Indonesia is an attractive market for Japanese companies seeking business expansion, not only because of its abundant natural resources and rapid economic growth, but also due to the generally favorable perception of Japanese people and products. However, while many Japanese companies have found success in Indonesia, it is also a fact that some have been forced to withdraw from the market.

When entering Indonesia, reviewing precedents and understanding the challenges involved, as well as preparing appropriate countermeasures, can help reduce the risk of withdrawal.

This article summarizes common problems faced during entry into the Indonesian market, characteristics of Japanese companies that struggle in the country, and case studies of Japanese companies that have withdrawn from Indonesia.

Trends in Overseas Expansion by Japanese Companies

According to a survey conducted by JETRO in fiscal year 2022, 72.5% of Japanese companies aimed to expand exports overseas. This figure shows a decline of approximately 10 percentage points compared to fiscal year 2021, indicating a slightly less positive outlook toward exporting.

The main reasons cited for maintaining, reducing, or considering withdrawal from export activities include “international situations such as the COVID-19 pandemic and wars” and “economic factors such as inflation in the destination countries.”

Although there is a waning enthusiasm for exports, some Japanese companies responded that they were “increasing local procurement of materials, leading to less reliance on procurement from Japan” or “considering local procurement due to the expectation that the yen will not remain weak.”

While attitudes toward exports appear somewhat cautious, the presence of multiple companies focusing on local procurement suggests that, overall, there is not necessarily a negative stance toward overseas business development and expansion.

Reference: JETRO “FY2022 | JETRO Overseas Business Survey: Questionnaire Survey on Overseas Business Development of Japanese Companies | P14. Signs of waning willingness to expand or newly start exports in the coming years”

Characteristics of Japanese Companies Struggling in Indonesia

Despite making careful preparations before entering Indonesia, it is not uncommon for Japanese companies to eventually withdraw due to unsatisfactory results.

This section provides an overview of the challenges faced after entering the Indonesian market, as well as characteristics commonly observed among Japanese companies that struggle in the country.

Excessive Deference to Headquarters

Even when operating locally in Indonesia, final decision-making authority often resides with the Japanese headquarters. In such cases, especially for large corporations, local branches must wait for approval from the head office, and the reporting obligations can consume considerable resources. This delay in decision-making caused by the need to consult with headquarters is one of the reasons Japanese companies struggle in Indonesia, as it can lead to missed business opportunities.

Furthermore, in emerging markets like Indonesia, circumstances can change rapidly on a daily basis. Companies that excessively defer to headquarters, which may not be aware of these local changes, risk steering their business in the wrong direction.

Lack of Localization

Products considered to be of “high quality” or services regarded as “excellent” by Japanese standards are not always appealing to Indonesian consumers. This is not limited to Indonesia; when operating overseas, understanding the local needs and implementing effective localization strategies are essential.

One successful example of localization is Fast Retailing, which operates the global apparel brand UNIQLO. The company has successfully expanded overseas by thoroughly catering to local needs—for instance, selling fleece products even in tropical countries with many business travelers.

In Indonesia, UNIQLO has gained popularity despite its higher prices compared to Japan and has continued to increase the number of stores.

This example underscores the importance of conducting thorough research on the target country’s climate, culture, lifestyle, and national character to understand local demand, rather than relying solely on past domestic successes or assumptions such as “it already sells well in Japan.”

Failure to Adapt to Different Business Practices

Indonesia’s business practices and work culture differ significantly from those in Japan. Japanese newcomers often struggle due to a lack of understanding of these differences.

For example, Japanese people are known globally for their punctuality and typically do not require strict progress monitoring by supervisors to ensure work gets done efficiently.

In contrast, many Indonesians have a more relaxed attitude toward time. As a result, it may be necessary to set earlier deadlines or monitor progress more closely to ensure timely delivery.

Moreover, in Indonesia—where nearly 90% of the population is Muslim—Islamic culture and customs often intersect with business practices.

Challenges Faced by Japanese Companies in Overseas Business Operations

Next, we present survey results regarding the challenges that Japanese companies actually face after starting business operations overseas.

The following data comes from a survey conducted by Dejima, a platform supporting overseas expansion and international business. The survey targeted companies that had consulted about overseas expansion over the past year, as well as companies that have expanded abroad or offer support services for such expansion.

According to the survey, the most significant challenge for Japanese companies in expanding their business overseas was “gathering information” (61.3%). This was followed by “finding local partners” (50.9%), “insufficient sales performance” (42.5%), and “conducting local research” (38.7%).

Even among companies entering Indonesia, it is not uncommon to encounter problems such as language barriers that hinder information gathering or weak local networks that complicate the search for suitable partners.

Image source and reference: Dejima — “Reasons (and Timing) for Withdrawal from Overseas Business: What Are the Criteria for Deciding to Withdraw?”

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Company Formation in Indonesia

Reasons Why Japanese Companies Decide to Withdraw from Overseas Business

Understanding why Japanese companies have withdrawn from overseas operations can help companies planning to expand abroad reduce the risk of eventual withdrawal.

Although the data is somewhat dated, the “FY2016 Survey Report on Overseas Business Activities of Small and Medium Enterprises” by the Organization for Small & Medium Enterprises and Regional Innovation, Japan (SME Support, JAPAN), provides the following reasons cited by companies that had withdrawn from or were considering withdrawal from overseas business:

• The most commonly cited reason was “a change in the management policy of the Japanese headquarters” (84%).
• This was followed by “rising labor and other local personnel costs” (78%), “intensifying competition in the local market” (63%), and “difficulty in adapting to local business practices and legal systems” (61%).

In addition to environmental factors such as cost increases caused by changes in international circumstances, lack of understanding of the local market—such as unfamiliarity with business customs and challenges in securing and developing local personnel—also played a major role in decisions to withdraw.

Reference: Organization for Small & Medium Enterprises and Regional Innovation, Japan (SME Support, JAPAN) “FY2016 Survey Report on Overseas Business Activities of Small and Medium Enterprises | P82. Chart 102: Reasons for Withdrawing (or Considering Withdrawal) from Overseas Sites (Up to Three Responses Allowed)”

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Japanese Companies That Withdrew from Indonesia

Rakuten

Image source: Rakuten BLOG

In 2011, Rakuten launched the e-commerce site “Rakuten Belanja Online” in partnership with an Indonesian company. The platform gained attention as a “Japanese-style online shopping platform.”

Thanks to the ease of access to Japanese products, the platform gained popularity among online shopping enthusiasts. However, by 2013 the joint venture was dissolved, and by March 2016, Rakuten had withdrawn from Indonesia. Around the same time, the company also exited Singapore and Malaysia.

Several factors contributed to Rakuten’s withdrawal from Indonesia. While the country was attractive due to its large population and high economic growth rate, challenges such as wide economic disparity and the prevalence of direct sales through social media meant that the e-commerce market was not as large as initially anticipated.

Additionally, fierce competition from local companies that understood local preferences and consumer behavior better made it difficult for Rakuten, as a foreign-owned operator, to sustain profitable operations. Ultimately, the company was compelled to reevaluate its business strategy.

7-Eleven

7-Eleven opened its first store in Indonesia in 2009. It expanded its presence to a peak of 161 stores before closing all locations and withdrawing from the market in June 2017.

In Indonesia, small-scale foreign-owned retailers are not allowed to operate directly owned stores. This regulation exists to protect local businesses such as traditional shops, eateries, and street vendors. Consequently, Japanese convenience store operators, including the now-withdrawn 7-Eleven, entered the market through partnerships with local companies and operated as “restaurants” under a franchise format.

These stores featured eat-in spaces within or adjacent to the premises, where customers could consume items purchased in-store. The café-like format, including hot snacks and drinks ordered at the register, felt fresh and novel to many Indonesians at the time.

However, Indonesia has always been a challenging market for foreign convenience stores. In recent years, regulations concerning product categories and store counts have tightened further. As a result, even Japan’s largest convenience store chain, 7-Eleven, ultimately faced financial difficulties and had to exit the market.

Among Japanese convenience store brands, both 7-Eleven and Ministop have withdrawn from Indonesia. Regulations in Indonesia change unpredictably, and public sentiment toward foreign-owned retailers remains harsh. Whether a company was able to find a compatible and proactive local partner played a key role in determining its success or failure in Indonesia.

In contrast, Lawson, which entered the Indonesian market in 2011, and FamilyMart, which followed in 2012, have steadily increased their store counts. As of August 2023, Lawson operated 550 stores in Indonesia, while FamilyMart operated 215 stores as of 2022.

Showa Denko

Showa Denko, which merged with Showa Denko Materials and is now known as Resonac, also has a history of withdrawing from Indonesia.

In 2007, the company established INDONESIA CHEMICAL ALUMINA in collaboration with the local joint venture partner Antam to produce aluminum oxide in Indonesia.

Over four years, the plant was operated with efforts to train local employees in production techniques. However, due to insufficient skill levels among workers, plant operations remained unstable. In 2017, the company decided to terminate its investment and withdraw from the business.

Training Indonesian employees can be more challenging than expected. Even if plant construction and launch proceed smoothly, difficulties in business operations may arise due to issues such as communication gaps between Japanese managers and local employees or insufficient skill levels among the workforce.

It is often assumed that unskilled workers can be trained, but differences in national values and educational backgrounds may affect motivation, ambition, and comprehension, leading to performance gaps.

While business withdrawals are typically the result of multiple, interrelated issues, in Showa Denko’s case, the recruitment and development of human resources played a significant role.

How Japanese Companies Can Succeed in Entering the Indonesian Market

Given the differences between Japan and Indonesia in terms of national character, business practices, and cost of living, companies must approach market entry from a different perspective and formulate strategies tailored to these distinctions.

While factors such as changes in international circumstances are difficult to avoid, understanding the specific challenges and complexities of doing business in Indonesia can help reduce the risk of failure and eventual withdrawal.

For companies considering entering the Indonesian market, we hope this article serves as a valuable reference.