Navigating parallel trading: lesson learned from Indonesia’s black market phones

Typically, the import and export of genuine products require permission from the brand owner. This permission is usually granted to licensed distributors. This process is crucial for maintaining brand integrity, pricing, and ensuring that the products sold meet the quality standards set by the brand owner.

Parallel trading occurs when the import and export of genuine products do not go through official channels. This phenomenon has surged dramatically with the burgeoning growth of e-commerce, social media, and digital influencers facilitating consumer access to these products. For brands, parallel trading has both positive and negative impacts.

Parallel trading becomes an issue when it involves contract violations. For instance, the destination country for imports should be an exclusive sales territory for a specific license holder, not the importer. Suppose a brand owner has an exclusive distributor in Germany, Company ABCD. If an importing company, EFGH, in the same country sells products under that brand through e-commerce without the brand owner's permission, its actions violate contractual agreements and constitute a breach of contract. While the products may be genuine, this remains a civil matter rather than a criminal offense.

Parallel trading also becomes a problem if the products entering the country do not comply with the import regulations set by that country, such as illegally imported mobile phones.

Black Market Phones in Indonesia

A few years ago, Indonesia faced significant challenges related to the parallel trading of mobile phones. Many phones were illegally imported without following proper procedures. Indonesian consumers referred to these as ‘HP BM’, an abbreviation for ‘handphone black market '. At that time, Indonesia was estimated to lose 2 trillion rupiah in potential value-added tax each year from illegally imported phones.

According to the Indonesian Mobile Phone Association (APSI) in a press release dated July 8, 2019, approximately 20 percent of the mobile phones circulating in Indonesia entered the country through the black market. If 45 million units of mobile phones were sold in Indonesia in a year, it meant around 9 million of them were illegally imported.

It was common knowledge that many of these phones entered through Batam, as a Free Trade Zone. The prices of imported phones in Batam could be much cheaper compared to other regions in Indonesia because they were not subject to certain taxes such as VAT or import duties

These phones were genuine products from a brand; however, they didn't have warranties, often had different accessories—such as chargers and manuals—compared to the officially sold branded phones, and often faced software compatibility issues.

Consumers were usually tempted to buy these phones due to their lower prices compared to officially sold phones, often unaware of these shortcomings. However, there were also consumers who specifically sought certain models that were not available in the domestic official market. Besides potentially harming consumers, black market phones also negatively impacted the local industry and reduced state tax revenue.

From the brand's perspective, problematic parallel trading can lead to brand image erosion, loss of price control, and ultimately disrupt relationships with official distributors.

To address the issue of parallel mobile phone trading, in 2020 the government issued regulations requiring the registration of International Mobile Equipment Identity (IMEI) for all mobile phones entering Indonesia. Phones that were not registered would not be able to use cellular services.

The registration process was conducted through cellular operators and aimed to ensure that all devices used in Indonesia are legal. The IMEI registration system was also equipped with monitoring technology that allowed the government to track unregistered phones.

Impact of IMEI Regulation Implementation

The IMEI registration initiative has shown positive results. As reported by Antara, Mulyadi, the Director of Device Standardization at the Directorate General of Resources and Postal and Informatics Devices (SDPPI) of the Ministry of Communication and Information, stated that based on information from the Directorate General of Customs and Excise of the Ministry of Finance, the implementation of this regulation has positively impacted state revenue, with an increase in Non-Tax State Revenue (PNBP) from mobile device importers of approximately Rp2 trillion.

Although there are still challenges in implementation, such as the need to raise public awareness about the importance of IMEI registration, this step is significant toward a healthier mobile phone market in Indonesia. In this regard, the government needs to continue raising awareness and educating the public about the risks of purchasing illegal imported phones and the benefits of buying registered products.

Many more sectors in Indonesia, including automobiles, home electronics, medicines, cosmetics, and other consumer goods sectors, also demand comparable focus. Through laws, a comparable registration and monitoring system applied in other sectors, the government can establish a more fair and open market.

Efforts from Brand Owners