As Indonesia strives to avoid getting stuck in the middle-income trap that threatens emerging economies sooner or later, its businesses need to tackle high logistics costs and improve operational efficiency. Information and communications technology (ICT) can address both of these areas simultaneously. ICT systems can usually be built faster than transportation or power infrastructure and to some extent acts as a substitute for these. This makes ICT solutions interesting for businesses that need to find ways of boosting productivity while having to contend with a lack of infrastructure in many parts of the country, especially outside of Java and Bali.
Trade integration and intensifying competition in the Southeast Asian region (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?) forces companies to become leaner and more innovative. This is true even at this time – not in spite of the recent economic slowdown, but because of it. Capital investment in ICT systems, if properly deployed and accompanied by staff training, tends to pay off quickly. In addition, Indonesia’s young population is keenly embracing new technology, as reflected in rising mobile phone penetration and the growth of online retail, which makes the consumer side of ICT equally appealing as the enterprise side.
Indonesia lags behind other countries of comparable development in terms of both ICT infrastructure and ICT utilisation. Moreover, the country has made little progress in recent years. In the World Economic Forum's (WEF) Networked Readiness Index for 2015, Indonesia merely ranked 79th among 143 countries, down 15 places from its position in 2014, but a marginal improvement on position 80 held in 2012. Indonesia ranked behind regional peers Singapore (Rank 1), Malaysia (32), Thailand (67), Philippines (76), but ahead of Vietnam (85). The annual index measures countries' ICT performance by taking into account a wide range of aspects: the regulatory framework, the business and innovation environment, ICT infrastructure, affordability and skills, ICT usage by individuals, businesses and the government, and finally the economic and social impacts of ICT. Indonesia scored particularly low on ICT infrastructure and affordability.
It is not all bleak though. “Although there is ample room for improvement,” the report notes, “[Indonesia] ranks a remarkable 35th worldwide in the Business Usage pillar, up 14 places since 2012 – an indication that more and more Indonesian businesses are adopting ICTs to improve their operations and expand their activities.”
Internet Users (per one hundred people)
Source: World Bank World Development Indicators
Internet penetration is still low in Indonesia. According to World Bank data, just over 17 in 100 people were internet users in 2014, compared to more than 30 in Thailand and the Philippines, almost 50 in Vietnam and more than 80 in Singapore. While Indonesia appears to lose out against regional peers, the low penetration rate also means the country has plenty of growth potential left, whereas Singapore is approaching a point of saturation. Whether Indonesia’s enormous upside potential will be exploited, of course, depends to a large extent on the quality and affordability of internet access.
Secure Internet Servers (per one million people)
Source: World Bank World Development Indicators
Indonesia also lags behind on the server side, with merely 6.2 servers per million people in 2014, compared to 10.9 in the Philippines, 23.3 in Thailand and 88.5 in Malaysia. Singapore plays in a different league entirely when compared to the region’s emerging economies in terms of the number of internet servers. Starting from a low base has helped Indonesia achieve rapid growth in recent years, with the number of servers more than tripling from 2010 to 2014.
Mobile users are, so to speak, the low-hanging fruit for internet service providers to expand access across the country. Today, the entire population of Indonesia is within range of at least one second-generation (2G) mobile network, according to the UN’s International Telecommunication Union (ITU). Indonesia has one of the highest rates of mobile subscriptions per user. This points to enormous growth potential if more of these users could be convinced to get and use mobile broadband access, and Indonesians’ fondness for social networks is one major driver of this.
The challenge is the cost side. Part of the reason for Indonesia boasting more mobile phone subscriptions than inhabitants is the fact that ICT consumers are keen to use the cheapest option available for whichever service they require (See Indonesian Telecommunications – An Increasingly Mobile Market). The vast majority of mobile phone subscriptions are of the prepaid type that comes with low customer loyalty. Eventually, the benefits that IT solutions like online shopping or mobile banking can afford users in terms of saving cash and time should convince a growing number of consumers that good access is worth the cost.
On the business side, meanwhile, the immediate potential may be greater: Small and medium-sized enterprises (SMEs) currently make fairly little use of IT, but the uptake in cloud computing is booming, according to the Asia Cloud Computing Association. As competition forces them to become more sophisticated, many SMEs will demand technological upgrades. This should ensure long-term demand for enterprise-focused ICT services, including hardware and software, hosting, cloud computing and consulting.
A similar uptrend is seen at larger companies, which already make more use of ICT solutions. Market researchers anticipate rapid growth on corporate IT expenditure in Indonesia over the coming years. A survey by research firm Frost & Sullivan estimated that local companies’ IT spending would reach $3.8 billion USD in 2019, up from $1.6 billion USD in 2014. The country will have around $1.7 billion USD connected devices by 2020 with more than 470 million mobile subscribers and more than 200 million active internet users, according to the research firm.
BMI Research, for its part, forecast that Indonesian IT spending would grow at a compound annual growth rate (CAGR) of 10.6% from 2016 to 2019 to reach 210.7 trillion IDR in 2019. The research firm expects “considerable spending growth potential over the medium-term as a result of income growth, enterprise and public sector modernisation, and the low device and solution penetration rate in the market at end-2015”.
Meanwhile, tech research firm Gartner predicts that total enterprise IT spending in Southeast Asia will total $62 billion USD by 2018, with Singapore, Malaysia, Indonesia and Thailand spending the most on IT and accounting for roughly 80% of IT spending in the region. IT spending in these four countries is growing at about 6% a year, according to Gartner, which compares to global growth of around 2% recently. “The growth of mobility and social media and the high percentage of younger people make this region suited to technology providers," the research firm said in a press release from March 2015.
Key to realising this potential is a substantial and continuous improvement in ICT infrastructure, as well as related infrastructure, such as dependable power supply.
Presidential Decree No. 96/2014 in October 2014 launched the so-called Indonesian Broadband Plan, which aims to vastly improve internet connectivity across the archipelago. By 2019, 71% of households in urban areas shall enjoy fixed broadband of 20 megabits per second (Mbps), while in rural areas, at least 49% of households shall have access to fixed broadband of a minimum capacity of 10 Mbps. In addition, mobile broadband (of no less than 1 Mbps) shall be available to everyone in urban areas and at least 52% of households in rural regions. The government also has concrete plans for new submarine cables to increase bandwidth with the outside world by 2018.
The plan envisions investment of $22 billion USD from the public sector, private sector and in public-private partnerships. This goal is to provide the physical infrastructure to facilitate ICT services across a wide spectrum of applications and sectors, including finance, agriculture, health, education and logistics as well as public services and procurement. In addition to the broadband plan, the government recently implemented regulations to facilitate the sharing of infrastructure between telecommunication operators, particularly towers, but also masts and power supply. The idea is to reduce operating costs by utilising existing infrastructure more effectively and collaborating to invest in new facilities.
Industry representatives have welcomed both the roadmap to faster internet and the infrastructure sharing push and expect multiplier effects on business activity in the entire ICT sector and the wider economy. On the technology side, improved infrastructure opens up opportunities for communication hardware as well as consumer and enterprise software solutions. While banking and manufacturing still dominate in terms of IT spending, businesses in industries, such as agriculture, health and education, are expanding their use of IT solutions and look set to account for a growing portion of the market in the future.
Implementing new systems should vastly increase demand for consulting services and vocational training. Especially in the beginning, when domestic providers are still working on their know-how and capacity, this spells a considerable export market for foreign-based hardware manufacturers, software firms and IT service providers. As research and development gradually develops in Indonesia, the market will shift slowly towards more home-grown solutions.
The current shortage of qualified human resources in ICT in Indonesia will remain a concern for the foreseeable future and should create strong demand for IT outsourcing and offshore solutions, which is an opportunity for service providers around the world. This extends beyond data centres and cloud computing to business activities such as software development, IT security governance and audit (including risk management) and IT training. For investors in these and other ICT services, getting a foothold in Indonesia also means easier access to other countries in the ASEAN Economic Community.
Global Business Guide Indonesia - 2016
Contribution to GDP: 39.07% (Q3 2015)
Sector Growth: ICT 10.83%, Hospitality 4.53% (yoy, Q3 2015)
Number Employed in the Sector: 54.9 million (February 2015)
Main Areas: Retail, Transportation, Media, Telecommunications, Finance, Hospitality, Tourism.
Government Bodies: Ministry of Trade, Ministry of Tourism, Ministry of Transportation, Ministry of Manpower.