiration for designs from many sources. Obvious places to look are pattern books in bookstores, fashion magazines as well as image searches on the internet. The internet is particularly useful for getting inspiration from overseas fashion trends.

• Conclusion

Many structural problems have been identified in the embroidery and garment industry such as the lack of labour protection, unequal bargaining power between buyer and producers, as well as inadequacies of contracting.

It is positive to note governmental efforts to help embroidery and garment industries through training, exhibition and loans. However the Trade and Industry Department’s facilitation should not stop at the exhibition stage as better post-exhibition follow up and feedback is required to help business acquire long term trading relations.

The limitations of government efforts must be understood in the wider context. Given its foreign obligations to repay International Monetary Fund loans, it can be understood that the government focuses on increasing exports and business revenue. Yet unfortunately few of the benefits trickle down to the small scale home based industries and worker who produce the embroidery and garments. Consequently, there is a need for these parties to increase their own competitiveness and sustainability through negotiations, market research and value added service.