18 Feb Digital business prospects in Indonesia
Globally, the pandemic has fast forwarded the adoption of digital technologies and nowhere does this ring truer than the emerging nations of ASEAN. The fact that digital transformation is crucial for business longevity has been accepted for some time now, but the stay-at-home restrictions accelerated the need and justification for it.
We focus on Indonesia, which is at the cusp of a digital revolution. While businesses were quick to adopt digital transformations to overcome pandemic-induced disruptions, there have also been large changes in customer behavior in terms of usage of mobile devices, cloud computing, and adoption of Internet of Things.
Status of Indonesia’s digital economy
The Indonesian government has been focusing on creating a digital ecosystem to compete with regional economies of Singapore, Vietnam and Malaysia. The government has repeatedly stressed on the role of the government, monetary authorities and financial sector in facing the dynamics of digital development together.
The geographical spread of this archipelago consisting of over 17,500 islands, is said to be one of the reasons for the unequal access to internet which has kept Indonesia in 56th place in the digital competitive index. Connectivity is still highly concentrated in Java, the country’s most populous island, followed by Sumatra as the country continues to build internet connection in remote areas. As per the Indonesian Internet Providers Association (APJII) nationwide survey in November 2020, Indonesia’s internet penetration rate has gone up to 73.7 percent in 2020 from 64.8 percent in 2018 catching up with ASEAN peers: Brunei (94 percent), Singapore (84 percent) and Malaysia (80 percent).
President Widodo has previously announced allocation up to USD 2 billion in 2021 state budget for information and communication technology (ICT) development, as it aims to aid digital transformation in public services and to improve the country’s connectivity inclusion. Central to this is the now completed USD 1.3 billion Palapa Ring broadband project, a 35,000-kilometer fiber-optic network installed across the country, designed to provide 4G services across the entire archipelago. This is likely to help provide internet access to remote areas of the country.
Attracting regional investments can also go a huge way in pushing Indonesian digital plans. Recently in January 2021, the Indonesian and Chinese Governments signed a memorandum of understanding covering cyberspace, international internet governance, data security and 5G technology development. In 2020, Indonesia had already signed agreements with China based Huawei through the country’s Agency for the Assessment and Application of Technology (BPPT). President Joko Widodo termed this collaboration as “central to achieving its goal of producing a creative and digital economy by 2035 and a “more developed” nation by 2045”.
In 2019 Japanese telecom giant NTT announced investment of USD 500 million in a new data center in Indonesia, the company’s third in the country. During the Digital Economy Summit in February 2020, Microsoft Corporation, is said to have expressed interest in building data centers in Indonesia. Japanese investment behemoth – SoftBank has also announced investment of USD 2 billion in Indonesia over the next five years, through digital firm Grab, in a bid to boost Indonesia’s digital infrastructure development.
As per the e-Conomy SEA report 2020 by Google, Temasek and Bain and Company, the gross merchandise value of the internet economy in Indonesia is expected to reach USD 124 billion by 2025, accelerating to ~23% CAGR. Amid such investment climate, banking sector too has shown a digital uptick by opening digital banking services, including BCA, the largest private bank in Indonesia, which announced the launch of BCA Digital Bank in early 2021. Other banks such as Bank Jago and Bank Neo Commerce, are all working towards providing all their services online. Bank Indonesia released a new regulation serving as the legal umbrella for the payment system regulation which has helped boost the nascent fin-tech sector. Increasing activity has been observed in the space with multiple global technology players such as Alibaba, WeChat, Samsung looking to collaborate with local bank partners, as required by the existing regulation for their e-wallet operations.
Road ahead
While the government has shown focus and clarity in terms of its future roadmap in ICT development, it still needs to bring in transparent policies and regulations to help further bolster the sector. Data security systems and governance policies for digital banks need overhaul amid threat of increasing cybercrime. Also, digital surveillance needs to be fair and transparent with strict penalties for violations and misuse of personal data. Human resources is another area Indonesia will have to tackle as digital talent is hard to find in the country. To compete with neighbors such as Singapore and Vietnam, Indonesia must invest in vocational upskilling and digital immersion programs to adapt international best practices. A 2021 published report by Asia Partners, revealed that most of the ASEAN region (barring Singapore) is lagging behind the world in terms of senior tech leadership or even in its concentration of general programmers (those in knowledge of Java and Python). Looking at data from LinkedIn, in Singapore, tech leaders (Chief Information Officer + Chief Technology Officer + Chief Product Officer + Chief Information Security Officers) as a percentage of all LinkedIn profiles stood at 0.20% compared to the regional average of 0.08%. Starting at the basic level, the Education and Culture Ministry in 2020 proposed a budget of USD 100 million for school digitalization programs in a bid to reduce technological discrepancies by improving digital access to education, a much-needed step to match human resources with the skills required by the industry in the immediate future.