The Indonesian Minister of Industry Pak Airlangga Hartarto outlined a vision of an Indonesia 4.0 with a digital economy to match sets to transform the Indonesian economy. He impressed upon FDI Spotlight, “The ministry of Industry has placed a great emphasis on Indonesia 4.0; that’s why we have created our four strategies for Digital Economy Success: Education, Inclusivity, Implementation and ‘I-centre’. Industry 4.0 is not disruptive in our view; we instead see it as an easier way to do business that is more automated and will help Indonesia as a whole grow and thrive.”
With a population of around 250 million, Indonesia’s e-commerce potential has captured the attention of global technology and investment giants. Indonesia is a country with one of the youngest, largest and most digitally savvy demographics in the world and has one of the biggest internet, mobile and social media markets in the world. With over 150 million mobile subscribers and 80 million internet users, in sum, the people of Indonesia have embraced social media as nowhere else.
So, why have Indonesians become so connected? The answer lies in Indonesia’s expanding youth population, and its vast and rapidly growing consumer class. One thing that the young mobile user wants above all is total connectivity. Social media use, in particular, is playing a pivotal role in helping to meet the aspirations of this brave new Indonesia, coupled with a rising consumer class fuelling the Indonesian economy through mass consumption.
In 2012, there were 45 million members of the consuming class in Indonesia, which is set to grow to 135 million by 2030. Supported by the growing working-age population, Indonesia’s young and expanding population could even touch 280 million by 2030.
Unlike many economies, including others in Asia with ageing populations, there is an expectation that numbers in Indonesia will both stay young and continue to grow until 2025, contributing to an annual 2.4% economic growth until 2030. Faced with a consumer class who are constantly connected, both domestic and foreign business leaders see vast digital potential in Indonesia’s emerging and aspirant middle class.
Consumer spending is expected to rise by 7.7% year-on-year, manifesting a trillion-dollar business opportunity by 2030. Thus it is critical for companies to understand the profiles, culture and behaviour of Indonesia’s evolving digital consumers.
Unlocking Indonesia’s digital opportunity
So how far along is Indonesia’s digital revolution? Not far enough yet is the simple answer – but herein lies the opportunity. The country presents a curious paradox: its digital denizens are among the most active in the world, with a vibrant start-up ecosystem, yet overall the country still lags behind in fully embracing the benefits of modern technology.
ICT infrastructure remains weak and digital usage is uneven within and among various business sectors. So whilst Indonesia’s connected citizens are tech-savvy, internet penetration is low. Indonesia still has a long way to go in the digital age. However, digital technologies are offering a panoply of new ways to boost productivity across sectors and expand participation in the economy to every segment of the population.
With so much of Indonesians’ current purchasing power shaped through social media recommendations, focusing on developing integration with Facebook’s platforms offers companies a unique space to profit through direct sales, advertising and partnerships and incorporating Facebook into popular Indonesian websites such as Kaskus and Tokobagus, as well as online stores like Sukamart. However, accelerating Indonesia’s digital prowess will still need its entrepreneurs to step up to the challenge and transform themselves into fully integrated digital businesses.
Guillem Segarra, CEO of Jakarta-based grocery delivery app “HappyFresh”, who raised an impressive $12 million Series A round in 2015, explained, “If we looked at the country five years ago, there wasn’t the appetite to embrace the digital economy. The willingness was there, but the policy framework and infrastructure wasn’t. Today, however, we can see that the invested stakeholders and, most importantly, the government are taking steps to embrace the digital economy and as such the investment climate for technology is much greater. There is still a long way to go regarding continuing the infrastructural push and policies that encourage digital entrepreneurship, but the future in Indonesia is bright.”
The digital age is often hailed as the “fourth industrial revolution”. This revolution has the potential to transform every facet of daily Indonesian life, from reshaping customer experiences, creating new business models, to optimising value chains for unprecedented levels of efficiency, harnessing mobile internet, cloud technology: the Internet of things (IoT), big data and advanced analytics. These four disruptive technologies are intertwined and complementary. Taken in conjunction, these four highly disruptive technologies are the keys to accelerating the impact of the digital revolution in Indonesia.
A Thriving Start-Up Culture
Industry disruptors such as Guillem Segarra are causing a paradigm shift, upending many traditional industries. In an interview with FDI Spotlight, he said, “The beauty of the tech industry is that as technology has changed and grown so much in the last 5-10 years. The policies and regulations haven’t been able to keep up with this, so tech players like us have been able to get in and disrupt the market, which has marked a shift in many industries. Now traditional industry players would rather partner with the new kids on the block rather than fight them because, in the end, you cannot fight the needs of 250 million people.”
Indonesia is experiencing the rapid adoption of each and laying a solid foundation for future investments and productivity gains. Whilst these are only the opening salvos, the digital revolution has certainly arrived in Indonesia.
Kevin Osmond, CEO of Printerous, told FDI spotlight, “In Indonesia, we have over 3000 independent printing companies across the archipelago. That is a larger printing market than Singapore, Malaysia and Thailand combined. We conducted our own research and found that 95% of these shops were running severely under capacity. That is why when we introduce ourselves to print shop owners; we are not seen as a threat or competition. We are welcomed with open arms. Through our own digital platform, we can fill the capacity of our printing partners across the nation, wherever our end client may be.”
Despite Indonesia’s progress in each of the disruptive technologies, the country still has a significant way to go. And amid all of the challenges, three megatrends are now coming to the fore. Therefore, the challenge will be in enabling Indonesia to capture its digital potential: across infrastructure, consumers, and businesses. Catalysed, as mobile data in Indonesia remains highly competitive, costing some 50% of what consumers in most ASEAN neighbouring countries typically pay. But quality connection speed and internet bandwidth can be low, whilst Indonesia’s size and geographic complexity only compound these challenges. The country’s performance has been much improved, particularly in the past 12 months, with the introduction 4G and LTE connectivity. However, there remains a clear and present opportunity to further upgrade and expand Indonesia’s digital infrastructure in the near term. Indonesia has an internet penetration rate of 34%, less than half that of ASEAN neighbour Malaysia, and far behind that of early adopters such as the United Kingdom, Japan, and Canada.
This means that Indonesia remains home to the world’s third- largest population of individuals without internet access. Digitisation also remains markedly uneven across Indonesia; with internet penetration closely correlated to income per capita, the poorer regions inevitably having the lowest penetration. Therefore significant obstacles to growth remain. While Internet connectivity is rapidly increasing, it is coming from a smaller base than other countries in the region.
Small but growing base of digital consumers
The number of internet users in Indonesia reached 73 million in 2016, approximately 29% of the population, according to the Ministry of Communications and IT. That is significantly less than Malaysia, who sits at 67.5%, Thailand at 55.9% or the Philippines at 43%. Indonesia’s internet users are further hampered by a fragmented logistics landscape and poor payment infrastructure, which also present hurdles to expansion, with just 6% of Indonesians holding credit cards, according to a 2014 report by UBS. Being mindful of the market’s characteristics will, therefore, be crucial for app developers planning expansion.
E-commerce solutions are increasingly being used to bridge gaps in Indonesia’s infrastructure, with some start-ups helping firms extend their reach to rural areas. Start-ups looking for innovative ways of reaching rural customers are also employing a tactic known as assisted e-commerce, which uses technology to connect local stores with product distributors, helping to minimise geographic and payment challenges.
Only the large population centres such as Jakarta and Yogyakarta have a penetration rate above 45%. However, those Indonesians who are connected are digitally savvy “Netizens” in every sense of the word, with a need for constant connectivity, instant information, a growing appetite for digital content, and who spend a higher than average amount of time on the internet engaging in heavy social media usage and e-commerce. Revenue from e-commerce in Indonesia amounted to USD 6 billion last year, with 78% of current internet users making online purchases.
With the industry projected to grow by 18% in the next five years, reaching a market volume of USD 16.4 billion by the end of 2020. Moreover, Indonesia is emphatically a mobile-first nation, with 75% of the online purchases made via mobile devices. The usage statistics even exceed those of digitally mature countries such as the United States, where digital media have been around longer and are far more established.
Indonesia’s internet population is also set to boom further due to the growing accessibility of access to the mobile internet and the increasing availability of inexpensive smartphones. Indonesia is expected to add 50 million new internet users from 2017 to 2020, reaching a penetration rate of 53%. Moreover, as smartphones have become ever more conventional in Indonesia, apps are enjoying a surge in popularity, suggesting increased platforms for e-commerce to strengthen its economic foothold.
Despite low digitisation across Indonesia’s key sectors, start-ups are also proliferating and thriving. E-commerce start-ups such as Alfacart.com and MatahariMall.com, who launched its operations in September 2015 with $500m in backing from Indonesian real estate developer Lippo Group and describing itself as the Alibaba of Indonesia, said it hopes to become a driving force for e-commerce in the country.
Financial services companies Kartuku and HaloMoney and transportation company Go-Jek who, since launching its mobile app in early 2015, the Indonesian two-wheeled motorbike taxi service, has seen its market value rise as high as $400m by early 2017 and the number of registered drivers jump from 500 to 200,000. The company is now active in at least five cities around the country, with plans to expand further in the year ahead.
As Peter Chandra, CEO of Jet Express – an Indonesian courier service who have a heavy reliance on an e-commerce system – explained, “On one end of the scale, there are the tech disruptor players such as the sharing economy taxi apps. These companies rely on creating a strong platform and being very light on physical resources, strategically speaking. On the other side of the coin, you have the traditional players who have invested a lot into their resources but are too cumbersome and slow-moving as a result. So in that respect, technology acts as a competitive advantage for us.”
Indeed the growing use of ride-hailing apps signals a wider expansion in e-commerce and mobile transactions. According to the Indonesian e-Commerce Association, the domestic online market is projected to triple in size to reach $20.7bn in 2018. While online sales represented around 1% of all retail sales in Indonesia in 2015, research firm eMarketer expects this share to grow to 4.4% by 2019, with e-commerce spending forecast to rise from $3.2bn to $10.9bn over the period, backed by an ecosystem of angel investors and venture capital firms including CyberAgent, Mountain Kejora, and Ideosource, among others.
In 2016, the total disclosed funding of start-ups in Indonesia was estimated to have reached USD 1.7 billion. Jakarta, Bandung and Surabaya are emerging as innovation hot spots. Realising that Indonesia’s growing potency in the digital economy sector, the President of Indonesia, Joko Widodo, has striven to improve the telecommunication infrastructure quality across Indonesia, describing this quality improvement as necessary to speed up innovation in information and technology and to support Indonesia in becoming, “the biggest digital economy amongst the ASEAN nations.”
Indonesia’s digital opportunity: USD 150 billion by 2025
Often underestimated as a driving economic force among its better known Asian brethren, Indonesia, therefore, presents a variety of unique opportunities in becoming one of the largest e-commerce spaces globally with an e-commerce market on track to be one of the largest in Asia, utilising mobile-first platforms to offer all Indonesians convenient access to consumer goods and services.
With so many mobile users, compounded by weak internal infrastructure, companies and individual sellers alike now have the potential to grow the e-commerce market to heights unseen.
Indonesia is now poised to enjoy the digital revolution. However, serious challenges remain, with the gauntlet thrown down to the country’s public and private sectors, which must now focus investments in digital technologies to enhance infrastructure, increase penetration, and boost productivity. The resulting economic impact – of an estimated USD 150 billion by 2025 – is too large a prize to ignore. Therefore, implementing a holistic digital strategy will enable Indonesian companies to win big in the digital age and lift Indonesia’s economic growth to the next level.
