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Indonesia policy reform

Source: Google images

The World Bank praised Indonesia’s recent reforms, including higher public infrastructure spending and deregulation measures to lessen strict trade and investment policies, for maintaining the country’s resilience and allowing the government to diversify economically.

Since September 2015, the government’s has announced numerous policy reforms. Some sectors — in particular, trade and investment policy — witnessing a shift towards deregulation and have helped to maintain investor confidence in the country, hence Indonesia’s resilience against limited investment due to slowing global demand and volatility in the global financial market.

Moving to Manufacturing

Rodrigo Chaves, the World Bank’s Country Director for Indonesia, said global economic headwinds, including the consistently low commodity prices and the sluggish global trade, have forced Indonesia — a commodity exporter country — to expand into sectors other than mining and commodity, such as the manufacturing and service sectors.

Indonesia’s manufacturing operations are dominated by assembling and blending, which makes the country vulnerable to changes in multinational corporations’ global strategies. The country’s global share of manufacturing has remained at around 0.6 percent over the last 15 years.

“This is the right time to improve Indonesia’s manufacturing sector,” said Ndiame Diop, the World Bank’s Lead Economist for Indonesia. “Now is a critical moment for Indonesia to implement further reforms that will enhance the competitiveness of its manufacturing and services sectors, especially tourism.”

The World Bank kept its March prediction that the Indonesian economy will grow 5.1 percent this year.

Earlier this month, the Bank downgraded its global growth forecast to 2.4 percent from the previous 2.9 percent. Private consumption and public capital spending are projected to support Indonesia’s growth this year.

“Indonesia’s policy reform is the foundation of our economic resilience. I can’t stress this enough,” said Trade Minister Thomas Lembong.

A version of this appeared in Jakarta Globe on June 20. Read the full article here.

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:

  1. Sell their shares to the local investors,
  2. Sell their shares through the domestic capital market, or
  3. 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).

Ecommerce Regulation in Indonesia - Ecommerce Foreign Investment Value in Indonesia

Source: Jakarta Post, May 2016

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.

Ecommerce Regulation 44 in Indonesia - Foreign Ownership Regulations for Ecommerce in Southeast Asia

Singapore is considered the easiest country in the world to do business, whereas Indonesia has traditionally been among the hardest

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. 

By Rara Kinasih

Tweet your feedback to @ecomIQ and @ARKRara 

Indonesia's ecommerce going public

Source: theinsiderstories

Online forum Kaskus and ecommerce platform Bukalapak are in talks with Indonesian Stock Exchange (IDX) about the possibility of going public this year.

Kaskus is Indonesia’s largest online platform founded by Andrew Dawis in 1999, while Bukalapak is one of the country’s leading trading platforms. They are not the only Indonesian ecommerce company to do so.

Director of IDX, Tito Sulistio, said the companies are now facing challenges in preparing legal and administrative matters. However, he is optimistic the challenges can be overcome. “If they commit, the process would take about four to five months only,” he said quoted by local media Kontan.

The IDX and the Indonesian Chamber of Commerce (KADIN) are reportedly launching a special board and incubator program to support Indonesian tech startups to go public. The board will facilitate startups to prepare them for IPOs. 

The plan comes in the backdrop of the country’s financial markets regulator Financial Services Authority (OJK) preparing a regulation that will provide a legal basis for SMEs, including startups, to generate funds as high as Rp1 trillion, approximately USD$74.63 million from IPO.

The regulator is evaluating the IPO norms for startups and the exercise would be completed by June with an implementation timeline expected later this year. IDX and OJK are in talks to set up a special board for SMEs or startup companies. The idea is that SMEs or startup companies that have net intangible assets as low as Rp5 billion may also list shares on the Jakarta bourse, said Tito.

Last year, Indonesia’s Minister of Communications and Information also expressed his vision for Indonesia’s ecommerce to go public this year. The move is seen as a positive step towards the country’s goal of establishing a $130 billion digital economy by 2020.

A version of this appeared in Deal Street Asia on June 20. Read the full story here.

thailand-hubba-startup, Thai Government's Efforts In Seeding Startups

Source: Tech in Asia, Hubba

The Thai Government announced a 20 Billion THB investment to accelerate 2,500 existing startups, with a target to increase the number to 10,000 by 2018. The government’s efforts in seeding startups will be a very important one, but they must ensure the program’s effectiveness and transparency. According to Pumin Yuvacharuskul, CEO at Eatigo,

Thailand’s ecommerce landscape is held back by unfavorable cross border investment policies and limited talent pool, which means that the government should roll out initiatives to sustain and grow start-ups as well as getting it off the ground.

Thai laws limit foreigners to holding 49% of the shares in an ecommerce business, as opposed to Singapore’s 100%. Law also states that the company needs to hire four Thai people to one foreigner. In order for Southeast Asia’s ecommerce landscape to flourish, opening up the market would help foster the local economy.  Indonesia has taken initiative and currently the Investment Coordinating Board (BKPM) is finalizing guidelines that will allow 100% foreign ownership of an ecommerce business with a minimum investment of US$8 million, or businesses that create 1,000 employment opportunities. In China, the government has poured a lot of money into startups and there are well established tax and tech-park incentives.

Governments can help create incentives for banks to support funding to help startups that have potential, and not only to SMEsAlthough this is a good initiative for a growing digital economy, it will take a long time to see results if local and international VCs are not involved in seed funding. Opportunities for  regional collaborations will also boost business. Recently, The governments of Thailand and Singapore announced a partnership to promote digital start-ups and mentoring for existing startups.

“Several drawbacks for startups operating in Southeast Asia are the limitations on users and monetisation given the combination of low GDP per capita and low credit card penetration in the region,” said Eddie Thai, a venture partner with the early-stage VC firm 500 Startups. “These challenges will be overcome with time in most countries, but it will be hard for any country to match Singapore, let alone Silicon Valley, without overcoming infrastructure and corruption issues.”

A version of this appeared in Bangkok Post on June 20. Read the full article here.

According to Daniel Tumiwa, the Chairman of the Ecommerce Association of Indonesia (IDEA), Amazon is coming to Indonesia with $600 million US (Kompas).

Tumiwa did not know exactly when Amazon would begin operations in Indonesia but said that the company’s first rumored entry into the region would probably follow the same pattern in other large countries.

The pattern, like in India, consists of one year of testing the waters followed by a decision on whether to stay in the game or not.

The IDEA chairman mentioned that Amazon was able to take over 50% of the Indian ecommerce market within one year, despite well-established local competitors like Flipkart. However, he also noted that they bowed out of China after one year, conceding the market to Alibaba. There are no ecommerce companies in Indonesia with the same kind of dominance that Alibaba has in China, which is why it would make sense for Amazon to enter the Indonesian market now.

Indonesia’s rapidly growing middle class, which is slowly becoming more comfortable with online shopping, makes the market potential huge. With an estimated worth of around $300 billion US, Amazon can burn through plenty of money to find solutions to Indonesia’s ecommerce problems.

A version of this appeared in Coconuts Jakarta  and Deal Street Asia on June 20. To read the full story, click here and here.

Indonesia’s logistics costs are 24% of GDP, currently the highest in the region. The country’s logistics performance index (LPI) also lags behind its neighboring countries like Malaysia, Thailand, and even Vietnam, according to World Bank but Hong Kong-based digital logistics startup OpenPort is attempting to lower Indonesia’s logistics cost via technology.

The platform enables clients to track the entire distribution process – claiming to cut companies’ logistics costs by up to 30% by cutting out the middleman. Connecting shippers and carriers via OpenPort’s digital platform will also replace the inefficient paper-based process, decreasing the time it takes carriers to receive payment from three months to one month. Their cloud-based digital logistics platform will allow the supply chain to be managed entirely in house, solving headaches for many logistics companies in the archipelago.

“With more than 17,000 islands scattered across the country, Indonesia needs to make its logistics and supply chain management system more transparent and more efficient, and it is impossible to do so without deploying technology and systems that can seamlessly monitor processes and cut out inefficiency wherever possible.” said its chief executive officer, Max Ward.

The Indonesian Logistics and Forwarder Association (ILFA) has highlighted that the republic can unlock a potential US$250-billion worth of value in the logistics market if it could make the sector more transparent and cut out hidden costs.

The startup plans to expand its operations in Indonesia to Surabaya where the major Perak Port is located.

A version of this appeared in Digital News Asia on June 14. To read the full article, click here.