Shein's retreat in Indonesia: the rise of protectionism- PingWest

Shein's retreat in Indonesia: the rise of protectionism

Rebbeca Ren

posted on August 11, 2021 9:47 am

The globalization clouds Indonesia's once-thriving garment manufacturing industry.

Less than a few months after setting up a regional center in Singapore, Shein, the fast-growing cross-border e-commerce platform, announced its retreat from Indonesia.

The ubiquitous fashion retailer ceased its operations in Indonesia on July 29, and shipments to the country have also been halted.

As the largest economy and most populous country in Southeast Asia, Indonesia's online shopping adoption rate increases. Alibaba-backed Lazada and Sea Group's Shopee both see it as an important market, where they compete fiercely with local e-commerce platforms such as Tokopedia and Bukalapak.

Although Shein did not explain why it bid farewell to such a market with substantial untapped possibilities, Momentum Works, a venture capital firm focusing on Southeast Asia, believe that it may be related to Indonesia's latest regulation for cross-border e-commerce, that is, starting from August 1, 2021, all Indonesian importers and exporters need to declare their Tax IDs for every import and export shipment.

"Shein was failed to find a fit forwarding agent to operate in accordance with the new regulatory requirements, and now Indonesia is not a priority market for Shein, so it is better to focus on regions that will achieve faster growth in the short term, such as Thailand, Malaysia, and Singapore," said the VC firm.

Meanwhile, as the country is increasing the protection of homegrown manufacturing and brands, cross-border e-tailers like Shein are feeling under the weather.

On May 19, 2020, to prevent an excess of imported goods from inundating the domestic market, the Indonesian Minister of Trade issued a regulation, imposing new requirements on foreign and domestic e-commerce companies selling goods and services on the country's online platforms. The regulation took effect on November 19, 2020.

It requires e-tailers to prioritize locally produced goods and services and improve their competitiveness. Foreign merchants must register their valid business license from their country of origin with a domestic e-commerce organizer (PPMSE) with electronic communication facilities for foreign merchants, which, in turn, will store the submitted registration data.

The country's negative list also requires foreign online retailers who wish to establish a business in Indonesia to support local SMEs.

"Calls to love our own products, Indonesian products, must be echoed. I also campaign for hatred towards products coming from abroad," President Joko Widodo said during a trade ministry event in March 2021.

Trade minister Mohamed Lutfi told the press that the president's remarks responded to concerns that Chinese manufacturers were copying products designed by small and medium-sized Indonesian enterprises and selling them on foreign e-commerce platforms at a fraction of the price crushing local producers.

Official data show that Indonesia's average annual trade deficit in merchandise trade with China, its largest trading partner, and significant investor, was approximately $14 billion in the past six years.

Shein is not the first cross-border retailer to be affected by the policy. In May, Singapore-headquartered Shopee said it would ban cross-border sales for 13 products, 11 of which are Muslim wear categories like hijabs and mukenas. The move is part of an agreement between Shopee and Indonesia's Cooperatives and Small and Medium Enterprises (SMEs) Ministry.

Prior to the ban, Shopee was under fire for allegedly killing small Indonesian businesses, especially low-end hijab manufacturers, by facilitating predatory pricing practices of foreign products, most notably from China. 

With a population of 270 million, 87% of which are Muslims, Indonesia has always dreamed of becoming the global Muslim fashion capital, The Ken said. According to the State of the Global Islamic Economy Report, Indonesia is also the fifth-biggest consumer market for modest fashion.

The Indonesian economy is highly dependent on garment exports. In 2019 the sector contributed 11% to total manufacturing exports and 5% to total exports. However, with the advancement of globalization, Indonesia has increasingly relied on cheaper imported fabrics, making this once-thriving garment manufacturing industry shrouded in clouds. Among them, manufacturers producing low-end apparel locally for the mass market face the biggest risk.

"Weaving and spinning factories are no longer common in Indonesia because importing ready-to-use fabrics from China is the cheaper option," said Arip Tirta, co-founder and president of Evermos, a social enterprise that works with local garment manufacturers, in an interview with The Ken. 

Founded in 2008 in Nanjing, Shein has a robust global presence and is seen as a serious competitor of fast-fashion retailers like Zara and H&M. It overtook Amazon as the top shopping app on US app stores in May. According to the Chinese news outlet LatePost, its global sales exceeded $6.1 billion in the first six months of 2020.

Although Shein terminated operations in Indonesia, it doesn't mean that it will ultimately give up the Southeast Asian country. After being requested by the Indian government to stop services last June, the company re-entered the emerging market through Amazon in July this year as a third-party seller.

Photo by Rio Lecatompessy on Unsplash