Last Updated 10 May 2020

Indonesia E-Commerce

Category E-commerce
Essay type Research
Words 2567 (10 pages)
Views 641
Table of contents

The world’s 4th most-populous country, Indonesia, is an archipelago country with nearly 242.3 million of population and with geography of 17,000 islands around the mainland and Jakarta is the most populated province. Furthermore, Indonesia is one of the South East Asia country that contribute a small percentage of its GDP and ICT implementation.

Indonesia is a rapidly digitizing country. It is expected to add 50 million new internet users between 2015 and 2020, reaching a penetration rate of 53%. Social media use in Indonesia is among the highest in the world—two of the top six Twitter-using cities in the world, Jakarta and Bandung, are in Indonesia.

E-commerce refers to all commercial transaction that relates to organization and individual, based on digital processing and based on internet. In Indonesia e-commerce as a one of activity in economics pattern that supported by internet infrastructure has a wide segmentation and implementation. The country has now emerged as the fastest growing e-commerce market. In the space of a year, Indonesia’s e-commerce growth rose from 45% to a staggering 78%.

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Indonesia’s e-commerce market is currently at US$2.2 billion in gross market value (GMV) in 2018, so it is considered as an e-commerce nest in Southeast Asia. This industry is seeing lots of investment and just as importantly, has great potential to continue being one of the biggest e-commerce economies in Southeast Asia. According to McKinsey, Indonesia’s e-commerce industry is expected to hit US$ 40 billion by 2022, a nearly four-fold increase. More Indonesians than ever are shopping online. According to a report by Google and Temasek, in 2017, 35 million Indonesians made online purchases; and the figure may reach 119 million by 2025.

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. Almost three-quarters of online consumers in Indonesia are using mobile devices to shop.

Indonesians are mostly skipping the typical evolution from PCs to mobile devices that Europe and the United States experienced. So instead, many consumers have turned directly to mobile devices. As a result, 70-80% of internet traffic runs through mobile connections. Mobile data, which is half of the cost of Southeast Asian peers and among the lowest in the world, is also affordable. As a result, the country has a large mobile subscriber base: about 180 million people, with about 106 million (40% of the population) owning smartphones.

More interestingly, 100% of people aged 16-24 who represent the country’s young generation have used the internet. And 98% of these young people have smartphones. They are digital or internet natives who have no problem in using e-commerce platforms.
Positives in e-commerce in Indonesia

One of the biggest positive aspects of the e-commerce industry in the Republic of Indonesia is its contribution to the development of the economy.

First, let’s look at the financial benefits brought by the e-commerce.

Indonesia is the largest online commerce market in Southeast Asia, generating roughly $3 billion in new consumption revenue today and a likely $20 billion by 2022, according to McKinsey estimates. Looking at it from a different angle, 30% of current online commerce is new consumption, or purchases that would not have occurred in the absence of e commerce.

This amount will likely increase as online commerce proliferates in regions with untapped consumption needs. The new spending generated by online commerce is possibly due to Indonesia’s high savings rate relative to peer economies, with national savings reaching 32% of GDP, compared with 30% in Vietnam, 28% in Malaysia, and 22% on average across the Organization for Economic Co-operation and Development (OECD) countries.

One sector that appears to have benefited from the growth of online commerce is jewelry. Exports have risen in the past few years from low levels to $4 billion in 2016, comparable in value to Indonesia’s exports of copper and brown coal. McKinsey’s research shows that the increase has been fueled by local artisans, who often rely on online platforms to reach buyers.

E-commerce is currently growing at a rate twice as fast as fragmented trade, trade of consumer packaged goods (CPGs) in retail spaces, forcing many of these independents to turn to the e-commerce model. This in turn creates a sea of individual sellers eager to satisfy e-consumer demand, alongside mass retailers targeting this same demographic.

Unlike other Asian nations, Indonesians currently allow individual sellers to have market share not only relying on mass retailers to guide their purchasing decisions. This allows the online market segment to be open to any competitor determined enough to form a market impact which is not something you would usually expect to see in other mobile-first nations.

Many Indonesian cities are currently deplorably underdeveloped due to a lack of strong government and infrastructure to support retail construction. However, digital commerce’s rise in popularity exploits this challenge by allowing consumers to purchase goods previously unavailable in their specific places.

With lots of potential growth in rural and semi-rural areas, e-commerce specifically allows Indonesian consumers to source hard-to-find goods, as opposed to other nations, where rural areas would not have as high use of internet-capable mobile devices. As a matter of fact, popular Indonesian online site BliBli has more than 30% of its 2.5 million customers living in rural areas, providing goods ordered almost exclusively off mobile platforms to a population whose only form of internet access comes via mobile devices or smartphone. This procurement of specialized goods to rural areas makes Indonesia a uniquely perfect place for online marketplace growth.

Indonesia’s e-market also allows for retailers and participants in the fragmented trade space to focus on developing truly mobile-first platforms. This specifically targets the mobile user as the captured demographic, instead of simply re-structuring a desktop platform to a mobile one.

This truly mobile-first scenario also allows sellers to use smartphones to their advantage, gathering hyper-personalized data to target individual Indonesian consumers as opposed to just specific demographics or groups among Indonesia’s vast population. Mobile-first also allows for the easier entry of participants into the Indonesian digital commerce scene, with startups having the flexibility to choose what products they sell, who they want as a consumer, through market penetration via mobile apps.

With other mobile-first nations being split between different social media sites (China: Weibo/QZone/Tencent QQ; India: Facebook/Google+/Twitter; Philippines: Instagram/Snapchat/Facebook), Indonesia is unique because of its widespread use of a singular social media platform: Facebook (with more than 92% of Indonesians having a Facebook account).

With so much of Indonesians’ current purchasing power being shaped through social media recommendations, focusing on developing integration with Facebook’s platforms offers companies a unique space to potentially profit through direct CPG sales, advertising or even partnerships. Tying Facebook into popular sites such as online forums like Kaskus and Tokobagus, or even online stores like Sukamart, could lead to the inclusion of high-quality videos, product comparisons and optimized images, alongside other mobile-first features, to encourage e-market growth.

Negatives in e-commerce of Indonesia

Despite its fast growth, the e-commerce in Indonesia has still a long way to go. One of those downsides includes lacking infrastructure. Assuring reliable logistics and infrastructure 889001333500comprises the quality of infrastructure, the quality of service providers and the ease of exporting products. Indonesia’s logistics infrastructure lags behind its regional peers; according to the World Bank, it ranked 63rd out of 160 globally in 2016.

In addition, Indonesia’s online commerce efforts suffer from limited logistics providers with sufficient geographic coverage and inconsistent service quality. In 2016, the World Bank ranked Indonesia 55th out of 160 countries in logistics quality and competence, 62nd in delivery timeliness, and 51st in the ability to track and trace consignments. The country also ranks 136th and 97th out of 188 countries on cost and time for export, respectively, according to the World Bank. One logistics expert said, “There are no standards in shipment process. Different companies have different parcel sizes, different truck sizes, different pallet sizes, and different IT systems.”

There is intense pressure to improve the country’s logistics infrastructure. Increased online commerce could lead to 1.6 billion parcel shipments in 2022—six times as many as today. Our research found that players are struggling to keep up. “I’ve checked with my members, and many said they couldn’t keep up with the volume increase, especially all the manual parcel sorting required. They also don’t have enough money to continuously invest,” said a board member of a logistics trade group.

Another issue is inefficient financial system. Payment adoption and security are prerequisites for a sound and growing online commerce market. Only 49% of Indonesians have access to financial services, well below regional benchmarks Malaysia (85%) and Thailand (82%).
Moreover, 99% of transactions, by volume, in Indonesia are cash based.

Indonesian consumers are very wary of online payments, much like Americans were in the U.S.’ early online marketplace days, particularly when compared to other mobile-first populations. Many e-commerce transactions are currently paid through either direct bank transfer or bayar di tampat (cash-on-delivery), which is greatly limiting e-commerce growth through lost transactions. With Indonesian spend growing nearly 10% annually, bayar di tampat will soon be unsustainable.

As a result, Indonesia lags behind most Asian countries in payments revenue per capita; in 2015, Indonesia recorded $74 in payments revenue per capita, compared with $271 in Malaysia. Point-of-sale card acceptance remains low, as do credit card and debit card ownership and use. In 2015, Indonesia ranks last among Asian countries in card penetration and ahead of only India in transactions per capita. Creating a trusted solution to utilize online payments could lead to huge growth, with retailers both large and small being able to streamline their business flows for optimum efficiency.

Online fraud in Indonesia is the highest among the ASEAN countries, while the country ranks 70th out of 165 in cybersecurity—a clear disincentive for consumers and merchants who might pursue e commerce. Orders originating in Indonesia are 12 times more likely than the global average to be fraudulent. In July 2017, Indonesia ranked second in the list of Asia-Pacific countries most vulnerable to malware threats and second worldwide in the number of network attacks.

The success of the online commerce sector depends on the supply and quality of local talent in addition to the number of start-ups. Indonesia faces great demand for technical talent, but the country produces just 0.8 science, technology, engineering, and mathematics (STEM) graduates per 1,000 citizens, far below China (3.4) and India (2.0). In the OECD’s 2015 Program for International Student Assessment (PISA) test results, Indonesia ranked in the bottom ten of 72 countries for math, reading, and science.

And 18 of the 20 executives of leading Indonesian companies in McKinsey report said that they are not satisfied with the quality of local talent. They go to school now and learn in technology what will be obsolete by the time they graduate, said the chief of information technology of one of the largest Indonesian telecommunications companies. It is not simply increasing the number of technology graduates in Indonesia—it is beyond that.

In comparison to other countries with similar backgrounds, like Thailand, Indonesian engineers need more ‘grit’ in solving a problem and need to substantially improve their analytical rigor in problem solving. It’s very difficult to find people that are smart enough and have the right skill sets, especially in digital marketing, software engineering, operations, and finance. The biggest change after the country received foreign investment is that it suddenly had access to thousands of engineers from investor’s home country. This made a huge difference since finding local talent is so hard.

Future of the e-commerce in Indonesia

“E-commerce in Indonesia is growing rapidly but is constrained by limited access to technology, a lack of technological savviness, and the absence of credit cards.” —Agung Nugroho, Cofounder and Chief Operating Officer, Kudo.

Indonesia currently presents a curious paradox as its digital citizens are among the world’s most active with vibrant startup ecosystem. However, overall the country lags in embracing the benefits of modern technology. Indonesian ICT infrastructure is weak and digital usage is not even within and among various business sectors. Indonesia's connected citizens are tech savvy, but Internet penetration is low. In short, Indonesia has a long way to go in the digital age.

The country can realize an estimated US $150 billion in growth—10% of GDP—by 2025 if it embraces digitization. Digital technologies offer ways to boost productivity across sectors and expand participation in the economy to all segments of the population.
The digital revolution is driven by 4 types of technologies that have advanced in recent years to significantly increase their impact on the global economy: Mobile Internet: Cloud technology: Internet of Things (IoT )

Big data and advanced analytics

The 4 disruptive technologies are intertwined and complementary. And taken in combination, they are the keys to accelerating the impact of digital in Indonesia. Indonesia has experienced increasing adoption of each, effectively laying a solid foundation for future investments and productivity gains. Despite Indonesia's progress in each of the four disruptive technologies, the country still has a long way to go.

As we established before, one of the main contributors to the rapid e commerce growth in Indonesia was availability of cheap mobile data. Mobile data in Indonesia is very affordable, costing just half of what consumers in some ASEAN neighboring countries pay. However, quality in terms of the average connection speed and Internet bandwidth can be very low. Indonesia’s size and geographic complexity aggravates the challenges. Even though Indonesia performance has dramatically improved in the recent years with the introduction of 4G, there are still opportunities to further improve Indonesia’s infrastructure in the near term.

With a large portion of Indonesia’s traffic going to international sites such as Facebook and Google, international bandwidth is an important consideration for planning Indonesia's digital future. According to Telegeography, Indonesia’s international capacity is limited, with only 0.01 megabytes per second (mbps) per user compared with Singapore with 2.74 mbps per user.

Connectivity is also concentrated, with most lines going through Singapore—a situation that leads to less than competitive pricing. 40% of landing points are located in just three cities (Batam, Dumai, and Jakarta). Data traffic in Indonesia is expected to rise six times by 2020, placing pressure on the capacity of the domestic network —that is, the linkages through submarine and overland fiber optic cables.

In order to raise fixed broadband penetration beyond the current low level of 2.5%, it is vital to expand the availability beyond the greater Jakarta area by strengthening connectivity in western and central Indonesia and expanding into eastern Indonesia. The fiber optic network needs to be increased by the timely execution of the 35,000-kilometer Palapa ring project, an undersea and terrestrial cable network spread from Sumatra to West Papua.

Furthermore, Indonesia’s last-mile 4G coverage was at only 23% in 2015. Growing e-commerce, mobile entertainment, and gaming content have increased the need for speed for the 73% of Indonesia’s users that access the Internet through mobile broadband. The country must enhance 4G/ LTE infrastructure outside Java to enable users to take advantage of the falling handset prices and increase 4G penetration beyond the 2015 level of 7.6%. Operators have already started moving aggressively in this direction.

In addition, recently Future Commerce Indonesia 2019 event was held. With the theme "Shaping the Future of Commerce", Future Commerce Indonesia 2019 brought together leading brands and retails from cross-industry, cross-technology, with innovative tech enablers and start-ups to disrupt and shape the future of commerce in the current digital economy. This quantum growth is being driven by digital commerce - the new ways of buying, selling and marketing goods and services through digital channels that are largely replacing the old ways of doing business online.

References

  • https://cdn1.katadata.co.id/media/files/2018/09/18/2018_09_1811_54_16_349a7478e48135c26c8c340b3a10359f.pdf
  • https://www.entrepreneur.com/article/331838
  • https://jakartaglobe.id/context/indonesias-ecommerce-market-larger-than-estimated-consumer-habits-changing-study
  • https://www.investasian.com/2016/09/28/indonesia-e-commerce/
  • https://www.mckinsey.com/~/media/McKinsey/Locations/Asia/Indonesia/Our%20Insights/Unlocking%20Indonesias%20digital%20opportunity/Unlocking_Indonesias_digital_opportunity.ashx
  • https://www.economist.com/business/2019/01/12/indonesia-binges-on-e-commerce
  • https://techcrunch.com/2016/07/29/indonesia-will-be-asias-next-biggest-e-commerce-market/

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Indonesia E-Commerce. (2018, May 13). Retrieved from https://phdessay.com/indonesia-e-commerce/

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