Ruth Dea Juwita, Jakarta – The government plans to cut local content requirement scores for goods made through contract manufacturers, a move business groups say will dent investment and competitiveness more than it will help the country to woo foreign capital.
The new policy would penalize firms that outsource production by slashing their scores on key local content metrics like labor and overhead costs, as companies using external producers could see those contributions lowered by up to 70 percent, according to a document seen by The Jakarta Post.
Businesses argue the changed rules would make it harder to meet the thresholds required to qualify for government tenders, which often require a certain minimum share of local content.
"Companies that rely on outsourcing or contract manufacturing will need to adapt fast, even restructure their supply chains," Deni Irawan, chairman of the Electronic Commodity Entrepreneurs Association (Apkonik), told the Post on Friday.
Uneven infrastructure for in-house production would leave unprepared companies most exposed, Deni viewed, though the future policy could "spur strategic and forward-looking" business players to strengthen the local industrial base.
"For electronics players, the best step now is to map out your supply chain, identify opportunities to localize components and consider vertical integration," he added.
Under the prevailing legal framework, firms can fully count locally sourced materials, labor and overhead toward their local content score, regardless of whether they operate their own factory or use a contractor.
The new formula, however, introduces a tiered system, where companies only receive full credit for labor and overhead if they produce in-house, the document shows.
Contract manufacturing often serves as the first step for companies entering the Indonesian market, before they decide to establish their own full-scale facilities, said Donna Priadi, chairwoman of the American Chamber of Commerce (Amcham) Indonesia.
It allows businesses to test the market, gauge consumer demand and gradually build their presence with lower initial risks and investment.
"Given this important role, the government should continue to recognize contract manufacturing as a significant contributor to domestic value creation paving the way for long-term investment in manufacturing facilities," Donna told the Post on Monday.
Even global giants like Apple Inc. rely on and invest through contract manufacturers as part of their supply chains, highlighting the importance of the model, said Mulya Amran, head of the Kadin Indonesia Institute, the advisory and training arm of the Indonesian Chamber of Commerce and Industry (Kadin).
Mulya contrasted Indonesia's approach with neighboring Vietnam's long-term strategy of actively cultivating a supplier ecosystem for Apple.
Apple's iPhones are assembled by large third-party contract manufacturers like Foxconn, while a robust network of local Vietnamese contractor firms has developed to supply essential components to those factories. This ecosystem of more than 35 suppliers took more than a decade to build.
"Vietnam has been growing its Apple vendor supplier base since 2008, while Indonesia is only at the beginning [...]. We have never seriously tried to grow our supplier base," he said.
Mandating stricter local content rules while a robust supplier base is not yet in place could drive away major "anchor" investments, he added, and pushing them to other countries "as they are hindered by supply chain limitations and unrealistic TKDN barriers."
Manufacturers received a briefing from the Industry Ministry's Center for Increasing the Use of Domestic Products (P3DN) in early August on new rules for calculating local content, a standard step to gather business feedback.
The new regulation aims to simplify the current complex cost-based calculation by moving to a points-based system, supposedly making certification cheaper, said Erwin Hermanto, secretary general of the Indonesian Medical Device Manufacturers Association (Aspaki).
Erwin told the Post on Monday that the revised method would "benefit research and innovation-intensive products" while "mature products will see their local content scores fall."
According to the document, the regulation will introduce an incentive allowing firms to lift their local content score by up to 20 percent if they invest in domestic research and development (R&D).
But given the diversity of the industry, medical manufacturing firms would still have flexibility to choose between the new method or the existing Industry Ministry Regulation No. 31/2020, he said.
Sectors exempted from the new formula also include smartphones and telecommunication equipment, pharmaceuticals, electric vehicles and solar panel modules, the document shows.
Asked whether the changes would affect investment plans, he said decisions were not determined solely by the calculation methods and more by the government's commitment to buying local content-compliant products.
"Without that commitment, certification is just a piece of paper," he said. "The regulation has been in place since 2011, but government uptake of TKDN-compliant [medical devices] remains very low."
Andry Satrio Nugroho, who heads the Trade, Industry and Investment Center at the Institute for Development of Economics and Finance (Indef), said on Monday that the government should exercise caution when regulating third-party manufacturers and provide detailed guidance on how the calculations are applied.
Manufacturers, particularly in the technology sector, raised concerns over local content requirements, from unclear calculations to rules that effectively dictate whether firms must establish a local presence or import certain products, he said.
"Contract manufacturing is not just for small companies," Andry told the Post, noting that many global firms relied on and invested through third-party vendors.
"If we look at China and Vietnam, many companies operate as contract manufacturers. [...] That doesn't mean they don't produce domestically," he continued.
Instead of setting more rigid rules, Andry said, Indonesia needs to urgently improve the country's competitiveness and investment climate by addressing limited raw materials, high energy costs and inadequate workforce skills, if it is to attract foreign industries and investment.
"TKDN [rules] should not obstruct investment; otherwise, it will hurt Indonesia's big market potential," he said, urging the change of the rules to be clarified per sector, so that industries could "understand the direction and rationale".
Deputy Industry Minister Faisol Riza declined to comment when asked by the Post, saying the regulation would be announced "by the end of the week."
Source: https://asianews.network/revamp-of-indonesias-local-content-rules-riles-businesses