Indonesia’s local content rule for 4G devices may cause import permits to stall in 2017, prompting the growth of black markets as demand for new tech increases.
Indonesia’s Investment Coordinating Board (BKPM) recently publicized a mysterious deal with a US-based gadget manufacturer. The foreign firm would put down US$18 million for a research facility in Indonesia. BKPM head Franky Sibarani said the company would train human resources in Indonesia to build apps, software, and other product designs.
While the identity of the American gadget company remains unknown, odds are the company is hedging its bets on Indonesia’s promising smartphone market. The trouble is the “investment” is likely less of a voluntary thing, and more of a pay-to-play chess move imposed by the Indonesian government.
Reports indicate that an application from Apple to get their latest smartphone certified – and therefore available for sale in Indonesia – has been filed with the Ministry of Communication and Informatics. However, a law passed last year may mean that Indonesia’s Apple fans have to wait even longer to buy the iPhone SE from local resellers.
In mid-2015, three ministries signed a joint decree stipulating that in order to obtain import permits, mobile devices embedded with 4G tech must carry local content, both hardware and software.
The rule mandates that as of January 1, 2017, all 4G devices in Indonesia must have at least 30 percent of their components made locally. Devices that connect to a network must be sold with a minimum of 40 percent local content and apps. Smartphone brands that fail to comply with the regulation risk having import permits revoked.
Smartphone brands have taken steps to up the local content of their devices. ASUS, for example, partnered with local manufacturing firm SAT Nusapersada to assemble certain smartphone models just for Indonesia. However, ASUS is still working on ways to meet the 30 percent criterion.
Other brands that have made efforts to comply with regulations include Samsung, Lenovo, and HTC. Most overseas gadget firms try to boost local content levels in Indonesia by assembling and manufacturing in collaboration with local gadget producers.
However, some foreign companies will inevitably hit a wall when trying to comply with the government’s regulation. Erajaya corporate secretary Djatmiko Wardoyo points out that certain smartphone brands would face challenges in reaching economies of scale if they even entertained the idea of setting up a factory in Indonesia.
Erajaya is a major distributor in Indonesia for brands like Apple, Samsung, LG, ASUS, and Lenovo. “The local supply of parts and the [manufacturing] ecosystem is not that conducive as well,” Wardoyo tells Indonesia Expat. For this reason, he doesn’t think the regulation will help anyone in Jakarta’s tech hardware game.
According to Wardoyo, the government should instead focus on incentives to attract brands to manufacture locally. Once the manufacturing ecosystem is mature, that’s when a regulation can be put in place, he argues. “There should be a three- to five-year grace period before the regulation takes effect,” he adds.
Most global gadget brands produce smartphones using fast and scalable manufacturing chain practices. This is one reason why China has become the global base for device manufacturing; factories that produce different parts of a smartphone are grouped in geographically close locations. This is usually not the case in Indonesia.
The archipelago has long suffered logistics nightmares, from extended dwelling times to transportation congestions which keep materials stuck at ports for long periods. Shipping parts around the nation inevitably leads to sluggish product turnover. For these reasons, industry pros believe importing phones remains the easiest and most cost-effective way of doing business.
Wardoyo says hurdles associated with setting up local factories are sure to make compliance impossible for some brands his company works with.
Although Indonesia has a few local smartphone brands, their products are unable to compete with global brands in the eyes of Indonesian consumers. Apart from distributing, Erajaya also sells its own line of smartphones under the name Venera.
“The issue is that local brands of 4G smartphones still could not fight against global brands [in terms of performance],” says Wardoyo. If challenges in bringing 4G smartphones into the country come about as promised in 2017, black markets will spring up in Indonesia to satisfy demand, he says.
Indonesia has become a lucrative market for smartphone companies, owing to the country’s rising consumer class. SIM card penetration has reached more than 120 percent in the nation, meaning many consumers own more than one mobile device.
International Data Corporation (IDC) Indonesia estimates that in the fourth quarter of 2015, smartphone shipments touched 8.3 million units, up 14.4 percent from the year before. According to IDC, the uptick was due to brands shipping goods in before their import licenses expire in 2016. The data says 29.3 million smartphones were shipped into the country in 2015, more than a 17 percent increase from 2014.
ASUS rose in the ranks to become a top brand with a 22 percent market share in Indonesia. Reza Haryo, IDC senior market analyst for mobile phones, says the brand shipped more phones as a pre-emptive measure to maintain local stock before the import license expired.
Apart from ASUS, IDC reports that Lenovo has a “strong foothold” in Indonesia with a market share of 6.5 percent. Other brands that had noteworthy market shares in the archipelago last year were Samsung with 24.8 percent, Smartfren with 10.8 percent, and local firm Advan with 9.6 percent.
“Lenovo too started its local manufacturing in Indonesia, and the A series phones priced at US$100 were quite successful in the market,” says Haryo.
IDC numbers show the majority of smartphones from Chinese brands are already 4G-enabled. To match the increase in 4G smartphones, Indonesian telecoms operators are actively promoting their 4G data plans and bundling offers.
IDC Asia Pacific research manager for mobile phones Kiranjeet Kaur says brands have taken steps to keep their respective places in the Indonesian market. “Despite the uncertainty, vendors have been quick to take steps to adhere to the regulation so they don’t lose out in the biggest smartphone market of Southeast Asia,” says Kaur.
She adds that the regulation’s impact on phone shipments will likely prove to be a short-term dilemma. Kaur notes, “The new initiatives are less likely to dampen the growth of 4G smartphones in the country in the long term, and IDC expects 4G smartphones to grow at a double digit growth rate for the next few years.”
If foreign smartphone manufacturers looking to enter Indonesia have done their homework, they might arrive at the conclusion that the country is always changing the rules. For this reason, big brands like Xiaomi may shy away from the risk associated with ephemeral policy changes.
It’s unclear how the Indonesian government hopes to enforce such an ambitious local content rule for every single 4G mobile device. But one thing is certain: when there’s a will, there’s a way. If this rule holds up in 2017, Indonesia can expect consumers to ultimately pay the price. They will be forced to buy inferior goods at higher prices, or turn to a black market for the latest iPhone.
