Local Contents’ Threshold on Goods
A refresher of the local contents’ requirements in Indonesia
Indonesia protectionist moves of banning Apple iPhone 16 and Google Pixel phones (on 25 Oct 2024 and 1 Nov 2024 respectively) based on the local contents requirements has been attracting endless attention from the global economic analysist.
Some analysts say that it might help Indonesia gain investments, some say that it could backfire as Indonesia economic scale is not comparable to Apple’s size of business.
The concept of local content is well known concept in manufacturing industries – this concept is an economic driven concept that was designed to help developing countries to make sure the importation of goods or foreign investment does not destroy the local economic. In the long run, the local content concept is intended to help the country’s economic on major scale, from increasing opportunity for the locals to find a job, to increasing the scale of investment going into the country.
Local content threshold in Indonesia is governed under the Regulation of the Ministry of Industry No. 16-M-IND/PER/2/2011 of 2011 regarding the Procedures and Mechanism to Calculate the Local Content (the “MOI Reg 16/2011”).
What is local content and where does it apply
MOI Reg 16/2011 defines local content as the local content on goods, services, and any combination of goods and services. The definition is further broken down as follows:
- Local content on goods includes the use of material, design, and engineering which contain the elements of manufacturing, fabrication, assembly, and the finishing of the product from and being performed in Indonesia.
- Local content on services includes the use of services (until the completion of the services) in utilizing workforce including the expert and work equipment such as software which originates from and being performed in Indonesia.
- Local content on any combination of goods and services includes the combination of the above.
Overview of the calculation method of local content for goods
Under Article 2(1) of MOI Reg 16/2011, the local content on goods is calculated based on the comparison between the price of the final goods deducted by the local content price. ‘Price of the final goods’ is the production costs to produce the goods.
MOI Reg 16/2011 excludes overhead costs and taxes from the calculation of the final goods price.
Article 2(4) of MOI Reg 16/2011 specifies that the determination of the local contents of goods is based on the following criteria:
- Country of origin of the direct materials.
- Country of origin and the ownership of the work equipment/facility; AND
- Country of origin of the employees.
The calculation of local content is done on a group basis rather than on itemized level, in the sense of the goods produced based on the production process and identical material should be calculated in the same method.
The local content calculation is done up to the material of the goods on secondary level. This type of material would be deemed as containing 100% of local content only if:
- The material is produced in Indonesia.
- The cost of the material is lesser than 3% of the primary goods production cost; and
- Accumulated cost of the secondary goods is, at a maximum, 10% if the total cost of the primary goods.
Smartphone local content threshold
When it comes to the threshold of local content, it is very much dependent of the type of goods.
The local content of smartphones is governed under the Regulation of Minister of Communication of Information No. 27 of 2015 regarding the Technical Requirements of Long-Term Evolution Technology-Based Standard of Equipment and/or Telecommunication Devices (“MOCI Reg 27/2015”).
Article 4(3) of MOCI Reg 27/2015 sets smartphones’ local content at 40% as of 1 January 2017.
Local contents enforcement
The ban placed on Apple Iphone 16 is an example of how Indonesian government enforce the local contents. Although, strictly from legal standpoint, the drafting of the relevant MOI regulation lacks clarity of the appeal process if business players are not agreeable to the Ministry assessment of the local contents of the goods.
As the government attempts to protect local economic, we do foresee that the enforcement of local contents would be stricter especially to the manufacturing industries.
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