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Indonesia's digital economy grows to US$44 billion


THE Indonesian government has been taking concrete policy steps in recent years to advance its digital transformation agenda and while steady progress is already being made in that direction, the good news is that the pace of change is expected to accelerate.

Indonesia's digital economy expanded by 11 per cent to US$44 billion in 2020 from US$40 billion in 2019, showing resilience amid the Covid-19 pandemic that wreaks havoc on online transportation, food and travel services, says Mrs Hastin A B Dumadi, Head of the Economic Department in the Embassy of Indonesia in Singapore, citing a recent report by Google, Temasek and Bain.

Significantly, Indonesia pulled out of recession in the April to June quarter, reporting its strongest annual growth rate in 17 years. South-east Asia's largest economy grew by a healthy 7.07 per cent in the second quarter of this year compared with a year ago, its first expansion in five quarters, Statistics Indonesia reported earlier this month.

The digital economy contributed 4 per cent of the country's gross domestic product (GDP) in 2020. In 10 years, or by 2030, the GDP will grow from Rp 15,400 trillion to Rp 24,000 trillion, according to Indonesian Trade Minister Muhammad Lutfi.

However, the Covid-19 pandemic has thrown the largest digital economy in South-east Asia off the earlier projected growth path. Indonesia is now projected to churn out a total of US$124 billion in gross merchandise value in 2025, down 6.7 per cent from Google's earlier projection of US$133 billion gross merchandise value. But it would still be re-accelerating to over a 23 per cent compound annual growth rate.

As businesses continue to digitalise, Indonesian consumers have significantly moved online. The mobile phone Internet user penetration in Indonesia reached 67 per cent in 2020 and is predicted to rise by another 20 per cent in the next five years. And as mobile devices become more affordable, social media use is also increasing, with the largest social network, YouTube, having a domestic penetration rate of 88 per cent, followed by WhatsApp.

The Indonesian Internet economy's value is based on five key sectors: online travel, online media, ride hailing, e-commerce and digital financial services, and is presented annually in the joint report authored by Google, Temasek and Bain.

The massive growth of the online market in Indonesia has been due to several favourable factors. The biggest contributing factor has been the growing Indonesian middle class, a highly tech-savvy segment of the population. In addition to the large number of Internet users, Indonesia also has a great number of smartphone users, and a recent study by GlobalWebIndex showed that 79 per cent of the population between the ages of 16 and 64 years has made at least one online purchase via a mobile device, says Mrs Hastin.

Significantly, there is mass acceptance of Internet in Indonesia with the number of users put at 202.6 million in January 2021. Their number increased by 27 million, a growth of 16 per cent between 2020 and 2021. Internet penetration in Indonesia stood at 73.7 per cent in January 2021.

At the same time there is strong digital buyer growth: In 2022, Indonesia's mobile phone Internet user penetration rate is forecast to increase from 29 per cent of its population in 2017 to reach 41 per cent, bringing a total of 114 million Indonesians online. This will provide digital players a large consumer base to market their services as well as drive marginal costs lower through economies of scale.

However, there have been some challenges in the logistics and infrastructure of the country to keep up with the growing demand of online purchases. The Indonesian government has made continuous efforts in improving the country's logistics and infrastructure. Two of the most prominent projects that have been launched associated with these developments are the Trans-Java Toll Road and the Palapa Ring projects.

The first aims to cut logistics cost and encourages economic activities on the island of Java, by facilitating transportation between key areas. The later project's purpose is to deliver high speed Internet services to under-developed regions of Indonesia, and thereby help to accelerate the country's Internet penetration rate, she adds.

The Covid-19 pandemic has also accelerated the ongoing process of digitalisation in 2020 due to the need to shift to remote learning for children across the country. In order to curb the spread of the Covid-19 virus in Indonesia, it was necessary to implement remote learning in the country.

Indonesia's Healthtech and Edtech sectors were in a good position to boost adoption and attract funding, which is likely to encourage more innovation in the sectors. In the Google- Temasek-Bain report, six key barriers to growth have been identified - Internet access, funding, consumer trust, payments, logistics and talent. This year, significant progress has been made on most, especially payments and consumer trust. Talent, however, remains a key blocker that all parties will need to keep working on to ensure the momentum gained this year is sustained.

For instance, MyDoc offered patients with respiratory symptoms universal access to their proprietary Covid-19 triage assessments, while Gojek and Halodoc, in collaboration with the Indonesian Ministry of Health, launched an online consultation that helped screen patients experiencing Covid-19 symptoms.

The landscape is competitive for the growth of the digital economy in Indonesia. During the various stages of lockdowns, users turned to the Internet for solutions to their sudden challenges. A significant number tried new digital services: 37 per cent of all digital service consumers were new, with 93 per cent of them intending to continue their behaviour post-pandemic.

The Google-Temasek-Bain report says that the new frontiers of HealthTech and EdTech have played a critical role during the pandemic, with impressive adoption rates to match. Even so, these sectors remain nascent and challenges need to be addressed before they can be commercialised on a larger scale. Nonetheless, the boost in adoption, compounded with fast growing funding, is likely to propel innovation in this space over the coming years.

The report sees resilience in times of crisis as e-commerce has driven significant growth in Indonesia, at 54 per cent. The 2020 seismic consumer and ecosystem shifts have advanced the Internet sector in unimaginable ways, putting it in a stronger position than ever.

Citing the Google report, Mrs Hastin says that overall, Indonesia's digital economy is on the path to profitability. Since peaking in 2018, funding for unicorns in mature sectors like e-commerce, transport and food, travel, and media has slowed. Platforms are now refocusing on their core business to prioritise a path to profitability, and are addressing consumers' broad range of needs through partnerships.

The emerging digital financial services battleground is one of the few spaces where the super services do collide, and though it's too early to tell the outcome, it is expected that continued funding and a strong cash generating core business will be key, including for Indonesian unicorns.

The report notes that the government has taken some concrete policy measures in recent years to advance its digital transformation agenda, but experience to date suggests that these efforts have been held back by fragmentation of data and information systems and challenges of coordination across the various agencies and tiers within the government.

A platform-based, whole-of-government approach to digital transformation, which has emerged as best practice in many economies globally, is necessary to overcome these challenges, it adds.



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