TikTok Shop ban reshapes the e-commerce space in Indonesia

Published on October 12, 2023

Chinese social media giant TikTok has suspended its online shopping service in Indonesia to comply with new regulations, which, according to the Indonesian government, aim to protect local physical and online retailers.

The new rules effectively ban e-commerce transactions on social media platforms, preventing users from buying or selling goods on apps like TikTok and Facebook.

On a recent episode of Indonesia Digital Deconstructed, ⁠Adrian Li⁠ of AC Ventures discussed the nuances of Indonesia’s latest regulation pertaining to TikTok Shop with Leighton Cosseboom. They tackled multiple questions surrounding the new rules, such as whether TikTok users still can publish links to sell their products on separate platforms, how the regulations are supposed to protect local businesses, and how TikTok can adapt.

The new regulation states that social media platforms cannot directly facilitate sales, they cannot directly sell imported items under US$100, and they cannot act as producers or manufacturers. This move came shortly after Indonesian President Joko Widodo called for stricter social media regulations, saying that the influx of such platforms has contributed to a decline in sales for domestic businesses by flooding the market with foreign imports.

Indeed, foreign goods have recently become more accessible in Indonesia through social media platforms. Adrian agreed that merchants who set up accounts on TikTok and ship goods from overseas without paying taxes could potentially harm the local economy. At the same time, he raised questions about what the ban on facilitating sales entails and whether TikTok will be permitted to provide redirect links.

How will TikTok adapt to new rules?

One possible solution for TikTok would be to establish a separate app for online sales. However, Sachin Mittal,  Head of TMT Research at DBS Bank, recently warned that because most purchases on TikTok are impulse buys, the need to log into a separate app might lead to a high drop-out rate. He explained, “Even if it can secure a separate license to operate, operating as a standalone app may still be challenging.”

TikTok said that complying with regulations is its priority, but voiced concerns over the impact on 6 million sellers and nearly 7 million affiliate creators who currently use TikTok Shop.

“Social commerce was born to solve a real-world problem for local, traditional, small sellers by matching them with local creators who can help drive traffic to their online shops,” a TikTok Indonesia spokesperson said in a statement.

Indonesia’s e-commerce market is currently dominated by names such as Tokopedia, Shopee, and Lazada, but TikTok Shop expanded rapidly since its launch in 2021 and gained significant market share. Indonesia with a population of more than 270 million people is home to 125 million TikTok users, and it’s the app’s second-largest market in the world.

Trade Minister Zulkifli Hasan said firms that do not comply with the ban on goods transactions would first be warned and then lose their license to operate in Indonesia if they fail to comply. 

A lobbying element

Overall, online sales in Indonesia have surged in recent years. The value of e-commerce is expected to increase more than sixfold between 2018 and next year, reaching around US$44 billion, according to the country’s central bank. Adrian raised the question of whether TikTok has stimulated this growth or if it has simply eroded market share from other players.

“My sense is that they probably haven’t significantly accelerated market expansion, and even if they did, it would likely be marginal,” he said, adding that Indonesians tend to adopt social media and internet products relatively quickly. Therefore, some consumers might have shifted to TikTok, affecting the existing e-commerce incumbents. He also noted that the new regulation likely came as the result of a lobbying effort to protect the other e-commerce marketplaces in Indonesia. Shares of publicly traded consumer internet company ⁠Sea Limited⁠ (NYSE: SE) and consumer tech company ⁠GoTo⁠ (IDX: GOTO) jumped on the news.

The regulation also prevents e-commerce marketplaces from manufacturing and producing their own white-labeled goods to compete with merchants who list their products. Adrian said, “I think that is very valid. Can you imagine Shopee or Tokopedia having their own merchants that compete with third-party sellers on their platform and being able to use their superior market competitive information and intelligence?”

He added that at some point, TikTok likely considered manufacturing white-labeled goods in China and selling them directly in the Indonesian market, which would give the platform an advantage over local players. He drew a parallel with Amazon Basics, Amazon’s private-label brand. Leighton agreed that Indonesia should learn from the experiences of the West, such as the case of Amazon, to establish checks against the potential development of a monopoly.

Adrian predicted that the new regulation is unlikely to harm the Indonesian e-commerce market in general, as players will adapt accordingly. Leighton also suggested that over time, regulations will evolve based on input from the industry.

Get the full episode for free on Spotify, Apple, and Google.