How Foreign Investment Restrictions Will Affect Indonesian Online Retail Industry

Following last week's revelation that the Indonesia Investment Coordinating Board (BKPM) has extended the interpretation of the Negative Investment List, which restricts foreign investments, to cover companies that conduct online trading, we contacted a number of industry figures to seek their opinion or understanding of this new implementation.

The majority of those we contacted had preferred to keep their thoughts private and a number of them wanted to contact their lawyers and advisors prior to making any public comment about the issue. However, the general sentiment is that this will be detrimental to the Internet business landscape that is just taking off in Indonesia.

We have also sighted the letter from the secretary general of the Ministry of Trade that we referred to on Friday but due to a confidentiality agreement, we are unable to reproduce the letter. The content of the letter, which is dated 28 June 2013, essentially conveys that the section on direct consumer retail within the Negative Investment List is now applicable to online trading as well.

Managing Partner at Grupara, Aryo Ariotedjo, had told DailySocial that foreign investors are important given the nascent market. He said that they have been one of the primary drivers of online commerce in the country given their willingness to take the very early risks of jumping into uncharted waters when hardly any (if at all) local investors had been brave enough.

Ariotedjo said that local and foreign investors have different ways of assessing and evaluating the market as well as the players and these differences help test the landscape and deliver a greater variety of business models and approaches. This variety is important to determine which models will emerge as the eventual winners in the Indonesian market.

By preventing foreign investors to participate in the market, the local small to medium businesses will be at a major disadvantage in sourcing capital as banks are not keen on taking on the risks that these companies will bring and the banks themselves do not present attractive loan propositions for the business models of these companies. Local investors are not as willing to take the risk as foreign investors are when it comes to Internet-oriented businesses which means the pool of resources for budding entrepreneurs will significantly shrink.

As we said on Friday, most small (or even tiny) businesses or small-time entrepreneurs that sell items online may not be affected directly by this implementation because not only are they mostly unincorporated companies, they don't actually have an online presence other than on social networks and messaging platforms, using them primarily as a catalog for buyers to choose from. Additionally, many of these entrepreneurs are individuals doing businesses out of their homes.

When it comes to actual online commerce companies in Indonesia though, many of the larger players are either foreign backed through investments or joint ventures, or entirely foreign owned. Companies like Lazada, Zalora, Sukamart, BerryBenka, and Tokopedia, are expected to be evaluating their options on how to proceed from this point on. Remco Lupker's post does provide a list of actions that these companies may choose as their solutions but, of course, as he said, it's wiser for them to contact the BKPM directly and seek advice from their own lawyers.

Existing major local retail businesses have yet to make their marks in online retail across the country. The Kanmo Retail Group (Mothercare, ELC, Gingersnaps), CT Corp (Carrefour), and Alfa retail group (Alfamart, Familymart) may have dipped their toes on the Internet but they are still relatively new players in online retail and their online components don't yet compare to their brick and mortar store performances. Even Mitra Adi Perkasa, the country's largest retail group with dozens of foreign brands under its management, has yet to start its online retail operations.

Foreign invested companies are said to have up to two years before they have to fully comply with the new regulation but as this is not a law passed by the legislative body, it is possible that the interpretation may change yet again given a convincing lobbying from the industry. How the lobbying is conducted would be up to the relevant companies and the Indonesian E-Commerce Association to decide.

With 2014 being an election year, however, a new Indonesian government run by a new president, with a new set of ministers and maybe even new policies, may choose to take another look at the Negative Investment List which was last modified in 2010, and get the BKPM to apply a different interpretation before the two year period lapses. Maybe. Currently the Investment Coordinating Board has no formal head of organization as the previous chief, Chatib Basri, had been appointed as the new Minister of Finance back in May.

Neither the Indonesian E-Commerce Association nor the BKPM had responded to DailySocial at publishing time.

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