TikTok bows down to Indonesia, shutting ‘Shop’ down. Will a new app arise?

• The ByteDance-owned app has stopped facilitating e-commerce transactions on TikTok Shop Indonesia from 5pm Jakarta time on October 4.
• TikTok said its priority is to remain compliant with the ruling and will coordinate with the Indonesian government for its next steps.
• There is no indication so far whether a separate TikTok Shop app will come out of this.

Indonesia, home to an estimated 125 million TikTok users, said farewell to TikTok Shop on October 4th due to a new regulation that bans e-commerce trade on social media. The country, one of the largest markets for TikTok, is officially the first in Southeast Asia to push back against the ByteDance-owned app, even though the social media app’s fastest-growing feature, TikTok Shop, has a burgeoning fan base in Indonesia. 

TikTok launched the shopping feature in Indonesia in 2021, and its instant success has encouraged it to expand into online retailing in other markets, including the US. Unfortunately, TikTok has been forced to end its e-commerce feature in the Southeast Asian nation this week or risk losing its local operating license. The move will impact roughly two million small businesses on TikTok Shop.

“Our priority is to remain compliant with local laws and regulations,“ said TikTok. “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 said in a Tuesday statement.

TikTok has been betting on Indonesia as a blueprint to expand into other online shopping markets, including the US. 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 for payments, including debit/credit cards, digital wallets, bank transfers, and cash,” the company explained 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 and 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 their 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 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.

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