“Made in Indonesia” smartphone law presents uphill battle for investors
A regulation due to come into effect later this year will shake up the Indonesian smartphone market. Global brands seeking access to Indonesia’s fast-growing and potentially vast mobile market will face significant challenges as they rush to keep up with the new rules.
In January 2015, the Indonesian Ministry of Communication and Information Technology (KOMINFO) issued two draft regulations related to mandatory local content requirements for 4G networks and devices. The new regulations, initially due to be finalised by March, are still under development and not expected to be completed before June.
Ministry of Communication and Information Technology officials confirmed, however, that Indonesia is pursuing a “made in Indonesia” smartphone law that will require global phone manufacturers to produce parts of their devices locally.
As Indonesia’s Communications Minister Rudiantara is yet to release an official draft of the regulations, investors are left guessing for the time being.
The laws are anticipated to build on Regulation 69/2014, adopted by the Ministry of Industry for the 4G spectrum in September 2014, which requires a local content of 30 percent by 2017. The respective quota is calculated as 80 percent from the manufacturing process and 20 percent from the development process.
The new smartphone regulations by the Ministry of Communication and Information Technology are said to modify MOI Regulation 69/2014 and come into force on January 1, 2017.
Uncertainty remains in relation to the 2017 threshold of local content, with figures ranging from 30 to 40 percent. The government is likely to apply the local content requirements progressively. One possible scenario is will require phone manufacturers to produce as much as 20 percent of their devices locally by the end of the year.
It is still being discussed how the local content will calculated. Industry Minister Saleh Husin stated that around a fifth of local content would have to be research and development. Companies would need to have some sort of design development centres in Indonesia in addition to manufacturing.
Hence, companies would have to meet the local content requirement from 20% intangible value (IPR, R&D) and 80% tangible local content, suggesting that investors must use local goods in the manufacturing process in order to fulfill the local content requirement.
Communications Minister Rudiantara refused to give further details on the way the percentage of local content would be calculated.
Moving up the value chain
The regulations are part of President Joko Widodo’s broader plans to help his country move up the value chain of manufactured products and boost economic growth to reach his ambitious growth target of 7 percent.
In addition, local content requirements can help the country to adjust its current account. When justifying the planned regulations, Rudiantara openly admitted that Indonesia needs a bigger share of the USD 3 billion in annual phone imports to tackle trade imbalances.
Even with a falling Rupiah, naturally enhancing export competitiveness, Indonesian manufacturers have struggled to export. According to data by the statistics bureau, exports fell the most in 2.5 years dropping 16.02 percent year-on-year.
Notwithstanding sluggish exports, Indonesia achieved a trade surplus (USD 738.3 million) for the third consecutive months on weak imports in February.
Concerns over the new smartphone law
The rationale behind the new local content requirements is comprehensible from an Indonesian point of view. At the same time, it is anything but surprising that the draft regulations raise concerns among foreign phone producers and their governments.
Smartphone giants Apple and Samsung declined comment to Reuters news agency. American political opposition to the new law has, however, been very vocal.
The United States, currently pursuing four trade cases against Indonesia, has repeatedly raised concerns about Indonesia’s rules on local content in investment in the telecommunications sector at the WTO.
The Committee on Trade-Related Investment Measures (TRIMS) circulated a communication at the request of the Delegation of the United States on March 26, expressing discontent at the regulations and seeking to understand the requirements and their status.
World’s fourth-largest smartphone market by 2018
Despite international frustration regarding legal uncertainty, the Indonesian mobile market is too important to ignore. A youthful population, low smartphone penetration rates, and higher disposable incomes make Indonesia a highly attractive market for smartphone manufacturers.
It is estimated that Indonesian smartphone users will more than double to 100 million over the course of the next three years, making it the world’s fourth largest market behind China, India and the US. Notably, Indonesia is expected to outpace other emerging markets, such as Brazil.
The Ministry of Industry has downplayed the ramifications of the regulations, estimating that 4G smartphones will account for only 5 percent of the total number of imported smartphones in 2015.
In the wake of rapid technological advance however, it is beyond doubt that smartphone manufacturers will have to sell 4G-compatible devices to remain competitive. Foreign companies might have to fight an uphill battle and rapidly seek viable strategies.