- Indonesia Digital Landscape
- Rapid growth of e-commerce in the country
- Factors contributing rising digital economy
Indonesia, despite having faced economic turmoil of 1997 Asian financial crisis, has emerged as one of Southeast Asia’s leading success story. This archipelago nation is being named as one of the fastest growing economies today. Electrical appliances, automobiles, textiles, oil and gas are legacy goods on which Indonesia’s economy was focused traditionally. However, during past few years, rising digital ecosystem in Indonesia has contributed significantly to the nation’s growth.
Indonesia is the fourth largest nation in the world in terms of population represented by a huge base of young people (~60% of the population is aged 40 or under). Its mobile savvy young generation is among the world’s most avid users of social media creating a burgeoning consumer market riding on the growing accessibility of mobile internet in the country.
At the same time, the nation is experiencing rapid growth in digital ecosystem. Indonesia, amongst other emerging Asian countries, presents immense opportunity for e-commerce. In line with the recent shift in consumers’ preference towards online buying, the country’s Information and Communications Technology Ministry estimates its e-commerce market to grow to USD 130 bn (in terms of GTV) by the year 2020 with an annual growth of ~50%, thereby making it third largest in this space after China and India (in Asia region). As per Statista, e-commerce revenue in Indonesia is expected to reach USD 47 billion in 2023 at CAGR of ~25.8% during 2019-2023. Amidst the healthy growth and strong mobile-first initiatives, sellers have huge opportunity in Indonesia to facilitate e-market growth.
The growth of e-commerce market in the country over the last few years has been primarily driven by structural changes in the overall economy and the industry. Amongst the key characteristics, the availability of low-cost mobile phones and internet has created a wider penetration among consumers and enabled them to use e-commerce platforms with much more ease then accessing an offline or physical store. As per Asosiasi Penyelenggara Jasa Internet Indonesia (APJII or “The Indonesian Internet Service Providers Association”), internet user base in Indonesia has reached to more than 171 million in 2018 while internet penetration has reached ~65% in the country amidst development of 4G network. Furthermore, as per McKinsey, ~75% of Indonesia’s online shoppers use mobile devices following increasing availability of inexpensive mobile phones and growing accessibility of mobile internet. This is a much higher share than neighbouring country Malaysia (~62%).
This explosive growth in mobile internet has bolster customer base for e-commerce companies. As per Amplitude, customers from Tier 2 cities account for largest share in the growth of e-commerce transactions in Indonesia as it has empowered them with wider choice of products previously unavailable to them. Though Indonesian e-commerce market is still relatively very small compared to e-com giant China (USD 723 billion e-commerce market in 2018) or India (USD 32 billion e-commerce market in 2018), it is expected to add more than 50 million e-commerce user base by 2023 with ARPU (Average Revenue Per User) of ~USD 222 from just USD ~52 in 2017 (Source: Statista, Macquarie Research). Moreover, while China and India’s e-commerce sale as a percentage of total retail sales accounts for ~19-20% and ~4-5% respectively, Indonesian e-commerce sale is only ~2-3% of total retail sales which suggest there is ample room for growth in Indonesia market.
Indonesian economy is marked by a growing middle class with rising disposable income who are avid users of social media too. Also, private consumption by household in Indonesia accounted for a higher proportion of GDP than China or India. As per McKinsey, Indonesia’s middle-income consumer base is expected to see an additional 90 million consumers to reach 135 million by 2030. It also projects this emerging middle class to spend its new disposable income on personal items like electronic and fashion which is influenced by social media recommendation. Social media (with more than 150 million users) is greatly shaping consumers buying decisions and e-commerce in the country is already benefiting from this shift.
Moreover, improved and accelerated payment infrastructure in the country is enabling consumers to pay for online purchases via a wide array of payment mechanisms; directly through bank account, by debit/credit cards or digital wallets apart from cash on delivery. Though bank hold only 48% penetration in Indonesia (more than half of the Indonesian population doesn’t have bank account), credit/debit cards and bank transfer are dominant payment method for online shopping while cash transaction hold just ~14%. This is simply leaving significant room for growth in cards and bank payments. E-wallets or digital-wallets are also slowly increasing in popularity.
The country’s digital economy is supported by a growing number of online sellers also which has reached to ~4.5 million active sellers in 2017. About half of them are online only stores with no physical presence. However, there are few factors that are undermining e-commerce ecosystem as well as presents a unique opportunity for it. Indonesia is a large archipelago, made up with more than 17,500 islands speaking approximately 580 languages. These factors are making procurement, online sale and product fulfilling a challenging task due to country’s weak infrastructure and logistics. Furthermore, payment systems need to be strengthened by encouraging secure, scalable and seamless digital or cash-less payments. To achieve this, support is being provided by the government which is actively encouraging digital economy by releasing “Roadmap for the National eCommerce System 2017-2019. This roadmap provides guidelines for Indonesia’s digital economy sector and prioritises the development of the National Payment Gateway (NPG) to boost online-commerce ecosystems in Indonesia. Notwithstanding the challenges, consistent and healthy growth in the economy, supportive policies from the government, rise in internet and mobile penetration and increasing middle class are expected to continue to provide strong growth in the e-commerce market in the country in the coming years.