TikTok’s Strategic Compromise: Navigating Local Protectionism with $1.5 Billion Tokopedia Deal for Indonesian Market Re-entry

On December 11, TikTok announced a US$1.5 billion strategic partnership with GoTo Group, an Indonesian e-commerce giant, in a deal that would mark TikTok’s return to the Indonesian market after a sudden suspension of its operations two month prior.

Under the deal, TikTok Shop Indonesia’s business would merge with Tokopedia, GoTo’s largest local e-commerce platform in Indonesia, with TikTok acquiring a 75% controlling stake in the joint venture. TikTok committed to investing US$1.5 billion to support the development of the business, while was allowed to resume its e-commerce operations in the Southeast Asian country.

Earlier in October, TikTok Shop Indonesia was suddenly order to shut down its operations in the country. That came after a new bill revised in Indonesia in September that requires companies to operate in separate industries. TikTok, as a social media platform, cannot engage in e-commerce business.

Under this legal backdrop, an important condition for TikTok’s e-commerce business to return to Indonesia is to obtain an e-commerce license. Acquiring a local Indonesian e-commerce platform is the fastest way to get this license, because applying for a new license could be slow, and there is uncertainty whether the Indonesian government would approve it.

TikTok navigated these complications focused on efficiency and speed. A return to Indonesia through acquiring a controlling stake in Tokopedia is seen as the fastest way under the current legal conditions. Moreover, the Indonesian market is a major battleground for TikTok’s e-commerce operations, once contributing over 70% of TikTok’s annual Gross Merchandise Value (GMV). The Indonesian government also remains optimistic about the e-commerce industry.

Regulations like the one in Indonesia that require separate industry operations are currently quite rare among economies. At present, most countries allow the same entity to engage in both social media and e-commerce businesses.

Tokopedia was established in 2009 and merged with Gojek, an Indonesian ride-hailing sector firm, in 2021 to become GoTo, Indonesia’s largest tech group. Subsequently, it went public on the Indonesia Stock Exchange.

Tokopedia’s market share once reached as high as 35% in Indonesia, but it has faced several crises under the relentless promotional campaigns of a competitor named Shopee. In 2022, Tokopedia and its parent company GoTo Group were in the news for significant layoffs, and they are still striving to turn losses into profits.

The merger of TikTok and Tokopedia is expected to capture about 30% of the Indonesian e-commerce market share. Research reports show that before the TikTok ban, TikTok Shop held 15%-20% of the local market share. With Tokopedia’s 14.2% market, the two parties combined share post-merger would around 30%, behind market leader Shopee’s 45.9% share.

During the period when TikTok Shop’s operations in Indonesia were banned, Shopee temporarily captured a portion of its transaction volume. However, according to a November report by UBS, Shopee only managed to recapture about 30% of the total transaction volume, with the remaining 70% lost. This seems to indicate the social media shopping model of TikTok has a certain irreplaceability.

In terms of organizational structures, there has been no changes following the official announcement. Tokopedia’s team has not merged with TikTok’s team. Indonesian officials have stated that the partnership between the two entities is still in a 3-4 month trial period, and currently TikTok is still within this "trial period." It remains to be seen whether the teams of the two companies might integrate after the trial period.

But there are significant changes to TikTok Shop’s operations after it resumed business. For example, some products on TikTok featured a "Beli Lokal" (meaning "Buy Local") tag, part of a campaign initiated by TikTok. Some merchants reported that without this tag, their sales seem to be limited to 100 orders per day, while local stores with this tag can get more traffic and exposure on Tiktok.

Higher-priced products seemed to gain more traffic on TikTok than before, according to merchants feedback. Although there is no explicit rule indicating that TikTok is supporting higher-priced products, the company has reportedly agreed to some conditions before re-entering Indonesia.

Those include "prohibiting the dumping of goods in the country of origin or the export of goods at prices lower than in the country of origin" and "prohibiting the sale of goods at prices lower than their cost." This implies that excessively low-priced products in Indonesia will face more challenges to succeed on TikTok and potentially face increasingly strict regulation from the government.

Ultimately, TikTok’s prospects in Indonesia remain uncertain, with upcoming elections casting doubt on how the new government will approach e-commerce and the presence of Chinese companies, including TikTok.

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