Analysis of Singapore’s investment opportunities in Indonesia’s e-commerce sector

The large-scale work-from-home phenomenon caused by the COVID-19 outbreak has led Indonesia to experience an “extreme” increase in the number of people shopping through digital platforms. This has accelerated the process of digitalization among Indonesia’s households with 70,05% of Indonesia’s total population using a smartphone in 2020 (Statista, 2020). According to AppsFlyer, in-app sessions among Indonesian users for e-commerce and shopping apps rose by up to 70% throughout the February — June 2020 period.

E-Commerce contributed US$ 21 billion to Indonesia’s digital economy in 2019 and is expected to reach 54% YoY to reach $31 billion in 2020, accounting for 60% of the digital economy in Indonesia. Apart from being a major driver in the country’s retail sector, Indonesia’s e-commerce is also one of the fastest-growing markets in the world and is projected to reach $83 billion by 2025 (Google Report, 2020). This makes Indonesia’s e-commerce sector hold a lot of opportunities for foreign investors.

Singapore and Indonesia work closely together bilaterally, as well as at ASEAN and various international fora. The relationship of both countries is rooted in strong economic cooperation as Singapore has been the top foreign investor in Indonesia since 2014 with bilateral trade reaching $59 billion in the year 2019 alone (Ministry of Foreign Affairs of Singapore, 2020). Moreover, Singapore has still consistently ranked as Indonesia’s main Foreign Direct Investment (FDI) origin, amidst the COVID-19 outbreak. In the second quarter of 2020 with US$ 2 billion, amounting to 28.8% of the total FDI realization in the country, Singapore is highly optimistic about the business and investment prospects in Indonesia (BKPM, 2020).

Besides, in 2018, Indonesia and Singapore have signed an agreement on a cooperation framework to support the development of the digital economy through e-commerce schemes as part of the ASEAN Economic Integration plan. According to Singaporean Trade and Industry Minister Chan Chun Sing, the agreement will help increase confidence and trust among ASEAN consumers in e-commerce to enable ASEAN businesses to grow domestically, regionally, and internationally (The Jakarta Post, 2018). Thus, e-commerce seems to be one of the best prospects for Singapore’s business enterprises to penetrate the Indonesian market.

Indonesia E-Commerce Sector

Indonesia E-Commerce Landscape

Indonesia’s e-commerce landscape experienced investment of at least US$ 2.5 billion from 2015 to 2018, paving the way for businesses to list and sell their products online. In 2015 alone there were at least 18 million online shoppers in Indonesia and expected to grow to 199 million by the end of 2025 (Google and Temasek, 2018).

The growth of Indonesia’s online transactions is mainly underpinned by local e-commerce giants such as Bukalapak, Lazada, and Tokopedia. These large online shopping platforms provide local and international businesses to establish an online storefront, accept transactions and, in Lazada’s case, provide warehouse and deliver products to the customer.

As logistics and smartphone penetration continue to improve, growth in the customer base of major e-commerce companies is shifting outside Jakarta. Bank Negara Indonesia has reported that customers in Indonesia’s Tier 2 cities have accounted for an increasingly large proportion of e-commerce transactions as residents take advantage of the wide choice of goods and services that were previously unavailable to them.

In 2019, e-commerce consumers are largely constituting of Gen Z and Millennial or below 35 years old that amounts to 84% and over 90% of them were in Java Island. However, with the pandemic, the adoption rate of new users outside Java Island had increased dramatically.

Smartphones play a crucial role in the growth of Indonesia’s e-commerce. According to a Statista Research Department report, smartphone penetration increased from 44.44% to 63.29% between 2017 to 2019, largely driven by low-cost devices that are available only at US$30. The same report also estimated that the number of online shoppers in Indonesia will increase accordingly from 20 million in 2017 to 65 million by 2022. As the world’s fourth most populous country of more than 265 million inhabitants, Indonesia would be one of the largest online marketplaces in the world.

Usage of e-wallets in e-commerce transactions has been and is predicted to continue increasing as internet and smartphone penetration grows, allowing consumers coming from lower economic status and rural areas access to e-commerce.

McKinsey Global Institute suggests that Indonesia’s economic and population growth translates to the country’s “consumer class” that could grow from 45 million in 2010 to 135 million by 2030 with 90 million additional consumers in 20 years. E-commerce is already benefiting from the rise in disposable income as private consumption of goods and services by households accounted for a higher proportion of GDP in Indonesia than in India and China.

Indonesia E-Commerce Amidst COVID-19

Indonesia’s e-commerce is expected to accelerate by 91% this year compared to 54% as previously projected, due to COVID-19 (Jakarta Globe, 2020). Currently, it is estimated that online shoppers grew from 75 million prior to the pandemic to 85 million people when COVID-19 strikes (The Jakarta Post, 2020). This mainly happens because of the drive of forceful trading activities towards digital channels and further accelerated by the growing number of middle-affluent customers. It is estimated that 12 million customers have adopted online shopping habits following the COVID-19 and will intend to continue online shopping in the longer term according to the 2020 Google Report.

Consumer’s payment preference also takes a toll due to COVID-19, Indonesian Central Bank estimated that the transaction value of digital money was 18.7% higher in April 2020 where the government started to enforce the large-scale social restrictions. Correspondingly, traditional banking payment methods experience a decline in transaction value and plummeted by 37% in April 2020.

It seems that both businesses and consumers have turned to e-commerce platforms as their alternative channels for their continuity in times of pandemic. For instance, Blibli, one of Indonesia’s online marketplace, experienced an upturn in the number of registered merchants by 90% in April 2020 compared to March 2020 (Sirclo, 2020). This indicates that numerous stores that were forced to close due to large-scale social restriction measures have utilized e-commerce for their business’ continuity.

On the other hand, consumers have been making the most of online platforms to fulfill their needs while minimizing the physical contact in the shopping process. There has been an increase in primary goods demand in March 2020 to the previous month such as food at 59% increase, personal care products at 29%, and school supplies at 34% via e-commerce websites (BCA, 2020).

Singapore Investment Opportunities in Indonesia E-Commerce Sector

Opportunities in Indonesia’s E-Commerce Sectors

Indonesia has the largest Internet user base in the region and it makes the country Southeast Asia’s largest digital economy with a value of S$40 billion in 2019 alone. It is expected that the digital economy’s annual growth rate of 22.2% to reach S$133 billion in 2025, making it also the fastest growing digital market in the region (Channel News Asia, 2020).

Although Indonesia is recording significant YoY growth of 60–70% since 2014, compared to its regional pacesetter, China, with sales of US$692 billion, the Indonesian e-commerce market is still relatively small at only US$8 billion. In 2016, Indonesia’s e-commerce sales as a percentage of total annual retail sales amounted to 1.6%, compared to 13% in China (Macquirie Research, 2017).

This shows that there is still space for development in the Indonesian e-commerce market, which is probably going to be driven by the continuous change of the industry through significant levels of investment and industry consolidation. As Darius Lim, Assistant Chief Executive Officer of Global Business at Singapore Business Federation stated at the SBF Indonesia Market Insights and Business Opportunities online seminar, “Gold mine opportunities through market digitalization.”

Although Indonesia’s e-commerce sector is rapidly providing access to an increasing number and types of consumers, it is essential for Singaporean businesses without existing connections in Indonesia to ensure that they have relevant product-market fit before taking steps to list their products online.

Indonesia’s specialized e-commerce platform market is evolving rapidly including a mix of B2B and B2C models across product categories that may appeal to Singaporean exporters. For instance, Zalora, a leading B2C shopping retailer that offers fashion products from leading local and international brands established in 2012 with a presence across Southeast Asia. The targeted consumers of this platform are people aged 25–35 years. Singaporean fashion businesses can gain easy access to Indonesian and Southeast Asian customers through the Zalora platform.

Recognizing the potential of the sector, in 2016 Indonesia announced the e-commerce sector has been removed from the negative investment list. This change has enabled international business enterprises to hold 100% ownership in e-commerce business if they create at least 1000 new jobs or invest Rp100 billion ($7.1 million). On the other hand, investors who spend less than the threshold can utilize joint ventures to hold a take of up to 49% (BKPM, 2016).

Moreover, Indonesia has Nongsa Digital Park in Batam that was officially launched in early 2018. It hosts companies based in Singapore to serve as an extended workbench for Singaporean companies to conduct digital operations to capitalize on resources and the digital ecosystem in Indonesia. The area will be accorded Special Economic Zone status, opening greater opportunities and benefits for Singaporean investors in the e-commerce industry.

Opening Doors for Singapore Businesses

Singapore’s businesses can take advantage of Indonesia’s e-commerce industry, although access may vary depending on the company’s size and products. They can work with in-market launch pads to build networks in Indonesia and reach out to tech talent to support both operations and in-market needs.

• Singaporean businesses with existing relationships and/or a local presence that already have an Indonesian e-commerce strategy with existing supply chains into China could leverage the relationships to test the Indonesian e-commerce strategy. For instance, Alibaba-Tokopedia or Alibaba-Lazada.
• Singapore’s companies that have not yet established Indonesian operations and no supply chains into China could create a local entity in Indonesia and importing products into the market will allow for the greatest access to e-commerce and a wider retail market.
• Most consumer products with the exception of fresh grocery enjoy healthy online trade with lower price points. This presents an immediate opportunity for Singapore companies that are in the field of consumer goods. B2B channels are less developed in this sense, presenting a larger opportunity for Singaporean businesses with the financial wherewithal and patience to exploit it.
• There are no major e-commerce sites that accept international drop-ship (in which goods are held offshore and dispatched upon order) in Indonesia. This could be one of the options of Singapore’s business to access the market.
• Singaporean businesses that seek to access the Indonesian e-commerce market through distributors should undertake careful consideration in choosing warehousing and logistic companies. Local service providers in Indonesia would include 8commerce, aCommerce, and Connexi.
• For Singaporean small to medium-sized enterprises (SMEs) can reach out for consultant agencies for pre-market entry advice, in-market consultations, leasing office space, and business matching.

The Conclusion

With Indonesia’s growing e-commerce industry alongside its high digital penetration rate bringing along new trends over time, it becomes more urgent for businesses to understand the market and the opportunities it affords them. Although improvements in regulations are helping businesses to advance Indonesia’s e-commerce industry as a whole, Singaporean businesses need to understand specific regulations that may affect their market entry.

Nonetheless, Indonesia has serious attention and Singaporean businesses with existing operations should already be actively looking forward to how to exploit Indonesia’s digital market in e-commerce opportunities. Indicators suggest Indonesian e-commerce is likely to continue growing even after COVID-19 and its case of access are improving. As a regional partner, the opportunity for Singaporean businesses is significant, as another regional player opens its doors to Singapore investment.

Singapore’s businesses can take advantage of Indonesia’s e-commerce industry with varied access according to companies’ capacities. Singaporean businesses with existing local presence could leverage the relationships to test the Indonesian e-commerce strategy and Singapore’s companies that have not yet established Indonesian operations could create a local entity in Indonesia.

Indonesia also provides immediate opportunities for Singaporean companies that are in the field of consumer products and access the market through international drop-ship. Moreover, Singaporean businesses wanting to access the Indonesian e-commerce market through distributors have several options of warehousing and logistic companies and Singaporean SMEs can seek consultant agencies for pre-market entry requirements.