Ministry of Trade Regulation No. 53/M-DAG/PER/8/2012 on Organizing Franchise Business has been issued to revoke the previous franchise regulation (Minister of Trade Regulation No. 31/M-DAG/PER/8/2008) and impose new requirements related to:
- Domestic Sourcing: 80% of raw materials, equipment, and merchandise must be sourced from within Indonesia.
- Engagement with SMEs: Franchisors must be willing to engage local small and medium enterprises as franchisees and suppliers, if they can meet the franchisors’ requirements.
- Restriction to Permitted Business Activities: Only 10% of a franchise’s goods can deviate from the business’s licensed purpose.
- Licensing authorities: The regulation makes minor changes to the authorities responsible for issuing franchise licenses (STPW).
The previous regulation contained a vague reference to prioritizing domestic suppliers, but the new regulation imposes a flat 80% domestic sourcing requirement for raw materials, business equipment, and merchandise. Unfortunately, the regulation does not make clear how the 80% requirement is calculated, i.e. whether all production inputs such as internal and outsourced labor and electricity are count towards the total, or do only narrowly defined “raw materials” count?
For franchises that specialize in imported goods, this requirement could be impossible to meet. Franchise owners may apply for an exemption from the Ministry of Trade, which will issue exemptions on an ad-hoc basis.
Local Engagement of SMEs
The previous regulation also contained a vague reference to prioritizing local businesses. The new regulation is similarly open ended insofar as it admonishes franchise owners to work with SMEs as franchisees and suppliers, but only if they are able to meet the franchisors’ “requirements.” If no local enterprise can meet requirements on capital or capacity, for example, franchises are free to conduct business as usual.
Restriction to Licensed Business Activities
The new regulation states that only 10% of the “type of goods sold” by a franchisee may deviate from the business’s licensed sector. This presents problems for businesses that operate in multiple sectors, such as minimarkets that provide restaurant and retail services. Further regulation is needed to clarify how the 10% will be calculated, i.e., by sales volume, stock volume, etc.
The regulation also makes minor changes to the franchise licensing (STPW) process. All franchisors (foreign and domestic) must now register their prospectuses with the Trade Services Unit of the Directorate of Trade Development (“Directorate”). (Previously, foreign franchisors registered with the Directorate, and domestic franchisors registered with the local trade office.)
Franchisees that enter agreements with foreign franchisors will register the franchise agreement with the Trade Services Unit. Franchisees contracting with foreign sub-franchisors, domestic franchisors, or domestic sub-franchisors can register the franchise agreement with the local trade office or the BKPM One Stop Shop Service Center.
All franchisors and franchisees contracting with foreign franchisors must submit annual business activity reports to the Directorate, while franchisees contracting with foreign sub-franchisors, domestic franchisors, or domestic sub-franchisors submit reports to the local trade office.
In the future, all registered franchises will be required to display a “certified franchise logo” as evidence of having a valid STPW. The logo and associated requirements will be addressed in future regulations.
Technical guidelines will be issued by the Ministry to elaborate on the above requirements. In particular, it is expected that further regulation is needed to clarify the nature of the 80% sourcing requirement.
In the immediate future, a further regulation is expected from the Ministry of Trade that will restrict the number of outlets owned by a franchisor or master franchisee to 100. Like the requirement to engage with local businesses, this is intended to bring more local people and businesses into the economy, but if implemented, is likely to raise issues with existing ownership and agreements as well as potentially restrict franchise growth due to the lack of suitable business partners.
Source: Ministry of Trade has issued Regulation No. 53/M-DAG/PER/8/2012 on Organizing Franchise Business
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