Global Business Guide Indonesia

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Manufacturing | Indonesia’s Electronic Component Sector: 4G Smartphones A Future Growth Driver

Indonesian smartphone sales continue to soar steadily since 2014. Currently, the country has the fourth-largest population of smartphone users and the third-biggest number of internet users in the world at 78 million and 65.2 million respectively.

Indonesia’s Electronic Component Sector: 4G Smartphones A Future Growth Driver
Requiring smartphone manufacturers to use local content will provide many benefits and added value to the Indonesian economy rather than just being a market for foreign products

Yet despite this, the growth in smartphone sales has not contributed sufficiently to the country’s economy as most of these devices are still imported as opposed to being manufactured in Indonesia. It is this that led the Indonesian government to set up requirements for 4G smartphone manufacturers to use 30% local content in their devices starting from 1st January 2017 (See Rising Local Content Requirements for 4G Smartphones in Indonesia). This rule is expected to help drive the local electronic component industry and create a multiplier effect on the economy.

Growing smartphone demand and sales

The GSM Association predicts that mobile gadget users in the Asia Pacific region will grow to 3.1 billion by 2020 and Indonesia will be a key contributor to the growth of mobile services in the region. This is evidenced by the growth of the Indonesian smartphone market by 6% in 2016 (See Indonesian Telecommunications – An Increasingly Mobile Market). The Ministry of Communication and Informatics reported that there were around 35 million smartphones sold in the last 12 months worth 60 trillion IDR. This has made Indonesia the third-largest smartphone user base in the world after China and India.

In terms of infrastructure, broadband services (3G/4G) accounted for 45% of total mobile connection in the Asia Pacific region in 2016. The figure will increase up to 70% over the next four years in-line with the growth of 4G investment. Indonesia will lead the migration from 3G to 4G until 2020, along with Malaysia, the Philippines and Thailand.

One factor that contributes to the growth of smartphone usership in Indonesia is that 93% of its people access the internet (See Indonesia and the Internet; Online & On the Move) via smartphones according to a survey by GfK Crossmedia Link. With the launching of 4G services by mobile operators, the number of 4G smartphone users in Indonesia will continue to grow.

International Data Corporation (IDC) recorded an uptick in the market share of 4G smartphones in the country in 2016 from 58% in Q2 to 68% in Q3. According to the IDC, the top five cell phone manufacturers in the country in 2016 were Samsung (32.2% ), Oppo (16.7%), Asus (8.2%), Advan (6%), and Lenovo (5.7%).

High reliance on imports vs local content requirements

Unfortunately, despite being a country with one of the largest number of cell phone users in the world, the sector’s contribution to the country’s economy is still low due to Indonesia’s reliance on imported devices. In 2014, for example, the country imported 63 million cell phone units. According to data from the Ministry of Communication and Informatics, Indonesia’s cell phone imports are worth $3.5 billion USD to $5 billion USD per year. This has put a pressure on the country’s trade balance causing a widening trade deficit as well as increase the volatility of the Rupiah exchange rate against the US dollar (See The Present Plight of the Indonesian Rupiah).

The Indonesian government has tried to limit cell phone imports and encouraged the use of local components by requiring smartphone vendors to use local content. On 3rd July 2015, three ministries, namely the Ministry of Industry, Ministry of Trade, and Ministry of Communication and Informatics agreed to implement local content requirements of 30% on fourth generation long-term evolution (4G-LTE) handheld devices based on frequency division duplex (FDD) technology.

Under these rules, mobile phone manufacturers are required to use at least 30% of local content in their 4G LTE-FDD smartphones and 40% in their base stations starting from 1st January 2017. Otherwise, they will be banned from selling their products in the country. Meanwhile, local content requirements for 4G smartphones based on LTE time division duplex or TDD technology will be applied in 2019 due to lower economies of scale.

The rules on local content requirements are stipulated in the Regulation of Ministry of Industry No. 65/2016 on the Provision and Procedures for Calculating Local Content in Cell Phone, Handheld, and Tablet Computer Products. The new rules aim at lessening the trade deficit and improving the Rupiah exchange rate. Previously, cell phone vendors are not obliged to use local contents in their products and were allowed to import cell phones as completely build units (CBU).

Requiring smartphone manufacturers to use local content will provide many benefits and added value to the Indonesian economy rather than just being a market for foreign products. These include increased investment, job creation, driving the local electronic component industry, amongst many others (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic). The Ministry of Industry expects Indonesia to produce 35 million cell phone units in 2017 or 50% of total national cell phone imports.

Mr Ali S. Oentaryo
Panggung Electric Citrabuana
Mr Ali S. Oentaryo
Consumer Electronics & ICT
Indonesia offers numerous investment opportunities including for consumer electronic goods and other market segments which we are excited to continue developing.
See Interview Learn more about Panggung Electric Citrabuana

According to the ministerial regulation, there are three ways to meet local content requirements, namely hardware, software, and investment schemes. Each scheme consists of three components, i.e. manufacturing, research & development, and apps at different percentages (See Mobile Apps in Indonesia Clicking into Gear).

Local Content Requirements for 4G LTE Smartphones

Since 2016, most of Indonesia’s smartphone vendors have already complied with local content requirement rules. They are Polytron, Evercoss, Advan, Mito, Axioo, SPC, Gosco, Asiafone, Samsung, Oppo, Haier, Huawei, Smartfren, Ivo, Bolt, and Lenovo; others, such as LG and Sharp prefer to wait and see. Some, however, including Chinese brand, OnePlus, decided to pull out of the Indonesian market, while Xiaomi tried to get around the rule by disabling its smartphone 4G capability.

Samsung, one of the leading smartphone manufacturers in Indonesia, invested $20 million USD to build a cell phone factory in Jababeka, Cikarang. Meanwhile, Oppo and Haier invested $30 million USD and $50 million USD each to build local factories in Tangerang and Cikarang.

Lenovo, Asus and Huawei chose to partner with local companies to meet local content requirements. The former partnered with PT Tri Dharma Kencana (TDK) to operate a factory in Serang, Banten. Meanwhile, Asus and Huawei partnered with PT Panggung Electronic Citrabuana in Sidoarjo, East Java and PT Sat Nusapersada in Batam, respectively.

Many local electronic component companies hailed this new regulation. For instance, Sat Nusapersada, a company engaged in cell phone and electronic equipment assembling, expects its business to grow by 40% following the implementation of local content requirements for 4G LTE smartphones. Lenovo, Asus, and Smartfren have expressed their interest to assemble their cell phones in its production facility that has a capacity of 3 million units per month.

Bright future

Many predict that 4G smartphone sales in Indonesia will continue on their upward trend given the country’s growing number of middle-class consumers which are expected to double to 140 million by 2030 and where some 60% of them are below the age of 35; the largest group of smartphone owners. Nevertheless, the government still has lots of homework to do to encourage mass adoption of 4G LTE technology.

Currently, 4G connectivity in Indonesia is still slow because it shares the same frequency band with 2G. Three years from now will be crucial for Indonesia as to whether it will be able to compete with other countries in terms of technology, economy and other sectors.

The Indonesian government must restrict and even discontinue the use of the 2G network to allow 4G to become fully developed. If this can be achieved, the migration to 4G is expected to be completed in 2019 or sooner than the transition from 2G to 3G which took around ten years.

The mass market adoption of 4G technology will further increase the sales of 4G smartphones. This will in turn boost the growth of the local electronic component industry which will eventually further drive the country’s economy.

Global Business Guide Indonesia - 2017

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Indonesia Manufacturing Snapshot

Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.