Will Indonesia's pressure on Apple set a global trend?

Indonesia has demanded Apple establish manufacturing facilities commensurate with its market size in the country. As global supply chains continue to evolve, such requirements from nations may become increasingly common.

Indonesia banned iPhone 16 sales in October 2024 over unmet local sourcing rules (TKDN), following Apple's unfulfilled investment commitments. After negotiations, Apple pledged US$1 billion for manufacturing facilities, including AirTag production, though no timeline for product availability was established. The outcome of Apple's negotiations with this potentially crucial market remains uncertain.

Strict local sourcing requirements spark tensions

The Indonesian government's local sourcing rules, TKDN, mandate foreign companies to incorporate local materials in products sold within Indonesia. The iPhone 16 must achieve a 40% local production ratio, leading to a dispute between Apple and the authorities. In October 2024, iPhone 16 sales were halted due to a lack of TKDN certification, stemming from Apple's unfulfilled US$110 million investment commitment.

Apple subsequently proposed additional investments, including a US$100 million offer, which the government dismissed as insufficient compared to investments in Vietnam. In December, authorities accepted Apple's US$1 billion investment proposal, which included plans for an AirTag factory in Batam and an accessories facility in Bandung. However, the timeline for resuming iPhone 16 sales remains undefined.

Divergent visions: Manufacturing versus digital development

During negotiations, Indonesia pressed Apple to establish manufacturing operations similar to Samsung and Xiaomi's investments. Officials highlighted the disparity between Apple's substantial investments in Vietnam despite Indonesia's larger iPhone market.

Apple initially countered by proposing developer academies to nurture digital talent rather than committing to manufacturing. In the spring of 2024, Apple CEO Tim Cook's Southeast Asian tour included pledges for increased investment in Vietnam while only suggesting another developer academy for Indonesia. His noncommittal stance on local manufacturing drew skepticism from officials.

Since 2019, Apple has invested over US$16 billion in Vietnam, generating more than 200,000 jobs and expanding its presence there. The company's strategy includes growth in India and Vietnam, including shifting some production operations like NPI for iPhones and iPads.

Indonesia's role in Apple's supply chain remains minimal, with manufacturing limited to Yageo's operations. While Apple has discussed establishing factories, its commitments in Indonesia are expected to focus solely on AirTag and related accessories production.

Established manufacturing presence by competitors

Though Indonesia might not appear immediately attractive for Apple's manufacturing operations, major competitors including Samsung, Xiaomi, Vivo, and Oppo have established a significant presence there over the past decade. Oppo has notably expanded its investments, with its Indonesian factory becoming its second-largest worldwide, producing up to 12.5 million units annually. The company reports that 36-37% of its smartphone components are now sourced locally, and it continues seeking additional Indonesian suppliers.

Xiaomi entered Indonesia in 2014, establishing a factory in Batam and achieving complete local manufacturing by 2017. Vivo also launched operations in Indonesia in 2014, setting up a facility in West Java. Samsung inaugurated its Indonesian factory in 2015 and has expanded production across both Vietnam and Indonesia following the pandemic.

Indonesia's negotiating strategy with Apple includes mandating local factory establishment to ensure all major players contribute equally to domestic manufacturing.

Market dynamics and growth potential

In 2023, Indonesia's smartphone market approached 35 million units, with Chinese manufacturers commanding over 70% market share. Chinese brands, led by Oppo, dominate the mid-price segment (US$200-600), while Apple and Samsung lead the premium category above US$600.

Chinese companies continue expanding their Indonesian manufacturing presence, emphasizing localization by aligning with regional preferences. Their strategy combines competitive pricing, localized marketing, employment opportunities, and community engagement. Enhanced focus on in-store experiences and customer service has strengthened Chinese brands' market position.

Unlike competitors, Apple lacks a direct retail presence in Indonesia, though it recognizes the market's significance, demonstrated by Tim Cook's visit and sales of 2.61 million iPhones, generating approximately US$1.8 billion in revenue in 2023. Analysts anticipate growth potential given the country's young, tech-savvy population. While Chinese brands traditionally succeeded through competitive pricing, technological advances including 5G and AI are driving all manufacturers, Apple included, toward more aggressive premium market strategies.

Regulatory challenges amid supply chain shifts

The iPhone 16 sales ban in Indonesia illuminates challenges for both the government and Apple. While Indonesia cites Apple's lack of local manufacturing as a regulatory breach, complex supply chains complicate Apple's ability to meet local manufacturing requirements, demanding continuous adaptation.

International analysts caution that Indonesia's strict approach might discourage foreign investment. As nations implement "China +1" strategies to diversify supply chains, Indonesia risks losing opportunities.

Beyond the iPhone ban, Indonesia has implemented measures supporting domestic businesses, including restrictions on e-commerce platform operations and nickel ore export bans to boost its electric vehicle sector. Despite the transition to President Prabowo Subianto's leadership, policy direction maintains consistency.

For Apple, even if iPhone 16 sales resume in Indonesia, similar restrictions could emerge elsewhere. Other nations might implement comparable local manufacturing requirements, potentially complicating Apple's supply chain diversification efforts.

Source: compiled by DIGITIMES, December 2024

Article translated by Jingyue Hsiao