Indonesia’s Ministry of Trade (“MOT”) recently issued a regulation on the distribution of goods. MOT Regulation No. 22/M-DAG/PER/3/2016 regarding General Provisions on the Distribution of Goods (“MOT Reg 22/2016”) stipulates that goods can be distributed directly or indirectly to consumers within Indonesia. It revokes Minister of Industry and Trade Decree No. 23/MPP/Kep/1/1998 regarding Trade Business Agencies.

The indirect distribution of goods can be done by (i) chain distribution involving a distributor and its network; (ii) an agent and its network; or (iii) franchise. The direct distribution of goods is conducted by way of special distribution through single-level marketing or multi-level marketing. Distributor is defined as a distribution business actor acting on its own behalf and appointed by a manufacturer/producer, supplier or importer based on an agreement to carry out the distribution of goods. An agent is a distribution business actor acting as an intermediary for and on behalf of another party, appointed by an agreement to carry out the distribution of goods.

The flow of indirect distribution of goods is as follows:

a. Distributor can only distribute goods to a sub-distributor, grosir, perkulakan and/or

retailer;

b. Sub-distributor can only distribute goods to grosir, perkulakan and/or retailer;

c. Agent can only distribute goods to a sub-agent, grosir, perkulakan and/or retailer;

d. Sub-agent can only distribute goods to grosir, perkulakan and/or retailer.

A sub-distributor is a distribution business actor appointed by a distributor based on agreement to carry out the distribution of goods, a grosir is a distribution business actor that sells various goods wholesale and not retail, a perkulakan is a grosir in the form of a store with a self-service system, and a retailer is a distribution business actor whose main activity is to distribute goods directly to consumers. A sub-agent is a distribution business actor that acts as an intermediary for and on behalf of an agent appointing it based on an agreement to carry out the distribution of goods.

Article 19(4) of MOT Reg 22/2016 caused controversy by prohibiting large and medium manufacturers/producers and importers from distributing goods to retailers. This prohibition on manufacturers/producers distributing goods to retailers is not consistent with the provisions of Government Regulation (“GR”) No. 36 of 1977 regarding Termination of Foreign Business Activities in the Trade Sector, as amended several times, lastly by GR No.15 of 1998 (together, “GR 36/1977”). Article 3(2) of GR 36/1977 provides that a foreign investment (“PMA”) manufacturing company deemed a large-scale company can conduct the following trading activities, including selling its products as a distributor/wholesaler directly to retailers under Article 3(2)a.(i):

“a. sell its own products:

(i) as distributor/wholesaler within the territory of the Republic of Indonesia; or

(ii) by appointing a PMA and/or non-PMA distribution/wholesale company; or

(iii) by appointing a non-PMA retailer company.

b. import complementary goods (in the form of finished goods or components) from a company overseas that has a special relationship with the relevant PMA

manufacturing company; and

c. sell the complementary goods mentioned in Point (b) above to the domestic

market.”

A PMA manufacturing company may also appoint PMA or non-PMA distribution/wholesale

companies or non-PMA retail companies to sell its products.

The prohibition stipulated in MOT Reg 22/2016 will affect the price of products since manufacturers must add a layer of distribution to reach consumers. It may also negatively affect investment in Indonesia since investors may not be willing to establish manufacturing facilities in Indonesia because of the multiple layers of distribution required to get products to consumers. Members of the business community have asked the MOT to amend Article 19(4) of MOT Reg 22/2016.