First, in comparison to neighboring countries, internet penetration in Indonesia remains low. While a commercial 5G network has been launched in a few urban areas, many islands and rural areas have limited to no internet access at all. According to village potential data collected by Statistics Indonesia (BPS), approximately 12,000 villages in 2018 had yet to be covered by the internet and even those that were covered experienced frequent connection glitches.
With a population of 273.5 million people, Indonesia is one of the most promising Southeast Asian e-commerce markets in the world, mainly due to the younger generation driving online shopping as a more convenient and affordable way to shop.
Let's delve a little deeper into Indonesia’s e-commerce market logistics to determine who and what matters:
The country’s large and small cross-border e-commerce platforms are also driving enthusiasm for online spending through online cashback payments, further accelerating the popularity of e-commerce.
Indonesia, with its huge population, has great market potential. During the COVID-19 pandemic, e-commerce transactions increased by 23% to a projected $32 billion. Total online market sales in Indonesia reached $44 billion in 2020, with the e-commerce sector accounting for 72% of total digital economy value.
Indonesia has the largest digital economy: roughly 40% of the total regional market share. It is home to ‘unicorns’ such as Gojek (ride-hailing), Tokopedia (e-commerce), Bukalapak (e-commerce), and OVO (digital payment), who are resolutely spearheading the country’s digitalization. They have attracted investors from all over the world, particularly large tech companies wanting to gain traction in the region.
Second, improving logistics infrastructure continues to be a challenge in a country with approximately 17,000 islands and a vast sea area, with “too few roads, berths and systems; too many ships, cars and grasping hands”. (The Economist, 2016)
Third, the quality of Indonesia’s workforce is fundamentally insufficient to meet the demands of its digital industry. Approximately 87% of the workforce has only completed primary and secondary school education. The majority works in agriculture and trade and have limited digital literacy.
According to the August 2020 BPS (Statistics Indonesia) survey, of Indonesia’s 138.2 million workforce, 56% (77.4 million) had only completed junior high school, 32% (44.2 million) had attained senior secondary education, and only 12% (18 million) had obtained degrees (academy/university education). There is consequently a huge lack of qualified human resources in the country, leading many tech companies to hire foreign workers to fill the gap.
Compared to other Association of Southeast Asian Nations (ASEAN) countries, Indonesia’s non-cash payments are still relatively underdeveloped. According to Bank Indonesia, the number of unbanked people in 2020 was estimated to be 91.3 million (67%). In the same year, 66% of e-commerce transactions were made in cash. However, as people avoided using cash during the pandemic, there was a boost in electronic payment systems in the country.
Another barrier to the development of e-commerce in the country is regulatory uncertainty. While the government has stated its intention to reform, changing certain inward-looking policies will be difficult. Therefore, the regulatory regime is expected to remain unpredictable.
To summarize, some argue that Indonesia offers the biggest opportunity in SEA e-commerce markets, with the highest projections ($120 billion e-commerce GMV by 2025), as more and more big players use online market platforms to expand their market base. This points to increased competition in the country’s digital economy. The recent merger of Gojek and Tokopedia demonstrates how big startups are planning to dominate Indonesia’s lucrative but turbulent market. At the same time, it appears that the government is attempting to strike a balance between regulating and facilitating the development of the sector.