Various cellular phone brands have invested in the construction of factories in Indonesia, including Tiphone, EverCross, Polytron and Axioo. Within two to three years construction will be finished and thus is expected to reduce Indonesia's need for mobile phone imports drastically. These companies will also produce smartphones and tablets. Next year, the import of cellular phones is expected to decline 10 percent as some factories will commence operation.

The government of Indonesia supports the establishment of domestic mobile phone factories and therefore provides a tax holiday on the import of mobile phone components. Such a tax holiday is only granted to companies that invest at least IDR 1 trillion (USD $84 million). The tax holiday comes at a right time because costs of imports have risen considerably as the Indonesian rupiah exchange rate has depreciated sharply against the US dollar resulting in ballooning import costs. The government will also increase actions to combat the illegal mobile phone and smartphone market. It is a well known fact that Indonesia contains a large illegal market for cellular devices. Media have reported that in 2013 between 65 and 75 million illegal smartphones are in circulation in the country.

Overview of the Indonesian Telecommunication Sector

Indonesia is unique in the sense that mobile phones are the primary tool for telecommunication. Not only with regard to telephony but also in terms of internet usage. Mobile phones are used as main tool device to access the internet by Indonesians. Mobile phone penetration has surged from 20 percent in 2005 to - currently - over 80 percent (although about 30 percent of Indonesian subscribers hold more than one SIM card). This indicates that the mobile phone subscription market is heading towards saturation; growth in voice and SMS revenue is stagnating. Internet penetration, however, is relatively low, thus having ample room for growth in the near and middle term future. High-speed broadband services are now the new focus of telecommunication companies. However, profit from call services remains to be the primary source of income for Indonesian mobile operators.

Indonesia is also unique in the sense that the country is predominantly a voice market due to low voice tariffs set by operators. Over 60 percent of total revenue in the mobile service sector is derived from voice services, while the remainder comes from non-voice or data services. The growing popularity of smartphones, however, contributes heavily to the growing data revenues. According to data from Frost & Sullivan, a consulting firm, smartphone penetration in Indonesia will exceed 50 percent in 2015 from only nine percent in 2012. The firm believes that the Indonesian market is in the early to middle stage of data usage increase.

Due to the promising perspectives of the mobile phone sector in the last decade, a number of companies are in fierce competition for market shares. Out a total of 11 telecommunication operators, five companies control a combined market share of around 90 percent. These five are: Telekomunikasi Indonesia - and its subsidiary Telekomunikasi Seluler (Telkomsel) -, Indosat, XL Axiata and Bakrie Telecom. Competition has brought tariffs for mobile phone services down significantly, while a new group of subscribers (from the poorer segments of society) has limited spending capacity. Instead, companies now focus on data services (broadband services) and value added service to attract subscribers, both of which are estimated to grow by 35 percent up to 2014. In 2011, there were around 70 million mobile phone data services users. This is estimated to increase to 160 million by 2015.