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Realising the potential of Indonesia’s eCommerce Sector

Known as one of the biggest mobile first nations, Indonesia’s 150 million internet users amounts to 56 per cent of the population of 268.5 million, according to We are Social Digital Indonesia report the fourth largest country in the world by population.  The growing adoption of internet based activities is evidenced by the increasing adoption of internet and social media users which increased by 13 per cent and 15 per cent, respectively,  YOY in January 2019.

According to JP Morgan’s Global Payments Trends report, Indonesia is a country of smartphone devotees. While penetration is only at 40 percent, those that do own mobile devices use them constantly. Shopping on the move is already the primary e-commerce mode in the country, accounting for 52 percent of all completed transactions.40

Indonesia is one of the fastest-growing mobile commerce markets in the world, now worth $7.1 billion,a figure that is projected to rise rapidly as smartphone penetration increases. The nation’s mobile commerce market is expected to grow at a compound annual growth rate of 45.2 percent to 2021, when sales via this channel will be worth a projected $31.5 billion.

Apps surge ahead in sales

Apps are the primary mobile sales channel, taking a 74.8 percent share of the mobile commerce market or $5.3 billion in sales.44,45 YouTube, Facebook and WhatsApp are the most popular social media channels, and, as in other countries, e-commerce merchants are using the power of influencer marketing.46 Social media represents a highly effective way to reach consumers: capital city Jakarta, for instance, has the highest number of active Twitter users in the world.47 Selling via social media sites such as Pinterest and Instagram’s Stories function is a key trend.48 As a result of micro-enterprises selling via social media, social commerce is now estimated to account for 40 percent of all e-commerce sales in the country.49 While these more informal sales platforms, which are dominated by micro-enterprises, may present issues for the country’s tax authorities, they also represent an exciting opportunity for larger merchants to engage with young, technologically advanced Indonesian shoppers.

According to Asian Briefing, Indonesia’s eCommerce industry holds a lot of promise for foreign investors, with a burgeoning consumer market facilitated by the increasing accessibility of mobile internet in the country.   Supported by the Google and Temasek’s research in its 2018 e-Conomy SEA report, which stated that the eCommerce industry’s Gross Merchandise Value or GMV in Southeast Asia reached US$23,2 billion reports Tempo.Co

According to Statista, In the eCommerce market, the number of users is expected to amount to 212.2m by 2023 with payments mode in 2019, 32% of total eCommerce purchases will be paid by E-wallet.

Statista records the following figures regarding eCommerce in Indonesia:

  • Revenue in the eCommerce market amounts to US$18,764m in 2019.
  • Revenue is expected to show an annual growth rate (CAGR 2019-2023) of 25.8%, resulting in a market volume of US$47,067m by 2023.
  • The market’s largest segment is Fashion with a market volume of US$4,792m in 2019.
  • User penetration is 62.2% in 2019 and is expected to hit 75.3% by 2023.
  • The average revenue per user (ARPU) currently amounts to US$111.47.

Asian Briefing reports that major players in the e-commerce field: Shopee, Lazada, Bukalapak, and Tokopedia are the leading general e-commerce websites in Indonesia. In fashion, Berrybenka and Hijup are the key players.

While Berrybenka offers more than 10000 local and international brands, Hijup focuses more on Islamic fashion. Traveloka and Tiket are the most-known travel start-ups in the country. Bhinneka and JakartaNotebook are one of the first and most popular electronic e-commerce platforms in the country.

 

Popular products and categories

As per one market survey, the most recognized categories purchased by Indonesians online are clothing (borne out by Statista figures), accessories, bags, shoes, personal care items, and cosmetics. In terms of market share, fashion is the leading product category, accounting for US$3.05 billion of the total sales, followed by toys, hobby, and DIY, which generates US$2.36 billion in sales.

To focus on the development of e-commerce potential of the country, the Indonesian government recently opened up the sector for foreign investment.

According to Reuters, JAKARTA, Aug 15 (Reuters) – Indonesia will unveil plans for increasing how much foreign investors can own of businesses in some sectors by year-end of 2019, the head of the country’s investment board told Reuters.

Thomas Lembong, who leads the agency known as BKPM, also indicated the government is looking to ease restrictions in areas that can support Indonesia’s booming digital economy, reports Reuters.

Adding that President Joko Widodo, who begins a second five-year term in October, has vowed a renewed push for structural reform in Southeast Asia’s largest economy, where tepid investment has contributed to keeping the growth rate at around 5% in recent years.

 

Foreign investment in Indonesia’s e-commerce sector

Asian Brief reports that through the Presidential Decree No. 44/2016 of 2016, the eCommerce industry was removed from the Indonesia’s list of prohibited sectors.

While this allows for 100 percent foreign ownership of e-commerce businesses and companies approved by the country’s Investment Coordinating Board (BKPM), foreign eCommerce companies must meet with the criteria of investing at least 100 billion IDR (US$6.67 million) in the business; or, create at least a 1,000 new employment positions for local workers through the foreign investment.

There is also the option for investors to form a joint venture with a local partner, for those investors who do not meet the threshold of US$6.67 million which translates into a maximum 49 percent stake as a foreign eCommerce company.

E-commerce businesses that can be fully (100 percent) owned by foreigners include the following:

  • Reservation websites for services such as hotel or restaurants;
  • Web portals that publish contents such as articles, audios, and videos using the content provided or made by the users; and
  • Marketplace websites that enable the sellers to meet the buyers.

E-commerce businesses that cannot be fully owned by foreigners, and have a maximum permissible limit of 49 percent partnership include the following

  • Content publishing websites made by the company itself;
  • Marketplace websites with opportunities for the sellers to advertise their products or services.
  • Distribution services websites that allow the company to deliver services.

Further, with effect from April 1, 2019, e-commerce businesses are subject to the same taxes as are applicable for conventional businesses.

 

The eCommerce potential

The Asian Brief reports that the presence of the easing of government legislation has mutual benefits, offering foreign businesses a unique opportunity to tap the country’s eCommerce potential.  Local companies, on the other hand can acquire knowledge and experience from foreign know-how in the sector.

 

Challenges

Currently the eCommerce industry is still developing with online purchase penetration showing lower results that that of neighbouring countries.  In 2017, Indonesia’s e-commerce sales as a percentage of total annual retail sales amounted to 3.1 percent, compared to 23.8 percent in China. According to one market report, Indonesians simply don’t trust online shopping yet and worry about payment safety, lack of sales support and unreliable quality.

However, despite these figures, the report by JP Morgan states that Indonesia’s business to consumer e-commerce market is worth $13.6 billion. While accounting for just 0.6 percent of the country’s overall retail market, the rapid expansion of the online shopping sector between 2016 -2018 of over a third, together with the expectation of continued growth has resulted in Indonesia having the highest eCommerce growth prediction out of all the countries surveyed in the report series.

 

Additional Challenges

Indonesia’s tough geography and poor infrastructure

According to Asian Brief One of the primary challenging areas is that of the countries geographical make up of 17 000 islands spanning over 5 000 km from east to west, making it difficult for e-retailers to operate across the country.

This is exacerbated by bottlenecks in the supply chain such as extended duration of goods in ports and lengthy clearances which are the typical problems faced by cross-border e-commerce businesses in the country.

Poor infrastructure increases the cost of transportation, affecting the final price of shipping and delivery of goods.

According to the World Bank, logistical costs account for up to 25 percent of Indonesia’s GDP, which is the highest in ASEAN. In Vietnam, Malaysia, and Singapore, logistical costs are only up to 20 percent of their GDP.

Slow internet connection

Slow internet speeds hinder seamless access to eCommerce in the country.  According to The ASEAN Post, Speedtest Global Index reported that as of March 2019, Indonesia is placed 118 out of 139 countries for its mobile internet speed of 10.51 Mbps, and 111 out of 178 for its fixed broadband speed of 16.65 Mbps. In February, Opensignal – a London-based company that specialises in mapping wireless coverage – found that in terms of the best 4G speeds offered in each country, Indonesia ranked 68 out of 77 countries with an average of 18.5 Mbps during off peak hours.

Low adoption of cashless payment

Stumbling blocks to the adoption of online payments includes a low financial literacy and a high number of unbanked customers.  According to Asian Brief, much like in any other Asian economy, Indonesians are wary of online payments. Most e-commerce transactions are made through either direct bank transfer or using cash-on-delivery, thus limiting the expanse of e-commerce in the country.

Think with Google reports that “66 per cent of the country’s 260 million population are “unbanked.” Additionally,  while 66% of the current population were raised with internet access,2 fewer than 40% of Indonesian smartphone users have used financial services apps before.3 This is surprising, considering the number of digital finance apps in the country has grown 6X since 2010, bringing the total to 140. And within that category, there are already 19 that are from e-money* providers that don’t require a bank account.

However, according to Asian Brief, recent developments in the payment space, suggest that alternative electronic payment solutions of e-wallets such as Go-Jek, T-cash, Doku, GrapPay, and Veritrans are gaining popularity among consumers.

As Think with Google says, “In the next few years, Indonesia’s digital banking industry will only grow in value and intensify in competition. Now’s the time to take action.”

Companies which are first to market will be able to gain a share of the digital banking pie, which in turn promises to generate growth in eCommerce industry and facilitate the realization of the massive potential of this huge customer base.

 

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investique

Investique Consulting is a dedicated global advisory and business development firm assisting corporations, partnerships and institutions with frontier market analysis in the Middle East, Africa, BRIC (Brazil, Russia, India and China) and N-11 countries. We guide clients through market expansion, potential investment and strategic partnerships that offer improved return.

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