Indonesia’s protectionist policy to attract unfair investment: Economists

Indonesia’s efforts to attract money from Apple and other technology companies through local investment and manufacturing needs are insufficient to yield long-term benefits and could backfire, economists warn.

Due to Indonesia’s long-term local content policies, or “TKDN,” an apple could not sell its latest iPhone model in the country until it invests or sources more parts locally.

On December 3, Indonesia’s vice minister of industry told the media that the country plans to increase the local content requirement for smartphone investments.

These plans come after the government rejected Apple’s $100 million proposal aimed at paving the way for iPhone 16 sales. Instead, the government is now asking Apple to invest $1 billion in the production of mobile parts in the country.

The content 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 rise comes at a time when Indonesia is competing with other developing countries in Southeast Asia, such as Vietnam, to attract investors and supply chains away from China.

However, although the content policy has attracted the commitment of some manufacturers in the past, economists say they are still misguided and ignore many of the deeper reasons Indonesia has failed to attract technology supply chains.

“I call it pseudo-protectionism. It is less about protecting the domestic market from foreign products and trying to scare foreign direct investment into the country,” said Bhima Yudhistira Adhinegara, executive director of the Center of Economic and Law Studies (CELIOS), a think tank of Indonesia.

“They think that if they scare big companies like Apple, they will invest more in Indonesia,” he added.

An Apple analyst previously told CNBC that Indonesia would be a promising growth opportunity for the Cupertino-based company if it could find a foothold in the market.

Until recently, Apple has gained favor in the market by creating “Apple Developer Academies” in the country, where students are trained in skills such as software development.

During his visit to Indonesia in April, Apple CEO Tim Cook announced that the company will open a fourth academy in Bali.

However, the government is now demanding more from Apple’s supply chain and wants more resources involved in the actual manufacturing of the products.

Officials also said the amount of investment previously proposed by Apple was lower than what was sold in Indonesia, saying smartphone companies such as China’s Xiaomi and South Korea’s Samsung had invested more.

On the Indonesian side of the negotiating table, it has the largest consumer base in Southeast Asia and the fourth largest population in the world.

Still, Indonesia is Apple’s smallest overseas market, with few consumers wealthy enough to buy a high-end iPhone, economists say. The company’s market capitalization alone is greater than Indonesia’s domestic product.

On that note, Apple could be very interested in using Indonesia as a gateway to the regional market, said Arianto Patunru, a board member at the Center for Indonesian Policy Studies.

He added that global technology supply chains such as Apple involve cutting value added, so each country can contribute only a small amount.

Indonesia’s content policy requires 40% of smartphones and tablets to be made locally.

Most economists who spoke to CNBC said they don’t believe content policies will work to attract companies like Apple and instead will have the opposite effect.

“Local content requirements have not succeeded in attracting FDI in Indonesia. On the contrary,” said Patunru, suggesting that they contribute to companies such as Foxconn and Tesla withdrawing their plans in the country in recent years.

Instead, Indonesia’s efforts to use “scare tactics” on companies like Apple “could backfire,” according to CELIOS’ Adhinegara.

“I think it’s very bad for the investment situation in Indonesia and it creates uncertainty about the rules,” Adhinegara said, noting that regulations often seem to be enforced on a case-by-case basis.

Yessi Vadila, a trade expert at the Economic Research Institute for ASEAN and East Asia, said that local content requirements in Indonesia have historically been tied to increased costs, reduced export competitiveness, and loss of productivity while providing little impact on growth or employment.

Some economists noted that local content policies have had some success in the past, though they said they would not be enough on their own to attract more investment from companies like Apple.

“I would say they succeeded in trying to build factories and equipment,” said Indonesian economist, Krisna Gupta, noting that some smartphone manufacturers, such as Samsung, had to invest in the market because of the regulations.

In addition to its local content requirements, Indonesia has also used other protectionist policies, including tariffs, to drive large investments into the country. Last year, a new law blocked TikTok’s commercial app until the company invested through a local partner.

However, while the Guptas say the strategy may be successful in the short to medium term, it will face problems in the long run unless the government can boost productivity and the overall business environment.

“Indonesia will need to raise its standards across the country,” Gupta said, noting that companies are looking at many factors, including compliance, trade policy stability, and the labor market.

“They can’t just say, we have a big market; you have to want to be here, so please invest a lot,” he added.

To attract more FDI, the country should prioritize building competitive infrastructure, build people, and provide investment benefits, according to CELIOS’ Adhinegara.

Economists who spoke to CNBC pointed to Vietnam as a country that has been able to attract more technology investors despite not having a large local consumer market like Indonesia.

Instead of strict requirements for local content, Vietnam has successfully used the benefits of investment, consistent policies and strong infrastructure relative to its regional peers, they said.

The country has been able to establish a free trade agreement with Europe, while Indonesia is still trying to reach an agreement. Vietnam has also been one of the biggest beneficiaries of the movement of goods from China amid growing US-China tensions.

According to Adhinegara, Indonesia may be given an important opportunity to attract diverted production, and Donald Trump will return to the White House.

The president-elect has proposed a major tariff increase in China, which could trigger another trade war and shake up Asian chains.

However, unless the Indonesian government understands why companies like Apple have chosen Vietnam in the past, they may miss out again, Adhinegara said.

While Indonesia’s direct investment has grown over the years, its FDI as a share of GDP has only decreased over the past two decades, according to data from the World Bank.