Indonesia's Ministry of Trade May Have Banned Foreign Investment for E-Commerce Companies

The Ministry of Trade apparently has issued a new directive which extends the negative investment list from offline businesses to online business, according to Remco Lupker, president of Ambient Digital Indonesia, on his blog post tonight. This, he says, effectively cuts off foreign investment for anything to do with direct sales to consumer. Lupker also outlined the effects it may have on the local e-commerce companies and how they can manage to comply with this new policy.

Last month we wrote about how a number of startups, especially e-commerce ones, have been facing difficulties in raising capital when the source of funds originate from overseas. At that point nothing seemed official as far as regulations are concerned but according to Lupker, on 28 June, the secretary general of the Ministry of Trade sent out a letter which expands the scope of the 2010 presidential decree number 36 to include companies operating online.

We have yet to obtain the Ministry's letter but if what Lupker said is true, then it's goodnight Gracie for e-commerce in Indonesia. Lupker said that the Investment Coordinating Board was instructed by the secretary general of the Ministry of Trade to apply the 2010 law to online companies.

The reason for this seems pretty clear. The government may have finally noticed the big moves made by foreign invested companies as well as from entirely foreign owned companies into the online commerce space in Indonesia. Japanese venture capital firms have set up offices and made significant investments in Indonesian e-commerce companies for a number of years. Rocket Internet is spending an absolute fortune in setting up Lazada and Zalora alongside its other ventures in the country.

These steps may have spooked the government into thinking that when these big companies make their marks in the country, the smaller players will be cut off and pushed aside from the market and Indonesian companies in general will have a hard time in establishing themselves online.

Certainly this issue with the negative investment list has spurned companies like Lotte from investing in cinema chain blitzmegaplex or even setting up its own in Indonesia. Earlier this year when the then head of the Investment Coordinating Board Chatib Basri confirmed Apple's USD 3 million dollar investment in Indonesia, he explained that if Tim Cook's company is to open a store in Indonesia, it needs to be 2000sqm or larger as described in the regulation pertaining to foreign companies or foreign invested companies. That's about the size of a department store instead of a regular electronics retail store.

These protectionist policies clearly exist to allow local companies to establish themselves in the domestic market and perhaps be able to eventually compete with larger foreign companies. However, looking at the Indonesian investment scene for technology and online companies, there has been historically very little involvement from local investors.

Yes, there are Indonesian angel investors that have been dipping their toes in the proverbial water but on a larger scale, few have been so forthcoming when it comes to investing massive amounts of money to develop online businesses.

Small to medium sized companies like Tokopedia, Bilna, and BerryBenka have received investments primarily originating from foreign investors. Tokobagus, the country's largest online classifieds company is funded by Naspers/MIH, which is South African and Rakuten is obviously Japanese. There are countless other online commerce companies that ended up seeking and receiving funds from overseas investors than from local investors. Still, there are thousands of online shops established and fully funded domestically but a significant majority of them are very tiny and operate mostly over Facebook, Instagram, BBM, or other social networks and messaging platforms, instead of being proper e-commerce outfits.

Cutting off foreign investment to current and future e-commerce companies in Indonesia will have massive repercussions with regards to the development of the industry. Indonesia does not have a history of great technology companies producing investors who are willing to fund the next generation of technology entrepreneurs.

The majority of Indonesia's rich today have come from trade, real estate, finance, and oil and other mining backgrounds over the past 50 years. There is very little understanding from members of this population segment about the online business, which unsurprisingly keeps them mostly away from entering the field.

Funds in investment companies such as Grupara and In House VC have been raised mainly from mining groups but these are two funds that have only been set up very recently and by the younger generations of the families that run the mining companies. They are the trailblazers, and being trailblazers, there's not that many of them.

If the Ministry of Trade expects e-commerce companies to be fully funded by Indonesian-sourced funds, the industry will likely be set back for five years as potential e-commerce companies will have to go back to the drawing board and devise new strategies to entice and convince local investors to enter the field.

Potential local investors will have to be educated about the nature of the online business which tend to not deliver meaningful revenue –or any for that matter– for several years as they build up their customer base as well as trust. And that takes time. Any investment made in online companies aren't likely to see any return for several years. It is a very long tail business as the likes of Amazon and eBay have demonstrated since the late 1990s, and local investors generally aren't prepared to wait for a decade or even half a decade before they see a return.

There is also of course the potential loss of online store entrepreneurs who may have wanted to set up their stores at any of the online marketplaces, but can't because those marketplaces may have been funded or run by foreign entities and may no longer operate if their source of funds are cut off. The ones that will be hurt by this directive will be the small to medium businesses.

The people who run Blibli are probably going to look at this with glee as they are run and established by Global Digital Prima of the Djarum group which is entirely local. Speaking of which, DailySocial is also funded and supported by the same group although under a different arrangement. While DailySocial has received investment from the group's MerahPutih Incubator since 2011, this year we have closed a funding round from foreign investors as well.

Pending confirmation of this directive, it's a good idea to read Lupker's blog post on this issue for some thoughts on how to proceed with regards to this new development and we will be seeking more information as well as comments from others in the industry in the coming days. We have sent an email to Daniel Tumiwa, head of the Indonesian E-Commerce Association for comments and confirmation regarding this matter.

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