Local electronics market undercut by illegal imports

Local electronics market undercut by illegal imports

By Stefanus Indrayana

JAKARTA (JP): Fauzie complained about the price of a
Videocassette Disk (VCD) Player he bought at an established
electronics store. For a well-known brand of Toshiba VCD player,
series 910K, he paid Rp 1,375,000. When, by chance, he visited
Jakarta's Glodok and Mangga Dua shopping centers, he was
surprised to find the very same VCD player priced at Rp 950.000.

In fact, he paid a very reasonable price for a legally
imported VCD player that also comes with a warranty from the
authorized distributor.

Maybe you have had the same experience, but at least you may
have the satisfaction of knowing you are a good, law-abiding
citizen who pays the required tax and who also helps the legally
appointed distribution companies or sole agents to survive in
Indonesia. Mr. Lee Kang Hyun from the Indonesian Electronic
Association once estimated the illegal electronic equipment
available in Indonesia to be around 30 percent.

He might have made a correct estimation for certain types of
electronic equipment such as 29-inch TVs or imported
refrigerators. But, according to my personal estimation, in
regard to smaller electronic items such as VCD players, this
count is reversed --- which means around 70 percent of these
products now available in Indonesia are actually illegal.

If we start to discuss illegally imported luxury cars or
mobile phones, please do not be surprised to find out that
electronic goods, imported illegally, cause a far greater loss to
government income from import duties and luxury tax/VAT.

The Indonesian market is in fact a nirvana for Asia's
electronic traders.

In the late 1970s and 1980s, a well-known word smokkel (Dutch
for smuggling) was used to describe those engaged in such
activities. This word is no longer popular, but the activities
still continue in Indonesia, even after (or rather, especially
the economical crisis.

To give a rough view of the vast size of the Indonesian
market, we may start by estimating the number of people per
household at 5 persons; hence for 200 million people we have at
least 40 million households as the target market.

Currently, ownership of color televisions in Indonesia is
estimated at 40 percent. This is the lowest penetration among
Southeast Asian countries, which translates into a great
potential for marketing color TVs in Indonesia. Sales of color
TVs in 1997 amounted to two million sets, while 1998 records
showed sales of approximately 500,000 sets. Nowadays, many
electronic companies -- either local, joint-venture or foreign
direct investors -- have factories and/or sole agents in
Indonesia.

If we assume that every TV purchase is categorized as a first
purchase, then our 40 percent ownership figure means there are 16
million TV sets in Indonesia. So, we can imagine if every year
five percent of TV owners purchase a VCD player, there will be a
veritable boom of VCD player sales here: about 800,000 sets per
year. An increasing demand for VCD players is also supported by
an abundant availability of low-priced software with literally
thousands of attractive titles. If we carefully peruse and check
official VCD player statistics however, the figures are far from
correct, as the larger, officially unrecorded portion of imported
electronic goods enter Indonesia without having paid the proper
duties nor reported officially.

To protect local Indonesian manufacturers, as well as
distributors of electronic equipment, the government did impose a
barrier in the form of import duties of CBU (Complete Build Up)
products. The duties are up to 20 percent, compared to an
assembler who pays from 0 to 5 percent for a CKD/SKD (Completely
Knockdown/Semi-Knockdown) product. Some electronic products are
categorized as luxurious goods and have to pay a luxurious goods
tax of up to 20 percent. A legal company also has to pay 10
percent VAT.

However, the rapid innovation of electronics including VCD
players, DVD players and other communication devices makes
introduction of imported goods in the form of CBUs much easier
and far quicker than the process of assembling them.

As legal companies, sole agents and/or distributors are
required to pay import duties, luxurious goods tax and VAT. But
"parallel importers" are able to avoid formal duties, either by
clever deception on container contents or using other means to
avoid custom officials. Ironically, the heftier the import
duties, the more profitable it is to "parallel import."

So, the price difference between legal and illegal electronic
products is quite impressive. For a VCD player, the price
difference can be as much as 35 percent, while for a 29-inch TV
the difference may amount to 30 percent.

Though the potential Indonesian market is large and lucrative,
neither the government nor the sole agents or legal companies
enjoy the sweet profits of the electronics business. The profits
are raked in by foreign traders, mostly from Singapore, shipping
and handling agents, unscrupulous Indonesian importers/traders
and, of course, Indonesian consumers who cannot resist the
temptation to buy cheaper products.

Therefore, if our government officials are truly willing and
able to compare their own figures of imported electronics from
Singapore with the real Singapore to Indonesia export data, they
will certainly be very surprised to discover how big the
discrepancy really is.

If this sad and deplorable illegal electronic import affair
continues, all legal companies who have been appointed sole
distributors for well-known foreign brands will most certainly
expire, as they are unable to compete with parallel import
products. Moreover, credit for large sales' volumes will continue
to be obtained by Singaporean subsidiaries instead of Indonesian
subsidiaries. And the Indonesian government's projection to
develop the local electronic industry will only remain a pipe
dream.

Local electronics companies, which are quite large at present,
such as Polytron, Akari, Cosmos and Maspion will, understandably,
not be able to compete in the Indonesian free market under the
current deplorable conditions.

The writer is the Public Relations Officer at EMC (Electronic
Marketer Club). This article was written in a private capacity.