Indonesia’s businesses are organizedorganizeraditional lines, with the full spectrum of agents, distributors and other intermediaries represented in the economy. Finding a stocking distributor can be a challenge due to a general unwillingness to assume the carrying charges involved with warehousing. In addition, corruption makes the use of offshore warehouses, especially in Singapore, attractive. Traffic congestion and weak infrastructure often make it very expensive to ship product long distances within Indonesia from a central warehouse.
Using an Agent or Distributor
Foreign companies who wish to sell their products in the Indonesian market are required to appoint a local agent or distributor pursuant to Ministry of Trade (MOT) Regulation No. 36/1977 on Termination of Foreign Business Activities in the Trade Sector as amended and by Government Regulation No. 15/1998. Registration of an Indonesian agent or distributor with the Directorate of Business Development and Company Registration at the MOT is mandatory under Regulation of the MOT No. 11/M-DAG/PER/3/2006.
An agent is a national trading company acting as mediator to act for and on behalf of the principal on the basis of agreeing to undertake marketing without transferring rights to physical goods and/or services owned/controlled by the appointing principal. The principal may be a manufacturer or supplier and may be located offshore or onshore. The agent never acquires any rights to the goods and services. A distributor is a national trading company acting for and on behalf of the company on the basis of an agreement to purchase, store, sell as well as market goods and/or services owned or controlled.
Any business operating as an agent or distributor must register with the MOT and obtain Registration Identity, hereinafter called STP (Surat Tanda Pendaftaran). STP is evidence that a company has been registered as an agent and/or distributor issued by the Director of Business Development and Corporate Registration, Ministry of Trade. If the principal is offshore, the agreement must be notarized and certified by an Indonesian trade attaché at an Indonesian Embassy or Consulate and submitted to the Ministry of Trade. These agreements may adopt the law of any country, but if they are written in a language other than Indonesian, they must be translated by a sworn translator. Depending on the type of goods being imported, certain other memberships, recommendations and/or licenses must be obtained and produced.
The appointment of an agent or distributor can be realized by a producer principal, a supplier principal on the basis of approval from producer principal, foreign investment companies operating in the trading field as distributors or wholesalers, or representative offices of foreign trade companies. Many Indonesian importers represent multiple foreign manufacturers and product lines. Large conglomerates often establish discrete company units to specialize around a product category. Medium and smaller importers tend to specialize in a narrower range of goods but are open to adding an unrelated product line if it appears to be profitable.
In many cases, foreign companies have established close connections with Indonesian importers, allowing the two companies to function as one. The Indonesian company acts as the importer and distributor, and the foreign company promotes its products, sometimes seconding expatriate staff to its Indonesian distributor/partner. A more active role for the foreign firm can be arranged through a management contract, which can take many forms, such as technical assistance agreements; management agreements; or combined management/financial agreements.
Establishing an Office
There are two main legal entity types available to foreign investors looking to establish an office Indonesia, representative office and a Limited Liability Company, known as “Perseroan Terbatas” and abbreviated as “PT.” Three of the most common types of representative offices in Indonesia are: (1) Foreign Representative Office (Kantor Perwakilan Perusahaan Asing); (2) Foreign Trade Representative Office (Perwakilan Perusahaan Perdagangan Asing); and (3) Foreign Construction Services Representative Office.
A PT (Perseroan Terbatas) company is a limited liability company established according to the laws of Indonesia for which liability is limited to amount of shareholder capital. There are two types of PT companies, a Local Company (PT PDMN, or Penanaman Modal Dalam Negeri) and Foreign Investment Company (PT PMA, or Penanaman Modal Asing). In a local PT, only Indonesian citizens and Indonesian legal entities are allowed to hold shares as registered shareholders.
A foreign company may establish itself as a foreign investment company but will be limited to sectors that are open to foreign ownership and not blocked by Indonesia’s negative investment list. To make investment in Indonesia more attractive to foreign investors Indonesia is moving from a Negative Investment List to a Positive Investment List. Indonesia will continue to close some sectors off entirely from foreign investment and to keep others open subject to conditions. Unless otherwise stipulated under the Positive Investment List or other regulations, 100 percent foreign ownership is allowed.
Foreign investment companies are eligible to receive various financial and non-financial incentives, particularly for those engaging in strategies industries.
The Indonesian Investment Coordinating Board (BKPM), which is a Non-Ministerial Government Agency, is in charge of implementing policy and service coordination for both domestic and foreign investment in Indonesia. BKPM has an integrated one-stop service center (Pelayanan Terpadu Satu Pintu), which aims to simplify and streamline licensing procedures for investment projects by eliminating the need to visit various government agencies to obtain the necessary permits.
According to BKPM Regulation No. 5 Year 2013, investor looking to incorporate a PT PMA needs to comply following conditions:
- A total investment plan of a minimum of IDR 10 billion (excluding land and properties);
- A minimum paid up capital of IDR 2.5 billion (or equivalent to 25% of the total investment);
- Appointment of two shareholders (there can be foreign individuals or corporations);
- There must be minimum equity of IDR 10 million per share;
- The appointment of at least one commissioner and a director (these can be held by foreign individuals);
- The director will be responsible for running the day to day activities of the company.
Indonesia has an Indonesia Investment Promotion Center (IIPC) located in New York City, New York at. Any U.S. company that is located in the U.S. and would like to know more about investment requirement in Indonesia can contact IIPC’s office in NYC or BKPM’s HQ in Jakart, Indonesia.
Indonesia’s franchise market has been attractive for many years, but regulatory reforms that tool place in 2019 make it even more attractive. There are many opportunities for innovative restaurant concepts to gain a foothold and grow in Indonesia. Potential franchisors should consider the needs for a young, digital savvy consumer bae with growing spending power. Beyond food franchises, there are also opportunities for entertainment, training, home services, and security franchises.
The Ministry of Trade Republic Indonesia issued Regulation No. 71/2019 on Franchise operations in September 2019. This new regulation simplifies the requirements for franchisees in Indonesia compared to the previous regulations. The previous regulation required both franchisors and franchisees to comply with challenging requirements, such as 80% local content requirements, a cap of 250 on the number of outlets, and clean break letter for unilateral termination. The new regulations removed these restrictions.
- Local Content Requirement Eliminated: The new regulation still encourages foreign brands to use domestic goods and/or products as long as such good/products meet with the quality standard required by the franchisor but the previous 80% rule is no longer applied.
- No Limitation of Outlets: The new regulation removed the 250-outlet cap.
- Language of Franchise Agreement: The new regulation requires all agreements be made in Indonesia language.
- No Clean Break Letter: The new regulation does not have a requirement to have clean break letter for a unilateral termination.
- Appointment of More than One Franchisee: The new regulation allows a franchisor to appoint more than one master franchise.
- Validity of STPW (Franchise Registration Certificate): The previous regulation stated te STPW was valid for five years. The new regulation does not specify a length of time.
- OSS System: The new regulation is now included in the Online Single Submission (OSS) system, which streamlines applications. This system is used to apply for an STPW Franchise Registration Certificate.
- Directorate General for Domestic Trade, Ministry of Trade
Traditionally, direct marketing in the form of printed advertisements distributed directly from the seller to potential customers has been used in Indonesia to sell many kinds of products, from insurance to sewing machines. Other methods like catalog marketing, telemarketing, online marketing, kiosk marketing and direct mail marketing are also commonly used in Indonesia. Several U.S. companies have built up large businesses in Indonesia by conducting direct selling, also referred to as multi-level or network marketing, through networks of local distributors. In recent years, direct marketing is increasingly conducted using social media advertisements online and push notifications in mobile phone applications.
To make investment in Indonesia more attractive to foreign investors the Government of Indonesia has published Presidential Regulation No. 10 of 2021, the New Investment list; this replaced the Negative Investment list, published as No. 44 of 2016, which opens more opportunity for foreign investment. However, Indonesia will continue to close some sectors off entirely from foreign investment and keep others a subject to conditions. Unless otherwise stipulated under the Positive Investment List or other regulations, 100 percent foreign ownership is allowed.
As a practical matter, a local joint venture partner is often essential for success in this market for the same reason that an active Indonesian agent or distributor often has advantages over a foreign trade representative office. The choice of an Indonesian joint venture partner is critical for many reasons, especially for knowledge of the local environment and contacts. A few firms provide background and credit-type reports on Indonesian entrepreneurs and firms.
A partnership in Indonesia is difficult to dissolve. Consequently, the first choice has to be the right choice. Business sense is as crucial to any commercial endeavor in Indonesia as it is anywhere else. Contacts alone, while important, cannot substitute for business skills in an Indonesian partner.
Because Indonesians place great importance on personal relationships and mutual understanding, partnerships tend to be based primarily on mutual trust with the written contract playing a less significant role. It is therefore important that any agreement be well understood by both sides. A contract over which there are conflicting interpretations is certain to cause future problems. In any case, a soundly written legal agreement is strongly encouraged, despite the weakness of the Indonesian legal system for enforcing contracts.
In some cases, licensing arrangements for products and services are more cost-effective options for U.S. companies doing business in Indonesia, but firms should apply the same cautions recommended for joint venture partners. For more information please visit: https://www.bkpm.go.id/.
All of the major express delivery services in the United States, including Fed Ex, UPS and DHL, are also available in Indonesia’s major cities. In addition, within Indonesia, there is local market leader PT. Tiki Jalur Nugraha (TIKI JNE), the Indonesian Post Office, PT. FedEx’s local partner Republic Express (RPX), Pandu Logistic, Wahana Logistic, First Logistic, and several other logistics companies. A recent market entrant is GO-Send, a service of the trendy e-commerce site, Gojek, Indonesia’s first hyperlocal transport, logistics and payment startup. Gojek’s biggest rival, GRAB, has also launched delivery services for e-commerce transactions.
Effective January 30, 2020 onwards, Indonesia implemented a new regulation reducing the threshold exemption (de minimis) to import duties from US $75 to US $3.00 per shipment for all imported goods shipped on a B2C basis. The threshold exemption was reduced to protect local small and medium businesses from competition from personally imported products that were exempt from import taxes. Now, foreign-produced textiles, clothes, bags, and shoes that cost a minimum of $3 will be subject to a range of taxes with a total rate of 32.5% to 50% of their value. For other types of imported goods worth between $3 and $75, import taxes will be lowered from 27.5%-37.5% of their value to a flat rate of 17.5%. Imported Goods worth less than $3 will still be subject to value-added tax.
In general, the business sector in Indonesia still operates in a somewhat opaque environment. For this reason, it is very difficult to get accurate financial and business reputation information about prospective customers or partners. Therefore, foreign companies intending to do business with potential local partner companies or agents are recommended to perform appropriate due diligence on their potential partners prior to established the partnership in Indonesia. U.S. Commercial Service in Jakarta offers the International Company Profile (ICP) service to assist U.S. companies with vetting potential business associates. Note that ICP’s can only be done on companies and not on individuals. Contact the U.S. Commercial Service office in Jakarta for details on price and availability, or visit our website at https://www.trade.gov/indonesia.