TikTok Strikes Back in Indonesia

FILE - The TikTok app logo is seen, Sept. 28, 2020, in Tokyo. On Wednesday, Nov. 29, 2023, an Indiana county judge dismissed a lawsuit filed by the state accusing TikTok of deceiving its users about the level of inappropriate content for children on its platform and the security of its consumers' personal information. (AP Photo/Kiichiro Sato, File) (AP)
FILE - The TikTok app logo is seen, Sept. 28, 2020, in Tokyo. On Wednesday, Nov. 29, 2023, an Indiana county judge dismissed a lawsuit filed by the state accusing TikTok of deceiving its users about the level of inappropriate content for children on its platform and the security of its consumers' personal information. (AP Photo/Kiichiro Sato, File) (AP)

Summary

The takeover of a local e-commerce business follows government efforts to ban shopping on social media.

The Indonesian government executed its crackdown on “social shopping" in the name of protecting local small businesses. TikTok ended up taking over a local champion.

The deal makes good sense for TikTok, in more ways than one. It gets a way back into its key e-commerce market in Southeast Asia. It also sends a shot across the bow of regulators in other countries that might be contemplating similar moves.

The viral short-video platform, owned by China’s Bytedance, agreed to combine its nascent TikTok Shop operations in Indonesia with GoTo’s e-commerce subsidiary Tokopedia on Monday. TikTok gets a 75% stake in the new combination, which will run the shopping features of TikTok’s app in Indonesia. TikTok will invest more than $1.5 billion into the new venture—a net $500 million for its stake and a promissory note for an additional $1 billion down the line.

The market’s verdict on the deal, at least for GoTo, was harsh: GoTo shares tanked 20% in Jakarta on Monday, before recouping some losses Tuesday.

Indonesia’s largest internet company doesn’t get any upfront cash, since the injection from TikTok will go into the joint venture rather than directly to GoTo. And GoTo will give up control of Tokopedia—considered a probable long-term value driver—in exchange for only a minority stake in the new venture. Meanwhile, TikTok’s e-commerce operations are unprofitable and much smaller than those of Tokopedia. Venugopal Garre, an analyst with Bernstein, reckons that TikTok Shop currently clocks in at just a third of Tokopedia’s gross merchandise value of $15 billion.

There was a risk of Tokopedia becoming unviable by itself, which may be one reason for the deal—competition is fierce from Shopee’s owner, Sea, and Lazada. GoTo also has the limited ability to fund growth. In comparison, cash-rich TikTok has been spending aggressively on promotions and incentives. Before 2021, the share of TikTok in Indonesia’s GMV was close to zero, according to Redseer Strategy Consultants.

For TikTok, the deal has obvious advantages. It was forced to suspend Indonesian e-commerce operations in October after the government banned online shopping on social media. Having a local partner in GoTo will probably help TikTok navigate the local landscape.

Other nations considering similar regulations that target TikTok will likely take note. Vietnam has complained about TikTok breaking laws related to e-commerce, information security and other areas. But TikTok has the financial firepower to buy into local firms and consolidate the market—sidestepping regulations meant to constrain outsiders.

Indonesia is a key market for TikTok’s foray into online shopping. A Redseer report in June put the country’s e-commerce market at $77 billion of GMV. TikTok’s shopping function has been popular in Indonesia since its launch in 2021. The country accounts for roughly 38% of its monthly active users so far this year, according to data tracker Sensor Tower.

While the U.S. is an attractive market for TikTok, which has 150 million active users there, Southeast Asia will probably be the more important e-commerce market, at least at the beginning. Such livestreaming e-commerce has been very popular in China and the internet and cultural landscape in Southeast Asia may be more similar.

Regulatory protection for local businesses is a natural response when faced with strong competition from abroad. But it can backfire, too: especially when the outsider is cash-rich and willing to fight back.

Write to Megha Mandavia at megha.mandavia@wsj.com and Jacky Wong at jacky.wong@wsj.com

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