Editions : January-March 2016

JOURNAL | INDONESIA 360 By: Shinta W Dhanuwardoyo

Being in the tech industry for nearly two decades, I have witnessed an unimaginable growth spurt of digital savviness in Indonesia. Being the world’s fourth-most populous nation, and boasting among the largest number of Twitter and Facebook users, Indonesia also has a dynamic and vast economy, with a continuously rising consumer class. Moreover, it is supported by one of the youngest, largest and most digitally savvy demographics in the world. Around 50 percent of Indonesians are under 30 years old, and 29 percent of the total population is under 15 years old.

These young and upwardly mobile and Internet consumers can propel an economic resurgence in the country that would scarcely have been imaginable 20 years ago. With around 90 million Internet users and more than 281 million active mobile phone subscriptions, we can anticipate the development of the digital ecosystem in Indonesia that will lead the growth. E-commerce has been one of the vital driving forces of Indonesia’s digital economy. Online sales last year reached an estimated $2.6 billion and are projected to reach about $4.5 billion in 2017, according to data from eMarketer. The future projections for the overall digital economy are well over $100 billion. Indonesia may just take a giant leap to become a global Internet powerhouse.

Indonesians today live in a digital world with new, exciting opportunities and even more exciting challenges. According to my friends at Facebook, Indonesia had 76 million accounts as of December, making the country the fourth-largest Facebook user in the world. The numbers of users could hit 90 million in the first quarter of this year. Facebook is the country’s most popular social media platform, even used by lower-income consumers by way of an app on their cellphones. With all of this potential and digital savviness, even lower-income Indonesians are taking part in the rapid growth of the country’s digital economy. Indonesia has no doubt been able to utilize the Internet to empower the grassroots economy to which these people belong. In addition, local companies are now embracing digital channels and we are also seeing a boom in Indonesia’s digital start-ups, which is generating huge excitement about the economic potential of the industry.

Indonesia, however, faces a number of challenges. Many Indonesians still cannot afford fixed broadband access; it is also not easy to provide Internet service across an archipelago of 17,000 islands, as it’s a huge infrastructure challenge. Although the national government is taking major steps to improve broadband access, Indonesia is indeed a mobile-first market and the growth of Internet access is through Internet-enabled mobile phones. Smartphone adoption is still in its early phase and smartphone users, as of the end of 2015, accounted for only about 52 million of all mobile phone users. Nonetheless, Indonesia’s mobile landscape is evolving quickly. Cheap Chinese-made smartphones have substantially lowered the price for many consumers to experience regular Internet access for the first time. According to estimates by Tech in Asia, an online platform for the region’s tech community, there will be nearly 70 million smartphone users in Indonesia this year and more than 100 million in 2018.

Indeed, this rapid digital revolution has reshaped Indonesians’ behavior, mind-set, culture and, ultimately, their economy. We must welcome and embrace the new and exciting opportunities of the “connected economy.”  Many industries that were traditionally done offline now must step into the digital age to keep pace. From the marketplace to transportation, they must embrace innovation to connect with a whole new system, new markets and new audiences.

The state of e-commerce

We cannot talk about Indonesia’s recent rise in digital without also discussing e-commerce. Indeed, the sector is growing and its value is increasing by 40 percent each year, according to Ernst & Young. E-commerce was valued at $12 billion at the end of 2014 and is predicted to reach $18 billion by the end of this year. Indonesia’s government has recognized the potential of the country’s e-commerce industry and has taken the first steps to creating an e-commerce road map, which will include a legal framework.

The potential is staggering: President Joko Widodo has repeatedly cited estimates that the digital economy could reach $130 billion by 2020. With such an ambitious goal in just five years, surely the government has much to do. Of course, overseas venture capital firms are turning their focus to Indonesia and that will surely help. Tokopedia, the giant online marketplace, created a milestone in Indonesia’s e-commerce boom when it received $100 million in funding from SoftBank and Sequoia. We are now seeing funding announcements for other Indonesian hopefuls such as 8wood, a fashion e-commerce site, and HappyFresh, a grocery shopping app.

Yet amid all the hoopla, investment in Indonesia is nonetheless lagging far behind China and India. In November, The Wall Street Journal reported that Indonesia’s digital economy had only drawn $62 million in investment for 2015 at that point, compared to $12.8 billion in China and $2.7 billion in India. These numbers brings us to the issue of policies, in which Indonesia is still lacking.

The same Wall Street Journal report noted Indonesia’s tech investment numbers are low due to poor tax laws and painful, bureaucratic procedures to start a company. Adding to this is the fact that e-commerce is still on the state’s “negative investment list,” meaning foreign players can’t directly participate in Indonesia’s digital economy. This is obviously a huge barrier to the flow of  foreign investment dollars into the country. The government is working to remove e-commerce from the negative investment list, but it remains to be seen how much resistance will surface.

Another challenge relates to a crucial aspect of the digital economy in general: e-payment. Recent numbers still show Indonesia’s credit card penetration is less than 15 percent of the population. Consumers still cite security as their main concern with using credit cards online. Bank transfers are still the most popular mode of payment, followed by cash on delivery. Although it seems like a setback, the lack of e-payment options is an opportunity for Indonesian entrepreneurs to enter the market, and indeed e-payment players such as Doku, Kartuku and iPaymu are emerging.

Additionally, as we are a mobile-first country, mobile payment should be the next best alternative. Major telecommunications companies have jumped into the mobile payment game, yet they still must convince users to trust this payment method. In addition, large Indonesian banks such as Bank Mandiri and its e-Cash service have the potential to entice Indonesian consumers to use mobile payments. Simple procedures, fraud prevention and good connectivity might just be the keys for e-payment to take off in Indonesia.

Indonesia’s e-commerce sector is facing other unique challenges. Top among them is Indonesians’ purchasing behavior. Indonesians tend to seek discounts, and are risk-averse and brand loyal, according to Tech in Asia. They tend to buy brands they already know, making it challenging for new e-commerce companies to compete with established, deep-pocketed players such as Lazada, the online marketplace. While there are big players out there, smaller players can compete, as long as they have genuinely good products. After all, the current big players were once start-ups. With the right strategy, mentorship and momentum, there are always ways to make it big. However, the right policies must be implemented to create a healthier digital ecosystem in Indonesia, which will be discussed later on.

A driving power for advancement

The Internet of Things (IoT) is another phenomenon to which we should all pay attention. With 4G entering and taking over the telecommunications market, Indonesia is entering the realm of IoT and we have seen platforms coming from local tech start-ups that are “disruptive innovations.” There are four key components for an IoT to create change: device, connectivity, data exchange and transaction.

Let us use the example of one of the country’s most talked-about and game-changing apps, Go-Jek. It helps low-income motorcycle taxi (ojek) drivers operate more efficiently, which leads to more productivity and higher incomes. The booming Go-Jek is a great example of an IoT that is driving change within Indonesia’s grassroots economy. It has increased the incomes of ojek drivers by up to 10 percent on average – and reportedly up to 100 percent in some cases. Today, Go-Jek has 200,000 drivers in 15 cities across Indonesia and has diversified its services from courier and transportation to food delivery, bill paying and much more. Its Go-Food platform has taken the food delivery business to the next level, killing competitor food delivery apps in only its first month of operation.

Indonesia needs more apps like this and hopefully Go-Jek is only one of many that change the game. As we’ve seen with Go-Jek, people in the grassroots economy have the opportunity for a better life thanks to technology. Innovations such as this will impact Indonesia’s economic development in the coming years in ways not previously thought possible.

Other Indonesian mobile apps such as 8village have allowed farmers to broaden their knowledge and improve crop yields. The Internet has shown Indonesians the capability and importance of IoT for economic growth and development. One prime example of an initiative to implement IoT at the grassroots level is the collaboration between a tech start-up called Groceria and the Indonesian Traditional Market Traders Association, headed by business mogul Sandiaga Uno.

Groceria’s business model is specifically designed to allow people to buy their groceries from traditional markets. So far, the app has been tested in Surabaya, the capital of East Java Province, where the start-up is based. The app also allows for crowdsourcing of “shoppers,” creating job opportunities for anyone interested in doing the shopping for app users at traditional markets. Groceria is revolutionizing the traditional market, changing the way farmers distribute their products, the way the Indonesian government controls commodity prices and the way people shop for their groceries.

Beyond traditional markets, IoT is also very much needed in the health care sector. In the future we could see apps that create health care access for people living in remote areas of Indonesia. These are people who desperately need medical attention but may not be able to get it due to poor infrastructure or lack of doctors in their region. Perhaps an app can be created so these people can consult a doctor and get diagnosed without having to see the doctor in person. Currently, health apps in Indonesia are more about scheduling appointments at hospitals and with doctors. 

One interesting addition to Indonesia’s health care app market is an e-medical record platform called MedicTrust. MedicTrust describes itself as an integrated health record management system that aims to solve the problem of having health records scattered across various hospitals and clinics, sometimes resulting in redundant treatments. With MedicTrust, users can access their health records, including previous blood tests, vaccinations and diagnoses, and have everything stored in a secure cloud system. The app, which is just now taking off, is one very good example of a start-up utilizing the power of IoT to create better health care management.

There is also an opportunity for disruptive innovation within Indonesia’s education sector that can enable anyone to learn anything, anywhere, at any time. A great example is Ruangguru (Teacher’s Room), an online marketplace that connects private tutors and students throughout Indonesia. Ruangguru offers courses on everything from traditional classroom subjects to sports skills, and even courses on classical guitar. The site also features tutors who specialize in test preparation, language studies and musical theory. The platform lets anyone learn from anyone.

At the end of the day, IoT and technology development in general can change Indonesia’s economy, especially when we achieve a connected economy (or a digital-based economy). Of course, there are challenges in implementing IoT in Indonesia, in particular with the transformation of nonusers to users. For instance, we are all used to ordering taxis by telephone, but now many people are using apps. While the younger generation can easily adapt to this change, that might not be the case for older people, so educating the public on using this technology is important. 

So, is this the “new economy”? It just might be. Indonesia is known to be a top commodities country. We are the top or among the top producers of many things including coal, tin, copper, cocoa and crude palm oil. But this is the “old economy.” The app economy has created a whole ecosystem of jobs, companies and income connected with the production and distribution of mobile apps. It is estimated that Indonesia has around 22,000 app economy jobs across the country.

 

According to Indonesia’s Central Bureau of Statistics, the information and communications sector alone grew by 10 percent in 2014, making it the fastest-growing sector that year. As a whole, the country’s total gross domestic product growth for 2014 was only 5 percent. Will Indonesia’s economy one day be digitally led rather than led by commodities? Within a few years the top 10 wealthiest Indonesians may not come from the “old economy.” Today, out of the top 40 wealthiest Indonesian business leaders, probably less than 10 percent are running or creating a digital empire. But five years from now, more than 30 percent may come from the digital industry.

Wanted: Good policies

Indonesia may not achieve its digital dream, however, unless it has the right policies and these policies are properly implemented. There should be a comprehensive national strategy that brings together entrepreneurs, government, venture capitalists and other players to reach a common goal. At the moment, the government has laid out plans for broadband and infrastructure, as well as a road map for e-commerce, involving eight ministries including information and communication, trade, finance and transportation. The information ministry has taken the first steps in coordinating with industry players and implementing policies to expand 4G coverage.

However, I believe the role of government here is not solely policy-making. It must include developing communications infrastructure for both the public and private sector. Indonesia also needs to upgrade logistics infrastructure. If the government believes that e-commerce will eventually be a key driver of economic growth, logistics must be a high priority. Again, this is a challenge given Indonesia’s geography, but it is vital that better roads and ports are built to support the growth of e-commerce. It costs twice as much to ship goods in Indonesia than in neighboring countries such as Thailand.

Aside from infrastructure policies, the government must have policies that will propel entrepreneurship in Indonesia. There is still a talent deficit that prevents us from excelling compared to other countries in the region. Undoubtedly, there are many positives to attract tech giants to Indonesia. Our vast market and digitally savvy population are not going unnoticed. Regardless, Indonesia can’t just be another market, standing in the shadows of China or India. Indonesia needs to be a digital player – and a competitive one at that. To achieve this goal, our tech entrepreneurs, especially developers, must amp up their skills and knowledge in order to compete.

I personally have established a nonprofit organization called Silicon Valley Technology Alliance (SVATA), which aims to bridge Silicon Valley and entrepreneurs in emerging markets, particularly Indonesia. SVATA works with entrepreneurs, venture capitalists and incubators to help high-growth start-ups from emerging markets grow into world-class companies. This platform for knowledge sharing is essential and a valuable opportunity for Indonesian entrepreneurs. However, further collaboration is needed to propel the growth of tech entrepreneurship here, and not just with Silicon Valley, but with companies around the world. It is important to have government support for this, as it can speed up the process. For example, our government could start collaborating with neighboring countries on knowledge and skills transfer programs. The government can also prioritize infrastructure and human capital development, specifically with the digital economy in mind.

Indonesia undoubtedly has the potential to be one of the world’s biggest digital economies, thanks to our large population and market. To truly embrace the digital economy and enjoy its benefits, however, Indonesia requires a concerted effort from multiple stakeholders including government, venture capitalists and big companies. While the numbers show Indonesia is still behind, we can be the next Internet powerhouse with the right mix of policies, initiatives and incentives.

 

Shinta W Dhanuwardoyo is founder and chief executive officer of bubu.com, a leading Indonesian digital agency. She is also an angel investor in various tech start-ups.

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