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.