Global Business Guide Indonesia

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Services | The Outlook for Indonesia’s ICT Sector

While overall access to computers and internet connections remains low at 20% and 21% respectively, Indonesia is quickly becoming a major target market for technology players and spending on IT begins to show healthy year on year growth forecast to continue at 15% CAGR to 2014. Indonesia has become the largest spender on IT in South East Asia and is ranked 19th by spending globally (International Data Corporation). This dramatic shift has come about as the public sector invests heavily to upgrade their internal infrastructure and the private sector follows suit in utilising the latest technology to enhance customer service and gain a competitive edge in the market place. As per the Indonesia Economic Masterplan to 2025 (MP3EI) and the Palapa Ring Project (See Improving Internet Access in Indonesia), Indonesia has ambitious plans in place to accelerate its economic development through ICT infrastructure. However the challenge will be to make these plans come into fruition and provide greater access to ICT beyond Jakarta and the secondary cities where current spending is primarily concentrated to realise the vision of Indonesia being an IT service focused nation.

The Outlook for Indonesia’s ICT Sector
Realising Indonesia’s potential as a major ICT market is reliant on the government making headway on fundamental infrastructure projects such as increasing electricity supply and a nationwide broadband network

Indonesia spent $10.9 billion USD on IT in 2011 according to the International Data Corporation and this figure is forecasted to rise by 18.3% to $12.9 billion USD for 2012. Sales of hardware still make up the majority of IT spending at over 80% and this level of spending is set to increase and reach $17.8 billion USD by 2016. Spending on hardware is mainly from the consumer sector and has been boosted by the government’s decision to eliminate duties on components for personal computers in April 2010 to make computers more affordable as well as assisting the local computer industry. IT services across the country recorded sales of $759 million USD over 2011 while software stood at $522 million (IDC). Sales of software are expected to grow and to make a more substantial contribution to overall ICT spending over the next 5 years; however awareness of software systems such as enterprise resource planning (ERP) still remains low among the country’s vast SME segment due to a lack of market understanding. In addition, the particular traits of Indonesian culture which colour everyday business practices are often unsuited to ERP software offerings from Europe and North America highlighting the need for locally engineered content. In other areas, the software industry also faces the challenge of widespread piracy and the industry is suffering increasing losses every year according to the Indonesia Business Software Alliance.

Public spending on ICT makes a significant contribution to overall ICT spending as state ministries and government bodies look to prepare their internal infrastructure for Indonesia’s further economic expansion. One such area is e-procurement under the e-GP scheme which was launched in 2007 as part of the ongoing efforts to improve transparency and reduce opportunities for public corruption which is now in operation in 25 state owned enterprises (SOEs). Toll roads are also a major focus of the country’s infrastructure investment drive which are being undertaken by public bodies such as the Ministry of Public Works and by private investment (See Public Private Partnerships). Toll road operators such as state owned Jasa Marga are therefore investing heavily in electronic toll payment systems as well as contactless payment systems which do not require drivers to stop thus reducing congestion and toll gates. A further area of state ICT investment is in electronic identification cards called e-KTP for all Indonesian citizens above the age of 17. Total investment in the system is estimated at $642 million USD covering card chip readers, fingerprint scanners, signature pads as well as the infrastructure to effectively store the personal data and provide access to the relevant government ministries as it will form the basis for documents such as tax returns and land registration. Implementation of the program began in 2011 and distribution of the cards is ongoing having so far collected data from 102 million out of the 172 million applicants. Education is a further area of concentration for IT spending for both e-learning software and hardware as the government has set the target to increase the current ratio of students to computers from 1:3,200 to 1:20 and with the current student population at 53 million, this will require 2.5 million computers. The establishment of cloud computing networks (discussed further later) for schools and university campuses is another area of focus for education focused IT spending which is set to continue for the foreseeable future.

E-commerce in Indonesia is still in its infancy with online transactions for 2012 estimated at $266 million USD although it is expected to rise steadily to $736 million by 2014 (Indo Telko). The sector offers great potential, not only within the context of the success of the industry in mature markets, but the key advantages that it offers to a market such as Indonesia. Infrastructure and logistical constraints in Jakarta, secondary cities and outlying islands make online shopping an ideal and convenient alternative while providing access to goods that are not available in the immediate vicinity of many consumers. A success story in e-commerce is Tokobagus which sells everything from cars to mobile phones and has taken a strategic position in the absence of global sites such as Ebay and Amazon in Indonesia.

The sector has been held back to date by the lack of a trusted online payment system due to weak online security measures and widespread fraud. This is in addition to the absence of industry standards and consumer protection measures which have made potential shoppers hesitant. Of Indonesia’s 50 million or so internet users, 57% have shopped online using bank transfers and cash on delivery. Multinational industry players such as Paypal have failed to establish a presence in the market leaving it open to local players. Indonesia’s largest website Kaskus developed their own online payment system in 2006 called ‘rekber’ which is essentially an escrow service whereby once the buyer and seller have agreed on a price, rekber serves as a middle man to release the funds once the buyer receives the goods. Other home-grown online payment services which are also making inroads into the market are Indomog, Kaspay and Inapay. These new services will hopefully build confidence among Indonesian consumers and provide the foundations for a new breed of online business entrepreneurs who can create concepts that give Indonesians a reason to buy online such as exclusive products and discount systems.

One of the key ICT trends that has seen fast adoption in Indonesia is cloud computing which is forecast to growth at a CAGR of 48% from 2010-2014 (Frost and Sullivan). A survey by IDC conducted in 2011 showed that 50% of the end user organisations surveyed expressed interest in adopting or exploring cloud computing services. A survey conducted by Springboard Research reported that the use of cloud computing in Singapore has reached 29%, 27% in Malaysia and only 20% in Indonesia thus far leaving plenty of room for further growth. Local and international players have already taken positions in the cloud computing market such as Telkom’s Telkom Cloud which has already announced that it plans to invest a further $10 million USD in expanding its capacity, Infinys System Indonesia, NEC and Joyent Cloud. This trend represents an interesting shift in approach to IT infrastructure as previously businesses and public entities concentrated on constructing their own in house data centres which would entail ongoing costs for software upgrades as well as hardware depreciation. Cloud computing provides an alternative to laying out such capital expenditures as it involves only maintenance costs providing savings of 10-50% while also giving businesses access to the latest technology in order to gain a competitive edge in their business segment. To date, the cloud computing has been most popular among the manufacturing sector while the public sector has adopted the technology for trials in over 20 schools in Yogyakarta and is also being applied to university campus wide networks and within the healthcare sector.

While the outlook for the ICT does look very positive, there are key obstacles that service providers must overcome to gain deeper penetration into the private sector market. The first is market education as understanding of ICT technology remains low, particularly among small and medium businesses. The second is the public perception; a survey by the Institute for Development and Empowerment of Information (LPPMI) of 100 firms on their main concerns towards the implementation of cloud computing showed that security issues were cited by 31.9% of respondents followed by reliability with 21.65%. Research by consultancy firm Frost and Sullivan confirms these findings and the need for improved telecommunication infrastructure to enhance bandwidth in Indonesia as well as supporting government regulations for the industry. Indeed, realising Indonesia’s potential as a major ICT market is reliant on the government making headway on fundamental infrastructure projects such as increasing electricity supply and a nationwide broadband network. With these foundations in place and greater market awareness, companies will have the confidence to invest in their ICT systems for both hardware and software to support their business growth.

Global Business Guide Indonesia - 2013

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Indonesia Services Snapshot – Telecommunication

Contribution to GDP: 4.94% (Information and Communications, Q4 2016)
Fixed Telephone Line Penetration: 16% (2016)
Mobile Phone Penetration: 40.4% (Statista 2016)
Unique Mobile Phone Subscribers: 47% (2016)
Smartphone Penetration: 43% Statista, 2016)
Internet Penetration: 37% (2016)
Fixed Line Broadband Penetration: ±2% (2016)
Main Operators: Telkom, Indosat Ooredoo, XL Axiata, Axis Telekom, Hutchison 3 Indonesia, Bakrie Telecom, First Media, Smartfren Telecom.