The War on Illegal Phones: Implications of TKDN Policy?

DISCLAIMER: This post reflects purely the author’s personal opinion, written casually, and does not represent the views of any institution.

Not long ago, the internet was abuzz with the government’s plan to block mobile phones that are unregistered, i.e., not officially imported. Every phone has an International Mobile Equipment Identity (IMEI) – essentially an ID card for phones – and phones without registered IMEI numbers are considered Black Market (BM) phones and cannot be used in Indonesia. Some coverage of this regulation can be found at Tirto, Liputan 6, and Kompas, among other outlets.

This plan infuriated many netizens. The Ministry of Industry’s Twitter account received unusual engagement, with many angry replies – some containing valid and useful criticism. But even the pure outrage, if read patiently, carries a message: citizens hate this regulation!

But why is the government trying to do this? If netizens are upset, it means BM phones benefit consumers, right? But this policy is being planned because someone is being harmed. If everyone were happy, why intervene? Who loses from the circulation of BM phones?

Number one: the government itself. Phones are taxed goods. Official phone prices in Indonesia already include VAT and income tax – something consumers don’t pay when buying BM phones. The Indonesian Phone Association (APSI) estimates that 30% of all phones circulating in Indonesia are BM phones. The government’s potential tax revenue loss from these untaxed phones reaches 2.8 trillion rupiah!

It’s easy to see why netizens like BM phones. Phones that skip VAT and income tax are automatically cheaper. The total tax consumers must pay is about 12.5% of the phone’s price. Since most phones in Indonesia are imported, prices don’t differ much from international prices. Buying in a country with lower taxes obviously benefits consumers.

Beyond Taxes: Local Content Requirements (TKDN)

But the cost-benefit story gets more complicated because of another regulation in the phone market: TKDN (Tingkat Komponen Dalam Negeri, or Local Content Requirements). TKDN is established in Minister of Industry Regulation No. 29/2017, which replaced Regulation No. 65/2016. So, in addition to tax rules, phone vendors must also comply with TKDN since July 27, 2016.

TKDN, or in English LCR (Local Content Requirement), is an industrial and trade policy requiring a certain percentage of local content in circulated imported products. Typically, LCR rules are designed to grow the domestic industry – in this case, the phone industry.

For smartphone TKDN, phones sold in Indonesia were required to have 20% local content in 2016, rising to 30% in 2017. Vendors wishing to sell phones in Indonesia must apply for TKDN certification from the Ministry of Industry, undergo verification by a surveyor, and if the result exceeds 30%, the vendor receives a TKDN certificate and may sell the product. Companies and products with TKDN certificates can be viewed on the TKDN website. It’s actually a good website!

This regulation appears to have been fairly successful in reducing imports and boosting investment from phone manufacturers. According to the Minister of Industry, phone imports declined continuously from 2014 to 2017. In 2016, phone imports fell 40% compared to 2015, and in 2017 they fell another 36% from 2016. Meanwhile, local production rose significantly. Investment shows a similar story. Proud to use Indonesian products!

But government intervention doesn’t always go smoothly. When first enacted, TKDN drew criticism from phone vendors because achieving local content in phone products is apparently not easy. According to Kompas, this regulation is why OnePlus never entered Indonesia, while some Xiaomi products had to be downgraded in specs to reduce imported content. I suspect this is also (one of) the reasons Google Pixel doesn’t sell in Indonesia.

TKDN is calculated across three main categories: manufacturing, R&D, and applications. Broadly speaking, there are two paths to compliance: using 70% hardware (leaving 30%), or 70% through applications. Looking at the regulation, the applications path seems to be why many phones come pre-loaded with locally-made apps.

There’s a 3rd path with a different calculation. The 3rd path is through investment. If a company commits to sufficient R&D investment and training domestically, its products can enter without meeting regular TKDN requirements. Apple iPhone 6 and 6s almost didn’t make it into Indonesia before this 3rd path was introduced. Looking at the TKDN website, only Apple products have exactly 30% TKDN (other products have decimal points). Apple’s products likely hit exactly 30% because their TKDN comes from investment commitments in innovation centers and training.

This 3rd path appears to have been added later, and other vendors like Samsung were frustrated because the 3rd path is cheaper than building a new factory in Indonesia – but Samsung had already invested in a factory targeting the 1st path (or maybe the 2nd).

This regulation seems genuinely difficult for phone vendors to comply with. The TKDN website shows that certified products almost all barely clear the 30% threshold. Some reach 35%, but most are just barely above 30%. This doesn’t even count phones that don’t enter Indonesia or those that had to change specs from their international versions. Mr. Wardoyo from Erajaya predicted in 2016 that this regulation could trigger an increase in BM phones.

Mr. Wardoyo may well have been right.

For vendors who’ve already obtained their hard-won TKDN certificates, BM phones are infuriating. BM phone sellers don’t pay taxes AND don’t need TKDN certification. The government loses tax revenue, and investors lose money on certification costs and the additional expense of building factories in Indonesia – when a single factory in Vietnam might have sufficed.

It’s therefore entirely justified for the government to fight BM phone circulation as hard as it can. We’ve already incurred additional costs for TKDN, so we might as well follow through with IMEI blocking. Reportedly the blocking equipment already exists and was provided for free.

Fighting BM phones becomes even more important because it doesn’t just hurt the government through lost taxes – it also hurts manufacturers who went through the trouble of complying with TKDN. Especially if BM phones have actually increased because of TKDN. Over time, as more companies invest in Indonesia and the component and application industries develop, TKDN should become easier to comply with and BM phones should decline in the long run.

In the meantime, netizens should be patient. As good citizens, it’s only proper to support the government’s efforts to boost manufacturing growth in Indonesia, particularly in phone production. Don’t just be angry all the time. Japan and South Korea also had to tolerate slightly more expensive products before becoming the developed nations they are today. Deal?

Stay strong, netizens! Support the government program! Be patient! We will surely become a developed nation soon!

Addendum: the IMEI regulation was reportedly going to be signed on August 17. Hopefully implementation goes smoothly. Stay strong, netizens! Support the government program!

Edit: it was not signed on August 17, 2019, and there’s no word yet on when it will be postponed to.

Addendum 2: The news article links are worth reading. Check them out!