Click to purchase: The e-commerce segment is widely considered to be a key driver of growth

With one of the fastest rates of internet uptake in the world and the largest economy in South-east Asia, Indonesia has witnessed the rapid expansion of its e-commerce segment over the past decade. According to a 2015 report published by the Indonesian E-commerce Association (idEA), between 2011 and 2015 online sales in the country expanded at a compound annual growth rate (CAGR) of nearly 69% for the period. In early 2016 Indonesia’s Ministry of Communication and Information Technology (MCIT) announced that the total value of the e-commerce segment was expected to be worth over $130bn by 2020, making it one of the region’s largest.

By comparison, at the end of 2014 the nation’s e-commerce market was valued at an estimated $12bn. The segment has so far attracted the bulk of recent investment in Indonesia’s burgeoning ICT sector, with 33 local e-commerce firms securing financing of various sorts in 2015, compared to just six financial services technology firms, the latter of which represented the next-largest investment destination in the technology sector. “There is huge potential here for e-commerce, driven by Indonesia’s large population and booming economy,” Heru Sutadi, the executive director of the Indonesia ICT Institute, told OBG. “Given these factors, plus the government’s ongoing support of the ICT segment more generally, the outlook is bright.”

Challenges to Growth 

At the same time, Indonesian e-commerce providers and customers alike currently face a number of hurdles. To date, foreign investment has been largely barred in areas related to e-commerce, which has helped local start-ups build strong positions in the market, but this is increasingly considered to be an obstacle to future market development. For example, the current lack of international-standard infrastructure for payments and deliveries could well be corrected by targeted international investment and foreign expertise. More broadly, e-commerce service providers face many of the same issues currently playing out across the technology sector as a whole. The regulatory framework has improved dramatically in recent years, but by most accounts remains outdated and burdensome for small and medium-sized enterprises (SMEs), in particular. A lack of tech talent has also had a negative impact on the sector’s growth. Additionally, while online shopping has become increasingly popular among Indonesia’s growing middle class in recent years, offline purchasing remains the norm, particularly among the nation’s large low-income population.

Problem Solving 

The government is working to address many of these issues. In February 2016 the MCIT introduced its long-awaited e-commerce roadmap, which included 31 initiatives aimed at supporting the ongoing development and modernisation of the country’s e-commerce industry. Major components of the strategy include plans to encourage the development of new logistics facilities across the country; ramp up financing options for start-ups and SMEs; improve consumer protection and cybersecurity; provide better technology-related training and education; and institute a raft of incentives aimed at facilitating the continued development of the sector. Furthermore, in May 2016 the Indonesia Investment Coordinating Board (BKPM) announced that it had finalised guidelines that would allow some foreign e-commerce investment in the country in the near future. According to local media reports, the new regulations will allow 100% foreign ownership of e-commerce businesses for firms that either invest The country’s e-commerce segment is expected to be worth over $130bn by 2020, making it one of the region’s largest. a minimum of Rp100bn ($7.3m) or create 1000 jobs in Indonesia. The new investment legislation was still in development as of mid-2016, with details about implementation and scope still being hammered out. “This should really be a national program not limited to the government, and designed to push the private sector,” Darmin Nasution, the coordinating minister for economic affairs, told local media.

In Figures 

Reliable, up-to-date e-commerce data is not widely available in Indonesia. The lack of comprehensive numbers is widely considered to impede planning and to be a key hurdle to the sector’s development. Given these circumstances, statistics reported here have been compiled from a variety of sources. (merakisalonnc.com) According to idEA, Indonesia has routinely posted the strongest online sales growth among all Asia-Pacific countries over the past five years. In 2011 the nation saw estimated e-commerce sales growth of 104.5% compared to 103.7% in China and a regional average of 37.2%. Since then Indonesia’s e-commerce sales growth has fallen off on an annual basis, though at a slower rate than many of its neighbours. In 2014 estimated e-commerce sales growth fell to 45.1%, compared to 51.2% in China, 27.1% in India, 7.1% in Japan and a regional average of 29%.

According to forecasts published by idEA in late 2015, Indonesia was expected to once again take the top spot in the region in 2015, with 37.2% e-commerce sales growth for the year, compared to 30.6% in China and 20.9% across the region at large. In 2016 and 2017, meanwhile, the domestic segment was forecast to post growth of 26% and 22%, respectively, while the region as a whole was expected to see expansion of 16.7% and 14.2%. Similarly, forecasts by the US-based consulting firm Frost and Sullivan indicate e-commerce segment CAGR of 31.1% in Indonesia during the period 2016-19. Recent reports by the Asian Development Bank (ADB) in conjunction with the UK-based international research body the Internet Service Providers Association (ISPA), show that in 2015 the e-commerce market was worth $18bn, with around 37m consumers purchasing products online. This compares to $12bn and 27m consumers in 2014. For 2016 the ADB and the ISPA forecast that the national e-commerce market could reach 49m consumers and be worth $25bn in total.

Market Framework 

The e-commerce environment consists of a wide range of firms, including online marketplaces where consumers sell various products directly to other consumers; online stores, akin to Amazon in the US and UK, where businesses sell products to consumers via a branded digital interface; and so-called “daily deal” websites, such as GroupOn and LivingSocial. Key local players that operate in the second category, namely business-to-consumer sales, include Bhinneka, which specialises in electronic goods; Tokopedia; Blibli; and MatahariMall, the latter of which is controlled by the real estate development company Lippo Group. Most of Indonesia’s top e-commerce firms are either expanding their operations or raising financing to develop their operations in the future, in order to keep pace with the rapidly growing market. Both the Lippo Group’s MatahariMall and Bhinneka announced plans to list shares in an initial public offering in the coming years. Similarly, in April 2016 Tokopedia raised $147m in a round of financing led by SoftBank Internet and Media, a Japan-based investment firm. “I think the timing is right for Indonesian players to actually realise basically decent valuations,” David Rimbo, managing partner for transaction and advisory services at EY’s Indonesia office, told media in mid-2016.

A handful of major international players have worked to gain a toehold in the domestic market as minority shareholders in domestically owned businesses. For instance, US-based e-commerce marketplace eBay currently operates through the local marketplace Blanja, which the firm co-founded in conjunction with Telekomunikasi Indonesia, the state-owned telecommunications operator. Meanwhile in January 2016, with an eye towards the MCIT’s announcement that foreign investment in e-commerce would be allowed under the ministry’s new roadmap, eBay launched a representative office in Jakarta. Meanwhile, Rocket Internet, a Berlin-based ICT incubator, has issued funding to two local e-commerce sites, Lazada and Zalora.

Driving Expansion 

The MCIT’s e-commerce roadmap, which was launched in draft form in early 2016 and is expected to span a five-year period, covers a wide range of topics related to e-commerce, including financing, taxation, logistics, consumer protection and digital security. While the roadmap lays out a wide range of specific policy points and suggested legislative changes, the MCIT will coordinate with other government entities to implement and enforce the roadmap. While this strategic plan includes a provision for allowing foreign investment in the sector, the actual rules enabling this to take place will be drawn up and introduced by BKPM.