Adrian Li is founder and managing partner at Convergence Ventures, a venture capital fund that invests in early stage technology ventures in Indonesia. He is also a mentor at several local startup accelerators.
The last three months have seen a massive increase in overseas institutional investor interest in the potential of Indonesia. This makes sense as it’s been spurred by the maturity and realized returns from China and the US. Investors are now thinking where next? Having fielded many questions from such investors, one query is invariably asked of me over and over again – “Aren’t logistics and payments a barrier to ecommerce?” Another is, “Will this prevent the growth of the market?”
My answer is to encourage investors to focus on the ecommerce opportunity and that logistics and payments are not barriers, just friction points. That frequently raises eyebrows. Here I’ll explain why I give that answer.
Inconvenience isn’t a barrier
I categorize true barriers to the growth of ecommerce as access, adoption, and spending. These three factors will truly prevent buyers from going online because they’re more than just an inconvenience. By “access,” I mean the ability of people to go online. Clearly if individuals cannot even get online, there will be no internet economy. Indonesia, however, is well clear of this with a connected internet population of more than 85 million and a forecasted 165 million by 2020. That’s from a total population of 250 million.
I define “adoption” as whether people with access to the internet spend time online or are prepared to transact online. Again, Indonesia has shown incredible adoption of internet products and services. Already it boasts the world’s fourth largest Facebook population, and Jakarta is the most engaged Twitter city in the world. Based on the 2014 State of the Internet report, the most screen minutes consumed globally per active user come from Indonesia.
This brings us to the final barrier – “spending.” In other words, are people wealthy enough to be spending on products and services online (or are such products being priced cheap enough to entice people to spend online)? Indonesia’s GDP per capita on a nominal basis is now quickly approaching the critical threshold of US$4,000 per year, which economists have seen as a tipping point for the rise of the middle class and ensuing consumer business opportunities.
To reinforce this, the phenomenal growth of ecommerce sites like Tokopedia, Lazada, and Traveloka in the last three years bears testament to customers’ willingness to not only access the internet, but also to spend online. If you ask me: “Are there big barriers to the growth of the Indonesian internet economy?” I would answer no.
What remains is a huge opportunity as growth in access, adoption, and spending continue and transactional friction is reduced.
Friction is just an inconvenience
So what’s friction? I would call payments and logistics friction points because typically it’s not that goods and services online cannot be paid for or that they cannot be delivered. Rather, it is more that these enabling layers of payments and logistics are not as well developed as they could be.
Taking payments for example, it is well known that the credit card penetration rate in Indonesia is only around 3.5 percent and that bank account penetration is only 20 percent. However, this has not stopped “cash on delivery” from being a solution for ecommerce payments – it typically accounts for around 30 percent of transactions in the country. Also, with more than 50 million people using bank accounts, it’s no surprise that bank transfers are a highly popular method of payment too.
Turning to logistics, while there is much to be developed, several local third-party logistics (3PL) providers – including First Logistics, JNE, ESL Express, and RPX – at least offer solutions to delivering to most of Java and to the larger islands beyond. This year, JNE is said to bedelivering an average of 4 million ecommerce packages per month – of which 40 percent are to outside Jakarta – via 7,000 motorcycles and 2,000 vans as well as hired trucks and boats. Most ecommerce players will work with a variety of 3PL providers in order to provide sufficient coverage.
Access, not convenience, is driving demand
Is convenience a major reason for the growth ecommerce? Actually the major driver of ecommerce is demand from outside of first-tier cities where demand arises from scarcity, not convenience. People in Indonesia are buying online because they cannot buy the goods offline, so it’s a choice of delivery within a week versus not getting the item at all. In this instance, even if it takes a week, at least the consumer can now buy the item.
The CEOs of large ecommerce firms have anecdotally confirmed this. Max Bittner from Lazada stated that over 60 percent of its customers in Indonesia are outside of Jakarta, with 20 percent outside of Java. William Tanuwijaya of Tokopedia has also stated that while 60 percent of its vendors reside in Java, 60 percent of deliveries are made outside of Java.
So the billion-dollar question is not about barriers or friction
Of course, it can be better and there are a lot of opportunities to improve these things. That’s why there are some smart startups like aCommerce and Veritrans which are tackling the logistics and payment issues. As access, adoption, and spending all continue to increase, these enabling technologies that reduce transactional friction are likely to benefit significantly.
But as investors, we should look past payments and infrastructure as barriers or even friction and focus on the real opportunity, which is that online commerce is just 0.5 percent of total retail sales in Indonesia. Given that in China’s online commerce is already at 10.6 percent of total retail transactions, we can be confident that Indonesia has a lot of upside potential. Hence the focus for investors and entrepreneurs should be to look for markets and verticals which can capitalize on this opportunity in order to build long-term successful businesses, and not on so-called bottlenecks.