With the fourth-largest Facebook population, more than 42m users and Jakarta ranked the number two Facebook city, Indonesians are active online. The country is number five in terms of Twitter accounts, behind the US, Brazil, Japan and the UK, but its capital tweets more than any other city, according to Semiocast. About one in four Indonesians tweet, the highest ratio in the world. In many ways, the country is one of the most promising markets for information technology (IT) on the planet. It is quickly accepting and adopting developments. At the same time, industry leaders know the country must move beyond where it is today and make more substantial investments in technology so that the sector can develop in more meaningful and profitable ways. Indonesia is now focused on getting beyond games and chat and moving towards building capacity and domestic capabilities. “I am not happy we are second or first on Facebook,” Setyanto Santosa, the chairman of the Indonesian Information and Communications Technology Society (Mastel), an industry organisation, told OBG. “It’s only entertainment.”
ARCHIPELAGO REALITIES: The problems with Indonesian technology have a lot to do with the geographical realities in the country, the same realities that affect most of Indonesia’s infrastructure and its development in general. As a poor and populous archipelago, and one that has over the past 15 years gone through a major economic crisis and a long period of political uncertainty, the basics necessary for an IT revolution simply are not there. Not everyone is connected to the internet, and when they are, they often do not have access to broadband speeds or the money to take full advantage of it when it is available. The technological achievements that get most of the headlines are those taking place in the major urban centres.
Internet penetration in Indonesia stands at about 22%, according to Internet World Stats current as of June 2012, which is lower than Vietnam (33.9%), Thailand (30.0%), Malaysia (60.7%), South Korea (82.5%) and Japan (79.5%). The Asian average is 27.5%, and the world average is 34.4%. In the World Economic Forum’s Networked Readiness Index 2012, Indonesia was ranked 53rd, and importantly its infrastructure environment rank was 74, the political and regulatory rank was 72, the government usage rank was 82 and the individual usage rank was 87. The country’s overall score was lower than India’s, Malaysia’s and China’s, though it did place higher than Vietnam and Thailand. On the UN’s E-government Readiness Index 2012 Indonesia was ranked 97th, behind Albania, Azerbaijan, the Dominican Republic, Thailand and Vietnam.
Indonesia does not have the necessary basic network infrastructure, such as backbone connections and leased lines, and when these connections are available, they are usually expensive. It is costly to plug into the national network and costly to get onto the global grid. For example, just a few years ago, a 2-km, 2-megabit-per-second (Mbps) leased line cost more than four times that of a similar line in the EU. Entrepreneurs have relied heavily on the use of Wi-Fi networks in order to keep costs down and to bridge the infrastructure gap. The proper lines have not been available or not available at a competitive price, so they have come up with an interim solution by using the wrong technology to get access to the backbone. While such solutions have worked and allowed for broadband-like connections in more remote areas, it is unstable, not suitable for critical applications and very expensive.
EXPENSIVE, SLOW: The costs and consequences of poor, basic infrastructure show up in the numbers. According to network diagnostics applications assessor Ookla’s Net Index, Indonesia ranked number 155 globally in terms of download speeds, at 2.25 Mbps, in tests conducted on November 30, 2012. In Padang download speeds were 1.41 Mbps. In terms of cost, Indonesia is also one of the most expensive countries on the list. It was ranked 60th out of the 64 economies that were rated by Ookla, with an Mbps price of $24.69. In Singapore the price was $4.38 (ranked 28), $3.65 in China (ranked 24) and $3.34 in Thailand (ranked 19).
Government-led efforts to improve basic infrastructure have not gone as planned and may not actually in the end do enough. The Palapa Ring, a fibre-optic backbone that was to cover all the main regions of the archipelago, is behind schedule and does not yet cover eastern Indonesia. The project involves the installation of 35,280 km of fibre-optic submarine cable and 21,708 km of fibre-optic underground cable. But even when finished, now scheduled for 2014, the main problem of cost and local access issues could still remain, as the ring itself does not deal with local issues as much as it does with linking regions. As of 2011, only about 1.13% of the population had fixed broadband internet, according to ITU data. “I think the big problem in Indonesia is the internet,” Andre Mantiri, the editor-in-chief of computer magazine Chip’s Indonesian edition, told OBG. “The bandwidth is not so good.”
CLONES & COPYCATS: Another concern is the lack of local investment in technology. Successful tech start-ups have been few and far between, and foreign investors show little interest in financing Indonesian technology entrepreneurs. International capital finds many of the ideas presented in Indonesia to be little more than clones of Western sites. The top 10 Indonesian tech start-ups as rated by The Wall Street Journal are mostly copycat endeavours. The list includes an Amazon-like site, a local Facebook, a business directory and an Indonesian-language news site. Few of the homegrown leaders are in the top 10 in terms of visits by Indonesians. The first eight are all foreign, including Facebook, Google and Twitter. Only numbers nine and 10 are local: detik.com, a news portal founded in 1998 and ranked third by The Wall Street Journal, and Kaskus.com, a Indonesian-language online community begun in 1999 and ranked first by the newspaper.
CREATING CONFIDENCE: E-payments are also a serious issue, and the lack of relevant development and services is having a real impact on the internet, preventing entrepreneurs from “monetising” their ideas. Only about 4.5% of Indonesians who qualify for credit cards actually have them, while the ATM network remains underdeveloped. Concerns about fraud, the absence of standards and a high level of regulation have made it difficult to develop a large-scale system for conducting business online. Many online merchants accept bank transfers, and 12 institutions issue e-money, including Bank Mandiri, telecoms operator Indosat and leading mobile operator Telkomsel.
But people still worry about being unable to obtain a refund if a product they have purchased online is damaged or simply the wrong item. In a survey published in August 2012 by DailySocial, an Indonesian technology research company, and Veritrans, an Indonesian e-payment company, it was estimated that only $900m, or 0.7% of all retail sales in the country, were conducted over the internet in 2011. The survey also found that only 6.5% of Indonesian internet users engage in e-commerce, compared with 28% in China and 71% in the US.
DEVELOPING MANUFACTURING: Progress in the local development and manufacturing of more technologically advanced products and the local development and production of software has been decidedly slow and inconsistent over the years, leaving Indonesia as a country with a very weak high-tech foundation. Imports are one reason for the paucity of activity on the ground. The country has admirably pursued a low-tariff barrier policy, with average tariffs dropping from above 18% in the late 1980s to about 5% now, and has worked to eliminate non-tariff barriers. But these liberal policies have made the country a prime target for exporting economies like China, and the result has been a flood of low-priced goods that crowd out and discourage domestic Indonesian research and capital raising efforts. In a low-tariff environment, there are also few incentives for foreign companies to manufacture locally. It is easier for companies in Malaysia, Singapore and especially China to make products in their home markets and ship them to Indonesia. A myriad of other factors have stood in the way of the growth and development of a high-tech industrial base, and these include poor infrastructure, the lack of English-language skills, the difficulty of acquiring factory sites, currency fluctuations, the lack of intellectual property protection – Indonesia is on the US Trade Representative’s priority watch list for copyright violations – and corruption.
EDUCATION & R&D: Education has been a particularly problematic bottleneck. While Indonesia is a fairly literate country, with 92% of individuals older than 15 able to read basic materials, its schools have not been preparing many people for technology-related fields. Enrolment in tertiary education has been low. According to UNESCO, the gross enrolment ratio for tertiary education was 23% in 2010, compared with 46% in Thailand, 26% in China, approximately 40% in Malaysia and 95% in the US. In a 2006 study it was found that half of the workforce had just a primary education or less. Overall, the country spends about 1.3% of its GDP on education, the same as Myanmar and less than the Philippines (2.4%), Cambodia (2.5%), Thailand (3.9%), Singapore (3.9%) and Malaysia (5.4%).
Indonesia has also severely underinvested in research and development (R&D), with total R&D spending making up less than 0.5% of GDP. In Singapore that number is 2%, and in Korea it is 2.5%. In fact, historically Indonesia has invested less as a percentage of GDP in R&D than even Mongolia, Thailand, Vietnam and India. Local firms have never been much inclined to invest in technological development. The state-owned enterprises are inefficient, have larger policy-driven roles and obligations and are subject to political interference, while the private sector tends to be relatively concentrated and led by slow-moving, traditionally structured conglomerates. Foreign firms have historically looked on the country as more of a market than a base and have been reluctant to transfer technology there.
The government has a poor record when it comes to R&D. Its large showcase projects prior to reformasi, the immediate post-Suharto era, were usually failures, the best-known being the IPTN airplane programme, which cost an estimated $3bn and never produced anything commercially viable. The government has simply never been good at picking winners. Private manufacturers remain primarily at the lower end of the high-tech sector. Domestic electrical goods makers, such as the Maspion Group and Star Cosmos, tend to focus on products such white goods and other home appliances. Foreign companies, joint ventures and a number of local companies do make higher-end products, but will often import the critical components and mostly do assembly work within Indonesia. High-tech exports as a percentage of total are about 11%, much less than the East Asia and Pacific developing country average of 28.7%, according to 2010 IMF statistics.
BRIGHT FUTURE: However, the local technology sector is rapidly changing and it is likely that R&D will increase, a high-tech manufacturing base will emerge and a critical mass will begin to form. It is important to note that while IT may not be as big as it is in other countries, it is nevertheless sizeable. As of 2011, the ICT sector already represented 1.6% of the economy, which is considerable considering that oil & gas is only 4.51% of the economy and footwear 2.08%. It is also worth noting that Indonesia is a large country. While some people in the remote regions of the archipelago may not have access to broadband or even to the internet, places like Jakarta, a city of 10m (twice the population of Singapore), are well served.
In recent years, the growth has indeed been exponential. In 2009 only about 28% of Indonesians had exposure to the internet, compared with 100% for television, 69% for newspapers and 56% for radio, according to a 12-city study. By 2012, the internet jumped to the number two spot, reaching 57% of the people surveyed. The survey, conducted by Yahoo! and TNS Net, also found that the internet was beginning to become a force in second-tier cities and was being rapidly adopted by older people – it was no longer just a toy for the rich and young in the capital city. Internet penetration in 2012 was 63% in Jakarta, double the level in 2009. In Palembang, a city of 1.5m in south Sumatra, internet penetration hit 64%, four times the number in 2009. While 89% of 15-19 year olds surveyed use the internet, 54% of those aged 30-34 do, triple the 2009 rate, and 52% of those aged 35-39, quadruple the 2009 rate.
International Data Corporation (IDC), an ICT analysis and advisory firm, is optimistic about the prospects for IT in the country. Economic growth drives increased usage, higher penetration rates, and demand for more advanced products and services, and with Indonesia as one of the fastest-growing economies in ASEAN, technology-related spending is seen as exceptionally strong. IDC estimates that IT spending in the country hit $12.9bn in 2012, up 18% year on year. The firm also believes that a number of significant trends will take hold as the country enters the “transformative” stage of IT development. Cloud computing is set to take off, with 50% of end users implementing or planning to implement a cloud solution within the next 18-24 months, while the drop in prices, especially of smartphones and dongles, the latter now about $25, is making data access finally affordable for most Indonesians.
MARKETING PUSH: At the same time, huge marketing efforts by major international manufacturers, especially Samsung, are driving the market. The Korean company introduced the Galaxy Note 10.1 in September 2012, at the time claiming 47% of Indonesia’s tablet market, and people camped out overnight to buy the device. IDC sees a sort of virtuous circle developing. As feature phones are dumped in favour of smartphones and tablets, data demand will increase, investors and corporations will commit more capital to the sector, and people will be still further attracted to the products and more inclined to utilise more bandwidth. The numbers seem to support that thesis. GfK, the German market research firm, reports that tablet sales in the country doubled from the last quarter of 2011 to the first quarter of 2012, largely as a result of improved connectivity. The firm also reported in November of 2012 that consumption of laptops and tablets in Indonesia reached 2.76m in the first three quarters of 2012, which marked a 37% increase over the same period in 2011 and brought in revenue totalling nearly $1.24bn. It also reported that smartphone sales rose 56% in the 12-month period ending on September 17, 2012.
Strategy Analytics’ Emerging Markets Communications Strategies argues the lack of wired infrastructure will ultimately be positive for the country. It also anticipates a “wireless revolution” as mobile operators and service providers work to meet demand from an increasingly technologically aware population, but one that is still relatively poor and spread out over 17,000 volcanic islands. In fact, the consultancy believes that the Indonesian model of high-volume, low-priced access, as opposed to the higher-margin, high-value-added strategy that dominates many more advance markets, may be a good template for developing countries and more appropriate for them.
TIPPING POINT: Indonesia seems to be reaching the proverbial tipping point. There is enough traffic and enough interest to make what was all but impossible just a year ago now very much a reality. Consider e-payments. To be sure, the payments business is fragmented and undeveloped, but entrepreneurs are working to fill this market void and are having some success. Multiply, for example, changed from a social networking site to an e-commerce site in August 2012.
It found it could not compete with Facebook and already had members who were using the site to sell products. Significantly, it innovated. Seeing the problems of e-payments, Multiply decided to offer to refund money to customers who do not receive their orders. While trust remains an issue, Multiply has removed some of the risk of online transactions.
Rakuten, the Japan-based company that runs the world’s number three online marketplace, has also entered the Indonesia e-commerce business despite payment problems, slow internet connections and logistics issues. The company set up an Indonesian site in June 2011 as a joint venture with Hary Tanoesoedibjo, the CEO of Global Mediacom. By November 2012, Rakuten Belanja Online had 400 merchants selling 300,000 products. The company estimates that only 1.4m Indonesians have purchased goods or services over the internet, but it has nevertheless found that the e-commerce environment in Indonesia quite good. Because of low operating costs and relatively cheap delivery within the country, many merchants are able to sell low-priced products that would not normally be appropriate for e-commerce.
Travel is one area where e-commerce is flourishing already. In June 2012 Tourism and Creative Economy Minister Mari Elka Pangestu estimated about half of all travel reservations were made via the internet. Citilink, the budget carrier of Indonesian national airline Garuda, confirmed that it sells half its tickets online, while Tauzia Hotel Management Indonesia, which operates the POP! Hotels, Harris Hotels and Solo Paragon brands, said 20-30% of its rooms are booked online.
POLICIES & PROGRAMMES: Government investment in ICT is on the rise, and that bodes well for development. The Master Plan for the Acceleration and Expansion of Indonesian Economic Development, the plan to rapidly lift the country’s economic rank through investment in infrastructure, is very much focused on connectivity, the idea being to develop six economic corridors and link them with transport and communications networks. Under the programme, $26.6bn will go toward ICT infrastructure. The government understands that universal access to the internet is vital for economic development, and has made it a priority. The Ministry of Communications and Information Technology is already hard at work investing to achieve 100% connectivity. In 2011 it also started to deploy mobile internet service centres, buses with computers and satellite links, to locations otherwise cut off from the internet infrastructure. As of April 2012, almost 6000 were in operation, and 100% coverage was expected in 2013.
Mastel’s Santosa, who was the CEO of Telkom Indonesia from 1992-96, believes simple connectivity is not enough and that Indonesia needs a national wired broadband network. He said this is vital for both the development of the internet and the development of the country, and that the wireless connectivity that exists now is only an interim solution. The government does not need to spend money to achieve this goal, he argues. It just needs to put the fixed broadband network into the national development plan and require telecommunications companies to install the infrastructure. As it stands now, the many initiatives being promoted by the government speak only generally about connectivity, but do not spell out exactly what is needed and how it will be done. Santosa believes that this should be mandatory. “It will not be solved until the government puts it in the implementation plan and establishes an executing agency for the national broadband network,” he told OBG, adding, “You do not need the money. You just need a decree.”
PRIVATE INVESTMENTS: Private industry is increasingly recognising the potential of ICT investments in Indonesia and moving beyond the model of manufacturing elsewhere and exporting to the country. They are attracted by the unique combination of low wages, high consumption and a large population. Labour costs in Indonesia may be the lowest in Asia, while currency and cost pressures in China are making it an expensive place to manufacture. Estimates put wages in Indonesia at half those in Thailand and a third those in China. Consumption in Indonesia is 56% of GDP, and the sale of ICT products is exploding. In the first five months of 2012 Rp10.3trn ($1.03bn) of electronic goods were sold in Indonesia, up 22.5% from the same period a year earlier, according to the Electronics Marketer Club. Samsung sees its sales in Indonesia doubling in 2012. International manufacturers are now working on improving their supply chains and diversifying their manufacturing bases. After the floods in Thailand, and in light of the rising wages in China and the growing unrest in the country, they are re-evaluating risk and putting factories in more countries globally so problems in one place cannot bring production to a halt. Indonesia, as a member of ASEAN, is particularly attractive in this respect. Goods and components can move relatively freely under the terms of ASEAN Economic Community integration.
Foxconn, the Taiwanese handset maker and supplier to Apple, has said it will invest up to $10bn in manufacturing in Indonesia over the next decade. The first facility was scheduled to be up and running by late 2012, and work on the second phase was supposed to begin on a 400-ha site in 2013. However, The Jakarta Post reported in December 2012 that Foxconn has decided to postpone its investment as negotiations are still under way. Industry Minister Mohammad S Hidayat said there were still requirements that the firms had yet to meet, though he did not elaborate further.
OUTLOOK: While Indonesia has done an impressive job so far in connecting the nation and providing basic services, many gaps still exist. Infrastructure falls short both in terms of coverage and quality. Private investment remains low in many areas, especially in terms of money going towards start-ups and new ideas. And the most valuable parts of the sector, content creation, manufacturing, hosting and research, remain largely outside the country. However, there are signs of growth. International firms are making large investments, and the country is a major market for smartphones and tablets, meaning demand for data is set to grow.
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