Southeast Asia (SEA) is fast becoming a battleground for many brands. With a population of 650 million and an extremely fast growing middle class, many brands are desperate to have some form of presence in this market. Most are choosing to penetrate and explore the market via cross-border eCommerce as this represents the lowest in terms of cost and risk; Especially in this market which has complex and unique market characteristics. However, this may not be the best for customer experience, especially with erratic customs practices and regulations, with the exception of a developed Singapore and to some extent Malaysia.
With 265 million people, Indonesia remains the key focus for many brands keen on getting a piece of SEA’s pie (or kueh). In recent years, Jokowi’s government has been pro-business and has made it somewhat easier for foreign brands to open up their subsidiaries or branches in Indonesia. However, registering a business does not translate to ease of operating especially when it involves the importation of products.
Businesses would need to jump through additional administrative ‘hoops’ prior to getting the products into the market. For example, applying for an import license and registering your products with BPOM and completing the necessary paperwork. (BPOM is Indonesia’s version of FDA which oversees products classified under food, health and beauty) This is especially true for brands big enough to require a certain degree of compliance. After the paperwork has been sorted, companies are placed in customs red lane for the first few months (or years) to ensure everything is inline. After which a ‘promotion’ to yellow or green status will hopefully follow.
This is purely import related and does not take into consideration the setup work required in establishing localised operations. Establishing a local business to import and then distribute to consumers is costly, time consuming and effort intensive. As such, most brands are looking at a B2C cross border eCommerce operating model. Not surprising, more Indonesian online marketplaces and sites are also looking at this supply chain option of B2C cross border import so as to attract (and acquire) more products, merchants and international brands to list on their sites. Lazada and Shopee are leading the way with almost 100% of imported products coming from China and of lower value. Amazon is surprisingly still very quiet in this market.
Why did cross border B2C eCommerce grow?
The change in customs import regulations in April 2017 has resulted in an influx of B2C cross border eCommerce companies. Prior to this, ‘borongan’ or bulk door to door shipping with unclear (or grey) import duties and tax, coupled with the usual red or green importation period was very prevalent. This old practice was put to a sudden and immediate stop. Possibly after the current highly respected Finance Minister Sri Mulyani, realised that there are huge leakages in import duties and tax based on past practices. Hence the introduction of clear import regulations associated withB2C eCommerce.
A de minimis of USD100 is the current policy in place, aimed at promoting consumerism. An average import duty and tax (PIB) is levied on products above this value. This consists of 10% VAT (PPN), between 10% to 20% income tax (PPH) and 7.5% import duties (BM). The policy change has opened the flood gates for eCommerce sites to procure or list products and brands from international sources as the formerly unclear factor of import duties and tax have been eliminated. Not only marketplaces, but both international and local sites which list products of higher values or with a specialised niche have reported increased sales to Indonesia via cross border B2C as consumers are better aware of the total charges involved; Also, imported products have a perceived higher value vis-a-vis the growing middle class with higher disposable income. These are the main drivers for the growth.
What about food, medicine and cosmetics?
BPOM keeps a close watch over Food, health and beauty products and the relevant regulations are still grey. A possible update to regulations includes mirroring Singapore, where products for personal consumption can bypass BPOM certification, is being studied. But the authorities are concerned that incognito businesses (resellers) would abuse the system; Importing under the pretence of personal consumption. A dilemma also faced by Singapore. Singapore currently gives the benefit of the doubt to the consignee, but whether Indonesia takes this approach is unclear. There are rumours that the ministry is reviewing the current importation rules. A reduction of the deminus, and reduction of the overall import duties and tax for eCommerce B2C might happen.
Managing your logistics in Indonesia
Today, logistics is still a protected and controlled industry in Indonesia, with every player requiring some form of operating license. Especially so for customs brokerage, a highly exclusive trade. As such, choosing the right partner or solution provider is critical in this market. Many have claimed to be able to do the job, but have failed to deliver. If the options above do not appeal to you, an alternative option to the above is using Trading Houses. This is another complex supply chain model which deserves an article on its own. Regardless it’s B2B, B2C or via Trading Houses, choosing the correct service provider is essential. After all, nobody wants to screw up in a highly lucrative market.
Our team at Momentum Works have a deep understanding of the regulatory challenges in cross border e-commerce in the region. With the necessary operations expertise in starting and scaling businesses, we have successfully helped many companies. We might just be the answer to your problems.
Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.