The population of Indonesia has embraced digital technology. As some of the most avid users in the world, the Southeast Asian country has a high percentage of the population using Facebook, Instagram, Line, Twitter, and YouTube. In fact, two of the top six Twitter-using cities in the world are Jakarta and Bandung – both in Indonesia. Complimenting this social media enthusiasm is an extended digital ecosystem that includes online commerce, ride-sharing services, media distribution, and financial services.
Mckinsey’s report, The digital archipelago: How online commerce is driving Indonesia’s economic development provides insights on how this rapid development of digital Indonesia is resulting in business opportunities while expanding additional opportunities in the form of new jobs, improved access to services, and greater connectivity with the global society.
McKinsey’s survey interviewed 60 experts, ranging from chief executives of publicly listed companies, small and medium business owners, startup owners, former ministers to heads of government agencies, across the archipelago. Additionally, the survey interviewed 3,200 people, including 700 online merchants, 500 offline merchants, 2,000 online buyers and 250 drop shippers.
Online Commerce Penetration
Internet penetration is expected to reach 53% from 2015 – 2020, adding 50 million new internet users to the country’s digital ecosystem. McKinsey reports that in addition to creating significant business opportunities, the rapid development of digital Indonesia is creating new job opportunities, improved access to services, and greater connectivity with the global society.
At present, Indonesia’s online commerce accounts for at least $8 billion in consumer spending, consisting of about $5 billion of formal e-tailing and more than $3 billion of informal commerce.
This is expected to grow eightfold, with formal e-commerce and social commerce reaching $40 billion and $25 billion, respectively by 2022 with new consumption contributing to thirty percent of this industry – an amount which would not have occurred without the digital environment. The year 2022 is also expected to have online commerce penetration rise to 83 percent of the internet users, from 74 percent today, with roughly one quarter of these users completing purchases. Where the current average individual spending is $260 a year, this is expected to increase to $620 in 2022. McKinsey cites reasons for this increase as an improvement in consumer trust in the ecosystem together with more MSMEs online, offering greater choice of products and affordable, reliable delivery options.
The by-product of employment
A significant byproduct of this market will be the creation of 26 million full-time-equivalent jobs in 2022 with formal e-commerce reaching $40 billion and social commerce up to $25 billion by 2022. Thirty percent of this activity will involve new consumption that would not have occurred otherwise, and the market will support up to 26 million full-time-equivalent jobs in 2022. In addition to raising revenues, online commerce can have a broader social impact: for example, McKinsey found that 35 percent of online sales are generated by women and that online commerce has led to savings of 11 to 25 percent for customers outside Java. This figure includes 30 percent of which will be consumption that otherwise would not have occurred. In addition to increasing revenue, online commerce can unlock broader social impact, facilitating women’s participation in the economy—for example, 35 percent of online sales are generated by women. Also, online commerce has led to a savings of 11 to 25 percent for customers outside the main island of Java.
e-tailing market
McKinsey defines online commerce as the online buying and selling of physical goods via formal e-tailing and informal commerce. Formal e-tailing means buying and selling physical goods through an online platform that facilitates a complete online transaction of displaying products and including payment and delivery. The more informal market is one of involving the buying and selling of physical goods through a social media platform where the platform serves as an avenue for listing and selling goods, but payment and delivery occur elsewhere.
The survey identifies five trends which support the rapid growth of online commerce in Indonesia: a “mobile-first” market; digitally savvy, young consumers; increasing MSME participation in online commerce; growing investment in online commerce; and supportive government policies.
Greater Jakarta has a more mature online retail market, contributing the most to online commerce spending, generating 55 percent of the Indonesian online commerce revenue. McKinsey records that online spending in Jakarta, as a percentage of household spending, is four times higher than in the rest of Java and ten times what it is outside of Java. However, provinces outside of Jakarta have about a ten-percentage point higher rate of new spending than Jakarta does, with Mckinsey projecting this figure increasing beyond 30 percent as online commerce reaches beyond greater Jakarta offering better choices and prices.
Exports through online commerce are still low, according to McKinsey. However, rising exports of consumer goods (such as automotive, hobby, fashion, and health and beauty goods), together with significant numbers of overseas Google searches for such products, suggest that demand is increasing.
Challenges
McKinsey noted that there are five key challenges if Indonesia wants to boost its e-commerce sector.
- Reliable logistics and infrastructure: World Bank data figures of 2016 shows Indonesia ranks 63 out of 160 countries globally in terms of infrastructure development. The country also needs to increase its logistic networks and quality of service delivery.
- Online payment systems: attention needs to be given to online payment adoption and cybersecurity. Currently, only 49 percent of Indonesians have access to financial services meanwhile which play a key role in the growth of e-commerce.
- MSME commerce system: Only some 60 percent of MSME have an online presence, 15 percent of which have online ordering and payment systems, indicating an urgent need for small business owners to implement reliable technology and payment systems.
- Encouraging strong local talent pool: Indonesia faces a technical skills shortage with only eight science, technology, engineering and mathematics (STEM) graduates per 1,000 citizens, while China produces 34 and India 20.
- Creating a healthy investment climate: McKinsey states that one way to gauge the health of an online commerce market is to examine its funding and local investment. Indonesia has received about 38 percent of total Association of Southeast Asian Nations (ASEAN) venture capital funding over the past three years, exceeding its relative contribution to ASEAN’s total GDP of 36 percent with e-tailing companies accounting for almost $3 billion of the funding. But, as McKinsey states, Indonesia has a relative lack of start-ups. While there is a challenge of expanding current startups by enabling them to qualify for at least Series A financing, a company’s first sizable round of venture capital investment.
As Indonesia’s digital economy unfolds online spending is likely to increase in all provinces as the nation continues to develop. As Internet penetration increases at an anticipated 4.6 percentage points a year together with the continued growth of household consumption, which grew at 5.2% per year in real terms from 2011 to 2017, online spending will increase enabling the country to enjoy the social and economic benefits of the digital economy.
