Enforcing TKDN Policy Compliance

KOMPAS/AHMAD ARIF

A child walks in front of a temporary shelter at the Balaroa evacuation post at Darussalam Great Mosque, West Palu, Palu City, Central Sulawesi, Tuesday (16/10/2018). The temporary shelter was provided by the Chinese government for victims of the earthquake and tsunami. They sent 153 family tents to Palu city and Sigi regency.

President Joko Widodo has issued Presidential Decree (Keppres) No. 24/2018 on the National Team for Domestic Goods Usage Intensification (P3DN) to accelerate the use of domestic goods acros all industry sectors.

The team’s establishment is in line with Article 73, Point 2 of Government Regulation No. 29/2018 on empowering industries, issued on Sept. 17, 2018.

Earlier, the Industry Minister issued Industry Minister Regulation No. 5/2018 on Amendments to Industry Minister Regulation No. 34/M-IND/PER/017 on the multi-wheeled vehicle industry. The new regulation, which enforces the local content requirement (TKDN), is most welcome news for reviving national industries.

Industry Minister Regulation No. 5/2018 includes an amendment to Article 4, Point 1, reaffirming that multi-wheeled vehicle companies may manufacture components at their own factories. However, the companies can also outsource the components, either partially or wholly, to local manufacturers for their own use.

Article 24, Point A stipulates that multi-wheeled vehicle companies must be licensed by the Industry Ministry’s director general of metal, engineering, transportation vehicles and electronic industries to import incompletely knocked down (IKD) vehicles. Annual import plans must be attached to the permit application and the company must still use local components.

As we all know, regulations that enforce the government’s TKDN policy, especially for finished goods, exist not only for the automotive industry but also for other industries, including 4G smart phones, as stipulated in Industry Minister Regulation No. 65/2016 on mandating and determining TKDN compliance in cellular phones, laptops and tablets. This regulation was then amended with Trade Minister Regulation No. 29/2017.

Other industries, like the textile or the food and beverages industries, refer to Trade Minister’ Regulation No. 16/2011 on determining TKDN compliance.

In the macroeconomic context, the TKDN policy reduces the nation’s dependence on imported materials. Meanwhile, the TKDN policy will surely improve and boost local companies to fulfill domestic market demands amid the influx of imported finished goods.

In this context, the TKDN policy must be viewed as the government supporting domestic industries through strategic industrial policies that contain economic and technological added values.

TKDN as protection

Many have acknowledged Indonesia as ranking among the world’s largest markets. With a population of around 250 million, the Indonesian market has high potential, combined with a hedonistic consumer culture, especially regarding imported products.

The implementation of the China-ASEAN Free Trade Area (CAFTA), the ASEAN Economic Community (AEC) and soon, the Asian free market, pose great threats and challenges for local companies in competing with foreign businesses. Therefore, protection is a viable way to improve the capabilities and competence of local companies in competing, including domestic competition.

Broadly speaking, there are two forms of protecting domestic industries. One is a tariff on imported products. Another is non-tariff barriers, namely implementing import quotas and bans on certain products. However, with the widespread hedonistic culture among Indonesian consumers, these two means will not significantly affect imports. Therefore, a more strategic protection scheme would be one that combines the appreciation of domestic products (ADP) list and TKDN preference.

TKDN implementation

The TKDN policy can be implemented internally, namely in combining imported and domestic materials in manufacturing, and through partnerships between foreign companies (brand owners) and local ones. Such concepts are expected to result in greater market capitalization.

Implementing the TKDN policy in various industry sectors, including finished goods, semi-finished goods and services, still poses problems. This includes the technical aspects of determining TKDN compliance, the long TKDN certification process and many others. However, regardless of these problems, enforcing the TKDN policy remains the government’s strategic path to protecting and boosting the growth of local companies. All relevant regulations must be final and binding.

The government must therefore consider drafting several regulations that involve corporate cooperation schemes to strengthen its enforcement of the TKDN. Foreign brand owners use partnership schemes with local companies in manufacturing their products, such as by assembling their products in cooperation with Indonesian businesses.

Under this scheme, the foreign brand owner should hold TKDN certification instead of the local manufacturing partners that process raw materials into finished goods. This is to prevent fraudulent practices in which local businesses are “used” in order to obtain TKDN certification, whereas the actual production takes place elsewhere or with other companies.

To prevent and minimize such fraudulent practices, it will be wise for the government to revise or amend its TKDN regulations by requiring companies of certain investment values to include its fixed assets in determining TKDN compliance. This will emphasize the actual conditions of the investment, namely the investor’s fixed assets, to ensure that TKDN certification is issued to local companies instead of foreign brand owners.

it is highly important to emphasize real (tangible) investment. Under the prevailing TKDN scheme, most foreign brand owners only have circulating (current) assets while the local companies generally own the fixed assets, such as factories and equipment. The TKDN certification, however, is issued to the foreign brand owner. Rather, the TKDN certificate should be issued to the assembly company (and therefore own fixed assets) instead of the brand owner.

The inclusion of fixed asset ownership as a requirement in determining TKDN compliance and issuing fixed asset ownership certificates to assembly companies will provide several benefits, including: (a) driving massive growth in investment and local industries; (b) ensuring the liability of TKDN certificate holders; and (c) facilitating government control over TKDN compliance. Implementing this scheme is in line with the government’s duties, specifically that of the Industry Ministry, in regulating, guiding and developing local industries. (EKO SETIOBUDI, Business observer)