Indonesia’s protectionist policy to attract investment is wrong: economists

Indonesia’s efforts to attract capital from Apple and other tech companies through local investments and manufacturing requirements are not enough to generate long-term profits and may backfire, economists warn.

Due to Indonesia’s long history local content policies, or “TKDN”, Apple has not been able to sell its latest iPhone model in the country until it invests or sources more components locally.

On December 3, Indonesia’s Deputy Minister of Industry told reporters that the country plans to increase the local content requirement for smartphone investments.

The plans come after the government rejected 100 million dollars Apple proposal aimed at paving the way for iPhone 16 sales. Instead, the government is now asking Apple to invest billion dollars in the production of cell phone components in the country.

The content requirements, which apply to various industries ranging from solar panels to electric vehicles, aim to protect local industries and create a value-added supply chain in Indonesia.

Its potential rise comes at a time when Indonesia is competing with other developing countries in Southeast Asia, such as Vietnamto attract investment and supply chains. diverted from china.

But while the content policy has attracted commitments 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 technology supply chains.

“I call it pseudo-protectionism. It is less about protecting the domestic market from imported products and more about trying to scare 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 believe that if they scare big corporations like Apple, they will invest more in Indonesia,” he added.

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

Until recently, Apple had earned market goodwill by creating “Apple Developer Academies” in the country, where students receive training in skills such as software development.

During a visit to Indonesia in April, Apple CEO Tim Cook announced that the company open a room Academy in Bali.

However, the government is now seeking more of Apple’s supply chain and wants local facilities to be involved in the actual manufacturing of the products.

Officials have also saying that the value of Apple’s previously proposed investments is less than that of its sales in Indonesia, arguing that smartphone companies such as China’s Xiaomi and South Korea’s Samsung have invested more.

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

Still, Indonesia is a small overseas sales market for Apple, with few consumers wealthy enough to buy a next-generation iPhone, economists said. 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 Indonesian Center for Policy Studies and an economist at the Australian National University.

He added that global technology supply chains like Apple’s involve dividing the value added, so each country could contribute only a small amount.

Indonesia’s content policy requires that 40% of smartphones and tablets be locally manufactured.

“Local content requirements have failed to attract FDI to Indonesia. Quite the opposite,” Patunru said, suggesting they helped companies like Foxconn‘sand teslaThe withdrawal of plans in the country in recent years.

Instead, Indonesia’s attempts to use “scare tactics” toward companies like Apple “may backfire,” according to CELIOS’ Adhinegara.

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

Yessi Vadila, trade specialist at the Economic Research Institute for ASEAN and East Asia, said local content requirements in Indonesia have historically been linked to higher costs, lower export competitiveness and productivity losses, while offering little impact on growth or employment.

Other economists noted that local content policies have racked up some superficial successes in the past, although they said they would not be enough on their own to attract more investment from companies like Apple.

“I would say they have been successful in trying to build some factories and facilities,” said Indonesian economist Krisna Gupta, noting that other smartphone makers, such as Samsung, have I had to invest on the market due to regulations.

In addition to its local content requirements, Indonesia has also implemented other protectionist policies, including tariffs, to encourage greater investment in the country. Last year, a new law banned TikTok’s trading app until the company invested through a local partner.

The country has also managed to establish a free trade agreement with Europe, while Indonesia is still trying to reach agreements in a deal. Vietnam has also been a major beneficiary of supply chains moving from China amid rising trade tensions between the United States and China.

According to Adhinegara, Indonesia may soon be presented with an excellent opportunity to attract diverted manufacturing, with Donald Trump set to return to the White House.

The president-elect has proposed massive tariff escalations on China, which could trigger another trade war and shake up Asian supply chains.

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

While Indonesia’s foreign direct investment has been growing over the years, its FDI as a percentage of GDP has only declined in the last two decades, according to data of the World Bank.