McKinsey: In Indonesia, ecommerce is the modern-day Industrial Revolution

 (Photo: Shutterstock)
(Photo: Shutterstock)

Though ecommerce as a concept had been ideated in the U.S. and exported overseas, the country in itself would have done well even without it, as it already had the means to shop and consume in ways that were alien to most across the world. However, to the developing countries in the East, ecommerce has been nothing short of a lifeline – raising a multitude of SMEs from seeming nothingness, bringing consumerism to people who didn’t know that ‘choices’ existed.

The latest McKinsey report delves into the digitized atmosphere of Indonesia, shedding light on how online commerce is powering the country’s economic development and the measures needed to broaden its reach in the future.

“Indonesians are among the world’s most avid users of social media, in a country with a rapidly growing digital ecosystem of online commerce, ride-sharing services, media distribution, financial services, and more,” said the report. “While these factors have created significant business opportunities and new jobs, improved access to services, and promoted greater connectivity with global society, Indonesia must still overcome several challenges to become a truly digital economy.”

It could be argued that the dawning of digitization in Indonesia was by no means gradual – a tale that reverberates across vast swathes of Asia. Countries like Indonesia virtually jumped blocks over technological evolution cycles, rushing through the elaborate process of moving from bulky desktops to touch phones, as technology came in fleeting and fast.

The country is expected to add 50 million new netizens between 2015 and 2020, with a penetration rate of over 50%. Regardless of this, the Indonesian ecommerce market being worth around $8 billion, is still a sliver of its GDP which stands at a little over a trillion dollars – leading to economic pundits reveling in its ecommerce possibilities for the future.

For the ecommerce market, smartphones have been a revelation. McKinsey states that nearly three-quarters of all Indonesian online shoppers use smartphones to buy products, which is radically different from the U.S. ecommerce scene, which stands at 39%. Indonesians are also heavy social media users, a trait that is exploited by local businesses to advertise their products. Social commerce accounts for roughly 40% of all sales, highlighting the extent to which businesses bank on social media rather than traditional media advertising.

The country currently has about 30 million online shoppers, with the number growing at an average of 12% every year. McKinsey estimates that online commerce will rise to at least $55 billion by 2022, while social commerce alone is expected to contribute $15 billion to the mix.

Drop shipping is a popular concept in Indonesia. In many ways, drop shippers are the diminutive equivalents of established ecommerce companies, but exist because they understand local demographics better and can offer better and ‘trustable’ payment methods.

Many people in Indonesia are still wary of paying online, out of irrational fear or because of a general aversion to technology. Drop shippers help ‘offline’ consumers to search and identify products they need through drop shipping platforms, proceeding to buy the products and providing it to the consumer at a small premium. The advantage of this system is that the consumer does not pay upfront, but only after he receives the product, with cash payments being an attractive option. Drop shipping now accounts for $500 million in gross merchandise value for online platforms.

All this being said, ecommerce currently represents only about 3% of the total retail sales in Indonesia. “While relative growth has been high—it has quadrupled over the past two years and is projected to grow eightfold over the next five years—the absolute growth of online commerce is less than the overall growth of the retail sector. In other words, offline retail is projected to continue growing in the near future despite some sales shifting to online,” said the report.

However, traditional retailers in the country should wake up to the reality of ecommerce, and should engage with their consumers online by understanding demographics, picturing go-to-market models, and identifying partners for online commerce and digital channels. McKinsey states that “only 6 percent of global retail customers are purely offline, with the remaining 94 percent engaging in at least one online channel as part of their shopping journey” – revitalizing the need for brick and mortar stores to go digital.

Indonesia’s online commerce industry has had a lasting impact on country’s workforce, raising countless SMEs off the ground, and directly or indirectly supporting nearly 4 million jobs, which McKinsey estimates would grow to 26 million by 2022. Ecommerce is also allowing Indonesian businesses to sell their wares to the West, making sizeable profits for themselves. The ongoing U.S.-China trade tussle could also be a sign for companies to ramp up exports to the U.S., as U.S. importers look elsewhere for business relationships.  

To sustain the growth of ecommerce, McKinsey advocates for bolstering logistics and the underlying infrastructure, making it easier for moving products through the supply chain. Also with regard to exports, it is crucial that the logistics machinery be well oiled, as precise engagement and quick delivery systems are the norm.

Payment methods need to be tackled as well. “99% of transactions, by volume, in Indonesia are cash based. As a result, Indonesia lags behind most Asian countries in payments revenue per capita; in 2015, Indonesia recorded $74 in payments revenue per capita, compared with $271 in Malaysia. Point-of-sale card acceptance remains low, as do credit card and debit card ownership and use,” said the report. Bringing in platforms like Alipay, the Chinese online payment service to Indonesia might bode well for the future.

Finally, the Indonesian government must look at improving its image as a place of investment, as the country lags behind woefully when compared to regional peers like Singapore, India, and China. “Indonesia needs start-ups to spur innovation. Innovation, in turn, will help the ecosystem grow to sufficient maturity so that it can capture value locally and prevent global competitors from entering and dominating the market,” the report said.

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Vishnu Rajamanickam, Staff Writer

Vishnu writes editorial commentary on cutting-edge technology within the freight industry, profiles startups, and brings in perspective from industry frontrunners and thought leaders in the freight space. In his spare time, he writes neo-noir poetry, blogs about travel & living, and loves to debate about international politics. He hopes to settle down in a village and grow his own food at some point in time. But for now, he is happy to live with his wife in the middle of a German metropolitan.

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