Mobile consolidation: Expanding industry and new regulations mobilise the market

The electronics retail market in Indonesia is crowded. Many players, raging from well established public companies in the fanciest of malls to no-name kiosks in disorderly low-end shopping centres vie for handset, tablet and accessory sales. The market is highly competitive and rapidly consolidating. Weaker players are being marginalised and will be bought, go out of business or survive as specialist shops. Similar to how most fragmented markets evolve, the electronics retail sector in Indonesia is becoming more concrete and streamlined form, and can expect to be dominated by just a few companies in the foreseeable future.

MAJOR PLAYERS: The largest and perhaps strongest of the pack is publicly listed Erajaya Swasembada, founded in 1996 and trading as ERAA after raising $100m on the Indonesia Stock Exchange (IDX) in December 2011. According to a recent report by Bahana Securities, the firm carries 11 brands. These brands include Acer, Apple, BlackBerry, Dell, HTC, LG, Motorola, Nokia, Huawei, Samsung and Sony. It also has its own brand, Venera. According to Bahana, Erajaya has 377 outlets – cooperating with around 16,000 independent retailers. The market share of the company is calculated at approximately 29%.

Erajaya’s distribution network is comprehensive, extending throughout the archipelago, with shops in Java, Sumatra Bali, Sulawesi, Kalimantan and Papua. Significantly, the company has been aggressively rolling out megastores. Its Artha Erafone Retailindo subsidiary opened its seventh in November 2012, a 240-sq-metre space at the Metropolitan Mall Bekasi. Erajaya also has megastores in Surabaya, Solo, Makassar and Medan.

DIVIDE & CONQUER: Consolidation of the market is already under way. In the second half of 2012, Erajaya purchased iBox, a 16-store Apple distributor. The company plans to expand the chain to 40 stores in 2013, with new branches in Sumatra, Bali, Kalimantan and Sulawesi. The acquisition is certainly strategic, as iBox is not only an Apple Premium Reseller, but is also the administrator of the only authorised Apple training centre in the country. Erajaya also acquired Teletama Artha Mandiri, a BlackBerry distribution company.

The sector’s dominant player is also expanding in other ways. In October 2012, it bought 30% of Inovidea Magna Global, an application developer in North Jakarta. Then, in November 2012, it bought 99.9% of Azec Indonesia Management for Rp26.6bn ($2.6m). The new subsidiary is involved in programming, and its clients include Telkomsel, Indonesia’s leading mobile telecommunications operator.

ROLLING OUT: Trikomsel, a publicly traded company (TRIO) on the IDX and the largest mobile phone retailer in Indonesia, has also been on the acquisition trail. The company bought 72% of the giant online retailer Global Teleshop in July 2012 for Rp901.1bn ($90.1m) in order to get a better foothold in the higher end of the market. Previously, Trikomsel’s OkeShop targeted lower- to middle-income customers, but in acquiring Global Teleshop, the group now accesses a somewhat more upscale market that runs Samsung Stores and is an authorised Apple Premium Reseller. The new combined entity has 1100 shops across the country and plans to add another 100-150 in 2013. Trikomsel also formed a joint venture (51% OkeShop and 49% Prima Karya Sejati) called Nusantara Trimultiprima. The company will sell handsets under a new brand called Momo (Modern Mobile Solution). The plan is to target mid-level customers by partnering with a coffee shop chain (of an as yet undisclosed foreign brand) and bookshops and to open more than 50 outlets in the Jakarta area.

Trikomsel has also teamed up with Lenovo, the Chinese computer manufacturer, to sell smartphones in Indonesia. The firm said it is committing $30m in capital expenditures and marketing for the roll-out of the handsets. Lenovo, the second-most-popular smartphone brand in China, will be offering a full range of products through Trikomsel, ranging from the relatively simple A60 to the quad-core K860.

TiPhone Mobile Indonesia, which went public on the IDX in early 2012 as TELE, is also a sizeable player. However, 85% of its top-line revenue is from the sale of top-up vouchers for Telkomsel and XL Axiata (though it also sells the TiPhone, a low-end Chinese smartphone). The company is also seeking to expand, and looks to acquire another voucher distributor and plans to buy an Apple distributor in 2013.

WINDS OF CHANGE: New forces will drive changes in the sector. “As the market nears saturation and operators focus on valued-added services and customer experience, diversification opportunities will arise, mainly in the fields of mobile content development, data and multimedia,” Hengky Setiawan, president commissioner of TiPhone, told OBG. This will undoubtedly require the expansion of network capacity. “Operators are investing in the expansion of the network capacity, but clearly this is not enough to cope with the rising demand for data services,” Sugiono Wiyono, president director of Trikomsel Oke, told OBG.

Another change under way is the government’s implementation of new import rules. As it stands now, many of the handsets and computers coming into the country enter via the grey market, and these products are usually sold at small kiosks or no-brand shops. This is all set to change. In late December 2012, the Ministry of Trade issued new regulations, which went into effect on January 1, 2013, requiring that the import of handsets, tablets and PDAs be done only by ministry-registered and licensed importers. The new rules will protect local industry and will crack down on grey market imports. The new regulations will likely threaten the existence of smaller retailers, pushing more business toward the larger, more established players.

LICENCES: To comply with the regulations and obtain the ministry licences, importers will have to prove that they have at least three local customers, but they will not be able to sell directly to retailers. The companies also must have the proper permissions to sell the products from overseas manufacturers, and they will be required to import products via five approved seaports or four approved airports. The regulations were designed to slow the flow of cheap and knockoff products into the market, and to help encourage the growth of a local handset manufacturing industry. This is one element of the country’s developing industrial policy. Under these regulations, which require strict and expensive compliance mechanisms and detailed paperwork, smaller retailers operating via more informal channels will find it more difficult to survive.

Consolidation may occur by the heightened interest on the part of international companies and investors in the local market. For a time, the manufacturers were content to allow their products to enter the country by whatever path was most convenient – local retailers, small mom-and-pop shops and grey market imports. However, they are now beginning to realise the potential of the market, and see the value of getting more involved. By establishing an interest in what happens in terms of sales and distribution on the ground, global manufacturers will protect their brands by making sure sale channels are appropriate and the products are delivered and serviced properly. However, such penetration remains tricky. “Under the current framework, the retail mobile market remains largely inaccessible to many foreign investors. Capillarity and local know-how are key success factors that can only be reached via partnership with local firms,” Budiarto Halim, CEO of Erajaya Swasembada, told OBG.

APPLE IS BACK: Apple recently announced that it will reopen its online store in Indonesia, closed for two years because of logistics problems, followed by the establishment of a physical store. Apple’s return could be a watershed for the retailing of electronics in Indonesia. The iconic outlet will set a new standard; retailers that want to compete will have to offer a similar level of service, product selection and marketing strength. Apple stores have become benchmarks globally, and that will probably be the case in Indonesia as well. Apple’s presence in Indonesia particularly important given Samsung’s new emphasis on the country. As the two rivals battle for market share, sales channels will be important and are likely to receive much attention.

The delay by Taiwanese electronics manufacturing giant Foxconn, which planned to enter into production in Indonesia is also relevant. One of the reasons why the company is said to have retuned to the negotiating table is the problem with grey market imports. The Indonesian government has placed a high priority on the Foxconn investment and will focus on cleaning up the retail sales channels to get the Taiwanese company to commit. Total investment from the Foxconn entrance could be as high as $10bn.

Furthermore, in June 2012, Standard Chartered Private Equity bought 13.5% of Trikomsel Oke for Rp498.6bn ($49.86m). While the company is not directly involved in the telecommunications business, its purchase will help the balance sheet of the distributor and will help speed the process of consolidation. If other investors see similar opportunities in the sector and invest, even by just buying the shares of the major players on the open market, mergers, takeovers and the exit of small players will likely be accelerated.