E-commerce has become the new darling of Indonesia’s economy. The future looks rosy for e-commerce, attracting more people, both Indonesians and foreigners, to jump on the bandwagon. The question is whether this bright picture is sustainable.
In less than five years, e-commerce has grown meteorically, bringing in more investments, creating jobs and contributing to the country’s economic growth. Indonesia is expected to receive between US$2 billion and $3 billion in digital economic investments per year. This amounts to 15 to 20 percent of foreign direct investment in the country.
The central bank, Bank Indonesia, has revealed that e-commerce transactions in the country amounted to $5.6 billion in 2016. The “PPRO High-Growth Market Reports 2018” named Indonesia as the fastest growing e-commerce market with a current value of $7.2 billion. The country aims to see annual e-commerce transactions worth $33.2 billion by 2020.
Is the picture too optimistic? Not at all. Indonesia has all the potential for e-commerce growth. Consider these findings. McKinsey Global Institute revealed Indonesia’s consumer class could grow from 45 million in 2010 to 135 million by 2030.
The nation’s growing middle class is likely to spend its disposable income on personal items, including fashion, makeup and electronics.
According to the “2018 Global Digital Report” released by wearesocial.com, 133 million Indonesians or 51 percent of the total population of 265 million have access to the internet through desktops, laptops and mobile connections. More interestingly, 100 percent of people aged 16-24 who represent the country’s young generation have used the internet. And 98 percent of these young people have smartphones. They are digital natives who have no problem at all in using e-commerce platforms.
As size matters in the economy, consider this fact: Indonesia is the world’s fourth-most populous country with the largest economy in Southeast Asia. It is a member of the G-20 major economies and is the world’s 16th largest economy by nominal gross domestic product (GDP).
With this background, will the country’s e-commerce be able to sustain its meteoric growth?
There are several reasons for being optimistic, despite the huge challenges ahead. First, Indonesia has been accelerating its internet backbone development. The country aims to complete the development of the Palapa Ring optical fiber installation that serves as the internet backbone for high-speed internet connections by the end of this year or early next year. The Palapa Ring will connect all cities and towns.
In addition, the country will soon issue a tender for a high-throughput satellite that will be able to provide high-speed internet access for some areas that are not covered by the Palapa Ring.
The Palapa Ring and high-throughput satellite projects are expected to answer some internet connection problems as cited in several findings.
The “2018 Global Digital Report” revealed that the average download speed of mobile users in Indonesia is still less than 10 Mbps, far slower than the average download speed of more than 50 Mbps available in Singapore.
While Indonesians must be satisfied with a cable internet speed of 13.79 Mbps, its Asian neighbors such as Singapore, Hong Kong and South Korea, enjoy above 100 Mbps.
Seeing the relatively low internet speed problem in a positive perspective, one may say that if the country’s e-commerce sector has been able to record such extraordinary growth with the current internet speed, it will certainly be able to achieve higher growth once the connection problem is settled. That is why we are keeping our fingers crossed for the completion of the country’s internet backbone project.
Second, the government is committed to developing $414.6 billion worth of new public works projects between 2015 and 2019. The projects include large-scale transportation, utilities and information communication technology network development.
By the end of 2017, 26 of the government’s pipeline of 265 projects were completed at a cost of $3.4 billion, while 145 projects are under construction.
These infrastructure projects aim to free up the country’s logistics gridlock. Indonesia’s logistics still lack road networks, seaports and airports.
No wonder that the World Bank has ranked the country’s Logistic Performance Index 46th out of 160 countries, which is far below that of Singapore at seventh place and below that of China and Vietnam, which are 26th and 39th respectively.
The Office of the Coordinating Minister for Economic Affairs says the country’s logistics costs account for 24 percent of its GDP. This percentage is more than double that of the 8 percent in Malaysia. However, consulting firm Roland Berger has projected that Indonesia will be able to reduce its logistics costs to 19 percent of GDP by 2020, which is certainly good news for the e-commerce sector.
Third, the online to offline (O2O) development has become part of the country’s e-commerce growth strategy. The O2O aims to form strategic partnerships between the country’s e-commerce firms and offline small-and-medium-enterprise (SME) retailers throughout the archipelago.
Based on Nielsen’s findings, Indonesia had around 3 million offline SME retailers as of June 2018. Assuming each of these retailers has approximately $678 sales revenue per day, the total revenue collected by these SMEs could amount to $2.03 billion per day or $741 billion per year.
Using these SMEs as pickup points, the country’s e-commerce firms can expand their markets and overcome the great distance barrier that often hinders e-commerce expansion.
The presence of pickup points that are adjacent to the e-commerce customer base will drastically reduce logistics costs and shorten customer waiting times.
Indonesia certainly has other valid reasons to maintain an optimistic view of its e-commerce development. The country’s e-commerce sector has demonstrated sustainable growth amid constraints, such as relatively low internet speeds and poor logistics.
Once freed from these constraints, the country’s e-commerce will reach its goal of becoming the key driver in building Indonesia.
The writer is president of Bukalapak, one of Indonesia’s e-commerce startup unicorns.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.