TOPSHOT – A staff of a small shoe manufacturer shows their new products to make an introductory video to be posted on social media in Bogor, West Java on September 27, 2023. Indonesia has banned goods transactions on social media platforms such as TikTok, Facebook or Instagram in a new regulation, its trade minister said on September 27, as Jakarta aims to rein in direct sales on major platforms it says are harming millions of small businesses.
Aditya Aji | Afp | Getty Images
TikTok’s ambitions in Southeast Asia will be severely impacted after Indonesia prohibits shopping transactions on social media apps, according to analysts speaking to CNBC.
Indonesia has given TikTok a one-week deadline to become a standalone app without any e-commerce features. Failure to comply could result in the app’s closure in the country.
“Becoming a standalone app could create significant obstacles for existing TikTok users and negatively affect their experience,” warned Jonathan Woo, a senior research analyst at Phillip Securities Research.
The new regulation in Indonesia bans e-commerce transactions on social media platforms like TikTok Shop and Facebook. Users are now prohibited from buying or selling goods and services through these platforms.
Even if TikTok can obtain a separate license to operate, operating as a standalone app will still pose challenges.
TikTok, which is owned by Chinese tech giant ByteDance, is already under scrutiny from US lawmakers due to concerns about its ownership structure and ties to China.
In an effort to diversify its global business as pressure mounts from the US, TikTok’s CEO announced plans to invest “billions of dollars” in Southeast Asia over the next few years.
Indonesia is TikTok’s largest market in Southeast Asia and its second-largest globally with 125 million users, second only to the US, according to the company.
“Since most purchases on TikTok are impulse buys, the need to log into a separate app might lead to a high drop-out rate,” cautioned Sachin Mittal, head of telecom, media, and technology research at DBS Bank.
Impulse buying from watching content is a key advantage for TikTok, according to Mittal.
“Even if TikTok can obtain a separate license to operate, operating as a standalone app will still pose challenges,” reiterated Mittal.
New social media rules
Indonesia’s President Joko Widodo has called for social media regulations, citing their impact on micro, small, and medium-sized businesses and the economy.
“We are aware of their impact on MSMEs, small businesses, micro-enterprises, and the market. There are markets where sales have started to decline due to their presence,” stated Widodo.
The only business directly affected by the new regulation is TikTok Shop, which relies heavily on social commerce.
Going forward, e-commerce platforms in Indonesia must implement a minimum price of $100 for certain items purchased from overseas. All products offered must meet local standards.
“The only business directly affected by the new regulation is TikTok Shop, which relies heavily on social commerce,” BMI stated in a recent report, predicting a decline in TikTok Shop’s performance.
A June report by Singapore-based consultancy Momentum Works found that TikTok Shop accounted for 5% of e-commerce’s gross merchandise value in Indonesia. It ranked behind Shopee (36%), Tokopedia (35%), Lazada (10%), and Bukalapak (10%), according to another report.
“In our opinion, TikTok Shop will need to prove that its e-commerce is a separate business from its social media platform, with no data sharing from the backend and a clear source of funding for e-commerce losses, which were initially funded by advertising on its social media app,” Mittal advised.
TikTok ‘deeply concerned’
In response to Indonesia’s latest move, TikTok expressed its commitment to abide by local rules and regulations.
“We are deeply concerned about this announcement, particularly how it will affect the livelihoods of the 6 million sellers and nearly 7 million affiliate creators who use TikTok Shop,” a TikTok spokesperson told CNBC.
“We respect local laws and regulations and will seek a constructive way forward,” the spokesperson added.
This comes as TikTok has been seeking growth outside the US amidst political challenges faced by Chinese-owned apps. Its main app has been banned in Montana as well as India.
TikTok Shop has been aggressively expanding in Southeast Asia, competing with Shopee and Lazada. Its e-commerce efforts include livestream shopping.
“In the short term, existing e-commerce players like Shopee and GoTo will be the main beneficiaries of this regulation,” said Jonathan Woo of Phillip Securities Research.
E-commerce marketplaces hold a significant share of Indonesia’s digital payment figures, BMI noted.
In July, the value of digital transactions in Southeast Asia’s largest economy reached a record high of 160 trillion Indonesian rupiah ($10.3 billion), while transaction volume amounted to 1.7 trillion. Both figures represented increases of 65.8% and 71.5% respectively compared to the same period the previous year, BMI reported.
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