E-commerce expansion primed for Indonesian market

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As smartphones become more commonplace in Indonesia, apps are enjoying a surge in popularity, suggesting that e-commerce – for both goods and services – is filling market voids and strengthening its economic foothold.

Online trading and transport apps in particular are generating interest, offering a solid foundation for other start-ups, and attracting international players and financiers to the country.

However, technology companies will be looking to further improvements in related services, such as logistics, and changes to foreign investment regulations to support continued expansion.

The era of the app

Since launching its mobile app in early 2015, Go-Jek, the Indonesian two-wheeled motorbike taxi service, has seen its market value rise as high as $400m and the number of registered drivers jump from 500 to 200,000.

Also seeing the opportunity in the market, in May Malaysia’s Grab expanded into Jakarta, launching its GrabBike service, before introducing a car-based service several months later. The company is now active in at least five cities around the country, with plans to expand further in the coming year.

The scale of the popularity of e-services was evidenced by the major backlash that Ignasius Jonan, minister of transport, faced last December when he attempted to ban transport apps like Go-Jek. Amid a public outcry and #SaveGojek trending on Twitter, the government quickly reversed its decision.

Voicing his support for ride-hailing apps, President Joko Widodo told local media, “Innovation among the younger generation should not be stifled. Applications such as Go-Jek exist because they are in demand.”

The growing use of ride-hailing apps signals a wider expansion under way across the country in e-commerce and mobile transactions.

According to the Indonesian eCommerce Association, the country’s online market is projected to triple between 2014 and 2016 to reach Rp283trn ($20.8bn).

While online sales represented around 1% of all retail sales in Indonesia in 2015, research firm eMarketer expects this share to grow to 4.4% by 2019, with e-commerce spending forecast to rise from $3.2bn to $10.9bn over the period.

Major players moving in

With a population of around 250m, Indonesia’s e-commerce potential has captured the attention of global technology and investment giants.

In late January US-based e-commerce platform eBay confirmed plans to open an office in Indonesia, following in the footsteps of Twitter, which has had a base in the country since March. The move will see eBay build on its local partnership with state-owned telco Telkom, through which it operates the online shopping portal Blanja.

For its part, the Chinese internet search company Baidu announced plans to boost investment in Indonesia, where it operates the MoboMarket app store with more than 500,000 products available for download.

Major new domestic players are also entering the e-commerce scene. MatahariMall.com launched its operations in early September with $500m in backing from Indonesian real estate developer Lippo Group. Describing itself as the Alibaba of Indonesia, the firm said it hopes to become a driving force for e-commerce in the country.

Hadi Wenas, the company’s CEO, suggested the site was created to mimic a brick-and-mortar shopping experience.

“Just like an offline supermall, you enter, walk around and shop by floor. Each floor focuses on different categories,” he told media at the launch.

Leading start-ups in Indonesia are also benefitting from international venture capital interest. Go-Jek, for example, attracted $6m in seed funding in mid-2014, with another $15m raised from US-based Sequoia Capital in April of last year.

Further investment in the industry is likely to be spurred by the easing of foreign ownership limits in the e-commerce segment. Previously included on the country’s negative investment list, the government recently ruled to allow up to 33% foreign ownership of e-commerce ventures.

More to be done

However, some obstacles to sector growth remain. While internet connectivity is rapidly growing, it is coming from a smaller base than other countries in the region.

The number of internet users in Indonesia reached 73m in 2015, or approximately 29% of the population, according to the Ministry of Communications and IT, significantly less than Malaysia (67.5%), Thailand (55.9%) or the Philippines (43%).

A fragmented logistics landscape and underdeveloped payment infrastructure also present hurdles to expansion, with just 6% of Indonesians holding credit cards, according to a 2014 report by UBS.

App developers will need to keep the characteristics of the market in mind when planning expansion. For example, a targeted approach is likely needed to attract Indonesia’s traditionally risk-averse and brand-loyal shoppers. A survey by McKinsey last year found that 63% of Indonesian consumers only buy products from brands they already know, suggesting word of mouth may be an important tool for growing local market share.

E-commerce solutions are increasingly being used to bridge gaps in Indonesia’s infrastructure, with some start-ups helping firms extend their reach to rural areas.

Start-ups looking for innovative ways of reaching rural customers are also employing a tactic known as assisted e-commerce, which uses technology to connect local stores with product distributors, helping to minimise geographic challenges and overcome low penetration of credit cards.

Kudo, for example, which was founded in early 2014, offers online shopping through physical point-of-sale kiosks in public places.

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