Under Indonesian Investment List changes introduced in May 2021, certain e-commerce activities are now reserved for local cooperatives and micro, small and medium enterprises. We look at the potential impact of these changes on Indonesian e-commerce players and prospective investors in this rapidly growing sector.

Background

Indonesia’s online commerce industry is one of the most dynamic and fastest growing in Southeast Asia. This has been supported by a regulatory framework that is generally more liberal than that applying to the brick-and-mortar retail industry, which is the subject of numerous restrictions, including a requirement for separate entities to undertake different types of trading activities.

The increasing focus on technology and digitalisation was further accelerated by the Covid-19 pandemic, as restrictions and lockdowns put in place by governments across the world, including in Indonesia, have led to increased numbers of retailers and consumers turning to e-commerce and other online digital platforms.

Under applicable regulations, online commerce primarily comprises e-commerce lines of business, web portals and commercial digital platforms, including online marketplaces, digital advertising, and on-demand online services. E-commerce is characterised as retail trading through the media, including post and internet ordering systems.

In this e-bulletin, we share our observations on recent Foreign Direct Investment (FDI) changes to the e-commerce lines of business introduced by Presidential Regulation No. 10 of 2021 on Investment Sectors dated 4 March 2021 (the Investment List), which contains new foreign investment restrictions for a raft of sectors in Indonesia and replaces the negative list under Presidential Regulation No. 44 of 2016 (the 2016 Negative List), as amended by Presidential Regulation No. 49 of 2021 dated 25 May 2021 (the Amended Investment List).

Summary

Under Indonesia’s 2016 Negative List, the e-commerce business was 100 percent open to foreign ownership as long as there was a partnership with local cooperatives and micro, small and medium enterprises (CMSMEs).

The Investment List appeared to further liberalise e-commerce business lines by removing the partnership requirement. However, just two months after the issuance of the Investment List, the Amended Investment List introduced new restrictions on several e-commerce business lines by allocating them exclusively to CMSMEs. These latest changes suggest a shift away from a previously liberal attitude towards e‑commerce through the introduction of regulatory restrictions previously only applicable to the brick-and-mortar retail industry.

As a result, Open E-Commerce Businesses (defined below) may now need foreign and large domestic investors to sell most (if not all) of the products referred to under the Restricted E-Commerce Businesses (also defined below), but it remains to be seen how this will be implemented or enforced in practice.

For more details, please read on.

FDI changes to e-commerce business lines

Under the 2016 Negative List, e-commerce business lines were open to 100 percent foreign ownership if the e-commerce business actors entered into a partnership with CMSMEs. Such partnership could take various forms, including sub-contracting, franchising, general trading, distribution and agency, supply chain (eg CMSMEs as local supplier of raw materials), operational collaboration, joint ventures and outsourcing.

Against this backdrop, it is worth highlighting the growing role of the Ministry of Investment/Investment Coordinating Board (BKPM) in developing CMSMEs through collaboration and synergy among key ministries, including BKPM, the Ministry of CMSMEs, and the Ministry of State-Owned Enterprises (SOEs). Since 2020, BKPM has entered into a memorandum of understanding with each of these ministries to collaborate on information sharing, the development of CMSMEs and partnership facilitation between, on the one hand, CMSMEs, and on the other hand, foreign investors, domestic investors or SOEs.

Interestingly, the Investment List did (for a very short period, when initially introduced) further liberalise e-commerce business lines by removing the partnership requirement that existed under the 2016 Negative List. During this period, the e-commerce businesses lines were simply open to 100 percent foreign ownership. However, just two months after the issuance of the Investment List, the Amended Investment List introduced further restrictions on several e-commerce business lines by allocating them exclusively to CMSMEs. In other words, these e-commerce business lines have now been closed to both foreign investors and large domestic investors.

Under the Amended Investment List, the following e-commerce business lines are now reserved for CMSMEs (Restricted E-Commerce Businesses):

The restrictions under the Amended Investment List are therefore more protectionist than those under the 2016 Negative List, which previously only required a partnership with CMSMEs.

It should be noted that the following e-commerce business lines are not in the Amended Investment List (Open E-Commerce Businesses) and, as such, should be open to 100 percent foreign ownership:

Therefore, it appears that foreign and large domestic investors will now need to rely on one of the Open E-Commerce Businesses listed above to establish a new e‑commerce business in Indonesia.

In the past, investing in an online commerce business (including e-commerce) in Indonesia was much more attractive for foreign investors than investing in a brick-and-mortar retail business, which is subject to complex sectoral regulations. These sectoral restrictions include restrictions on the location of retail stores, the size and types of products that can be sold by retail stores, and the types of activities that can be undertaken by retail stores. Despite the recent liberalisation introduced by the Amended Investment List to brick-and-mortar retail businesses, only some types of retail stores are open to 100 percent foreign ownership, including department stores with floor space exceeding 400 sqm.

The changes introduced by the Amended Investment List suggest a shift away from the previous liberal attitude towards e-commerce through the introduction of regulatory restrictions previously only applicable to the brick-and-mortar retail industry. Open E‑Commerce Businesses may require foreign and large domestic investors to sell most (if not all) of the products referred to under the Restricted E-Commerce Businesses, but how that will be implemented or enforced in practice remains to be seen. Open E‑Commerce Businesses could be attractive to online department stores that sell a broad range of products. However, we doubt that such businesses would be attractive to foreign and local brands, which typically sell only a limited range of products.

It is also unclear whether the sectoral restrictions under Government Regulation No. 29 of 2021 regarding Implementation of Trading Business (issued in February 2021 as an implementing regulation of the Omnibus Law) that apply to “retailers” (pengecer) will be interpreted by Indonesian regulators to also cover e-commerce businesses in practice.

We will continue to monitor developments in this area, noting that the future growth of e-commerce in Indonesia will depend to a great degree on the policies and practices adopted by Indonesian regulators for existing and new e-commerce businesses in Indonesia.