E-commerce in Indonesia: Rising, but challenging

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By Michel Struharova

A growing middle class and the widespread availability of technology in Indonesia has sparked the growth of e-commerce. Yet online purchases represented in 2015 were only 1% of total retail revenue in the country.

In February, the Indonesian government introduced a revised version of the negative list of investments, which regulates the volume of investments from overseas in various business sectors.

In a concerted effort to attract foreign investors responded to the booming e-commerce sector, the government has allowed 100% foreign ownership in the e-commerce industry. Until now, this sector has been closed off to foreign investment. Hence, in Indonesia currently, global giants such as E-bay or Amazon are still absent.

Shopping is integral in much of Asia, and shopping malls are venues for leisure time. Indonesian consumers still tend to rely on word-of-mouth product recommendations. Trends do not indicate that any breakthrough would be likely in the near future, and this creates a challenge for future investors wanting to grow the e-commerce sector.

It is also challenging for foreign investors to market products in Indonesia, an archipelago nation of more than 17,000 islands, populated by people from diverse cultures.

Internet penetration and quality

Internet penetration is increasing every year in Indonesia, of course. But when one takes a closer look at the latest statistics, only 19.4% of the Indonesian’s population are internet users, compared to 68.6% for Malaysia, 43.5% for the Philippines, and 42.7% for Thailand.

Nevertheless, internet quality has been steadily advancing in Indonesia. The 4G network was launched in mid-2015.

Since smartphones have become widely available, they have played a significant role in the consumer behaviour of Indonesians. Youths often do not have access to computers, and hence their first contact with the online world comes right through their smartphone. Indeed, the volume of shopping through a mobile phone in Indonesia far exceeds that of shopping through the use of a computer.

Apps: “if demanded, they should exist”

One of the most successful Indonesian startups now is the mobile app Go-Jek, a motorcycle based taxi service. Since its launch at the beginning of 2015, it presented an increase of registered drivers from 500 to 200,000 and is currently valued at 400 million USD.

Popularity of Go-Jek is growing and this innovative approach to transport resonates among Indonesian political authorities now as well. Go-Jek was able to successfully challenge an official ban directly from the Minister of Transport.

It was due to the massive public pressure through social networks that Indonesian President Joko Widodo annulled the ban, saying that the “innovation of the younger generation can not be suppressed, and applications such as Go-Jek, if demanded, should exist.” The founder of the startup, Nadiem Makarim, sees mobile applications as an inseparable element of e-commerce business.

Another fact is that 80% of all Internet activity consists of social network based traffic, and 15% of all global tweets on Twitter come from Indonesia. Social networks are key to influencing shopping behaviour, so it is contingent on potential investors to beef up their marketing strategies, to build up brands in Indonesia.

More problems, but also more opportunities

A lack of quality infrastructure in Indonesia increases considerably the cost of transportation, adding to the price of shipping and delivery of goods. In Indonesia, there are often power outages which can last up to several hours.

Currently in Indonesia, there is no reliable e-payment system that is also in universal usage. Payments are complicated and are often being declined by customers. Instead, customers prefer a bank transfer or payment upon delivery. To draw-up a reliable payment system that is supported by mobile devices, user-friendly and safe, will be key in the further development of e-commerce.

The Indonesian government recognises the importance of the progress and development of e-commerce industry, which signals the country’s desire to attract foreign investments.

As mentioned earlier, the removal of e-commerce industry from the list of prohibited sectors in the updated version of the negative list of investments step by step opens up the door for international entrepreneurs who stood away from Indonesia in the past.

The next step is a so-called “e-commerce roadmap”, which consists of the government’s priorities, and focuses on the development of e-commerce potential of the country. The main source of interest will most likely be the available tax break for tech-startups.