Global Business Guide Indonesia

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Business Updates | Disruptive Innovation Challenging Business as Usual in Indonesia

For most Jakartans commuting to work in the central business district, 22nd March 2016 began like every other day in the Indonesian capital – with gridlock. Traffic on this particular occasion, however, was brought about by events far removed from the typical causes for congestion in the city; namely, a demonstration by more than 12,000 protestors primarily comprised of employees from the country’s leading taxi cab operators as well as motorised rickshaw drivers from the informal sector. Uniting this odd pairing in protest was a shared uneasiness over the continued emergence of ride-hailing apps such as Uber, Grab, and Go-Jek – tech-driven enterprises leading a new wave of disruptive innovation in the passenger transport industry in Indonesia that have thus far taken advantage of legal grey-areas aplenty in offering cut-rate prices to gain market share.

The government’s approach in seeking to defuse flaring tensions has largely been cautious and noncommittal, understanding that any course of action taken is likely to be seen as an industry-redefining milestone that will impact the future entry of similar disruptive technologies down the road. Though a patient approach in this regard is warranted, prolonged indecision and a lack of clarity have begun to breed negative sentiment in a market in which other innovative firms such as Netflix have recently faced unexpected barriers to operate.

A controversy calling for consensus

The root of the dispute currently dominating Indonesia’s transportation industry boils down to the following: as app-based businesses, Uber and Grab posit that they should not be subject to the same regulations as conventional taxi cab operators, nor should they even have to register as public transport service providers. Having seen their customers drawn away by the lure of lower fares and greater convenience offered by ride-hailing apps (See Mobile Apps in Indonesia Clicking into Gear), the market’s firmly-entrenched taxi firms have strongly opposed this thinking, specifically pointing to Law No. 22 of 2009 Concerning Road Traffic and Transportation and its mandate that only vehicles designated for use as public transportation are permitted to transport people in exchange for money.

With highly-publicised discourse between policymakers and relevant parties on this issue having failed to yield any clear results, tensions spilled over in late March and have placed an international spotlight on the Indonesian government’s ability to adapt to disruptive innovation. Though the country is not alone in dealing with controversies related to the emergence of Uber and similar technologies (one needs only to look at similar protests initiated by cab drivers in Paris, Rome, Brussels, London, Melbourne, Sao Paolo, and Kuala Lumpur to see that this is very much a hurdle to be cleared on the global stage) mixed messages from senior members of the government have not helped the situation.

While President Joko Widodo has been forthright in stating that innovation in transportation should be embraced for its role in filling gaps in the industry’s ability to meet the people’s needs, cabinet members such as the current Minister of Transportation, Mr Ignasius Jonan, have proven less supportive. In the months preceding the mass protest, Mr Jonan went to considerable lengths to explain that insofar as Uber remained unregistered as a public transport provider, the company should be considered ‘illegal’ – a phrase picked up on by aggrieved taxi cab drivers and used as their rallying cry during protests.

Patchwork policymaking and reactionary rulings

Certainly, it would appear that the government is itself caught in two minds in deciding to appease industry titans by subjecting ride-hailing apps to existing regulations or to employ a more laissez-faire approach to encourage the continued growth of tech-driven businesses. Contributing to the conundrum is a general reluctance to take any action that could lead to further unrest over job security amidst rising layoffs across key sectors (See Indonesia’s Garment and Textile Sector; Short Term Woes) as well as lofty tax revenue targets that add an extra incentive to classify Uber and Grab as conventional transportation service providers.

A compromise of sorts was hashed out in the immediate aftermath of the protest, with Uber and Grab being set a two-month deadline to either partner with a licensed public transport operator or establish their own legal companies. Though neither option is ideal – particularly the latter, in requiring these companies to set up in a manner that runs counter to their asset-less and borderless business model – there are potential positives to come out of partnering up with local players, irrespective of the government’s insistence to serve as an unsolicited matchmaker. Spotify’s recent move to enter the market was precipitated by its decision to partner with Indosat, specifically agreed upon with a view towards the Indonesian telecommunications firm providing legal support. As suggested by Telkom following on from its move to block Netflix from its platforms, some of the US-based streaming service provider’s legal issues might have been avoided had it sought out a prominent local partner.

Integrating disruptive innovation

In seeking to fine-tune its balancing act between welcoming firms offering disruptive technologies and placating longstanding players who stand to get disrupted, Indonesia needs only to look back upon its approach to e-commerce (See E-commerce Incoming; An Industry on the Rise). Presented from the outset as an area of opportunity instead of an impediment to the future success of brick and mortar retail businesses, this particular disruptive innovation faced very little opposition and was instead quickly integrated into the business strategies of conglomerates that stood to lose out considerably if they failed to adapt. Lippo Group’s recent $500 million USD investment to launch MatahariMall – the online offshoot of its chain of department stores under the Matahari brand – stands among the most poignant examples of a business choosing to move in lockstep with technological progress instead of hoping to fight it off by hiding behind the government. This vigour in opening up to e-commerce has undoubtedly played a role in the industry’s meteoric rise in valuation in Indonesia, from $8 billion USD in 2013 to a projected $25 billion USD by end-2016 (Google Indonesia, idEA, and Taylor Nelson Sofres).

A similar mindset is needed to move past the speed-bumps facing ride-hailing apps in the transportation industry, and the same applies for other sectors in which ‘business as usual’ will soon be challenged by the rising popularity of new disruptive innovations. Hospitality and property businesses, for example, will likely soon need to anticipate a future in which Airbnb and other peer-to-peer platforms become serious competition. Accepting disruptive innovation as an unavoidable aspect of Indonesia’s ongoing development is the first step in moving to take advantage of it and play a role in the modernisation of the economy’s structure, instead of prolonging its stasis.

It is not in Indonesia’s interest for the country to develop a reputation as a market seriously unprepared for – or worse yet, hostile to – disruptive innovation. McKinsey projects that up to 12% of ASEAN’s GDP is to come from disruptive technology and Indonesia would be well-served to embrace this eventuality, particularly if the country is to achieve its goal of creating 1,000 tech new startups by 2020. Following on from his visit to Silicon Valley in February 2016, President Widodo reiterated his vision of Indonesia becoming the largest digitalised economy in the ASEAN. In working to resolve recent issues related to a fear of disruptive innovation, he now has an early opportunity to prove that this is more than just rhetoric.

Global Business Guide Indonesia - 7th April 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)