Indonesia: A market where obstacles and opportunities co-exist

This story was originally published on Lianhe Zaobao on 20 October 2019.

Known as the “The Country of Thousand Islands”, Indonesia has gradually become one of the hottest investment locations in recent years, drawing continuous influx of foreign enterprises in search of business opportunities, including many Singapore companies.

On one hand, Indonesia is the most populous country in ASEAN, with a young population and a fast-growing middle class, which constitutes huge consumption and market potential. On the other hand, Indonesia's cities are congested, infrastructures are inadequate, and the amount of red tape in government agencies coupled with low administrative efficiency create resistance to the development of enterprises.

Lianhe Zaobao’s "Businesses in ASEAN" (“商聚亚细安”) series, will focus first on Jakarta, Indonesia. Learn about what challenges the largest economy in ASEAN presents to businesses, as well as the opportunities it offers. 


ASEAN Indonesia
Indonesia is the fastest growing economy in Asia and has vast investment potential, but also faces challenges such as congested cities and problematic traffic. (Photo: Lianhe Zaobao)

 

Mr Syed Ali Ridha Madihid, Chief Operating Officer and co-founder of Singapore logistics company Janio, has been a frequent visitor of the airport cargo office since childhood days. His father was a warehouse manager and he would tag along on his father’s rounds, which helped the young Mr Madihid develop his business acumen in logistics. 

ASEAN Indonesia Janio
Mr Syed Ali Ridha Madihid, Chief Operating Officer and co-founder of logistics company Janio, had sensed the potential of Indonesia’s logistics industry and decided to target this market first for his business. (Photo: Lianhe Zaobao)

 

In the past few years, when Mr Madihid visited relatives who lived near the airport in Jakarta, he noticed cargo planes taking off and landing with high frequency. Having sensed the underlying potential of the local logistics industry, when he co-founded Janio with his business partners in 2018, he decided to target Indonesia first.

Fast forward a year later, Janio has become one of the leading logistics service providers in Indonesia, providing customs clearance and cross-border delivery services for e-commerce platforms such as JD.ID, Zilingo and Bukalapak, with an average daily delivery of approximately 20,000 to 40,000 parcels, and sometimes even up to 80,000 parcels.

In just over a year, the company has achieved rapid growth. Mr Madihid believes that this is because the company made the right choice to focus on Indonesia at the beginning. 

In an interview with Lianhe Zaobao, he said: "Indonesia is the largest market in ASEAN, so naturally it attracts our interest. More importantly, Indonesia not only has great business potential, but it is an archipelago spanning more than 17,000 islands, with many challenges such as high logistics costs and complex cross-border delivery. If we could overcome Indonesia,  it would give us confidence to venture into other markets."

The ASEAN market has attracted much attention from investors in recent years, and Indonesia is one of the most popular markets for foreign investors.

According to statistics from Enterprise Singapore (ESG), Indonesia is the fastest growing economy in Asia, with an average annual growth of about 5% since 2000. It is also the most populous country in ASEAN, with a population of nearly 270 million, accounting for about one-third of the total ASEAN population.

■ High visibility of Singaporean brands

In addition to Indonesia's favorable demographic structure, the middle class is also continuously expanding, giving rise to a fast-growing demand for goods and services which in turn provides immense business opportunities for foreign businesses. In 2018, the foreign direct investment (FDI) hit 27.9 billion US dollars (S$38 billion).

Singapore shares close economic and trade relations with Indonesia and it has been Indonesia's biggest investor since 2014. In 2018, Singapore’s total investment in Indonesia reached $9.2 billion US dollars, ahead of Japan ($4.9 billion US dollars) and China ($2.4 billion US dollars), which is a year-on-year surge of 55%. The bilateral trade volume between the two countries also hit S$65 billion in 2018, a significant increase of 9.4% from the previous year.

ASEAN Indonesia ESG Khairul Anwar
Mr Khairul Anwar, ESG's regional group director (Indonesia), said that most of Singaporean investments goes to consumer related industries, energy and infrastructure businesses. (File Photo)

 

Mr Khairul Anwar, ESG's regional group director (Indonesia), said that half of Singaporean investments goes to consumer related industries. Other sectors that attract Singapore businesses include energy, infrastructure, finance, tourism and hotels.

Singapore brands can be seen frequently on the streets of Jakarta, from food and beverage companies like Chee Seng and Prima Deli, to service providers such as EtonHouse and Fullerton Health. In addition, three major Singapore banks and serviced apartment operator Ascott also have operations in Indonesia.

■ Industry 4.0 Opportunities

ASEAN Indonesia Auk Industries
Mr Lee Eu Harn, Chief Marketing Officer and co-founder of Auk Industries, a Singapore Industrial IoT solution company said that Indonesia is committed to promote the Industry 4.0 roadmap and increase industrial production efficiency (Photo: Lianhe Zaobao)

 

“The Indonesia market is really huge.” 

Mr Lee Eu Harn, Chief Marketing Officer and co-founder of Auk Industries, a Singapore Industrial IoT solution company said: “"In Singapore, larger factories probably have about 10 to 20 machines. But in Indonesia, one factory can have hundreds of machines. We can hardly imagine their scale... hence we can deploy our devices in these factories to achieve better economies of scale."

Auk Industries mainly develops devices that monitor machine performance. Mr Lee describes that these devices are like the "Fitbit" (fitness tracker) of machines. They can detect the productivity of each machine at any time, identifying those that are not operating optimally as well as those that are overworked.

The local government, led by President Jokowi, is committed to promote the “Industry 4.0” roadmap, focusing on growth sectors such as automotive, chemical, electronics, food and textile industries.

Mr Lee believes that the equipment developed by the company can help to improve Indonesia's industrial production efficiency and is commercially viable, so it ventured into the Indonesian market last June.

Another local IT company, SkyLab, integrates its core expertise in the fields of big data and IoT, focusing on data transmission applications in Indonesia's urbanisation process.

ASEAN Indonesia Skylab
SkyLab Chief Operating Officer Mr Stephen Ho shared that the proprietary data acceleration technology developed by SkyLab can deliver real-time transmission of massive data with precision. (Photo: Lianhe Zaobao)

 

SkyLab Chief Operating Officer Mr Stephen Ho explained that the communication network structure in Indonesia is still underdeveloped, with low network coverage, particularly in  towns and villages. The proprietary data acceleration technology developed by SkyLab can deliver real-time transmission of massive data with precision, resolving Indonesia’s urgent demand in real-time data processing.

The company entered the Indonesian market in July 2019 and has launched a pilot project for mobile payments in retail and convenience stores, to help with the delivery of paid data.

With the advent of the 5G era, solutions to reduce data latency and improve acceleration will be the key concerns for digital economy-related companies in Indonesia. Mr Ho is confident that this will also create business opportunities for the company.

■ Pain points that accompany Business opportunities

ASEAN Indonesia map

 

Although the relatively backward logistical, industrial and communicational infrastructure in Indonesia have generated plentiful business opportunities for Singapore companies, they have also become their biggest pain points.

When citing challenges faced in the Indonesia market, Singapore companies often mention problems such as urban congestion, poor traffic flow, poor connectivity between islands and obstruction in logistics. Other issues that rank high on the list include inefficient government agencies, lack of transparency in regulation and volatile political situations.

When interviewed, Mr Michael Goutama, vice chairman of the Indonesian Chamber of Commerce and Industry (Kadin), agreed that Indonesia has to improve its regulatory system. In particular, rules on employment, investment and trade, often have many restrictions, and require lengthy approval processes. These have posed great resistance to Singapore enterprises’ expansion into Indonesia.

Mr Goutama is also the Chairman of the Singapore Council of the Indonesian Chamber of Commerce and Industry, which is responsible for promoting collaboration projects by Singapore and Indonesia enterprises. He emphasised: "The institutional challenges include corruption and inefficient administration. These aspects have been seriously dealt with by Joko Widodo’s government and we have seen much improvement.”

Mr Khairul Anwar pointed out that Indonesia is a diversified country. Besides the politics, race, culture and religion can also affect the country's development. Singapore companies should monitor changes in the local situation and make adjustments accordingly.

For example, the sharp depreciation of the Indonesian rupiah last year caused many Singapore companies to suffer losses. The recent announcement by President Jokowi on plans to shift the capital to East Kalimantan province also became a matter of concern for enterprises.

On the whole, Mr Khairul Anwar is still optimistic about Indonesia’s outlook. In addition to its economic foundation and stable expansion, it has a large consumer base and middle class growth. More importantly, young Indonesians are creative and hardworking.

He said: "Indonesia provides an enormous business opportunity. But that also means that Singaporean companies must be ambitious and have long term expansion plans, otherwise they will have a hard time in this increasingly competitive market.”

Scoot offers flights to and from five destinations in Indonesia, including Jakarta, Bali and Surabaya. There are 21 direct flights a week from Singapore to Jakarta.

Challenges in the rule of Law

ASEAN Indonesia ISDN
Mr Teo Cher Koon, Managing Director and President of ISDN, had invested in Indonesia's hydropower plant in 2013. The project was originally expected to complete in two years, but it took six years before it was wrapped up. (Photo: Lianhe Zaobao)

 

Besides the digital economy, the Indonesia government is putting efforts on enhancing the local supply of clean water, energy and transportation, while basic infrastructure, energy and urban planning sectors are expected to have strong growth. Singapore companies have strengths in complementary areas such as technology and talent.

ISDN, a Singapore precision engineering and renewable energy company was drawn by the potential of Indonesia’s renewable energy market. In 2013, it started to set up small hydropower plants in North Sumatra and Sulawesi.

Mr Teo Cher Koon, Managing Director and President of ISDN, said that he invested in Indonesia's hydropower plant because he was optimistic that Indonesia's urbanisation will create demand for electricity. Indonesia also has abundant water resources and ample land, which are conditions suitable for building hydropower plants.

However, early birds do not necessarily catch the worms. Mr Teo’s investment project had met roadblocks along the way. The project was originally expected to complete in two years, but it took six years instead.

On this note, Mr Teo reflected helplessly: "Having grown up in Singapore, we are used to the rule of law and take many things for granted. Many things are unfortunately not the same in Indonesia."

He gave an example that the land upon which the company wanted to construct the power plant was originally an area of wilderness, but once building plans were announced, many “landlords” who claimed they had ownership emerged suddenly.

Survivor’s guide for business owners in Indonesia

① Invest more time and energy on building relationships and mutual trust with local businesses and professionals. Do not expect to reach an agreement in the first few meetings, nor should you think that trust can be established through email communication. Locals prefer to converse through messaging apps such as WhatsApp as well as meet face to face for business communication.

② Be prepared to deal with regulators that differ greatly from Singapore because you need to deal with both central and local governments. You will also need to navigate the different levels of government regulations and application guidelines. Finding local partners or employees who are familiar with the various levels of government operations is often one of the best solutions.

③ The Indonesian market is attractive to many foreign investors, especially in  sectors such as consumer and digital economy, which are on the upward trend. Therefore, Singapore companies must be prepared to compete with foreign and local brands for market share.

④ In this crowded and vibrant market, companies must be able to adjust their strategies at any time and allow for buffer to accommodate unpredictable changes. For example, you should allow ample time for daily travel in order to respond to sudden changes in road conditions.

⑤ Different countries and regions have different needs, and companies should come up with unique products and solutions for the Indonesian market to meet local needs.

——Mr Khairul Anwar, Enterprise Singapore's regional group director (Indonesia) 

Avoid direct confrontation with local businesses

With the rise of the Indonesian digital economy in recent years, it has attracted the attention of Singapore companies.

According to Google, Temasek, Bain & Company e-Conomy SEA 2019 Report, Indonesia's digital economy topped the chart, hitting $40 billion US dollars in 2019 and is expected to grow to $130 billion US dollars by 2025.

Indonesia currently has five Unicorns including Gojek and Tokopedia, and there are also many quasi-Unicorns, proof of an entrepreneurial ecosystem that is full of vitality.

Another point worth noting is that there are Chinese capital footprints everywhere in Indonesia’s entrepreneurial circle. For example, the main investor of Tokopedia, Indonesia's largest e-commerce platform, is Alibaba. Tokopedia is hence also known as the "Indonesian version of Taobao."

ASEAN Indonesia Hearti
Kenneth Tan, Chief Marketing Officer and co-founder of Hearti has set his eyes on Indonesian SMEs, capitalized on Hearti’s data analysis capabilities to provide virtual credit card Benefit.X. (Photo: Lianhe Zaobao)

 

Mr Anwar pointed out that Indonesia’s digital economy is still in the development stage, and Singapore start-ups can still find some access to the market. “The important thing is that we have to come up with innovative solutions that will attract Indonesian companies as partners, and not fight it out with local enterprises.” 

Hearti, a Singapore fintech startup, targeted Indonesian SMEs and capitalized on its data analysis capabilities to provide virtual credit card Benefit.X.

Kenneth Tan, Chief Marketing Officer and co-founder of Hearti said that SMEs are relatively neglected by Indonesia banks, and they often run into the wall when applying for credit accounts. “We have rolled out a virtual credit card called Benefit-X for Indonesia local SME.  Besides credit card services, these cards also include HR functions such as business credit , claim, and payroll. These are services that SME are lacking now, yet there aren't a lot of such service providers in indonesia now."

In order to promote Singapore-Indonesia start-ups, NUS Enterprise worked with Indonesia’s Salim Group about two years ago to establish Block 71 in Jakarta, Yogyakarta and Bandung progressively.

Professor Freddy Boey, Deputy President (Innovation & Enterprise) of the National University of Singapore, said that Block 71 aims to provide incubation for Singapore-Indonesia start-ups and create an innovative and entrepreneurial ecosystem. He said that Block 71 has presence around the world, including Suzhou Industrial Park and San Francisco, helping start-ups establish networks and conduct international cooperation.

 

Discovering Vietnam in the next issue of “Businesses in ASEAN”

 “Businesses in ASEAN” is a series of reports launched by Lianhe Zaobao, bringing up to date regional market information to Singapore companies. This bi-weekly report focuses on key growth areas and business must-knows in different markets.

In the next story, “Businesses in ASEAN” will visit Vietnam to explore how the trade war has benefitted Singaporean companies there.

Other stories in the series:

1. Explore business opportunities in ASEAN