Will Indonesia's 'Ban or Pay Up' strategy force tech giants to comply?

Last month, Indonesia banned the sale of Apple’s iPhone 16s, which was launched globally in September.

The ban also extends to other Apple products like the Apple Watch Series 10.

According to an Indonesian news agency, the government has also moved to block the iPhone 16’s IMEI registrations, rendering imported devices unusable within the country.​

Similarly, the Google Pixel phones have also been banned in the country, though these devices are not officially distributed in the Indonesian market.

So why is the government imposing these bans?

Back in 2017, Indonesia introduced a regulation known as the Domestic Component Level or TKDN which states that 40% of the components or value of smartphones or products sold in Indonesia must be locally sourced.

Tech giants like Apple and Google are struggling to comply with these regulations.

Earlier this week, the government also rejected Apple’s $100 million investment proposal.

Last week, Industry Minister Agus Gumiwang Kartasasmita, said Apple’s investment offer of $100 million over two years does not meet the globally recognised principle of fairness in investment.

“We urge Apple to immediately establish a production facility in Indonesia so that it does not need to continue to submit investment proposals every three years,” he said.

While Apple has no manufacturing facilities in Indonesia, it has been setting up app developer academies in the country since 2018 – which including the new academy have a total cost of $101.8 million

He suggested that the ministry would invite Apple to visit Indonesia to negotiate further.

A source close to the issue said it is a legitimate concern for any government including Indonesia to build internal manufacturing capacities and drive foreign investment.

“This kind of ban may not be an ideal way to communicate this message to the industry,” he said.

“It may work short term in some sectors like consumer electronics where it’s too huge a market to ignore, and with no choice for companies but to follow or negotiate for wider investors in Indonesia.

The source explained that Indonesia is a growing market with large consumer aspirations.

“No player in consumer electronics can afford to ignore it. Businesses and the government should find ways to work together to make sure Indonesians have access to a wide array of quality products,” he added.

What is the TKDN?

The Tingkat Komponen Dalam Negeri (TKDN), or Domestic Component Level, is a regulatory framework introduced by the Indonesian government to promote the use of locally sourced components in goods and services.

The aim is to bolster national industries and reduce reliance on imports. The policy reflects Indonesia’s broader commitment to fostering self-reliance in key sectors.

The TKDN is similar to India’s 2014 ‘Make in India’ movement and the Chinese Certificate of Origin document which verifies the country of origin for a specific product.

It is issued by the exporting party’s government authorities and is required by importing country authorities to prove the origin of goods.

The idea behind the TKDN is simple: invest in the country if you want to tap into a 270 million-strong market.

The best example to look at is Indonesia’s top selling smartphones: Samsung and Oppo.

In 2015, South Korea’s electronics giant Samsung set up a phone assembly factory outside of Jakarta. Over the years, Samsung has invested more than $1.8 billion in the country.

Recently, the Chinese company Oppo invested around $82 million to build a factory in Jakarta to make phones.

According to the South China Morning Post, the director of Oppo’s Indonesia Manufacturing Centre, Jefry Firman de Haan, said around 36% to 37% smartphone components that Oppo sources for its Indonesian factory in Tangerang come from domestic suppliers, including batteries, packaging materials, adaptors and USB cables.

He added that they were on the lookout for good suppliers for all of their components, and they had communicated and cooperated closely with the Ministry of Industry and local governments to find the right suppliers and vendors.

At the moment, Oppo is the best selling smartphone in the country, followed by Samsung. Apple is ranked fifth and Google Pixel is even lower in the ranking, according to IDC, a research firm.

Bans vs investment opportunity?

In 2023, the Indonesian government blocked TikTok’s marketplace feature, claiming that it would hurt the local retail industry. The move was reversed when TikTok’s Chinese parent company, ByteDance, invested $1.5 billion in a merger with Indonesian e-commerce giant Tokopedia.

Similarly, last month, Chinese e-commerce giant Temu, was also banned in Indonesia, claiming that this could hurt the county’s small and medium enterprises.

While Indonesia’s policies are aimed at securing investment from tech companies, it makes one wonder if this is the best way to go about it.

While such strategies might attract investments when companies comply, they also risk deterring potential investors if the demands are looked upon as overly restrictive.

Striking a balance will be crucial for Indonesia to fully leverage its market potential without alienating global tech players.