Foreign companies wishing to sell their products in Indonesia are required to appoint an Indonesian agent or distributor pursuant to Ministry of Trade (MOT) Regulation No. 36/1977. The registration of an Indonesian agent or distributor with the Directorate of Business Development and Company Registration at the MOT is mandatory under MOT Regulation II/M-DAG/PER/3/2006. Appointment of an Indonesian agent (or distributor) requires care, since it is difficult to get out of a bad relationship. Indonesian law allows the severance of an agency agreement only by mutual consent or if a clause permitting the severance is contained in the original agency agreement. A trial agency period of at least six months is generally written into agency contracts. As in many countries, the Indonesian agent’s network of contacts and personal power affects costs and ability to exit an unsuccessful bad agency agreement.
The services of an aggressive, active Indonesian agent or distributor can be an important means of expanding sales in Indonesia because they know the cultural minefields and systemic processes that foreigners need years to begin to master. Many Indonesian importers do not specialize in particular product lines, and represent multiple foreign manufacturers and product lines. Generally, however, large conglomerates establish discrete company units that tend to specialize around a product range. Medium and smaller importers tend to specialize in a narrow range of goods, but are not averse to adding a completely different product line if a profit can be foreseen.
It is generally advisable to set up agency arrangements with firms that handle a complementary range of products. These are not essential, however, since substantial sales can often be made by firms active in quite different product lines. An increasing number of firms identifying themselves as suppliers of "technical goods" concentrate on general industrial machinery and equipment. These firms often have engineers on their staff and are prepared to provide engineering assistance and after-sales technical support.
In many cases, foreign companies have established close connections with Indonesian importers, allowing the two companies to function as one. The Indonesian company acts as the importer and distributor, and the foreign company promotes its products, sometimes seconding expatriate staff to its Indonesian distributor/partner. A more active role for the foreign firm can be arranged through a management contract, which can take many forms.
Foreign principals often work out a management agreement that allows the foreign company in Indonesia to play a more active role in the marketing efforts of its Indonesian agent or distributor. In many cases, a separate agreement is signed between the expatriate personnel and their foreign employer to regulate this relationship. The tax liability of the foreign firm is limited to the income of the expatriates assigned to the representative office, while any other taxes are assessed to, and borne by, the agent.
Types of management agreements include:
(1) technical assistance agreements;
(2) management agreements; and
(3) management agreements coupled with financial agreements.
The technical assistance agreement limits the foreign firm's function to providing technical assistance to the Indonesian company. The management agreement allows the foreign firm to manage the company or a division within the company. In the management agreement coupled with a financial agreement, the foreign firm also finances the Indonesian operation, either under the name of the Indonesian company or a division thereof. Remuneration to the foreign company can be in one of the following forms:
(1) fixed fee;
(2) commission; or
Whatever basis is used for remuneration, it must be formulated clearly in the agreement, and it must comply with current Indonesian laws. To protect the foreign company's interests properly, a bona fide and comprehensive agreement should be drawn between the parties concerned.