Interview: Lee Kang Hyun

What challenges do you see in positioning products in South-east Asia’s largest market?

LEE KANG HYUN: There are some gaps between Indonesia and the global market, as it differs from other niche markets. Before, Indonesia would associate high-quality electronics with Japanese brands and any other foreign brands would have a hard time penetrating the market. Today, local consumers are more aware and are highly influenced by information found online. The consumer has the need to study and understand what benefits a product has over another brand. Most established brands are spending less on branding campaigns and more on product differentiation.

Which segments were spared from the consumption slowdown of 2015-16?

LEE: The electronics industry is in quite a challenging position. Major manufacturing industries slowed, starting with the car industry, followed by the motorbike manufacturing industry and then the electronics industry. All three industries dropped by 40-50%, and other industries went down when the economy dropped in the second half of 2015. Overall, all industries dropped by about 30-40% compared to 2014. In the fourth quarter of 2015, the currency fluctuations helped industry to recover significantly for about three months, before falling again between February and April 2016.

Some hope came during the Eid period in July, but we still have to wait and see if it will continue through to the end of 2016. Generally, the mobile phone and consumer electronics markets are getting smaller due to a decrease in consumer purchasing power. As a result, today’s consumers are reluctant to change their mobile phones to something high-end. The economic situation in 2015 was caused by three factors: the new and inexperienced ruling bodies, the Indonesian rupiah currency fluctuation and the fall in commodity prices, which Indonesia relies heavily upon.

How is the minimum local sourcing percentage affecting 4G device manufacturing?

LEE: The government forced the creation of local mobile manufacturers based on the high import levels of mobile components and completely built units (CBUs). CBUs needed to be completely built in Indonesia, not imported. All manufacturers would agree that manufacturing in Indonesia is actually more expensive than just importing CBUs. Furthermore, the Ministry of Communications and IT is changing the rule for 4G device development, with the local content percentage rising from 20% to 30% for hardware. It will also require higher local content for software, but is considering a 0% rule for local hardware content. This contradicts the essence of the previous regulation and would entail losses for smartphone manufacturers that have invested in Indonesian hardware production facilities. Again, achieving that percentage with Indonesian components is very challenging when no supporting industry is available in-house.

What other factors are preventing Indonesia from becoming a manufacturing hub?

LEE: New policies should be put in place, such as temporary cuts in luxury taxes to boost the market’s absorption and industry’s development. There is a big gap between the presidential, ministerial and ground levels in terms of applying or coordinating regulations, and nothing is moving as fast as it should. Many governmental policies are being pushed, rather than being pulled. So far, our biggest challenges in doing business are linked to regulations. On the other hand, foreign investors have huge opportunities here, despite Indonesia’s growth not fluctuating as perhaps anticipated.