After a meteoric rise through 2022 and 2023, TikTok Shop in Indonesia stopped accepting orders on the afternoon of Thursday 5th October 2023. The cause of this drastic development has been well-reported. New regulations from Indonesia’s Ministry of Trade place strict and immediate limits on the integration between social media and e-commerce, forcing TikTok to put a halt on its e-commerce operations in the country while it figures out its longer term strategy.

Now that the dust has settled it’s important to look ahead. TikTok Shop has become an integral part of Indonesia’s e-commerce ecosystem and an important source of revenue for both sellers (ranging from large multinational brands to SMEs) and creators (affiliates and influencers receiving commissions from sales generation), so it is leaving behind a vacuum that has wide-ranging implications across the ecosystem.

Conversations with brands, media, and industry observers over the last week have converged on two central questions: 1) What will TikTok do next, and 2) What does it mean for Indonesia’s e-commerce market? In this report we lay out the solution space we consider most likely, based on our reading of the new regulations and our latest insights about the broader e-commerce market. 

Context: TikTok did not bring social commerce to Southeast Asia, but made it more seamless

In our 2022 Social Commerce in Southeast Asia report, published in December last year, we sought to define and size social commerce in the region. One central concept emerged – no matter whether social commerce showed up in the form of live shopping, conversational commerce, or community group buying, it was driven by a desire for consumers, sellers, and platforms to bring content and commerce more closely together. We described this trend as below in that report:

While some of this showed up in the form of e-commerce platforms adopting social and content features (e.g. Shopee’s seller live chat, or Lazada live streaming), the space only really took off once a social and content platform – TikTok – decided to implement robust e-commerce features (e.g., integrated payment and order tracking). 

Tangibly, this tight integration of e-commerce features allowed TikTok to bring several meaningful innovations to Indonesia and Southeast Asia more broadly. Two of the most important are:

• Seamless integration of e-commerce check-out from live shopping, which had previously been happening mostly on social platforms like Facebook and Instagram with no easy way to accept transactions and manage payments
  
  (To a lesser degree, the same seamless check-out from short-form videos)
• A fully integrated affiliate marketing feature set, allowing sellers to offer commissions to creators for driving sales on the platform; while affiliate marketing is no new concept in Southeast Asia, TikTok made it more attractive for both creators and sellers because of its very high attribution quality

We believe that a large part of the success of TikTok Shop is owed to these types of innovations that created seamless “closed loop” social commerce experiences that were previously not possible, as we have outlined in the image below: 

What’s happening now: A vacuum is left behind; other e-commerce platforms can absorb some of TikTok Shop’s momentum, but not all of it

Implicit from the previous section is also our belief that these innovations – which made TikTok a “closed loop” shopping experience – were more important to TikTok Shop’s rise than factors related to its seller base, assortment, or price level versus other e-commerce platforms in the market. Two insights from our proprietary research support this claim:

• TikTok Shop’s assortment largely overlapped with leading competitors like Shopee and Lazada, that its price level was similar, and that most of its sellers were also present on several other e-commerce channels
• Our research into the incrementality of sales on TikTok Shop in Indonesia indicates that only about 30% of its sales cannibalised other e-commerce channels like Shopee and Lazada; rather, about 50% of the platform sales cannibalised offline channels while up to 20% was truly incremental consumer spending – in other words, TikTok Shop expanded not just Indonesia’s e-commerce market but also consumer spending overall

Because of the innovation effects outlined above, we expect the halt of TikTok Shop in Indonesia to leave behind a meaningful vacuum that will be felt by consumers as well as sellers. It will not be as simple as all of TikTok Shop’s sales volume going to other e-commerce platforms. 

Of course, TikTok Shop’s competitors are wasting no time to try and win back some momentum. Over the last week we have seen both Lazada and Shopee commence campaigns to lure sellers to live stream through their platforms with promotions like streaming incentives and sales commission holidays. Lazada has even gone on to say that “Recent regulatory changes have led to a more positive, healthy competitive landscape for our industry’s long-term growth.”

While these efforts will undoubtedly have some effect, the structural challenge for e-commerce platforms hosting live streams remains that most of their viewership is limited to those consumers who show up with an intention to shop, whereas TikTok was able to attract much higher live streaming viewership by introducing commercial streams to the much larger group of users who originally opened the app for entertainment. It will be very hard for e-commerce platforms to create this level of live streaming viewership.

What’s next: TikTok will seek to regain as much of its momentum as possible; interpretation of the new regulation will dictate how well it can ‘close the loop’ again

Given the above context, and the size and importance of Indonesia regionally and globally, we expect TikTok to stay in the e-commerce game and attempt to regain as much of its lost momentum as possible under the new regulations. This has implications in the short-term and long-term:

Short-term: TikTok allows outlinks to competing e-commerce channels in order to maintain live streaming and short-form video activity

Less than a day after TikTok Shop ceased accepting orders in Indonesia, it added a crude but useful new feature for sellers to link out from their live streams to alternative e-commerce channels like Shopee, Lazada, or even their WhatsApp business account. 

While this new feature can seem paradoxical (why would TikTok want to drive valuable traffic to its direct e-commerce competitors?), it is a sensible short-term trade-off to ensure that its million-strong seller and creator base continue creating content and live streaming on the platform while it can prepare for a more permanent solution to re-enter e-commerce.

As such, although this feature is undoubtedly resulting in a short-term order boost for players like Shopee and Lazada, we do not expect this set up to be sustainable. Anecdotally, we are hearing from sellers that this type of out-linking is not very efficient. They also claim that traffic to their TikTok live-streams has dropped, so this approach of half-TikTok half-Shopee doesn’t appear to have garnered high adoption.

Long-term: TikTok will seek to test the limits of the new regulation to ‘close the loop’ again; regulators will dictate the exact solution

The new out-linking feature does however support the hypothesis that TikTok is not giving up on e-commerce in Indonesia, but rather just preparing for its next move. And we believe that next move will be guided by two factors:

• What would allow TikTok to once again provide seamless ‘closed loop’ e-commerce transactions for the benefit of consumers, sellers, and itself as a platform
• What type of setup would pass muster with Indonesia’s Ministry of Trade after the adoption of the new social commerce regulations

A few short clauses in the new regulation (link) define the possible solution space:

Art 17: “Social-Commerce is a social media provider that provides certain features, menus and/or facilities that enable Merchants to place offers for Goods and/or Services.” 

Art 21.3: “Electronic Trade Solutions Providers (ETSP) with a Social-Commerce business model is prohibited from facilitating payment transactions on its Electronic System.

With the above in mind, we see two potential pathways that TikTok can explore:

A: A “Small change scenario” guided by the strict ‘letter of the regulation’ where the TikTok Shop order catalogue, basket assembly, shipment tracking, and e-commerce customer profiles all stays in the main TikTok app, but payment is relegated to a separate app (or multiple apps) which could be owned by TikTok or a partner. 

This solution would have very limited negative implications for TikTok Shop and likely allow it to return to its previous strong growth trajectory. 

B: A “Big change scenario” guided by an expansive interpretation of the regulation about clearly splitting social media and e-commerce experiences. In this scenario the main TikTok app will be the home of live streams and short-form videos with links to a new stand-alone TikTok Shop app housing the product catalogue, product pages, check-out, payment, shipment tracking, and e-commerce customer profiles. 

This solution would have more serious long-term implications for the growth of TikTok Shop as it imposes new frictions in the customer journey as well as the flows of data to inform recommendation algorithms and attribution of sales to specific pieces of content or affiliates. 

While this solution would allow TikTok to remove the feature of linking out to competing e-commerce platforms, its long-term success would rely critically on whether it can bring back the seamless ‘closed loop’ transactions that made it stand out to begin with.

It is difficult to predict whether the next version of TikTok Shop in Indonesia will look more like scenario A or scenario B, but we consider the two to be helpful end points of the spectrum for understanding which solutions TikTok can bring to the Indonesian regulator for approval. 

No matter where on this spectrum TikTok Shop ends up, we expect the platform to remain an important part of Indonesia’s e-commerce landscape due both to its inherent innovations and the sheer importance of the vast Indonesian market to TikTok’s strategy.