Apple CEO Tim Cook (center) speaks along with Indonesian Communications and Information Minister Budi Arie Setiadi (right) and Indonesian Industry Minister Agus Gumiwang Kartasasmita during a press conference after a meeting with Indonesia’s President Joko Widodo at Merdeka Palace in April 17 Jakarta. 2024.
Bay Ismoyo | Afp | Getty Images
Indonesia’s efforts to attract capital from Apple and other technology companies through local investment and manufacturing needs are not enough to generate long-term profits and could backfire, economists warn.
Due to Indonesia’s many years of experience Local content guidelines, or “TKDN”, Apple was unable to sell its latest iPhone model in the country until the company invests locally or sources more components.
On December 3rd: Indonesia’s Deputy Minister of Industry told reporters that the country plans to increase local content demand for smartphone investments.
The plans come after the government rejected a $100 million request Apple’s proposal aims to pave the way for sales of the iPhone 16. Instead, the government is now calling on Apple to invest 1 billion dollars in the manufacturing of mobile phone components in the country.
The substantive requirements, which apply to various industries, from solar panels to electric vehicles, aim to protect local industries and create a value-added supply chain in Indonesia.
Their potential expansion comes at a time when Indonesia is competing with other developing Southeast Asian countries, such as Vietnamto attract investment and supply chains distracted by China.
But while the content policy has drawn commitment from some manufacturers in the past, economists say it is still misguided and ignores many of the deeper reasons why Indonesia has failed to attract tech supply chains.
“I call it pseudo-protectionism. It is less about protecting the domestic market from imported products and more about discouraging foreign direct investment into the country,” said Bhima Yudhistira Adhinegara, executive director of the Center for Economic and Legal Studies (CELIOS). , an Indonesian think tank.
“They think that if they scare away big companies like Apple, they will invest more in Indonesia,” he added.
What is at stake?
An Apple analyst previously told CNBC that Indonesia would be a promising growth opportunity for the Cupertino-based company if it could gain a foothold in the market.
Until recently, Apple had gained good market reputation by establishing Apple Developer Academies in the country, where students are trained in skills such as software development.
Apple CEO Tim Cook announced this during a visit to Indonesia in April Open a fourth Academy in Bali.
However, the government is now looking to expand Apple’s supply chain and wants local facilities to be involved in the actual manufacturing of the products.
Officials have too said that the value of Apple’s previously proposed investments is less than that of its Indonesian sales, arguing that smartphone companies like the Chinese ones Xiaomi and South Korea Samsung I invested more.
On the Indonesian side of the table, the country has the largest consumer base in Southeast Asia and the fourth largest population in the world.
Still, Indonesia is a small foreign market for Apple because there are few consumers wealthy enough to buy a cutting-edge iPhone, economists say. The company’s market capitalization alone is larger than Indonesia’s gross domestic product.
In that sense, Apple may be more interested in using Indonesia as a gateway to the regional market, said Arianto Patunru, a board member at the Center for Indonesian Policy Studies and an economist at the Australian National University.
He added that global technology supply chains like Apple’s involve sharing of value creation, so each country may only contribute a small amount.
Indonesia’s content policy requires 40% of smartphones and tablets to be manufactured locally.
Will Indonesia’s “scare tactics” backfire?
Most economists who spoke to CNBC said they did not believe content policies would attract companies like Apple, but instead that they would have the opposite effect.
“Local content needs have failed to attract foreign direct investment to Indonesia. Quite the opposite,” said Patunru, suggesting that they have helped support businesses like these Foxconn‘s and TeslaThe withdrawal of plans in the country in recent years.
Instead, Indonesia’s attempts to use “scaremongering” against companies like Apple could “backfire,” according to CELIOS’s Adhinegara.
“I think this is very bad for the investment climate in Indonesia and creates uncertainty around regulation,” Adhinegara said, pointing out that enforcement of regulations is often done on a case-by-case basis.
Yessi Vadila, trade specialist at the ASEAN and East Asia Economic Research Institute, said local content requirements in Indonesia have historically been linked to higher costs, reduced export competitiveness and lost productivity, while having little impact on growth or employment.
Other economists noted that local content policies have had some superficial successes in the past, but said they alone would not be enough to attract more investment from companies like Apple.
“I would say they have managed to build some factories and facilities,” said Indonesian economist Krisna Gupta, pointing out that other smartphone makers such as Samsung have also done so had to invest due to regulations in the market.
In addition to its local content requirements, Indonesia has also introduced other protectionist measures, including tariffs, to drive greater investment into the country. Last year, a new law banned TikTok’s trading app until the company invested through a local partner.
Holistic approach required
Although Gupta said the strategy could achieve some success in the short to medium term, it will face problems in the longer term unless the government is also able to boost productivity and the overall business climate.
“Indonesia needs to step up across the board,” Gupta said, noting that companies are considering a range of factors, including law enforcement, trade policy stability and the labor market.
“You can’t just say we have a big market; You must want to be here, so please invest more,” he added.
To attract more foreign direct investment, the country must prioritize building competitive infrastructure, building human capital and providing investment incentives, said CELIOS’s Adhinegara.
Economists who spoke to CNBC pointed out that Vietnam is a country that has managed to attract more technology investment, even though the local consumer market is not as large as Indonesia.
Instead of strict local content requirements, Vietnam has successfully leveraged investment incentives, consistent policies and strong infrastructure compared to its regional peers, they said.
The country has also managed to set one up Free trade agreement with Europe, while Indonesia is still trying to come to an agreement on a deal. Vietnam has also been a key beneficiary of shifting supply chains from China amid rising US-China trade tensions.
According to Adhinegara, Indonesia may soon have a golden opportunity to attract diverted manufacturing operations as Donald Trump returns to the White House.
The president-elect has proposed a massive escalation of tariffs against China that could spark another trade war and rattle Asian supply chains.
But if the Indonesian government doesn’t understand why companies like Apple have chosen Vietnam over the country in the past, they could be missing out again, Adhinegara said.
While Indonesia’s foreign direct investment has increased over the years, its foreign direct investment as a share of GDP has only declined over the past two decades Data from the World Bank.
