It has warned that the app could be shut down if it does not become a standalone platform within seven days. "Even if it can secure a permit to operate independently, the chances of maintaining a significant level of activity could be slim, since most of its purchases are usually made on an impulse," noted Sachin Mittal from DBS Bank.
The Indonesian government has set a one-week deadline for TikTok to remove its commerce feature or risk closure. Analysts told CNBC that this move will have a major impact on the platform's aspirations in Southeast Asia.Jonathan Woo, senior research analyst at Phillip Securities Research, commented that such a change could adversely impact the user experience, as it introduces "significant friction" to existing TikTok users.Indonesia has prohibited any transactions involving the buying and selling of goods and services on social media applications such as TikTok Shop and Facebook.
TikTok, which is owned by Chinese tech giant ByteDance, is already facing scrutiny from the U.S. due to their ownership structure and concerns of ties to China. In response, the app's CEO announced plans to invest billions of dollars in Southeast Asia over the next few years to expand beyond the U.S. Indonesia is the largest Southeast Asian market for TikTok and comes in second worldwide with its 125 million users. Sachin Mittal, head of telecom, media and technology research at DBS Bank, noted the possibility of users losing interest in the app due to the need to log into a separate one for purchases.
Mittal noted to CNBC that TikTok has an advantage of being able to prompt impulse buying through the content it presents. However, Mittal expressed concerns that a separate license might not be enough to pave the way for the app to operate effectively as a stand-alone platform.
On Saturday, Indonesian President Joko Widodo declared the need for regulations of social media, noting the impact it has had on micro, small and medium-sized businesses as well as the country's economy. In a statement, he commented, "We are aware of the harm it has caused to MSMEs, small businesses and micro-enterprises, which is reflected in the gradual decrease in market sales."
Going forward, Indonesia is requiring e-commerce platforms in the country to set a minimum price of $100 for certain items that are imported directly. All products should comply with local guidelines. According to BMI's Tuesday report, just one business, challenger TikTok Shop, will face repercussions due to its business model involving social commerce. Momentum Works' June report pointed out that TikTok Shop possessed 5% of the gross merchandize value of the e-commerce in Indonesia, with the remaining percentages belonging to Shopee (36%), Tokopedia (35%), Lazada (10%), and Bukalapak (10%). Mittal said that in terms of e-commerce, TikTok Shop should be able to demonstrate that it is a distinct entity from its social media, without any data sharing in the backend and with a stable source of funding for any e-commerce losses, which was initially derived from advertising revenue on its social media app.
In response to Indonesia's latest move, TikTok declared that they will abide by local regulations. A TikTok spokesperson told CNBC that "we are substantially worried about [the] declaration and how it may affect the lives of the 6 million traders and almost 7 million affiliate creators who use the TikTok shop." The spokesperson went on to say "we are conscious of local laws and regulations and seek to take a constructive approach moving ahead." This is in light of TikTok's attempt to enlarge its reach beyond the US as Chinese-linked apps are meeting political resistance. The app has been prohibited on personal devices in Montana, being the first state to do so, as well as in India.
TikTok Shop has been actively engaging in expansion to Southeast Asia, where it is competing against Sea's Shopee and Alibaba's Lazada. Such e-commerce ambitions also involve livestream shopping. According to Woo of Phillip Securities Research, the initial results of this strategy will likely reward existing e-commerce players like Shopee and GoTo. BMI research reveals a hefty proportion of Indonesian digital payments are processed through e-commerce marketplaces. In July, record-breaking figures were set when digital transactions in Southeast Asia's biggest economy totaled 160 trillion Indonesian rupiah ($10.3 billion). Meanwhile, the transaction volume for that period was 1.7 trillion, recording an annual growth rate of 65.8% and 71.5% respectively.
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