Getting connected: The challenges of wiring the world’s fourth-most-populous country are many, but so are the potential rewards

Following the dissemination of studies by the World Bank and others that show a link between technology take-up and economic growth, the developing world has become awash with road maps, master plans, frameworks and other strategies to get connected, train young workers and move into the knowledge economy. In 2010 Indonesia’s Ministry of Communication and Information Technology (MCIT) surveyed the condition of the country’s connectivity and capacity and produced a white paper outlining what has been done and what can be expected for the future.

BACKDROP: The white paper results confirmed conventional wisdom: people in Jakarta and a few other cities have internet access and a growing degree of technological savvy. Usage of the “.id” internet domain grew by an annual average of 12% from 2005 to 2010, and there has been a 56% drop in mail sent through the postal service, indicating its displacement by the rise of email. As with many areas of development in the world’s fourth-most-populous country, growth rates even from a small base can be impressive.

Computer ownership, which was at 4% in 2006, doubled to 8% by 2008, according to the government’s white paper. Moreover, research firm BMI projects Indonesian PC sales of $3.1bn in 2011, up from $2.6bn in 2010, while TransWorldNews reports that 20% of the country now has access to a PC. Getting the masses online might be harder in Indonesia than almost anywhere else in the world, given the size of the population and the geographical obstacles presented by its dispersion across an archipelago of some 17,500 islands. World Bank reports for 2009 put the number of people with access to the internet at 20m, or 8.4% of the population, with 0.7% having a fixed broadband internet subscription. An Internet World Stats report for December 2010 put the internet penetration rate at 16%.

SCHEMES: The government’s plan to improve the situation includes a heavy reliance on wireless phone networks. Many Indonesians’ first online sessions will more likely happen via smartphone than personal computer. The action plan also implements a mix of technologies to get people connected, including broadband and WiMAX, among others. When the Palapa Ring, the national fibre-optic cable network, is completed it will bring broadband to 440 regencies and municipalities in all 33 provinces. The plan calls for 35,280 km of undersea cable and 21,807 km of above ground cable.

As of 2010, most of Indonesia’s major Islands had already been linked. These include Sumatra, Java, Kalimantan (Indonesian Borneo), Sulawesi, and West and East Nusa Tenggara (see analysis).

Meanwhile, technology companies have already arrived in Indonesia, having realised that a population this big is a major sales opportunity. The challenge for Indonesia is to get the familiar brands – IBM, HewlettPackard, Microsoft and others – to do more than sales and low-cost manufacturing in the country. “All the global tech companies are here, but they see Indonesia as a manufacturing centre of a sales opportunity,”

Chrisna Wardhana, the lead partner for technology and telecommunications in the PwC Jakarta office, told OBG. “This makes sense given the population we have.

The labour costs are low enough that we are still competitive. But less sophisticated electronics are being made and not technologically advanced equipment.”

SIZE & SCOPE: Growth projections hold that the Indonesian information and communications technology (ICT) market will grow at a 15% compound annual rate until 2014, reaching $6.9bn annually. Hardware generally accounts for just over two-thirds of spending. Acer was the top seller of computers in 2009, and, together with HP, accounted for more than half the market.

With regard to software, a ministerial decree in 2009 mandated that local government offices must be using open-source software by 2011, a target which should cut costs on software spending.

The thousands of universities and vocational schools in the country hope to aid sector development by means of training. “In terms of IT education, most of the public budget is still being allocated to provide hardware equipment in schools,” Jusuf Darwin Salim, the president director of local IT services provider Astra Graphia, told OBG. “Even though the budget for education has increased, further efforts are required to raise the level of IT awareness in Indonesia.” There is currently a lack of human resources, particularly for skilled workers who have the potential to lead indigenous research and development projects. It was estimated that around 2.1% of workers in the manufacturing industry were employed in tech jobs, according to the government’s white paper. A consumer market with around 240m potential purchasers is clearly a focus, but another key driver of demand for both software and hardware is the financial services sector. In addition, manufacturing industries are also expected to increase spending, following the cautious few years that resulted from demand concerns after the global financial crisis. In one of the biggest acquisitions in the history of Indonesia’s technology sector, in 2008 Telkom, a mostly state-owned telecommunications legacy firm, bought an 80% stake in Sigma Cipta Caraka, an indigenous software company that specialises in financial services technology. Sigma’s main products include a system for daily banking operations for tellers and customers, as well as back-office accounting procedures. In addition, Sigma offers outsourcing services that are tailored to financial firms and has developed software specifically to support the Islamic financial services industry.

LOCAL RELATIONS: However, complications might accompany access to Indonesia’s massive consumer base. For instance, the government has told internet service providers to block users from accessing internet pornography. Meanwhile, smartphones have emerged as a powerful distribution tool for questionable content in the country and the continuing debate over what standards should be applied may have ramifications for technology companies. The public figure most associated with this movement is Tifatul Sembiring, the minister of communication and information technology, who comes from an Islamist party. A spokesman for the minister, however, told local media in early 2011 that a comprehensive ban would not be attempted by the government.

The current political climate also has implications for hardware firms. The maker of Blackberry smartphones, Research In Motion (RIM), was given a deadline of August 2010 to filter its content. When the company did not comply, Sembiring threatened to revoke RIM’s licence to operate in Indonesia. Because Blackberry web content is transmitted through RIM servers, the firm’s relationship with governments is more complicated than those of the simple hardware sellers who have little to no control over the use of their devices once they are sold. The government has also asked RIM to allow it access to the data and messaging traffic of select users, a request the Canadian company has also grappled with in Saudi Arabia, the UAE and India. Those countries have cited security concern s as the reason for this request, whereas Indonesia says it wants to use the data to help fight corruption and white-collar crime.

E-PROCUREMENT: Another way Indonesia is using technology to fight corruption is an online procurement system for government. The system was developed by the MCIT as a way to prevent corruption by buyers of materials and services for state projects.

The system, instituted in December 2008, is an online exchange in which government buyers post their procurement needs and suppliers bid on them. It also works for contracts, consulting services, auditing and other forms of public procurement. Overall, to date it has been implemented in 24 of Indonesia’s 33 provinces.

OUTLOOK: Success in Indonesia’s IT sector will likely be measured according to a number of steps. Getting as much of Indonesia as possible connected to the internet will be a good start with economic benefits. Getting to a point where technological innovation happens domestically, however, may be a more difficult task.

Training and investment on a massive scale will be required to increase connectivity. This is particularly important given the regional competition of others at various stages of the same IT development process.