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Jack Ma in Indonesia shows e-commerce growth potential

Tuesday, October 4, 2016 - 08:58
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In a testament to the rising consumer potential of the world's No 6 emerging market, Indonesia's President Joko Widodo has tapped for guidance from the king of Chinese e-commerce: Jack Ma.

[MUMBAI] In a testament to the rising consumer potential of the world's No 6 emerging market, Indonesia's President Joko Widodo has tapped for guidance from the king of Chinese e-commerce: Jack Ma.

Jokowi, as Indonesia's leader is known, further intensified the buzz surrounding his country's US$2 billion e-commerce market with a stop at Jakarta's sprawling Mangga Dua bazaar last month, buying an iPad from a store belonging to web retail giant Bhinneka.com.

Indonesia has an e-commerce market that McKinsey & Co says can be one of the fastest-growing in the world, part of a digital economy adding US$150 billion a year to gross domestic product by 2025. All the more reason for Jokowi to turn to Mr Ma, founder of Alibaba Group Holding Ltd, to advise his administration on how to supercharge online retailing in the country.

"It does have that potential and I think that part of it boils down to also Indonesia, as a culture, being incredibly consumptive," said Adrian Li, managing partner of Convergence Ventures, which backs early-stage tech startups in Indonesia.

"By some estimates, for example, you've seen Indonesia and the adoption of e-commerce grow even faster than some of the peers in China."

Indonesia's urban consuming class - individuals with disposable income of more than US$10 a day - is growing by about 5 million a year to reach 86 million by 2020 amid rapidly expanding access to the Internet, according to McKinsey.

Online sales could reach 7 per cent to 8 per cent of the total retail market by 2020 from about one per cent currently, it estimates. The central bank projects e-commerce transactions will almost double to US$4.6 billion this year.

'Explosive Growth'

South-east Asia's biggest economy with a population of 255 million is experiencing "explosive growth" said Ali Potia, a Singapore-based partner with McKinsey and head of the company's Asia Consumer Insights Center. The value of e-commerce could increase by as much as US$15 billion over the next three years alone, the company estimates.

Jokowi turned to Alibaba's Mr Ma after touring the company's headquarters in Hangzhou, China in early September. He told his ministers last week that Indonesia could become the biggest digital economy in South-east Asia and he is "ordering that implementation be accelerated because if it's done not immediately, then we will be left behind."

Mr Ma has already established a foothold in Indonesia, where 100 million people are hooked up to the Internet - a figure growing at a rate of more than 10 per cent a year - and 40 per cent of mobile users have a smartphone. Alibaba made its biggest overseas acquisition in April with a US$1 billion investment in the online emporium Lazada Group SA, which is based in Singapore and sells clothes and electronics in six South-east Asian nations.

Online Retailing Go-Jek is another example of the transformative nature of e-commerce. Starting out as a ride-hailing app, it now offers vendor-to-door delivery of everything from concert and movie tickets to massages and even pedicures and cream baths via its "Go-Glam" button.

"If you look at where Go-Jek is today - bear in mind this is a company that's less than three-years-old - the number of deliveries and transactions it's able to do per month, that's also significant," said Convergence Ventures' Mr Li.

"Again, it's on par with some of the fastest-growing startups you've seen in China." Unlike the US, Mr Li added, and similar to China about a decade ago, traditional retailers in Indonesia don't have a national footprint where people in smaller cities can purchase the types of goods and services others can buy in the major metropolitan areas of Jakarta or Surabaya.

Infrastructure Challenge

"With the penetration of e-commerce they now are able to buy those things," he said.

"Increasingly we see with large branded retailers coming online - Alibaba purchasing Lazada, Matahari Mall, JD.com - people become more and more comfortable with transacting online. There is less and less of a trust issue."

Still, challenges remain, particularly with infrastructure. The archipelago of more than 17,000 islands lacks reliable electricity supply and warehousing facilities, while poor road, rail and air networks hamper transportation, driving up costs and delaying delivery of goods and services.

E-commerce growth is also restricted because of low credit-card and technology usage. Internet penetration in 2015 was just 34 per cent, according to McKinsey.

"E-commerce operators in Indonesia will need to sharpen their focus on building sustainable, cost efficient operations that have a clear path to profitability," said McKinsey's Mr Potia.

"This will require other parts of the ecosystem - such as logistics, payments, mobile Internet - to keep up as well."

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