Humbler and quieter than the flashier economic stars of China and India, Indonesia offers spectacular opportunities for tech investors wanting to get in on the ground level of an economy that is expected to exceed the size of Germany and the UK within two decades. Indonesia is already one of the world’s top five markets in mobile subscribers, Facebook users, Twitter users and mobile ads, yet we still believe it can deliver a number of surprises on the upside. And with a burgeoning middle class and an average age of 28, its highly favourable long-term demographics mean that tech opportunities will abound.
Rapid growth driven by strong fundamentals
By any measures, all the tech numbers for Indonesia look good: its base of 55 million internet users today (larger than Korea’s) will grow rapidly to 125 million users by 2015 (more than Japan’s). And in parallel with this expansion, everything from e-commerce to online media to B2B applications will grow rapidly.
This growth is driven by one of the world’s most vibrant mobile markets: Indonesia’s huge and growing mobile market now has 278 million subscribers, 15% of mobile users already have smartphones, and the mobile ad market delivered around 200 billion impressions last year, second only to the US. On top of this, Indonesia is in the top five countries for both Facebook and Twitter usage, as well as having the world’s most active Twitter city, Jakarta.
Sitting behind all these numbers is a well-managed economy whose growth from 2012-2107 will only be exceeded by China among the world’s major economies. Indeed, over the past decade or so, the Indonesian economy has been so robust that it sailed through the 2008 financial crisis with barely a blip on growth.
But these numbers – while hugely positive in themselves – sit on top of a far more exciting story: Indonesia’s internet market is likely to offer some of the biggest opportunities for tech investors in Asia over the coming decade.
A huge consumer market that experiences step-change growth spurts
Indonesia’s middle-class is already big, and it’s booming. It will double over the next seven years to 85 million people, and by 2030 there will be 135 million middle-class consumers. At that point, Indonesia’s economy will be the 7th largest in the world, exceeding the economies of both Germany and the UK.
And to put the size of today’s Indonesia into perspective, its dynamic, fast-growing capital Jakarta has a population and GDP equivalent to that of the whole of Malaysia.
But this expansion of the middle-class is only half the story – the other half is technology affordability. Indonesia is a young, tech-savvy nation, full of people who are extremely enthusiastic to own and use the latest gadgets and technologies. The main barrier to ownership is not interest or desire, it is price.
So the fact that the consumer’s spending power is increasing at the same time as technologies are becoming cheaper means that the price-affordability balance for the average Indonesian can suddenly change very quickly. Unlike developed economies, where growth is primarily driven by the pace of mass market adoption, Indonesia experiences huge step-changes of growth as waves of pent-up demand are suddenly satisfied when the technology hits key price points.
Look at two recent examples:
What you see in the first graph above is how internet subscriptions in Indonesia rocketed upwards when the mobile operators began a 3G price war in 2009, bringing the monthly cost of an internet connection down from US$50+ to US$15, and in the second graph the sudden growth in smartphone purchases when the street price fell from US$400+ to under US$200 in 2010. (And it’s also worth noting that the sprawling Mangga Dua Mall in North Jakarta is already selling Android smartphones priced a shade over US$50).
So the technology markets in Indonesia frequently leap forwards in large steps as technology suddenly becomes affordable for the mass consumer market, rather than growing steadily as technology is adopted. What underlies this characteristic (and what many outsiders don’t realize) is that Indonesia is not like other Asian manufacturing-led economies. 60% of Indonesia’s economy comes from domestic consumption, so Indonesia is a huge consuming market.
A unique tech sector in Asia
Indonesia is both a young country (with an average age of 28) and a demographically advantaged country (the proportional size of the working population is still growing). Unlike China, which faces the upcoming challenges of an aging population, and India which must manage huge population growth, Indonesia has the dual tailwinds of healthy population growth rates and a steadily growing workforce.
Indonesia’s youthfulness also leads to a very active tech sector. Literally hundreds of startups have been formed over the past few years, with the pace of business formation accelerating from 2010 onwards. Many of the startups have a mobile focus, reflecting the mobile-first nature of Indonesia, with numerous others focused on social media, e-commerce, payment platforms, online advertising and B2B markets.
In addition, the internet, mobile and media sectors are completely open. Unlike China, the government of Indonesia has rejected strong regulation of the internet sector, and as a result Facebook, Twitter, Google and Yahoo! are currently Indonesia’s most-visited sites. Indonesia is also fully open to direct foreign investment. The top mobile operators all have large foreign shareholders, and Rakuten (the world’s third largest e-commerce company, after Amazon and Taobao) and Rocket Internet of Germany have both invested heavily in building Indonesian e-commerce sites.
Investors in the tech sector therefore have a range of strategic options available to target Indonesia, from setting up their own venture in Indonesia, to forming a joint venture with an local Indonesian company, to investing in an Indonesian tech business, to targeting the Indonesian internet users from an overseas-based website.
But again, this is not the whole story.
What many have overlooked so far in the growth of Indonesia’s tech sector is the potential of the internet to transform the way things are done in Indonesia. Much of the focus of the startups in the past 2-3 years has (rightly) been in bringing online concepts from overseas into Indonesia: mobile messaging, daily deals, social networks, online payments, e-commerce, and so on.
However, the real potential of the tech sector is in providing services that meet the specific needs of Indonesia’s growing consumer class. Improving the education of their children. Providing simpler ways to pay bills. Enabling them to make better choices for healthcare. Providing online shopping experiences that cater to the social nature of Indonesian culture. Making it easy for them to travel locally, and helping them satiate their increasing desire to make overseas trips.
So there is a major opportunity on the upside as the Indonesian tech sector moves from a perspective of seeking to localise overseas websites to one where it develops unique local solutions. Somewhat paradoxically, these local solutions will require overseas capital and expertise to bring in the skills and experience required to build large-scale online companies.
Huge rewards await those willing to invest capital and skills
So we believe Indonesia has the potential to deliver two upside surprises:
Firstly, the already-attractive forecasts of internet growth are likely to be exceeded as the rising wealth of over 100 million gadget-loving consumers coincides with falling technology prices.
Secondly, Indonesia’s young and growing population has the potential to revolutionise the way business is done in the country by leveraging the power of the internet: in effect, an entrepreneurial surprise on the upside.
Huge opportunities therefore exist in Indonesia for investors who see and understand these dynamics. What Indonesia needs from those investors are:
1. Investors who are prepared to invest not just in facilities and advertising, but also to invest in building the skills and expertise base in Indonesia. The tech sector in Indonesia does not need valleys, it needs bridges!
2. Investors who are willing to take a 3-5 year initial time perspective, and see the benefits of investing in Indonesia for the long term.
3. Investors who are prepared to work closely with local entrepreneurs to understand local needs and to fund the development of solutions relevant to this huge market.
The end-game prize will be to get in at the ground floor of the internet revolution in the world’s fourth-largest country by population, and an opportunity to establish a beachhead as Indonesia moves to becoming one of the world’s largest economies.