Background
Indonesia's recent economic growth and the increasing wealth
and size of the local market has seen a growing demand for foreign
brands and a corresponding increase in international businesses
entering the market through franchising.
Franchising in Indonesia has been regulated since 1997. Franchisors
must register with the local authorities, including submitting a
pre-contractual disclosure document, before signing a franchise
agreement with a franchisee.
The Indonesian Government has recently issued a new regulation
referred to as "Regulation 53", which
came into force at the end of August 2012. The main purpose
of Regulation 53 is to increase the participation of local SMEs in
franchise supply chains.
Key Requirements - The 80% Rule
Regulation 53 amends aspects of the registration and
pre-contractual formalities but it is the "domestic
product" requirement which is the main cause for concern for
international franchisors, particularly to franchisors whose
commercial models rely on a high level of imported products,
equipment and materials. International retailers will need to look
very carefully at this issue.
Regulation 53 imposes a requirement on the franchise business to
use "local components for at least eighty per cent (80%) of
the raw materials, business equipment and merchandise used in the
franchise", (the "80% Rule").
In certain cases the Ministry of Trade
("MOT") may grant exemptions to the 80%
Rule. However, it is not yet clear on what grounds a
franchisor may apply for an exemption. The MOT needs to enact
implementing legislation, which, it is hoped, will clarify this
issue but some commentators believe it could take the best part of
two (2) years before this happens. The implementing
legislation will establish an "Assessment Team", which
will be tasked with enforcing Regulation 53.
What are the options for Franchisors?
- Get Your Franchise Application or Renewal Submitted
Before Regulation 53 Takes Effect: It is likely that
current applications or renewals will not be judged against
Regulation 53 until such time as the enabling legislation is
passed, although it is expected that the MOT will review
applications and renewals made post August 2012 and apply the
Regulation 53 retrospectively, so this option is not fail
safe.
- Full Compliance: Franchisors may consider
adapting their supply models now to ensure that local suppliers are
involved wherever possible. This may include identifying
appropriate local suppliers for equipment, fixtures and fittings,
materials and possibly even the retailed products and merchandise.
However, this course of action may be commercially unviable and/or
possibly premature, as the MOT may soften its stance before passing
the enabling legislation.
- The "Licence Agreement" Route: some
local observers suggest that franchisors can avoid the franchise
regulations by opting to enter into a "licence agreement"
or "distribution agreement". However, if the
underlying relationship has all or most of the hallmarks of a
franchise relationship, this option may not be legally
compliant. The main risk of this approach is that the MOT
could impose fines and/or revoke the franchisee's operating
licence leading to the closure of stores and considerable brand
damage.
- Wait and See: Some commentators suggest it may
take up to two (2) years before the enabling legislation is passed
and the new Assessment Team is established, by which time there may
have been development in terms of grace periods, postponements or
even revocations of some of the requirements of Regulation
53. Franchisors not already operating in Indonesia may
therefore decide to put entry on hold until the regulatory
framework is better understood. However, the longer they wait, the
more they risk losing out to competitors in this growing
economy.
Conclusion
Franchisors that are either looking to expand into
Indonesia or are due to renew an existing franchise licence need to
be aware of the franchise regulations and how they will impact upon
their business.
The MOT's position towards foreign franchisors is not clear and
the new regulations raise more questions than answers. It can only
be hoped that the authorities strike an appropriate balance
between, on the one hand, creating an environment which encourages
foreign investment through franchising and, on the other hand,
ensuring local businesses can participate in those supply chains as
much as reasonably possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.