Out of 189 countries, Indonesia ranks in the bottom 30% of worst countries to do business in according to the World Bank in 2014. Nonetheless, with its quarter billion population and largely untapped ecommerce potential, the archipelago is still pegged as the next big thing after India and China. Some even call Indonesia China’s little sister.
Since President Jokowi came into office in 2014, one of his main goals was to attract more foreign direct investment to Indonesia and on May 12, the President signed Presidential Regulation number 44 of 2016 that changed the rules of the Negative Investment List, a list that stipulates which sector is open to foreign investment in Indonesia as well as the percentage of foreign ownership permitted. Specifically, it changed foreign ownership laws in ecommerce business.
Now, 100% foreign ownership is allowed for business and companies approved under the Investment Coordinating Board (BKPM). The caveat is that the ecommerce business in Indonesia needs to have a value of at least 100 billion IDR ($7.3 million US). If a foreigner has a great idea for an ecommerce venture but without the minimum investment, they can own a minority stake in a company, up to 49% with an Indonesia counterpart.
The Investment Coordinating Board’s (BKPM) director for business development, Pratito Soeharyo, said that since October last year, any company, including ecommerce businesses worth 100 billion Rp or more could be established in just three hours under the so-called three-hour licensing facility. Since the three hours licensing facility has been introduced, any company not in the list of Negative Investment List category could be established in three hours compared to the previous 23 days it required. Ecommerce business is now one of them.
Who Benefits the Most
1. Enterprise level ecommerce corporations
Regulation 44’s valuation threshold will encourage large and established foreign investors to set up operations in Indonesia, such as Amazon, which just announced its expansion into Indonesia on June 16 2016.
2. Local Indonesian ecommerce startups
The other major winners and perhaps most important of all are smaller ecommerce startups from Indonesia. The regulation will ensure that foreigners who don’t meet the threshold of $7.3 million USD will have a joint venture with a local partner. The maximum foreigners can own is a 49% stake.
This will help level the playing field for both foreigners and local players as they will be able to easily attract more foreign investors.
Definition of “ecommerce business”
“Ecommerce business” is defined as online marketplaces, daily deals websites, price-grabber sites, and online listing platforms. Ecommerce enabler services such as logistics companies and on-demand transportation services are also included in the category, which falls under the jurisdiction of the Ministry of Communications and Informatics.
The change in regulation is part of a larger ecommerce roadmap that is being drafted by the government. The few key topics proposed are about consumer protection, including payment gateway and estimated delivery time, and also fiscal and business entity surrounding the industry. The roadmap plan will be finalized this year.
How Ecommerce Regulation 44 in Indonesia affects current e-business
Foreign ecommerce players operating in the country were using loopholes by splitting business units in the company and registering multiple entities.
For example, one local company is established to handle fulfillment where it owns the inventory and handles everything related to delivering the product to the consumer. Another separate entity holds the IP and is registered as a web portal. The fulfillment company can have an exclusive contract with the web portal legally by Indonesian regulations. But this process of setting up multiple entities takes a lot of money, time and requires a lot of trust.
Overall, the new regulation will enable an easier process in setting up an ecommerce business or injecting new capital to the existing players. And in future cases where foreign ownership exceed the allowed percentage, they will have two years time to comply with the rules with three options:
- Sell their shares to the local investors,
- Sell their shares through the domestic capital market, or
- Buy the exceed ownership portion from the investors and treat it as treasury stock.
Indonesia Ecommerce Market Potential
The changes in this regulations are expected to serve as a strong foundation to level out the playing field, giving local companies more foreign know-how and foreigners a chance to have a localized best practices as well as stimulate job growth. 2015 saw the total ecommerce sector reach $19.7 million US and employ 3404 people. With the new regulation, 24 projects were listed in Q1 2016 and the government expects to see ecommerce sales in the country rise to $25 billion US by the end of the year and reach $130 billion US by 2020.
The government expects to see ecommerce sales in the country rise to $25 billion US by the end of the year and reach $130 billion US by 2020 with Regulation 44.
Sales estimated with the expectation that the number of internet users in Indonesia will reach 280 million by 2030. It is already up to 100 million users this year according to data from the Association of Internet Providers (APJII).
Indonesia versus the world of ASEAN
According to A.T. Kearney, Malaysia and Singapore have the best-established ecommerce laws in Southeast Asia. Philippines has allowed 100 percent foreign ownership for ecommerce. In Thailand and Vietnam, despite the law restricting foreign investment in various sectors, ecommerce in both of these countries is one the sectors that get the most support or promotion by the local government to attract foreign investors. Ecommerce Regulation 44 in Indonesia was taken to entice more foreign investors.
With the door opened for the foreign players to play solo in the open field, it certainly attracts The Giants with a lot of money to burn. But even Goliath can be beaten by David and local players have the advantage of their market knowledge. It will take more than big capital to conquer Indonesia but no one can say that the reward won’t be worth it.