Indonesia becomes first nation in Southeast Asia to push back against TikTok

• TikTok is prioritizing the ruling and will coordinate with the government in Indonesia for its next steps.
• There will likely be a separate TikTok Shop app since the ByteDance-owned app has two operating licenses, one for social media and another for e-commerce.
• Meanwhile, TikTok has temporarily lost a strong income seam in a key market.

Last Tuesday, TikTok was given one week to separate its e-commerce feature from its main social media platform. The order left the ByteDance-owned app with no choice but to bring the operation of TikTok Shop to a screeching halt today, or it would have risked losing its license to operate in Indonesia altogether. Now, TikTok is at risk of losing a significant source of growth since the social media app’s fastest-growing feature – TikTok Shop – has a burgeoning fan base in Indonesia. 

Indonesia also officially became the first nation in Southeast Asia to push back against TikTok, putting roughly two million small businesses on TikTok Shop at risk in the process. The shopping feature, started in Indonesia in 2021, was a huge success, making the market a blueprint for TikTok to expand elsewhere. But the country’s government intervened sharply to protect local physical and online retailers.

“Our priority is to remain compliant with local laws and regulations. As such, we will no longer facilitate e-commerce transactions in TikTok Shop Indonesia by 17:00 GMT+7, October 4, and will continue to cooperate with the relevant authorities on the path forward,” the company confirmed in a Tuesday statement.

It all started in April 2021, when TikTok Shop fully launched in Indonesia, one of the first countries to pilot the feature outside China. By the end of 2022, TikTok Shop had become the fifth-largest e-commerce platform in Indonesia, according to data from Singapore-based venture outfit Momentum Works. 

Despite its expanding operations, TikTok did not receive an Indonesian payment license and relies on third-party payment service providers within the country. “TikTok currently does not have its own payment and logistics system in Indonesia. TikTok accepts various payment methods, including debit/credit cards, digital wallets, bank transfers, and cash,” the company stated in a fact sheet.

A license would allow TikTok to earn from transaction fees and compete more effectively with other payment service entities. What the authorities in Indonesia want is for TikTok or other platforms to split shopping from social media. The unprecedented regulation for the popular video-viewing app will bring TikTok’s e-commerce thrust to a screeching halt just as it was gaining traction against Sea Ltd. and GoTo Group. 

“Out of the five million local businesses on TikTok, two million sell on TikTok,” Anggini Setiawan, TikTok Indonesia’s head of communications, told AFP last month. Momentum Works said the country represented 42% of TikTok’s US$4.4 billion regional gross merchandise value (GMV) last year.

What’s next for TikTok Shop in Indonesia?

According to a local media report quoting the country’s Director General of Public Information and Communications of the Ministry of Communications and Informatics, Usman Kansong, Tiktok Indonesia has two permits from his ministry. “There are two permits: social media and e-commerce. But with Minister of Trade Regulation No. 31 of 2023, Tiktok must separate social media from e-commerce,” he added.

A check on TikTok’s fact sheet suggests that the video-platform app obtained the E-Commerce Foreign Trade Representative Office License (SIUP3A PMSE) from the Ministry of Trade, as required by local law. Usman reportedly told reporters that if Tiktok Indonesia separates itself from TikTok Shop and registers the latter as a separate entity, it can be business as usual for the e-commerce platform. 

TikTok has yet to indicate its next move, besides the fact that there will be discussions with the local authorities. Clearly, the fresh restrictions in Indonesia open a new front in the platform’s fight with regulators worldwide. Should TikTok create a separate app, Bloomberg Intelligence’s analyst, Nathan Naidu, believes it would impede the conversion of its 125 million local monthly active users (MAU) into shoppers.

Meanwhile, Jianggan Li, CEO of Momentum Works, noted in an email that Shopee has been voicing its support for Indonesian MSME exports yearly. “Banning TikTok Shop could be operationally messy (and many of our friends say impractical). There are many different permutations of how things can evolve (eg, a separate e-commerce app or specific programs for MSMEs).”

“Regardless of how the ban proceeds, TikTok’s vast consumer traffic will continue to be harvested for e-commerce, through TikTok Shop or other means, by TikTok or other parties,” he noted. Li also believes it is not too late for TikTok to engage and turn the tide. He suggests that TikTok needs to adopt a bold and localized approach.

Is the TikTok ban linked to Indonesia’s upcoming election?

A week before the ban was announced, Southeast Asia’s largest wholesale market, Tanah Abang, was inspected. According to Minister of Cooperatives and Small and Medium Enterprises Teten Masduki, sellers at the market in the capital, Jakarta, were experiencing a more than 50% loss of profits, as they claim an inability to compete with imported products sold online at much lower prices.

At the same time, the Indonesian government has accused TikTok of engaging in predatory pricing that disadvantages local SMEs. The response from TikTok is that “TikTok does not set the price for products on the platform. Merchants can price products at the desired level according to their business strategy. Products on TikTok Shop and other e-commerce platforms in Indonesia are priced at similar levels.”

Even when talks on the new ruling were making waves last week, TikTok argued that separating social media and e-commerce would hamper innovation and hurt millions of merchants and consumers. The company says some rely on its platform to make a living and that all its sellers are Indonesian or have local entities. 

After all, TikTok invested US$10 billion (IDR 148 trillion) in the MSMEs in Indonesia as a form of appreciation to the Government of Indonesia for its support of TikTok.

What the future holds for TikTok and TikTok Shop in Indonesia undoubtedly depends on the nature and the content of the talks with the local authorities, but it seems the onus is also on TikTok to find a bold solution to its relative sudden issues in Indonesia – without giving other jurisdictions the idea that it can be shaken down – or shut down – to boost local political prospects.