Indonesia's tech start-ups' role in the economy

 

The innovative tech scene in South-east Asia has garnered international attention. A jolt occurred in the international tech industry in early 2018, when the Singapore-based ride-hailing app Grab announced that it would take control of the Southeast Asian operations of its US-based competitor, and global first-mover, Uber. The purchase, which gave Uber a 27.5% stake in Grab, put the spotlight on the increasing competitiveness of tech start-ups across the region. Similar to larger companies, many of the 11 firms in South-east Asia that have achieved “unicorn” status – that is, start-ups valued at more than $1bn – have had to adapt their businesses in light of the Covid-19 crisis. In early April 2020 multi-service apps such as Grab and Indonesia’s Gojek disabled the motorcycle taxi option for customers in Jakarta as part of measures to stop the spread of the virus. However, other services, such as food delivery, remain available, as more people stay home.

Medical technology (medtech) companies are also playing an increasingly important role during the pandemic, as are e-commerce sites and online education platforms for students learning from home while schools are closed.

Leading Example

Alongside its wealthy neighbour Singapore, Indonesia has proved to be fertile ground for entrepreneurs. Home to over 260m people, it is the most populous country in South-east Asia, and its vast economy – with GDP upwards of $1trn – is partly fed by a vibrant start-up scene. Indonesia has produced four unicorns and one “decacorn”, valued at above $10bn, in Gojek. A report by Google-Temasek estimates that Indonesia’s digital economy will grow to $100bn by 2025, largely powered by existing unicorns and emerging start-ups.

One of the reasons for Gojek’s rise to prominence is its ability to adapt. Having started in 2010 as a motorbike ride-hailing service to help beat traffic congestion in Jakarta, it has evolved into a super app, providing a wide range of services, such as food delivery, grocery shopping, ticketing and payments. Its effective adaptability has attracted the interest of major financial backers, which include Google, Temasek Holdings and SoftBank Group.

Fertile Ground

Gojek’s track record has had a knock-on effect on the country’s start-up scene, providing investors with the confidence to take stakes in other companies in the archipelago. For example, in late 2018 Tokopedia, an e-commerce firm worth an estimated $7bn, raised $1.1bn in its series G round of funding. China’s Alibaba and Japan’s SoftBank were among its investors. Meanwhile, travel aggregator Traveloka has raised funds through US giant Expedia, among others.

Despite the natural fragmentation of logistics chains in a country made up of over 17,000 islands, successful Indonesian start-ups have managed to thrive by harnessing technology to allow previously isolated businesses and individuals to access new customers and markets. For example, e-commerce platforms Tokopedia and Bukalapak use a customer-to-customer marketplace model, which results in their products being delivered by local sellers and small and medium-sized enterprises (SMEs), opening up new economic opportunities. Gojek, meanwhile, estimates that its ecosystem directly or indirectly supports the livelihoods of 5m-7m people. Its food delivery app, GoFood, sources at least 80% of its orders from independent local stores, ensuring that small businesses benefit as well.

Although much of the success of Indonesian unicorns is a result of grassroots innovation from creative, young technopreneurs, the authorities have lately become more focused on improving the digital ecosystem and accelerating the development of the digital economy. For example, they have introduced measures aimed at boosting the number of start-ups in the country, as well as issuing orders to ministries to support the growth of SMEs and provide grants to incubators. In April 2019 the Ministry of Communication and Information Technology inaugurated the NextICorn Foundation, which aims to provide opportunities for start-ups and facilitate the creation of additional unicorn companies in the future.

Nevertheless, more work is still needed to improve nationwide digital infrastructure and boost smartphone penetration. In terms of governance, the authorities must tread a fine line between over-regulation and addressing concerns about intellectual property and data security.

Growth Needed

Although less developed than Indonesia, the Philippines has had some success in terms of the growth of its start-ups, and currently boast one unicorn, in the form of real estate company Revolution Precrafted, which builds prefabricated homes across the country. The company is capitalising on the country’s need for affordable and high-quality housing, as the housing backlog affects some 5.7m people. While the demand is clear, its founder, Robbie Antonio, told OBG that some developers would find it difficult to follow in his firm’s footsteps because of difficulties accessing credit from domestic banks.

With a relatively young and aspirational population of more than 100m people, and an economy that is largely consumption driven, there is an argument that the Philippines underperforms in the area of start-up tech companies. Philippine start-ups raised a combined total of $304m in funding in 2018, a figure dwarfed by the $4.07bn raised by start-ups in neighbouring Indonesia the same year.

In part, this could be the result of the power of large family-run corporations in the Philippine economy, where the digital space is already dominated by the two incumbent telecoms firms that operate everything from e-wallets to internet-ofthings business solutions. This has a discouraging effect on risk-taking and means that new players are often picked off or muscled out of the market at an early stage. Regulations have also had a stifling effect in some areas. For example, local motorbike ride-hailing service Angkas was forced to suspend operations several times in recent years due to various resolutions and directives from the government.

However, some positive policy measures have been implemented. In 2016 the government partnered with the private sector to establish the QBO Innovation Hub, aimed at helping small businesses grow. In addition, the Innovative Start-up Act became effective in November 2019, providing tax breaks and removing registration barriers for start-ups. The authorities have also said they plan to establish a one-stop shop, known as the Start-up Business One-Stop Shop, to assist start-ups with registration. While such measures are indeed encouraging, time will tell whether they will contribute to the emergence of new unicorn companies in the country.

Catching Up

Elsewhere in the region, Malaysia offers significant potential due to its strong education system, large economy and well-developed infrastructure. Although it has yet to see its first unicorn emerge, there is a general view that the country is ready for growth in the segment.

One high-potential area in Malaysia is medtech, where entrepreneurs are harnessing technology to improve access to health care across the country. Naluri, for example, is a health and wellness app that provides coaching, and raised $1.5m in a series A round held in early 2019. Another prominent Malaysian medtech company is BookDoc, which created an app that connects individuals with medical professionals, and already has a presence in Singapore, Hong Kong and Thailand. The government has also introduced measures to support start-ups in the country, including the Digital Free Trade Zone, developed by the Malaysia Digital Economy Corporation, which aims to increase the exports of Malaysian SMEs through e-commerce.

Another country that offers potential in terms of start-ups is Myanmar. It was only a few years ago that internet connectivity was out of reach for most of the population, but that changed when the government liberalised the telecoms sector, a move that saw SIM card prices fall from $150 in 2013 to $1.50 in 2015. From a very low base, Myanmar now boasts a smartphone penetration rate that is among the highest in the world, at 80% as of 2018. In addition, liberalisation has brought competitiveness to the sector, as consumers are able to choose from four operators – Telenor, Ooredoo, MyTel and MECT el.

This shift has contributed to a boom in the number of start-ups in the country. Although none have reached unicorn status, there is significant room for growth, and many start-up firms are attracting the interest of major financiers. For example, freelance platform Chate Sat raised six-figure funding in 2018; logistics firm Kargo raised $800,000 in its seed round in May 2019; and waste-management company RecyGlo attracted $150,000 in February 2019 as part of a Norwegian accelerator programme, demonstrating the scale of interest in the country’s start-up scene. However, there are still significant barriers to development. These include inadequate access to capital – which is partly caused by Myanmar still being mainly cash-based – and a lack of reliable power, which limits the proliferation of techbased services and solutions.

Regional Potential

It is clear there is significant potential for growth in the number of Southeast Asian start-ups. A number of factors work in the region’s favour, notably that the combined population of ASEAN surpasses 630m, making it one of the largest global markets. Furthermore, the region is home to a young workforce, with approximately 60% of the population under the age of 35 and increasingly well educated and tech savvy.

However, for that potential to be fulfilled, certain improvements need to be made. Beyond providing support in the form of tech incubators, governments could play a more prominent role in supporting startups, notably by making it easier for firms to invest in education. Compared to other parts of the world, governments across South-east Asia typically spend a low percentage of GDP on education, and national curricula and teaching practices have often failed to keep pace with the global wave of technological innovation. “The biggest obstacle for tech start-ups that are seeking to enter other ASEAN markets is the limited availability of talent in engineering, product management, data science and design,” Nadiem Makarim, founder of Gojek and current minister of education and culture, told OBG. “Across ASEAN we do not have open borders that allow us to admit engineers and product managers from all over the world. Therefore, these new skill sets are in short supply. As such, talent needs to be imported in order to effectively transfer knowledge to the local level.”

Although the region is made up of countries that are diverse in religion and culture, there are also countless similarities in terms of consumer trends and consumption patterns. As governments look to invest in infrastructure upgrades, reducing the barriers to cross-border trade could provide a significant boost for start-ups that are looking to capitalise on demand across South-east Asia. “Countries in the ASEAN region need to continue to push for the harmonisation of trade regulations, including clearance and certification requirements for goods and services,” Rachel Barger, COO of SAP Asia Pacific Japan, told OBG. “The flow of goods and services should also be digitalised through initiatives such as the ASEAN Single Window and the ASEAN Agreement on E-Commerce, as this will lay the foundations for dynamic growth.”

New Industries

South-east Asia has seen rapid technological advancements that have changed the way businesses operate. It was not long ago that 3G internet connectivity was the exciting newcomer to the region, but that has shifted onwards to 4G, which currently dominates the market. Many countries are already looking to roll out 5G technology. The GSM Association expects that Asia will host around 675m 5G connections and roughly 4.8bn SIM connections by 2025. The ultra-fast connections that this next-generation technology will bring will open up exciting new opportunities in the digital economy and beyond in the years ahead.

Medtech, which provides solutions to an industry that has historically been inefficient and expensive for the governments of developing countries with large populations and infrastructure gaps to maintain, is especially promising. For example, remote diagnostic tools can be used to monitor and advise patients in areas where it would otherwise be expensive and time-consuming to visit a doctor.

Of the region’s current crop of unicorns, four operate in e-commerce. When looking to potential industries for the next generation of regional unicorns, it is clear that this area is poised for further growth. In its “e-Conomy SEA 2019 report”, Google-Temasek estimated the e-commerce market in South-east Asia to be worth $38bn in 2019, and that this would grow to around $150bn by 2025, largely because of increasing consumer spending as the middle class continues to expand.

Furthermore, new travel apps may take off after the pandemic passes and international travel resumes, while additional agri-tech start-ups are likely to emerge as the crisis’ disruption of supply chains brings greater focus on food security.

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