The government formulated this new “40 percent made in Indonesia” rule in order to support the local cell-phone components manufacturing industry. Currently, Indonesia already produces various components including plastics, keyboards and batteries and therefore Ali Cendrawa, Chairman of the Indonesian Cell Phone Dealers and Importers Association (Aspiteg), is confident that Indonesian smartphone manufacturers can comply with the new regulation. This is not the first government regulation that aims to protect the domestic cell-phone industry. In mid-2014, the Indonesian government imposed a 20 percent luxury-goods tax on the sale of high-spec imported smartphones to limit the inflow of imported cell-phones and support the local industry.

Referring to the new requirement, the American Chamber of Commerce in Indonesia (AmCham Indonesia) fears that it “restricts access to new technologies, raise costs of ICT for Indonesian companies, and stimulates both grey and black markets for mobile cell-phones. Indonesia currently still lacks the supply chain to produce high-quality mobile phones.” AmCham added that the new rule may violate international trade law governed by the World Trade Organization (WTO).

Indonesia is one of the world’s fastest growing mobile phone markets and has a smartphone penetration rate of about 25 percent only, implying ample room for growth in a largely still untapped market (making the country very attractive to companies such as Apple and Samsung Electronics). Indonesia has a total population of about 250 million people, characterized by rapidly rising per capita GDP. Therefore, Indonesia’s demand for smartphones has been rising. In 2014 Indonesia imported 24.8 million smartphones. These smartphone shipments to Indonesia are expected to rise to 30 million this year.

However, Indonesia is also plagued by illegal phone imports. According to the Indonesian Trade Ministry around 50 million phones that were circulating in the country in 2013 were illegal. Analysts claim that the new requirement to use at least 40 percent of locally-manufactured components in smartphones could cause an increase in smuggling. This increase was also detected after the introduction of the 20 percent luxury tax.