Will TikTok's deal with Indonesian e-commerce giant Tokopedia set precedent to make allies out of enemies?

For a spell last October, it looked like TikTok had been kneecapped when Indonesia banned it from engaging in e-commerce in its second-largest market by user numbers.

This week, however, the viral short video app found a way back into the country's e-commerce space through the completion of a US$1.5 billion acquisition of Tokopedia, taking a 75 per cent controlling stake in Indonesia's second-biggest shopping platform that is part of the GoTo group.

It made sense for Tokopedia, GoTo Chief Executive Officer Patrick Walujo said, as the e-commerce platform was burning cash and had seen transaction volumes decline by more than 25 per cent at the start of last year.

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It needed the injection of cash for it to keep growing in a challenging market, Walujo said in an interview with This Week in Asia.

Walujo, one of the first investors in Gojek, the ride-hailing and on-demand service that is the other part of GoTo, has every reason to be upbeat after winning what he describes as a "beauty contest", with his company not initially in the running with other competitors vying for the TikTok deal.

The sale has stirred concerns about foreign ownership of big companies in Indonesia, a suggestion Walujo shrugged off as unwarranted, as he expressed confidence it would enable Tokopedia to chart future growth and make a greater impact rather than wither away into irrelevance.

It was a case of willing buyer, willing seller, he said, as the options for Tokopedia were narrowing. The other part of the deal that was attractive was a 0.4 per cent fee on both TikTok and Tokopedia's combined transaction amounts as a revenue stream for GoTo with no associated cost. "That's immediate profit," he said.

Analysts said the acquisition was a way of tethering foreign companies such as TikTok's owner, Beijing-based ByteDance, to local partners rather than allowing them to cream off profits, adding that it could pave the way for similar deals in other countries.

Currently valued at US$225 billion, ByteDance is the most valuable privately owned global start-up, according to CB Insights. In 2023, it was reported to have made US$110 billion in sales, with 80 per cent of that from the Chinese market through the Mandarin version of TikTok, Douyin.

In Indonesia, TikTok first began offering in-app shopping in 2021 and had been courting sellers to offer their wares on TikTok Shop. But regulators imposed a ban last year, forbidding it from e-commerce transactions in a bid to protect the country's domestic and offline businesses that had lobbied hard against it.

As the ban did not forbid joint ventures, the merger with Tokopedia will mean a back-end integration of their systems allowing purchases to be completed on Tokopedia even as the advertising or promotion of products continues on TikTok, especially its live channel.

Asked how the merger would help small offline merchants, Walujo said the company was committed to ensuring no predatory pricing, helping micro and small businesses get online for a share of online spending, and developing local talent.

These were the government's objectives and GoTo will aim to fulfil them, he said.

Sources separately told This Week in Asia that TikTok would be putting in more effort to cultivate the Indonesian side of its business by setting up an "Indonesian Pavilion" on Douyin to help businesses from the country gain market access in China.

Douyin said in a statement that it was in discussions with Indonesian stakeholders about a plan to set up an online pavilion "to help Indonesian merchants access the China consumer market", adding: "The project is for Douyin only and not related to TikTok."

Soon after Indonesia's ban, Malaysia said it was studying its own regulations closely and Vietnam hit out at TikTok for content that Hanoi says spread distorted information, including inciting violence, while its shop also failed to provide requisite information about sellers' goods, according to the government.

Analysts said the Tokopedia deal, after countering strong headwinds in Indonesia, could inform future manoeuvres by TikTok in dealing with commercial pressures in other regional countries, even as regulations might differ among jurisdictions.

Jianggan Li, chief executive officer of Singapore-based consultancy Momentum Works, said: "The deal is a masterstroke, in my opinion. It allows TikTok Shop to turn a group of Indonesian interests from enemies into allies, greatly reducing the political risks operating in the country."

As for GoTo, he said "they traded a money-losing and market share declining asset that they needed to turn around into a potentially profit-generating machine that they do not have to actively manage".

Walujo said the move to integrate systems had also provided another benefit to GoTo: access to Chinese engineering capabilities it previously lacked. His competitors all had such access, he added, without naming Shopee and Lazada, both of which have their engineering centres in Shenzhen.

After undertaking a strategic review, Walujo said Tokopedia had recognised that it needed to have the same technological know-how to compete, adding that Chinese engineers familiar with e-commerce had the latest knowledge in terms of artificial. "When we do this partnership with TikTok, it's a lot easier for Tokopedia to get help on all these missing pieces ... you don't know what you're missing until you look under the hood."

Li said that while he did not see other regional governments having the same determination as Indonesia to bring TikTok under some form of control, the episode had probably "changed TikTok's calculus and tactics - they are putting more focus on understanding and aligning with local interests instead of only focusing on growth".

In an earlier report assessing the deal, Momentum Works also noted that Tokopedia and TikTok would jointly hold a 40 per cent share of Indonesia's e-commerce market after this week's signing, compared with the 35 per cent held by market leader Shopee, owned by the Sea group.

Indonesia's e-commerce industry is set to expand to about US$160 billion by 2030 from US$62 billion in 2023, according to a report by Google, Singapore state investor Temasek Holdings and consultancy Bain & Co.

Josua Pardede, chief economist at Permata Bank in Indonesia, said Tokopedia could take full advantage of TikTok's live selling channel, while TikTok could use the infrastructure and network already built by Tokopedia.

"All in all, we view that this merger could change the landscape of the digital economy in Indonesia - not only by changing the market share of e-commerce but also by opening the possibility of new kinds of collaboration between e-commerce and social media companies in the future."

But much will also ride on the execution, Li said. Future regulatory hurdles could also appear if the original concerns over the plight of small merchants are not sufficiently addressed.

Meanwhile, GoTo's other businesses in ride-hailing, delivery and financial services will also stand to gain from the spillover effects of an enlarged consumer base, analysts said.

For Walujo, who took on the job as CEO last June after GoTo continued to bleed massive losses, the deal is a source of satisfaction and he intends to stick around to ensure a smooth merger. An early investor through his private equity firm Northstar, he was brought in to turn around the business.

A former Goldman Sachs banker, Walujo previously served as GoTo's supervisory commissioner.

Asked about potential blowback on the partnership with TikTok given the regulatory scrutiny it is facing in the US, especially over its Chinese ownership and purported links to the central government, Walujo was philosophical. Geopolitics and US-China rivalry are issues businesspeople paid attention to, including in Indonesia, he conceded.

But he added: "We are just businesspeople, we go where the opportunities are. We have a set of values that we will adhere to. But it is what it is ... Do we pay attention? Yes, we pay attention to make sure that we don't get caught with a wrong move."

The completion of the merger also comes in the wake of GoTo reporting its first-ever profit on an adjusted basis, a significant achievement for the company amid fierce competition.

GoTo announced last week its earnings before interest and taxes for the fourth quarter, without stating any figures. It will release its detailed earnings report for that quarter and the full year in March.

The company's shares have lost more than 70 per cent of their value since its Jakarta initial public offering in 2022. It has undergone massive job and spending cuts and completed a strategic review.

GoTo and regional peers such as Grab and Sea have been competing for customers but stiff competition and lack of consumer spending power have made growth and profitability a challenge.

While previous management had looked at listing in the United States, Walujo reiterated he had no such plans and the ambitions for GoTo remain centred on Indonesia and its vast population of some 300 million.

This article originally appeared on the South China Morning Post (SCMP).

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