[JAKARTA] Indonesia is trying to walk a tightrope: staying open to reform and foreign investors while also safeguarding national interests, in an effort to avoid trade blowback from the US. The technology sector could be where it makes the first big move.
On Apr 14, Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto announced that the South-east Asian nation, which had a US$17 billion trade surplus with the US last year, is ready to ease non-tariff barriers.
A key move towards this end involves relaxing local content requirements in the tech sector of the world’s fourth most-populous country. The rule mandates the use of locally sourced goods and services in certain sectors, including tech,to promote domestic industries and reduce reliance on imports.
Such protectionist regulations are not only viewed as an impediment to foreign investment, but are also partly blamed for stifling the productivity and competitiveness of domestic industries, say experts.
Dedi Dinarto, lead Indonesia analyst and senior associate at strategic advisory firm Global Counsel, views the potential easing of local content rules – particularly in the burgeoning information and communications technology (ICT) sector – as likely to be a key concession the country will make to appease Washington.
“What Indonesia is putting on the table could be quite appealing to the Trump administration, especially since many foreign technology companies – most recently Apple – have been running into roadblocks with Indonesia’s local content requirements,” Dinarto told The Business Times.
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Airlangga led a delegation to Washington on Apr 16 to begin negotiations with the US, with the trip set to conclude on Apr 23.
Indonesia was hit with a steep 32 per cent tariff – one of the highest in South-east Asia – before US President Donald Trump granted temporary relief by lowering the rate to a “baseline” 10 per cent for 90 days from Apr 9.
The country has also pledged to purchase more US goods to address its trade imbalance.
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Indonesia’s local content policy, long a barrier for foreign tech companies, came under fresh scrutiny when the government reportedly blocked Apple from launching the iPhone 16, citing the company’s failure to meet the regulation requiring 40 per cent of smartphone components to be sourced locally.
In response, Apple committed to a US$1 billion investment to build an AirTag factory in Batam, which granted the iPhone maker the nod to sell its devices in the country.
In a 2024 report, the American Chamber of Commerce in Indonesia emphasised that the content rule remains a major barrier to US investments, given that essential components are not yet locally available.
Last October, another tech giant faced the same stumbling blocks – Google was banned from selling its Pixel phones in the country. The ban is still effective.
But if Google opts to comply with Indonesia’s potentially relaxed local content regulations, it could pave the way for the company to sell its devices in the country.
“It has become a double-edged sword, particularly when it comes to job creation – something Indonesia desperately needs.”
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Adinova Fauri, researcher at the Centre for Strategic and International Studies Indonesia
Indonesia has been harnessing its local content policy as a strategic tool to draw substantial investments into its machinery and electronics industry.
Over the past five years, investment in the sector has grown at an average rate of 35 per cent annually, based on data from the Ministry of Investment. In 2023 alone, the industry attracted nearly US$1.8 billion – up a remarkable 70 per cent from the year before.
Yet, despite the influx of capital, there has been no meaningful uptick in job creation, raising doubts over the impact on the real economy.
In response to Trump’s tariff moves, Indonesian President Prabowo Subianto acknowledged that local content rules, on their own, are not a silver bullet for strengthening the country’s capacity to manufacture electronic components.
He stressed that real progress hinges on broader improvements in education and the development of a skilled workforce.
Push for flexibility
As a result, there appears to be a rethinking of the rule. “We have to be realistic. If (the local content rule) is forced, we will eventually lose competitiveness. It should be flexible,” Prabowo said.
Introduced in the 1950s as part of the “Made in Indonesia” campaign, the content policy has been continually refined – particularly in strategic sectors such as energy and telecommunications – to boost domestic production and empower domestic industries.
“Without (the local content rule), Indonesia will become only a market. There won’t be significant investments or job creation because Indonesia will simply become a place to sell products, not a hub for innovation.”
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Heru Sutadi, executive director of the Indonesia ICT Institute
Adinova Fauri, a researcher at the Centre for Strategic and International Studies Indonesia, pointed out that the country’s overly protectionist stance has, in actuality, stifled productivity and undermined the competitiveness of local industries.
“It has become a double-edged sword, particularly when it comes to job creation – something Indonesia desperately needs,” he said.
He added that the current crisis offers an opportunity for the government to advance much-needed reforms, particularly in sectors tied to Indonesia’s trading partners.
Threats to local industry
Still, apprehensions persist. While the easing of the local content requirement is one step towards reform, there are fears that it could hurt the country’s domestic tech industry.
Dinarto from Global Counsel noted that the real concern lies in whether Prabowo’s administration plans to extend the policy changes beyond the ICT sector as part of the negotiations. “If the scope widens, it could pose serious challenges for domestic industries,” he said.
Indonesian manufacturers are also concerned.
Daniel Suhardiman, secretary-general of the Indonesian Electronic Industries Association, argued that domestic content requirements for electronics should be strengthened and expanded – rather than loosened – to provide more certainty for the industry and attract long-term investments.
He cautioned that relaxing the policy could backfire – a lack of regulatory clarity might put off investors, driving them to other markets instead.
He added: “Declining utilisation – especially for products procured through domestic content programmes – combined with uncertainty around the rules will raise red flags and could lead to electronics investments shifting out of Indonesia.”
According to the Ministry of Industry, the country’s electronic manufacturing sector has operated below 40 per cent capacity for the past decade. A key reason is that many companies in the subsector double up as importers, relying on foreign products to meet market demand. This practice keeps production lines underused and limits the growth of domestic manufacturing.
Heru Sutadi, executive director of the Indonesia ICT Institute, warned that easing the local content policy could harm the country’s fledgling tech industry.
“Without it, Indonesia will become only a market. There won’t be significant investments or job creation because Indonesia will simply become a place to sell products, not a hub for innovation,” he said.
