Apple CEO Tim Cook recently engaged in discussions with Indonesian officials, including the Minister of Communication and Information and the Minister of Industry, during a press conference following a meeting with President Joko Widodo at the Merdeka Palace in Jakarta.
Indonesia’s push to attract investment from tech giants like Apple may face significant challenges, as experts indicate that local content policies could hinder long-term benefits. Economists have raised concerns that the nation’s existing local content requirements, known as “TKDN,” have prevented Apple from launching its latest iPhone model until it increases local investments or sources more components domestically.
On December 3, the deputy industry minister announced plans to elevate the local content requirement for smartphone manufacturing, following the government’s rejection of Apple’s $100 million investment proposal intended to facilitate iPhone 16 sales. Instead, Indonesia is now requesting Apple to invest $1 billion in local component production.
These content policies, designed to safeguard local industries and develop a value-added supply chain, apply across various sectors, including solar energy and electric vehicles. As Indonesia competes with other Southeast Asian nations, such as Vietnam, for redirected investment and supply chains from China, the effectiveness of these policies comes under scrutiny.
Economists argue that while some manufacturers have committed to local investments in the past, the strategy is misaligned with the fundamental issues impacting Indonesia’s ability to attract tech supply chains. Bhima Yudhistira Adhinegara, from an Indonesian think tank, criticized the approach as “pseudo-protectionism,” suggesting it may dissuade foreign investment rather than attract it.
What’s at stake?
Industry analysts highlighted the potential for growth in Indonesia if Apple can establish a presence in the market. Previously, Apple received positive feedback from the local community with initiatives such as “Apple Developer Academies” aimed at training future talent in software development. The CEO announced plans for a fourth academy in Bali during a recent visit.
However, with the government demanding greater involvement from Apple in the manufacturing sector, the pressure mounts. Officials contend that Apple’s prior investment proposals cannot compare to the commitments made by competitors like Xiaomi and Samsung.
Despite its large consumer base and being the fourth largest population worldwide, Indonesia represents a relatively modest market for Apple, with few consumers able to afford high-end iPhones. Additionally, Apple’s market capitalization exceeds Indonesia’s gross domestic product, leading some experts to suggest that the country might serve primarily as a gateway for regional distribution.
Indonesia’s local content policy mandates that 40% of smartphones and tablets must be produced locally.
Will Indonesia’s tactics backfire?
Most economic experts assert that stringent content policies could deter, rather than attract, companies like Apple. Patunru pointed out that local content requirements have historically failed to draw foreign direct investment (FDI) into the country, even contributing to exits from planned investments by firms like Foxconn and Tesla.
These “scare tactics” may adversely affect Indonesia’s investment landscape by creating regulatory uncertainty, according to Adhinegara, who noted inconsistent enforcement of regulations. Trade specialists have highlighted how local content requirements have historically led to increased costs, decreased competitiveness, and limited employment growth.
While some previous successes can be acknowledged, such as factory establishment by other smartphone manufacturers, critics argue that such superficial achievements will not suffice to entice substantial investments from major corporations.
In addition to local content mandates, Indonesia has also introduced tariffs aimed at enhancing investment. Last year, new regulations restricted TikTok’s commerce operations until the company partnered with a local entity.
A holistic approach needed
Experts emphasize that although current policies may yield short-term gains, the long-term sustainability of Indonesia’s investment appeal hinges on improving productivity and the overall business environment. Gupta noted that companies weigh various factors when considering investments, including legal stability, trade policy consistency, and labor market conditions.
To enhance FDI, the government should focus on building competitive infrastructure, enhancing human capital, and providing investment incentives. Economic comparisons showcase Vietnam’s success in attracting tech investments despite its smaller consumer market by leveraging incentives and maintaining a steadier policy framework.
Moreover, Vietnam’s strategic agreements with global markets stand in contrast to Indonesia’s ongoing negotiation efforts. Experts warn that unless Indonesia addresses the underlying reasons why firms favor other nations, it risks losing out on potential investments.
Despite an overall increase in foreign investment flows in recent years, Indonesia’s share of FDI relative to its GDP has seen a decline over the past two decades.
