This commentary first appeared on aaronmichael.co. Republished here with permission. You can access the other commentaries from the author on the same website as well.
With the recent changes in Indonesia’s import regulation changes, we’ve seen unpopular changes in de minimis values being reduced from USD 75 to USD 3, to the current change where the customs authority now mandates that they have your ID when importing parcels. Why?
What exactly happened?
This regulation was implemented way back in 2018/19, but it was never enforced. Why is it now? Before I give my opinion on the matter, it is important that you have a good understanding on how this works. This requirement was set in place in order to curb online shoppers from ‘splitting’ their parcels up to avoid duties and taxes. This was a part of Indonesia’s “anti-splitting” measures put in place by customs.
However, when the requirement was initially set, no enforcement was done because there was limitations as to how to validate such information.
Remember, Indonesia has only started centralising their government data at the start of 2013 with very poor implementation. By 2018 they still have yet to fully convert everyone’s ID into a digital ID. Passports are not fully digital/biometric, taxes in some cities and regions are still manually tracked and collected.
Bringing us back to current time, the implementation of mandatory form of ID is still very much a loose and poorly implemented mandate. Reason: they’re not able to validate the information that they collect. At this point you’ll be asking, “If they can’t validate it, why mandate that everyone gives them this data?”. The answer to this question is, not even the biggest baddest brokers and friends of mine understand.
What I do know is this, marketplaces, businesses and merchants are up in arms about this and it has been causing a lot of resistance as such mandates in such a short period of time is not fun for a lot of businesses. The mandate came out of the blue around Mid-July and to be implemented on August 1, 2021. Many are not happy, but many are told by brokers that they’re able to provide any form of ID from KTP (Indonesian ID), NPWP (Tax ID), Student Card, etc. down to just substituting it with their own phone number if the merchants and marketplaces are not able to collect this information initially.
So if we cannot enforce and data integrity, why are they doing this? As part of their initiative to protect the local market and economy from imported products, the government is making it harder and harder for B2C products to penetrate Indonesia and also making it more costly for B2B imports by larger wholesalers. In the hopes that Indonesian made products flourish and start to gain back marketshare.
Unintended Outcomes
However, similar to how history will always repeat itself in line with Indonesia’s always poorly implemented advancements and governmental progress, let me take you a path down memory lane:
Indonesia once had impossible import regulations, it gave birth to the local’s favourite “borongan” solution. Margins for these solutions gets pinched over time, government bodies clamp down, regulations eased, and “borongan” is gone. Came the era of e-commerce and Indonesia wasn’t ready. Again “borongan” flourished, margins got pinched, regulations reformed, and “borongan” is gone.
And so it begins, the new era where the regulations for B2C official import has become somewhat not feasible. Personally, I think the tax rates don’t affect buying all too much. At the end of the day, if they cannot afford the product with the import duties and taxes, they definitely shouldn’t be buying them. That being said, where it really hurts, is when you are purchasing a high value item.
Product A
Price: $45
Duties and Taxes: $8.21
Total Landed Cost: $53.21
Product B
Price: $4
Duties and Taxes: $0.73
Total Landed Cost: $4.73
Product C
Price: $699
Duties and Taxes: $127.57
Total Landed Cost: $826.57
While the same mentality should apply to the higher valued products, it is at a value that requires more consideration. So while my personal opinions probably don’t matter to most sellers from China, it creates many problems for the government and the logistics companies in Indonesia.
The unintentional borongan
It’s human nature to constantly challenge the system and find abstract ways to bend the rules in their favour. Even when the de minimis was at USD 75, sellers was under-declaring the value of their products to avoid the import duties and taxes. Soon, this became a ‘value-added’ service that smaller brokerages and logistics companies provided.
A means to saving costs and keeping their already low margins.
This, along with tactics to split larger orders into multiple parcels quickly became a strategy that customs identified easily and measures such as anti-splitting and invoice and proof of payment verification were implemented.
Did you know? When I was providing services for Amazon to import products into Indonesia, the concept of having to provide a proof with which payment of the exact amount declared was requested, is beyond the comprehension of the American giant? It took a lot of back and forth, but we eventually managed to come to an agreement about how this would be a breach in data safety and privacy.
The intentional borongan
As it became harder and harder for people to import and cheat the system by under-declaring product value, they looked into other avenues of how to save as much cost as humanly possible.
Setting the record straight, while I may provide this service to some companies and friends, I honestly think that costs should never be full optimised. Streamline operations to achieve maximum utilisation of cost and let it rest. Pushing cost will only lead to corner cutting. That’ll be good for nobody.
The return of borongan isn’t a secret. In fact, it was almost done in plain sight.
With costs of importing legally and the right way starting to go up, especially with the de minimis going down to USD 3, people started to find solutions on how to work the borongan scene once again.
Now, borongan is thriving. Margins are good, solutions are becoming more and more reliable and everyone is for the most part happy. We’ve found a happy medium where everyone can perform and operate at optimal levels with sufficient margins for the risk it takes to do what they do.
I don’t think this will last for long. Before you know it, the market will demand a lower, more competitive rate and the vicious cycle will continue.
What’s next for Indonesia?
I think Indonesia really need to sit down across multiple ministries and think long and hard about the future of the nation. While accepting foreign investments becoming easier as the years go by, it is still hard to consume foreign products in the country.
A country is only as good as the tools that they have. Imagine not having the luxury of gaining access to the latest camera equipment, or the latest medical devices to perform operations. Without access to technology and innovative products, down to the simple cool over-engineered, overpriced phone cases, the country will never be able to thrive and create quality products of their own (or take a long time to get there).
The government needs to understand, while desperation breeds innovation, the country is more than smart enough to cheat the system, making the need for innovation out of desperation, not a need.
What will the government do next? Only time will tell. Will they make the right decisions for the future of the nation? Maybe. Maybe not.
Starting a podcast!
In other news, I have been thinking long and hard about how to create better content and also get better topics to write about. With that said, I’d like you, the readers to tell me:
- What would you like to read!
- What do you think about a podcast that can talk about anything and everything logistics or even current affairs surrounding the industry?
I’m open to suggestions and would really love to hear your thoughts on this!
Shoot your suggestions and thoughts to thoughts@aaronmichael.co!