The Tiktok Shop Phenomenon: Rethinking the Ecosystem Digital Downstreaming in Indonesia

In the last decade, the digital economy has become a form of socio-political change in the economic system of mankind.

In the last decade, the digital economy has become a form of socio-political change in the economic system of mankind. The digital economy provides virtual business transactions through social media platforms that are networked across borders. A calculation from McKinsey, Indonesia’s digital economy reaches US$ 120 billion per year (Aprilia et al., 2021). Currently, there are 64.2 million Micro, Small, and Medium Enterprise (MSMEs) that contribute 61% to Indonesia’s GDP and only around 17.5 million MSME players are involved in the digital ecosystem and utilize e-commerce (Kominfo, 2022).

To encourage the digital ecosystem, the government has targeted the development of national MSMEs in the future, such as a target of 24 million MSMEs to be on boarding in 2023 and increasing to 30 million in 2024 (Kominfo, 2022). The national target marks the delay of business actors in Indonesia to be integrated in the digital ecosystem. This is certainly significant considering Tiktok’s plan to launch Project “S” as a national form with lower prices and information disclosure because it can be directly accessed by potential consumers.

Indonesian MSMEs are the parties affected by this business expansion. TikTok is planned to enter the Indonesian market with an aggregate data strategy from users in identifying market product preferences in order to present foreign product content algorithms. This transnational e-commerce phenomenon implies the politics of trade between multinational companies and small businesses in Indonesia, where some parties benefit from comparative advantages while most are disadvantaged by business operations. In particular, the presence of Tiktok Shop in Indonesia indirectly questions the current digital downstream policy and market dilemma.

The Significance of E-commerce in Indonesia and its Dilemmas

According to Momentum Works’ estimates, by 2022 Tiktok Shop controls 4.4% of the e-commerce market share in Southeast Asia and is projected to rise to 13.2% by 2023 in Southeast Asia (Annur, 2023). Indonesia ranks second only to the United States for the most Tiktok users, with a total of 125 million Monthly Active Users (MAU) (Rahadian, 2023). The data proves that Indonesia is a promising aggregate market for the Chinese PMN’s home country products. This indicates that TikTok is developing into social commerce in Indonesia. By definition, social commerce allows consumers to shop on social media without leaving the platform.

Now, it can be interpreted that Tiktok takes on a dual role as a platform-social media and e-commerce. Tiktok’s dominance is strengthening in Indonesia’s digital economy, so it is undeniable that it has resulted in disparities between social commerce and conventional business actors. There are many factors that contribute to the social commerce gap, be it from merchant skills to cheap product quality. Some MSME players in Indonesia who are involved in Tiktok Shop believe in the benefits gained from this feature. However, most feel abandoned by consumers because of the existence of Tiktok Shop.

The Tiktok Shop phenomenon in Indonesia, if analyzed further, no longer describes homeland products versus foreign products, but instead implies the competition between modern commercial methods and conventional commercial methods. The gap between local business actors in Indonesia is actually grappling with marketing strategies that must transform with market developments and consumer preferences. When compared, Tiktok’s dominance as a platform has created market standards that have aggregate consumers, so in such a dilemmatic position, the government’s political regime needs to rethink economic policies that can be a means of digital downstreaming in addition to taking temporal protective measures.

Protectionism and the Foundation of the Digital Downstream Ecosystem

The increasing projection of Tiktok Shop in Indonesia along with the decline of consumers in urban wholesale centers has resulted in the need for the government to take protective measures. The government through the Ministry of Trade of the Republic of Indonesia released Minister of Trade Regulation Number 31 of 2023 which regulates the obligation for traders and e-commerce platforms to display and trade proof of compliance with goods standardization. Thus, Tiktok Indonesia agreed to comply with these government regulations and was followed by the closure of Tiktok Shop operations in Indonesia on October 4, 2023 (Sandi, 2023).

The power of digital platforms-Tiktok-has the potential to marginalize legal regulations and protection at any time (Michaels, 2018; Wakunuma, 2019), so what needs to be studied next is the discourse of digital ecosystems in Indonesia in the future. TikTok Shop is a symbol of market disruption and current consumer style, therefore it cannot be interpreted as a fatal mistake in the Indonesian economy. In fact, this phenomenon reminds us of the readiness of the digital ecosystem and infrastructure in Indonesian society. Because, basically, the international economic market does not live in a stagnant space, but is dynamic following the modern world trend algorithm.

The global digital economy is now believed to be almost monopolistic in the dynamism of international trade politics. Digital downstreaming in Indonesia needs to be implemented with the right commitment. The main problem of digitalization is the ability of Indonesian people to utilize digital communication. Indonesia’s digital literacy index in 2022 is at the level of 3.54 points on a scale of 1-5, meaning it is in a ‘medium’ position (Annur, 2023). To improve the quality of digital literacy, it is necessary to address common barriers to internet access such as ICT adoption rates, and regional disparities in less accessible areas. Next is the technical aspect, where digital skills in the community both managing and utilizing platform features are essential to support a healthy digital ecosystem.

The Government’s Strategic Role: Learning from China’s Experience

The term ‘laissez-faire’ does not apply to the digital economy. Strategically, governments play a special role in the digital economy, especially in emerging economies. First of all, political regimes require policies that control market access, monitor market forces, standardize, and encourage innovation (Spencer, 2021). These ideal conditions can respond to the accumulation of digital capital in large companies, and limit new types of monopoly power. As market forces are accessible to political regimes, governments can design appropriate taxation and incentive systems for the digital economy (Spencer, 2021). Again, taxation in the digital economy is complicated and complex due to the transnational nature of transactions. Last but not least, it is important to strengthen international cooperation in the field of digital trade.

China’s industrial policy acts as a catalyst to advance the economic platform. The success of China’s e-commerce phenomenon shows how well it combines state planning and market forces, with the implementation of technological infrastructure and complementary institutions, to market productivity and a global expansion agenda (You, 2020). Emerging economies, like Indonesia, can look to China’s experience as a reference for digital market ecosystems. Digital transformation, especially as it relates to the platform economy, requires a commitment to a long-term, holistic industrial policy. Because digital downstreaming here also means the added value of producers as the axis of the global trade chain.

Anugrah Wejai
Anugrah Wejai
My name is Anugrah Wejai, currently studying International Relations at Gadjah Mada University, Yogyakarta, Republic of Indonesia. Yogyakarta is not my hometown, I was born and raised in Biak, Papua. As an overseas student in Yogyakarta, I am involved as a leader in several organizations, and have an interest in reading and writing about anything social, political, and economic. My interests and experiences are in line with my vision of life, which is community service.