Indonesia’s Fast-Growing Technology Market

Indonesia is exploding. Catch it while you can.

Indonesia has quietly become a great place to do business. The country finally seems to have cast off many of the problems that plagued it for years. Investors are starting to notice. Tokopedia recently raised $100 million from Sequoia and Softbank, Zalora raised $112 million from various investors and GrabTaxi, which is based in Singapore but has focused operations in Indonesia, took over $340 million in the last year, and $250M, alone, from Softbank.

Tokopedia’s startup story is inspiring. CEO William Tanuwijay is a self professed academic, reader, and engineer — not a businessman. He spent the first 10 years of his career taking jobs at various online and payments companies. None of these businesses excited him, so he spent his nights reading local online forums. He saw people complain loudly about problems they faced paying for goods online and receiving them offline. There was no trust between buyers and sellers. Combining business models from eBay, Craigslist, and Google AdWords, he set out to form Tokopedia. He has one mission: to build a product that everyone in Indonesia can and wants to use.

But starting a business in Indonesia was not always so simple. Five major terrorist bombings from 2000–2003 killed hundreds and spooked foreigners. Corruption was rampant. Inter-religious conflicts often flared.

This difficult past may explain why the country lacked much outside investment. Suharto, Indonesia’s president for more than 30 years, ruled Indonesia with a strong, centralized military government until 1998. In 1998, Bascharuddin Jusu Habibie started Indonesia’s truly democratic transition. He and the two presidents who followed encountered many internal conflicts and challenges. Then in 2004 Susilo Banambang Yudhoyono was elected, providing the first strong democratic president for Indonesia. He, too, was an Army general but spent his eight years fighting corruption, establishing a political system of checks and balances, and forming free trade agreements (with Japan in particular). Despite this progress, last year the World Bank rated Indonesia114 out of 189 countries for ease of doing business.

Next year, it will probably rank much higher.

New President Joko Widodo — a timber collector and furniture salesman by trade — wants to diversify Indonesian businesses and attract over $500 billion in investment in the next five years. He has already pushed through a one-stop national office for business permits, created tax breaks for foreign nationals, and mapped out technology parks for high-growth industries.

Legal reforms are making the country a much safer place to invest, do business and collect payments. In the past, if a business took a customer to court for not paying its bills, the winner was decided by how much the judge was bribed, said Ichiro Kawada, CEO of BA Partners. Ten years ago tax collectors would demand personal payment for tax re-imbursement, he said. Kawada-san has been working in Indonesia with Japanese investment firms such as JAIC since 1998. He says that the environment has improved significantly and he is much more comfortable advising his Japanese to invest there now than.

All these regulatory changes will benefit the country’s growing and increasingly tech-savvy middle class. Indonesia is home to 250 million people. Within the next 20 years it is projected to become the world’s third most populous country behind India and China. Indonesia’s per capita GDP of $3,500 sits between India’s of $1,500 and China’s of $6,800. But it is growing faster than both, having doubled in the last five years. Widodo’s government has set a goal to increase GDP another 5% to 7% by luring foreign investment for infrastructure and new industries.

Technology companies will play a critical role in this planned growth.

The new consumer class is demanding the best the market has to offer, and Silicon Valley is not blind to that. Of the 70 million Indonesians who access the Internet, about 22% are on Facebook, making it Facebook’s fourth-largest market.

Roughly 60% of Indonesia’s Internet users access it only through mobile phones. It’s a fast growing market for mobile phones as China’s Xiaomi recently learned. It sold 100,000 phones online in its first three months and users held ‘Mifan’ — the Xiaomi operating system — parties in Indonesia, Xiaomi Vice President Hugo Barra said on stage at the recent Startup Jakarta event. Indonesia is a bit behind India in term of smartphone mobile adoption but its growing faster. We are investing heavily here, he adds.

Investors swarmed Startup Jakarta with a very clear mandate: find companies that solve everyday problems. Just 5% of Indonesians have a credit or debit card that that can be used to make purchases online. To collect from the rest, merchants need to let customers pay through alternative channels like cash on delivery, bank transfers and counter payments, said Neil Davidson, CEO of Coda Payments. “We are trying to solve online payments for merchants and consumers,” he said.

Simply building out e-commerce infrastructure — which happened almost two decades ago in the West — is another opportunity that’s attracting investor attention. There are over 78 e-commerce companies in Indonesia. acommerce provides everything from the web services to the fulfillment — even delivering on small Motos — for many of them. Founded by Stanford educated CEO Hadi Wenas, acommerce helps global e-commerce companies enter Indonesia and marks Groupon and BodyShop as customers already.

Investing in Indonesia is not a sure bet, but what is?

One drawback is the lack of engineering talent there. Indonesia under-indexes in terms of R&D spending and engineering expertise compared to its neighbors. “With all of our new investment, we will hire a lot of engineers in India, Vietnam, and China,” said Tokopedia’s Tanuwijay. Engineering talent is still at is infancy in Indonesia but will get better as students see a future in technology, he said.

It is still early days in Indonesia and execution is very tough, venture capitalist Hian Goh says. Who would know better than he? As Founder of the Asia Food Channel, he scaled the company to over 200 employees and successfully sold the company to the Scripps Network. It was the first real venture backed success story in the region.

This success shows the excitement in Indonesia can be very real. Sequoia is betting on the future and has already hired two partners in the region. But the rest of the Valley is still watching from home. Some locals like Anthony Tan, CEO of GrabTaxi, say that even if Silicon Valley investors and companies try to invest, they’ll fail if they don’t take time to understand the nuances of the market.

He may be right.

But if Valley investors do not start to understand the market and invest soon, for many it will be China all over again. They will just watch as the new next big consumer market passes them by.

Co-Author: Josh Wein