Rapid internet uptake lays the groundwork for leapfrog technologies in Indonesia

Indonesia has the largest GDP in South-east Asia and the fourth-largest population in the world. Some 70% of its citizens are under the age of 39, and many Indonesians are mobile-first and digital native consumers, making it a very attractive market for purveyors of data services, applications, software and hardware. Developing domestic ICT infrastructure has been a key goal of President Joko Widodo’s administration. When his administration took office in October 2014, it unveiled a Rp278trn ($19.7bn) broadband connectivity plan designed to spur broad-based and inclusive economic growth, with a 35,000-km, nationwide, fibre-optic network, the Palapa Ring, as its centrepiece.

The rise of domestic IT has positive, long-term implications for the wider economy, as digital innovations tend to lead to new business opportunities and improve productivity. Indeed, there are numerous positive indicators of the country’s ICT potential. The digital economy is projected to contribute $150bn to GDP by 2025, according to a report by the non-profit Switzerland Global Enterprise. Meanwhile, Indonesia had the largest and fastest-growing internet economy in South-east Asia in 2018, worth $27bn.

Despite its development successes, the archipelago lags behind its neighbours in terms of ICT infrastructure and utilisation. Its geography encompasses more than 17,000 islands, which makes digital grid development and maintenance particularly challenging. The Networked Readiness Index, a publication of the World Economic Forum (WEF), assesses countries around the globe on how effectively they are using ICT to boost competitiveness and well-being. The latest issue ranked Indonesia 73rd, ahead of fellow ASEAN members Vietnam, Laos and Cambodia, but behind Thailand (62nd), Malaysia (31st) and Singapore (1st), citing the legal system, the availability of new technologies and the ease of starting a business as areas for improvement in Indonesia. Nevertheless, the development of Indonesia’s digital economy appears to have significant momentum, buoyed by favourable demographics, a population of digital natives and a vibrant start-up ecosystem.

Structure & Oversight

The country’s ICT sector is primarily overseen by the Ministry of Communication and Informatics (Kominfo), which is comprised of seven directorates as well as five advisory commissions. On the level of national policy, Kominfo is focused on enabling the transition to a digital economy, expanding access to digital infrastructure across the archipelago and encouraging small and medium-sized enterprises (SMEs), micro-entrepreneurs, farmers and fishermen to enhance their competitiveness through ICT.

Alongside Kominfo, the Indonesian Telecommunication Regulatory Authority was founded in 2003 and is responsible for formulating, monitoring and enforcing the law in the telecoms sector.

Smartphone usage has emerged as the main driver of growth in the digital economy in recent years. Indonesian mobile e-commerce has the highest penetration rate of any country in the world, as 76% of surveyed, domestic internet users reported buying something in the last month via a mobile device.

The mobile sector is concentrated among one domestic telecoms company (telco) and three foreign-owned operators: Telekomunikasi Indonesia; its subsidiary Telkomsel, which is joint-owned by Singaporean Singtel; XL Axiata, owned by Malaysian Axiata Group; and Indosat Ooredoo, the local branch of a Qatar-based telco. According to Singapore-based DBS Bank, Telkomsel accounted for 70.3% of national revenue by market share in the first quarter of 2018, followed by Indosat (15.5%) and XL Axiata (14.2%). Telkomsel is even more dominant outside of Java, the country’s largest island by population, with the firm bringing in around 80% of market share.

Regulation

Under the terms of the licences that the Kominfo began issuing in the mid-2000s, Indonesia’s operators are required to build out extensive telecoms networks, which eventually came to host the high-speed data services that have become standard throughout most of the country.

While the Widodo administration’s revision of the negative investment list in 2016 eased restrictions on foreign investment in several sectors of the economy, it actually tightened restrictions with respect to some digital activities. The reform set a 49% cap on foreign ownership of small e-commerce businesses; restricted foreign investors to owning 99% of shares in e-commerce businesses worth more than Rp100bn ($7.1m); barred foreigners from owning more than 67% of fixed or satellite telecoms services; and banned foreign investors from owning businesses in telecoms towers or management. Additional regulation requires foreign tech companies to build in-country data centres to manage their electronic transactions and systems.

The European Centre for International Political Economy (ECIPE) cited two of these provisions – the limitation on foreign ownership of small e-commerce businesses and the mandate to build local data centres – in naming Indonesia the fourth most legally restrictive economy out of 64 countries surveyed with respect to the digital economy. The ECIPE went on in its assessment to warn that the imposition of these laws could act as barriers to investment and stifle growth in this critical segment of the domestic digital market.

In March 2018 the administration blocked around 101m prepaid SIM cards as it moved to enforce a new Kominfo regulatory regime requiring all mobile users to register their SIMs, in an effort to clean up the data bank and combat misuse of the cards. During the same month some 305m SIM cards were successfully re-registered, a figure that well exceeds the population of 265m and reflects that many Indonesian consumers use multiple SIMs simultaneously, although the law imposes a limitation of three SIM cards per citizen.

Statistics from DBS showed that data pricing contracted by around 40% in the first quarter of 2018 against the same period of the year prior, driven by intense competition between operators during the pre-paid SIM registration period, which was the first sign-up window under the new regulations. That competition proved to be beneficial for consumers, as the operators promoted starter pack sales and offered promotional packages to encourage uptake before registration concluded in May 2018.

Growth Strategies

The government is active not only in regulating, but also in designing and implementing, digital solutions to the country’s development challenges. The 2014 Indonesia Broadband Plan identified five priority sectors for broadband deployment and utilisation: e-government, e-health, e-education, e-logistics and e-procurement. According to its administrator, the Ministry of National Development Planning, the plan aims to boost economic growth and competitiveness, support human capital development and maintain national sovereignty. The administration is currently on track to achieve many of the plan’s targets, such as providing access to fixed broadband services of at least 20 Mbps to 70% of urban households and of 10 Mbps to 49% of rural households in 2019.

In an effort to build out a nurturing ecosystem for innovation as well as increase the levels of digital inclusion, the government launched its Go Digital Vision 2020 campaign in 2015, with a focus on helping the nation’s millions of farmers and fishermen access new business opportunities through digital means. The following year the Ministry of Industry launched a complementary digital platform, e-smart IKM, meant to support SMEs through product promotion and sales, particularly those working in priority industry clusters like jewellery, furniture and cosmetics.

The administration expects that the increased use of e-commerce platforms and the adoption of data analytics solutions can improve corporate decision-making and widen the scope for revenue generation. “Indonesia is still in the early stages of big data and cloud solutions,” Handy Surya Wirawan, president-director of Packet System, a Jakarta-based ICT systems integrator, told OBG. “The question is how well data can be interpreted to enable businesses to be more efficient. To be able to do that, we see that our customers have started to refresh their infrastructure to begin the digital transformation journey as one value proposition to stay competitive.”

Recent Initiatives

Kominfo partnered with several academic and government institutions to launch its 100 Smart Cities initiative in May 2017. The programme aims to deploy smart technologies, such as internet of things (IoT) appliances and artificial intelligence (AI) innovations, in 100 municipalities in 2019, with the eventual goal of improving the quality of urban life. Three of the country’s largest cities – Jakarta, Bandung and Surabaya – have been identified as smart city models for other settlements to replicate. In 2018 approximately 50 local governments joined the initiative.

In April 2018 the Ministry of Industry released its Making Indonesia 4.0 roadmap, which is aimed at advancing Indonesia’s capacity in Fourth Industrial Revolution technologies, such as IoT, AI, human-machine interface, robot and sensor technology, and 3D printing, to enable the growth of advanced manufacturing. The roadmap prioritises development in the food and beverage, automotive, textile, electronics and chemicals industries, as part of its broader goal of making Indonesia one of the world’s 10-largest economies and creating approximately 19m new jobs by 2030 (see Industry chapter).

Meanwhile, local authorities have been encouraged to adopt e-procurement and e-governance solutions to reduce the scope for corruption and to strengthen internal budgeting and controls. Moreover, in 2018 the Coordinating Ministry for Economic Affairs launched an online single submission system to reduce red tape in obtaining permits and to limit corrupt practices.

Recent Performance

The telecoms sector has grown significantly in the past decade, largely on the strength of a quadrupling in the mobile subscription rate between 2007 and 2017, from 40.1 to 173.8 subscriptions per 100 people, according to data from the UN’s International Telecommunication Union (ITU). While the telecoms market was expected to grow in value from $22.13bn in 2017 to $22.74bn in 2018 and $22.85bn the year following, the consultancy Frost & Sullivan projects the sector to shrink slightly over the 2020-22 period. However, digital services are forecast to expand at a compound annual growth rate (CAGR) of 38% between 2017 and 2022, from $1.8bn to $9.5bn.

Though intense competition has locked local telcos in a price war in recent years, Telkomsel announced in August 2018 that they would join Indosat and XL Axiata in raising data tariffs for the first time since 2016. Since it entered into force in 2018, the SIM card registration requirement has made it more difficult for consumers to chase cheap sign-on discounts by switching services.

DBS cites that competition and heavy subscriber losses stemming from SIM re-registration as drivers in the 2-3% decrease in telco revenues in 2018, though the bank projects rising tariffs and growing demand outside of Java to increase mobile revenue by 7-8% in 2019. Performance may be affected by the Sunda Strait tsunami, which caused minor disruptions to the services of Indosat and Telkomsel in December 2018.

E-commerce and the online media market – including online advertising, gaming, subscription music and video on-demand – are becoming new engines of growth in the digital economy. Domestic online media is presently valued at $2.7bn and rose at a CAGR of 66% over the 2015-18 period, making it the largest and fastest-growing market in South-east Asia, according to a report prepared by Google and the Singaporean state investment company Temasek. Ride-hailing services have also gained significant traction, growing at a CAGR of 57% from 2015 to reach $3.7bn in 2018. Online food delivery has been a major catalyst of this growth, primarily via the expansion of GO-FOOD, a service of the ride-hailing app GOJEK (see analysis).

Mobile Broadband

Indonesia has been a regional leader in the adoption of innovative, mobile telecoms technologies for more than a decade, after becoming the first country in South-east Asia to implement a 3G broadband data system in 2006, and Frost & Sullivan projects the country to have more than 470m mobile subscriptions and 200m active internet users by 2020.

As of 2016 the entire Indonesian population lived in range of at least one 2G mobile network, according to the ITU. As mobile and smartphone penetration rates increase and infrastructure investments gather pace, 2G is likely to disappear in the near term. “Most telecoms companies now obtain the bulk of their revenues from data,” Aming Santoso, president-director of Sarana Menara Nusantara, an investment firm with extensive interests in telecoms towers, told OBG.

ITU data showed there were 98.3 mobile subscriptions per 100 people in Indonesia in 2017. Meanwhile, a study by the Pew Research Centre published in February 2019 indicated that 42% of Indonesian adults owned a smartphone, which was significantly lower than neighbouring Philippines (55%), despite the fact that Indonesia is a larger economy. This discrepancy suggests there is considerable room for growth in the mobile hardware market and bodes well for a digital economy that has given rise to four tech unicorns in recent years, all of which have benefitted from sales and revenues derived from smartphone apps.

According to 2018 data from digital marketing agency We Are Social, Indonesians spend an average of 3.23 hours on social media every day, the third most in the world, behind only Brazilians and Filipinos. In a survey by Chinese web platform Baidu, 81% of Indonesian respondents cited social media apps as their most frequently used apps, followed by web browser apps (64.5%) and game apps (34.5%). This prolonged screen-time and high rates of social media usage suggest significant market potential for integrated apps linked to e-wallets, e-commerce and other services. “Indonesians are highly sociable, which is shown by high per capita usage of Facebook, Twitter and Instagram. In return, this translates into a steep growth curve for data,” Santoso added. As of January 2019 Indonesia was home to the third-largest number of Facebook users in the world, with around 130m people registered.

Indonesia had 143m internet users and an internet penetration rate of around 55% in 2017. The ITU reports that 47.2% of households nationwide had access to internet services that same year, whereas only 19.1% of households owned a computer, illustrating the importance of mobile connections.

There is still a marked gap in the availability of internet services between urban and rural areas. Some 72% of city dwellers had access to internet services in 2017 against 48% of rural residents, underlining the urgency of operationalising grid projects like the Palapa Ring to improve digital connectivity nationwide.

4G & 5G

Revenue from domestic pay-TV and telecoms services is expected to increase at a CAGR of 3.7% over the period 2017-22, primarily spurred by growth in 4G and fixed broadband use, according to Global Data, an analytics and media firm. In late 2018 Kominfo revoked the spectrum licences of Bolt Internux and its parent company, First Media, due to their failure to pay Rp708bn ($50.2m) in fees accrued in 2016 and 2017. Both companies were part of the Jakarta-headquartered Lippo Group, a services conglomerate whose high-speed 4G service was the first on the national market when it launched in 2013. Smartfren Telecom, which had 4% of market share at end-December 2018 and is moving aggressively to broaden its subscriber base, took over Bolt’s licence in a deal that allowed Bolt customers to switch SIM cards free of charge.

Two operators – Telkomsel and XL Axiata – trialled 5G services at the Asian Games in Jakarta in late 2018. Rudiantara, Minister of Communications and IT, told local media that he wanted to see 5G introduced to the domestic market as early as 2019. The implementation of a 5G network is projected to provide a significant boost to the local digital economy, as its lower latency, greater coverage and higher data rates enhance productivity and innovation across a broad range of industries and transform consumer lifestyles.

While the potential of 5G is grounded in the expansion of the fibre-optic backbone through the Palapa Ring project, there are major hurdles to clear in the implementation of a 5G spectrum in the foreseeable future, including the high costs of switching over from existing infrastructure, extant regulatory gaps and an innovation ecosystem limited by skills shortages and low investments in research and development. Given that much of the country is only now gaining access to 4G and that rates of technology uptake among SMEs – critical to social learning in the application of new business tools – have been lacklustre, the commercial rollout of 5G is likely some way off.

Fixed Broadband

According to the ITU, the rate of fixed telephone subscriptions per 100 people has fallen drastically in recent years, from 16.9 in 2010 to just 4.2 in 2017, as Indonesians increasingly depend on mobile technologies for communication. While this transition has been beneficial to the consumer market in many respects, the change has not been entirely without drawbacks: the Asian Development Bank observed in 2015 that Indonesia’s “heavy reliance on mobile networks for internet access is straining capacity and adversely affecting internet and telephony quality.”

On the other hand, fixed broadband grew exponentially from 2007 to 2017, as subscriptions leapt from 779,000 to 6m and drove the uptake rate from 0.33 to 2.3 subscriptions per 100 people. DBS estimates that fixed broadband penetration rate doubled in the 15 months to November 2018, from 4% to 8%, as Telkom added 2.7m subscribers over the period. All of the major providers of fixed broadband are expanding their internet services nationwide to capitalise on demand for high-speed data, which has grown rapidly with the expansion of the middle class, and DBS has predicted that coverage will surpass 20% by 2022 as the broadband market increases by 9m households.

Start-up Investments

Of the $24bn invested in the South-east Asian internet economy between January 2016 and June 2018, a full fourth was raised by Indonesian companies, second only to the $16bn in inflows to firms in Singapore over the period, according to the Google-Temasek report. The archipelago serves the headquarters of four of the of ASEAN’s seven unicorns – defined by the report as privately-held companies valued at over $1bn – and has become one of the biggest investment centres in Asia for venture capitalists, who have funded companies in financial technology, e-commerce, logistics and agritech.

According to the Australian Trade and Investment Commission, growth in e-commerce activities has made Indonesia “one of Asia’s more attractive destinations for digital investment. This opens the door to firms ready to bring in capital, technology and security solutions, who are willing to work with local companies to launch their own e-commerce arm.” Frost & Sullivan projects Indonesian spending on IT to reach $3.8bn in 2019, more than double the $1.6bn spent in 2014.

As part of its Go Digital Vision 2020 campaign, the government unveiled the 1000 Start-Ups Movement in 2016. The initiative, which is run by local start-up ecosystem builder Kibar with support from Kominfo, is intended to help launch 1000 digital start-ups valued at a total of $10bn by the end of the decade. Ultimately, its aim is to help these companies utilise digital technologies, mobile applications and IoT capabilities to find solutions to pressing social problems in 10 of the country’s biggest cities, before fanning out to other settlements in the near term.

Despite the dynamism of the digital start-up scene, the sector is still constrained to some extent by problems affecting the wider business environment, such as excessive regulation and bureaucratic procedures, skills gaps and shortfalls in infrastructure.

Human Resources

Based on several key indicators including internet use, internet access, ICT infrastructure and the population’s skills in using a variety of telecoms tools, the ITU’s ICT Development Index ranked Indonesia 111th in 2017, below most of its regional neighbours and higher only than three other ASEAN states – Cambodia, Laos and Myanmar – with significantly lower GDPs per capita.

Other analyses of local ICT development convey similar impressions of the human capital shortage: the WEF ranked Indonesia 96th out of 137 economies in terms of labour efficiency in 2018, and the World Bank projects a shortage of 9m skilled and semi-skilled ICT workers from 2015 to 2030, observing that the abilities of ICT graduates often fall short of industry requirements. This assessment is supported by the OBG Business Barometer: Indonesia CEO survey that was published in November 2018. Of the survey’s 112 respondents, 21% cited computer technology as the skill most urgently needed among the domestic workforce, second only to the 32% of respondents who chose leadership as their highest training priority.

The World Bank recommends greater collaboration between government and industry to define digital skills needed over both the short and long term. The administration intends to train 58m skilled workers by 2030 in order to become the seventh-largest economy in the world. As part of its efforts to upskill the labour force, the government has signalled that it may allow foreign universities and polytechnics to enter the local education market. As a case in point, the administration is expected to sign a free trade deal with Australia in 2019, which would allow Australian tertiary education providers to operate in Indonesia.

Outlook

Although infrastructure and skills gaps continue to pose challenges to the development of the ICT sector, Indonesia has established itself as a leader in the regional digital economy, and opportunities abound for further growth. With infrastructure upgrades such as the Palapa Ring project set to expand the availability, speed and reliability of internet connections to more remote areas, there is significant potential for the deployment of digital innovations to overcome myriad hurdles to market access that have constrained development on the archipelago. From cashless financial transactions to remote health diagnostics and e-learning solutions, the increased availability of smart technologies should provide more and more Indonesians with opportunities to generate new revenue streams and improve their quality of life.