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Indonesia in early 2015 issued a draft regulation mandating the use of at least 40% local content in the manufacture of 4G smartphones sold within the country. Scheduled for implementation on 1st January 2017, this law is in keeping with the new administration’s much publicised plans to transform Southeast Asia’s largest economy into a nation of producers, given its present standing as a market best known for its active consumer base.
With Indonesia slated to become the world’s 4th largest smartphone user population by 2018 (eMarketer), the 40% local content requirement should serve to encourage the development of the still-fledgling local electronics assembly and component manufacturing industries, but serves as a considerable impediment to popular international smartphone brands already subject to unfavourable taxes on imported luxury goods. Reaction to this new legislation has therefore been unsurprisingly negative, with organisations such as the American Chamber of Commerce and the United States Trade Representative making formal statements voicing their trepidation. Among the primary concerns is a lack of information pertaining to how the 40% local content requirement will be measured, as well as the unpreparedness of local manufacturers to meet a surge in demand for Indonesian made components.
The latter of these two challenges, however, also presents new opportunities to international firms able to advance the capabilities of a local electronic component manufacturing industry dwarfed by regional counterparts in terms of output, despite the size of the domestic smartphone market. Foreign companies with expertise in the design and engineering of advanced smartphone components can thus look beyond the limitations of this draft regulation in tapping into an underdeveloped smartphone manufacturing industry with scope for growth in line with rising domestic demand.
Indonesia Smartphone Users 2013 – 2018 (in millions)
Source: eMarketer
With similar local content requirements having been passed into law in other sectors in the past despite substantial international opposition (See Going Local: Understanding Indonesia’s Local Content Requirements), it is largely assumed that the draft regulation will pass into law following on from the issuance of a circular decree later this year. Though some uncertainty remains as to whether the minimum local content requirement will be set at 40% or slightly below, mobile phone manufacturing companies and distributors should expect to be given a period of less than 2 years to comply, with failure to meet the requirements resulting in license revocations as well as a ban on sales and distribution activities. Given this context, cooperation with local original equipment manufacturers (OEMs) can serve to be an invaluable asset for fulfilling new local content requirements and meeting a rise in demand for Indonesian made smartphone components.
As it stands today, most smartphone companies look to Indonesian OEMs for the assembly process. Singapore-based brand Axioo through its Indonesian operations, PT Axioo International Indonesia, assembles its smartphones and tablets by appointing local OEM, PT Teradata Indonusa. PT Sat Nusapersada Tbk is a Batam-based OEM that has assembled phones for Asus and other foreign brands. Should the proposed local content regulation be enforced, however, these OEMs will have to address the need to begin producing phone components locally. While the current draft regulation states that the use of Indonesian human resources in manufacturing 4G smartphones counts towards the 40% local content requirement, the physical capital-intensive nature of the industry means that smartphone companies will also need to source parts from Indonesian firms as well as carry out some research and design locally.
This brings about promising joint venture opportunities in the form of technology transfer and knowledge-sharing between foreign and local companies to further mobile gadget manufacturing capabilities so that local OEMs develop the wherewithal to produce phone components beyond LCDs, batteries, chargers, and cameras. More complex parts such as integrated circuits are still being imported by cell phone manufacturers due to the lack of knowhow, and success in incorporating this within the skillset of OEMs should ease the transition into stricter local content requirements. The Indonesian Telematics Community (MASTEL) asserts that designing chipsets domestically should enable smartphone brands to surpass 60% local content. At present, only a handful of domestic companies such as Hariff Daya Tunggal Engineering are making headway in this domain through the use of a surface mount technology production line.
Engaging with electronics OEMs in Indonesia is not without its share of hurdles. The Indonesian Cell Phone Association (APSI) acknowledges several challenges that might potentially hinder the manufacture of smartphone components understanding that imports are required for certain phone parts which cannot be produced domestically. Though Indonesia is the largest exporter of tin in the world – a material used in smartphones and electronic devices – there are rare earth elements such as Neodymium needed to produce phone speakers and microphones predominantly found in China. These imports can be relatively expensive, and may dissuade the entry of foreign firms already wary of Indonesia’s well-known weaknesses in logistics and protection of intellectual property rights.
Aware of this potential stumbling block, the Industry Ministry’s Director for Electronics and Telematics Mr Ignatius Warsito in an interview with The Jakarta Post (22/01/2015) stated that the government has offered to pay import duties on cell phone components. Asus’ chosen OEM, PT Sat Nusapersada Tbk already enjoys value added tax and duty free benefits from Indonesia’s regulatory bodies as a company to have set up in the Batam Special Economic Zone, an area quickly developing into a hub for electronics manufacturing (See A Look into Indonesia’s Special Economic Zones). Despite such attractive incentives from the state, international companies partnering with OEMs will ultimately need to be innovative in manoeuvring around these pitfalls.
Partnering with local OEMs presents a potentially lucrative opportunity for foreign smartphone brands looking to offer their 4G devices in Indonesia given the long-term prospects for the country’s smartphone market. The country’s well documented proclivity for mobile phones has yet to transition into 4G LTE-capable smartphones, with a 2013 study by Ray Morgan Research finding that around 84% of Indonesians owned a mobile phone but smartphone users only constitute 24% of that number. This creates a timely opening to pre-empt the next wave in consumer technology by working with OEMs to develop components and take advantage of a local market of smartphone users projected to reach 103 million people by 2018 (eMarketer) - a reasonable estimation given the increased availability and affordability of handsets as well as the rising popularity of smartphones as a means to access the internet.
Smartphone versus Non-Smartphone Penetration in Asia, 2013
Source: Nielsen, “The Asian Mobile Consumer Decoded”
Within Indonesia’s untapped smartphone market, the rapidly growing middle class segment - currently standing at 74 million people - emerges as an area of particular opportunity. This portion of the market indeed represents the majority of the country’s smartphone users as well as exhibits a strong tendency to switch to the latest mobile phones should such devices become more affordable; hence the expected shift to 4G-capable handsets that provide the convenience of superfast data transfer. 4G LTE technology’s inevitable popularity in Indonesia itself is a function of Indonesian consumers’ inclination for intensive data streaming (online gaming, movies and music) and mobile application downloading. Research for Q3 2014 by InMobi, a performance-based mobile advertising network encompassing 759 million users across 160+ countries, found that Indonesia recorded the highest app download rate in the world with 6 apps per capita, more than double of joint second-place Malaysia, the Philippines and South Korea each with 2.7 apps, or France at 2,3. Furthermore, Indonesian consumers are also avid social media enthusiasts and are among the world’s most active users of popular platforms such as Facebook and Twitter.
Foreign brands have certainly begun to tap into the aforementioned middle-class segment by producing budget-friendly devices. A recently forged partnership between Google and leading local phone brands Nexian, Evercoss and Mito serves as an example of effective cooperation. The California-based technology giant is already working with its local partners to produce Android One 3G smartphones sold domestically at prices below 1.5 million IDR, the entry-level price bracket for first-time owners as well as the emerging middle class.
In spite of its short-term shortcomings, the proposed 40% local content requirement should translate into more long-term oriented opportunities for consultancy, technology transfer and joint venture for foreign firms offering a means to improve upon the production of 4G LTE-capable smartphones and its components, whether in furthering OEM management capabilities or in implementing the latest manufacturing processes. Other avenues for cooperation include researching new technologies and innovations suited to the Indonesian market, such as long-lasting batteries to account for the country’s still low electrification ratio. Foreign firms should also take heart in the government’s recently announced plan to invest 278 trillion IDR in improving broadband connectivity across the archipelago, ensuring that rising demand for 4G smartphones will be supported with the necessary infrastructure.
Global Business Guide Indonesia - 27th May 2015
Contribution to GDP: 4.94% (Information and Communications, Q4 2016)
Fixed Telephone Line Penetration: 16% (2016)
Mobile Phone Penetration: 40.4% (Statista 2016)
Unique Mobile Phone Subscribers: 47% (2016)
Smartphone Penetration: 43% Statista, 2016)
Internet Penetration: 37% (2016)
Fixed Line Broadband Penetration: ±2% (2016)
Main Operators: Telkom, Indosat Ooredoo, XL Axiata, Axis Telekom, Hutchison 3 Indonesia, Bakrie Telecom, First Media, Smartfren Telecom.
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