Online Retail In Indonesia Now Closed For Foreign Investments

| 11 Comments

noentryUPDATE: Anyone doubting what I write below please read this post and stop asking me for “proof” or quoting me as an unconfirmed souce! Much appreciated.

Wow, this is kind of a shock indeed. Coming home from summer holiday to find out that e-commerce, or online retail as you will, is now completely excluded from ANY foreign investment/ownership in Indonesia. This was already so for offline retail (unless the shop size is larger than 400m2, 1200m2 or 2000m2 depending on the kind of retail), but until now the online industry was excused for this regulation.

But this all changed on June 28th 2013 with a letter from the Secretary General of the Ministry of Trade with reference 689/SJ-DAG/SD/6/2013. Google it. You won’t find it. But basically all the rules that already applied to offline retail now apply to online retail as well. Check page 61 of Perpres 36 2010 where you find the DNI (list of negative investments) for retail businesses. Now if you think your company type is actually not listed there then don’t get your hopes up. Apparently, any company selling directly to consumers (as in private persons) is only allowed in case of 100% local ownership.

The first thing that frustrates me is that apparently the law is now really clear, but no one can really produce the supporting documents. Basically the BKPM (Indonesian Investment Coordinating Board) was instructed on this by the Secretary General of the Ministry of Trade and they’re now executing accordingly.

Grandfathering principle,  but…..

So, what about foreign investors and companies who already have done investments in Indonesia? Well, the grandfathering principle applies which should mean they don’t have to worry because at the moment they did the investment this rule didn’t apply. However. It gets tricky when the invested e-commerce company needs more money. Basically the law now states that an already foreign funded company can still receive funds from foreign investors but by doing so it has to comply to the new rules within 2 years. Meaning that within 2 years the foreign invested Indonesian company has to be 100% locally owned.

Why?

Well, you can agree or disagree but the official reason for the whole DNI is to protect the local SMB from foreign giants. Does that make sense? Well, one can argue that big foreign retail chains pushing small local businesses out of business is not in the interest of the local community. On the other hand, it’s extremely hard for online retail companies to find local funding. So in my opinion this legislation will slow down the development of the e-commerce ecosystem and will also make it much harder to regulate the e-commerce market.

E-commerce is still very much in early stage in Indonesia and needs evolve into a mature industry. Companies like Zalora and Lazada do a great job at setting the benchmark for other players when it comes to technology, marketing, products, delivery and service. Big dominating players are necessary to educate the market and with all due respect, so far there aren’t any really “dominating” local player in the industry who put their mark on the industry.

What Now?

Well, for starters this will definitely scare away boat loads of investors from investing in the Indonesian digital industry in general and anything e-commerce related in specific. For an industry struggling to grow up that’s bad news, especially since local investors are not known for doing high-risk, long-term investments.

On the other hand people will be creative and that’s where it will actually backfire more on the Indonesian government. After all, it’s not like there are no huge companies active in Indonesia that basically shouldn’t be allowed to be active her because they do things that based on the DNI they shouldn’t be doing.

The Advised Solution

The solution that’s mostly being offered is to let a locally owned PT handle all the B2C transactions. This could also mean splitting up an existing company in a (partially) foreign owned company (PMA) and a 100% locally owned company. The PMA would/could own all the assets including domain name, infrastructure, warehouses, website etc and basically wholesale to the PT who’s only role is to execute transactions with consumers. Sigh. Kind of annoying to have to set it up this way but does the job. So besides overcomplicating things what’s the use of the law?

The Creative Solution

Well, let’s say you’re selling fashion items. If the PT would actually have a store the size of 2000m2 it would not fall under the DNI anymore so can be 100% foreign owned and sell both offline as online. The law doesn’t state where the store has to be located. So why not rent 2000m2 in the cheapest part of the country, put a nice lady in it selling some products and there you go. I’m pretty sure renting 2000m2 in Papua is a lot cheaper than in Jakarta and an acceptable overhead considering the potential of the market. I’m curious if the BKPM will actually do a survey when you invite them to the middle of nowhere.

The Offshore Solution

The next “solution” or rather result will be that e-commerce companies won’t establish local presence in Indonesia anymore but just target the Indonesian market from abroad or completely ignore it. Result. No new jobs. No taxes paid in Indonesia. No way of regulating. No local knowledge development. Less investments in infrastructure. In short, no upside whatsoever.

The “Moron Solution”

Is also called the “Nominee construction”. Google it.

Conclusion

Well, for me personally, I’m not really that worried about it, just frustrated. I mean, I don’t have any intention or interest of interfering in local politics. I realise I’m a guest here. If tomorrow Indonesia decides that foreigners can no longer live in Indonesia I wouldn’t get all guerrilla but just pack my bags and leave. But at least that would be more clear than the current legislation. Now I’m allowed to live here but without having the same rights and opportunities.

Most of my plans don’t involve online retail anyway and elections are coming up. However, I am curious what the position of the idEA (Indonesian E-commerce Association) is on this, of which at one point I was a founding member. So far I haven’t heard anything from them so hopefully they will issue an official response and share it with you.

Disclaimer

Please, don’t make any business decisions based on this post, consult a lawyer or contact the BKPM first to make 100% sure you get the information that applies to your specific situation.

  • Chris

    Remco, thanks for the article. So is this letter which you are referring to the source of this major change?

    • http://sangatpedas.com Sangat Pedas

      Hi Chris. Unfortunately I can’t publish the letter as I got it from my lawyer who requested me not to publish it. But I sent BKPM an email asking for a direct confirmation, this was their answer:

      Thank you for contacting Investor Relations Unit. Regarding your request
      bellow, please send a formal letter to the Directorate of Deregulation
      in order to obtain the Letter of Intent as the official public document
      which confirms that online retail is closed for foreign direct
      investment.

      Please send your request to the following contact:

      Directorate of Deregulation
      Indonesia Investment Coordinating Board
      Jl. Gatot Subroto No. 44, Jakarta

      Sincerely,

      Investor Relations Unit
      Indonesia Investment Coordinating Board

      Aarrrggg, burocracy :)

  • Alex

    Now I know why my friend in indo told me to hurry and set up a company a month or so back!
    The same is happening in TH.

    • http://www.facebook.com/profile.php?id=738232932 Terence Lee

      what’s happening exactly in Thailand?

  • Obed Kusman

    Remco, awesome article (thank you btw), I like it when you wrote, the “Moron Solution” which shows your identity on this blog for “sarcasm, drama and controversy”. That’s the problem with bureaucracy. I think I could understand why Indonesian’s gov tried to do this (they want to save everything for our “anak cucu cicit buyut” (like to said in Bahasa Indonesia to emphasize the meaning, in this case better to use it in English language I think) don’t get me wrong with this because even U.S is having a problem when we outsource everything to China nothing “Made in USA” anymore but then it would prevent international competition. It’s all being politicize in my opinion. Welcome to “dog eat dog” world! But again I think there is always a light at the end of the tunnel, right?

    • http://sangatpedas.com Sangat Pedas

      Hi Obed, thanks for your response, love the “anak cucu cicit buyut” :) I definitely understand the basic idea behind the decision but obviously money is needed to develop the online retail industry. For me there’s not even a tunnel, just light. I love Indonesia and as a guest I accept and follow the local rules whether I like them or not. Still more than enough other opportunities. Cheers!

  • reintweets

    I don’t know this is related or not, maybe the regulator see their experience in banking industry where they open the door for foreign investment and the result is at least 9 of the top 15 banks in Indonesia owned by foreign entity (http://www.ide.go.jp/English/Publish/Download/Dp/pdf/406.pdf – see page 6) that means Indonesian is not the host of this industry.

  • Kevin

    Remco, do you know what’s supposed to happen if a PMA remains a PMA after 2 years? Say a company is still foreign-owned after that 2-year period, do you think the government is going to start nationalizing e-commerce businesses? That would be quite a sight.

    • http://sangatpedas.com Sangat Pedas

      Hi Kevin,

      Also sorry for the late reply :)

      As long as the PMA doesn’t receive any EXTRA foreign funding they’re allowed to go on. As soon as they receive foreign funding after the regulation went into effect they have 2 years and after that the PMA must be 100% locally owned. As this situation hasn’t happened yet I have no idea how a situation like this would play out in real life.

  • mary

    Hi, im new in Indonesia and actually im trying to set up my company, im going to be producing fashion goods locally and i have asked two consultants and they have both told me there’s no problem and i can sell online. Im setting up a PMA where theres a 1% local shareholder and 99% two foreign investors, should i set up the store only to sell abroad to avoid problems?im so lost with this :(

    • http://sangatpedas.com Sangat Pedas

      Hi Mary,

      Sorry for the late reply, the only advice I can give you is to talk to the right people. Maybe go to the BKPM directly or maybe get other consultants. The situation described in this post hasn’t changed.