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Apple’s CEO Tim Cook recently addressed the media at a press conference held at the Merdeka Palace in Jakarta, following a meeting with Indonesian President Joko Widodo. The event also featured Indonesian Minister of Communication and Information Budi Arie Setiadi and Minister of Industry Agus Gumiwang Kartasasmita, highlighting the ongoing discussions between Apple and the Indonesian government.
Economists are expressing skepticism regarding Indonesia’s strategy to draw in capital from Apple and other technology firms through stringent local investment and manufacturing requisites. They caution that these measures may not yield lasting benefits and could potentially hinder foreign investment.
Indonesia’s longstanding local content policies, known as “TKDN,” have resulted in Apple being unable to introduce its latest iPhone model in the market unless it enhances local investment or component sourcing.
On December 3, Indonesia’s deputy industry minister announced an intention to elevate local content mandates for smartphone investments. This initiative follows the government’s rejection of a proposed $100 million investment by Apple aimed at facilitating iPhone 16 sales. Instead, officials are requesting that Apple invest $1 billion in the production of mobile components in Indonesia.
The local content requirements are intended to bolster domestic industries and establish a value-added supply chain, spanning across various sectors from solar panels to electric vehicles. However, these policies are being introduced in a competitive landscape where Indonesia is vying for foreign investment against countries like Vietnam, which has been attracting supply chains shifting away from China.
While the local content policies have historically garnered some manufacturer commitments, economists argue that the root causes of Indonesia’s challenges in attracting tech supply chains remain unaddressed. Bhima Yudhistira Adhinegara, executive director of the Center of Economic and Law Studies (CELIOS), characterized these policies as “pseudo-protectionism” aimed more at alarming foreign investors rather than genuinely protecting the domestic market.
What’s at stake?
Previous analyses revealed that Indonesia could represent a significant growth sector for Apple if solidified in the local market. The company has, until recently, maintained goodwill through initiatives like the establishment of “Apple Developer Academies,” training students in software development. Tim Cook announced plans to open a new academy in Bali during a visit in April, showcasing Apple’s commitment to educational investments in the region.
However, Indonesian officials are increasingly insisting on a broader supply chain presence from Apple and more direct involvement in product manufacturing. They have pointed out that Apple’s investment proposals seem to lack equivalency compared to the commitments made by competitors like China’s Xiaomi and South Korea’s Samsung.
Indonesia boasts the largest consumer base in Southeast Asia and ranks as the world’s fourth-most populous nation, facts that lend weight to its bargaining position. Nevertheless, for Apple, Indonesia remains a relatively minor overseas market, with a limited number of affluent consumers willing to purchase high-end iPhones. Economists suggest Apple may see Indonesia primarily as a gateway to expand into the broader regional market.
The local content policy requires that 40% of smartphones and tablets sold in Indonesia be manufactured locally, but this approach has raised concern among economists about its effectiveness.
Will Indonesia’s ‘scare tactics’ backfire?
Experts largely agree that such stringent policies are unlikely to attract major companies like Apple and may have the opposite effect. According to Arianto Patunru, a board member at the Center for Indonesian Policy Studies, local content mandates have historically failed to bring foreign direct investment (FDI) to Indonesia, possibly prompting companies like Foxconn and Tesla to reconsider their plans in the nation.
Adhinegara further noted that the government’s “scare tactics” could jeopardize investor confidence, creating regulatory uncertainties. He stressed that inconsistent enforcement of regulations can lead to skepticism from potential investors.
Yessi Vadila, a trade specialist at the Economic Research Institute for ASEAN and East Asia, warned that local content regulations have historically been associated with higher costs and reduced global competitiveness, ultimately not contributing to economic growth or job creation.
While there have been isolated successes linked to local content requirements, economist Krisna Gupta stated that they are insufficient by themselves in attracting significant foreign investments. He noted that while some smartphone manufacturers such as Samsung have established operations in the country, overall, the regulatory environment needs improvement.
Indonesia has also employed additional protectionist measures including tariffs, intending to enhance investment allure. For instance, a recent regulation barred TikTok’s commerce platform until it partners with a local entity for investments.
Holistic approach needed
Gupta emphasized that if Indonesia’s strategy aims to yield long-term results, it needs to improve productivity and create a favorable business environment. He stated, “Indonesia will need to step up their game across the board,” recognizing that multinational corporations consider multiple factors like law enforcement, trade policy stability, and the quality of the labor market when making investment decisions.
Experts contend that Indonesia must prioritize developing competitive infrastructure, enhancing human capital, and providing robust investment incentives to attract more FDI. Vietnam serves as a successful example; despite a smaller consumer market, it has effectively harnessed investment incentives, stable policies, and superior infrastructure to its advantage.
Furthermore, Vietnam has negotiated a free trade agreement with the European Union, whereas Indonesia has yet to finalize similar terms. Vietnam has also benefitted from the shifting of supply chains away from China in light of escalating U.S.-China trade tensions.
The forthcoming presidency of Donald Trump could provide Indonesia with another chance to attract manufacturing businesses fleeing China, as he has proposed significant tariff increases. However, unless the Indonesian government critically assesses why companies prefer regions like Vietnam, it risks continued missed opportunities.
Although FDI in Indonesia has seen an upward trend, the ratio of FDI to GDP has diminished over the last two decades according to World Bank data. This trend underscores the imperative for Indonesia to refine its investment strategies if it wishes to compete on the global stage.
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