Deloitte Indonesia Perspectives Second Edition, February 2021Realising thepotential ofIndonesia’s digitaleconomyWith predictions suggesting thatIndonesia’s digital economy is poisedto grow to size of about USD133 millionwithin the next five years11, realising itsfull potential has become a priority forboth the government and businesses inrecent months, especially as the COVID-19pandemic continues to drive digitalisationacross all sectors.1121“Jokowi: Ekonomi Digital Indonesia Terbesar di Asia Tenggara”. 27 February 2020.

Deloitte Indonesia Perspectives Second Edition, February 2021 Given its digitally savvy consumers, acceleratinge-commerce market, and vibrant technology start-upscene, Indonesia’s digital economy appears to bepoised for take-off. To enable this, however, Indonesiamust make a concerted effort to support micro, small,and medium enterprises (MSMEs) in their digitaltransformation efforts.Specifically, while MSMEs are the backbone of Indonesia’seconomy, they continue to face challenges in migratingtheir operations online, including but not limited toconnectivity and infrastructure issues, data privacy andcybersecurity issues, as well as a lack of adequate digitaltalent.In this report, we will take a brief look at Indonesia’se-commerce market; discuss how digital transformationcan help businesses, and MSMEs in particular, becomemore resilient; and finally, suggest a few priorities thatbusinesses and government alike should consider in theirefforts to realise the full potential of Indonesia’s digitaleconomy.Figure 1: Daily usage of the Internet in IndonesiaUnknown4%Less than 1 hour 7%1-2 hours11%More than 8 hours20%2-3 hours12%7-8 hours6%6-7 hours7%5-6 hours10%3-4 hours12%4-5 hours10%Source: Indonesia’s Internet Service Provider Association (APJII), 2020.Poised for take-offHome to 268 million people, Indonesia has the world’sfourth largest number of Internet users of around185 million12. Notably, Millennials and Generation Zconsumers – the young, digital natives who came ofage or are coming of age in today’s technological era– account for a significant proportion of Indonesia’spopulation, and are increasingly becoming the maindrivers of growth for its digital economy. According to theNational Socioeconomic Survey (SUSENAS), Millennialsand Generation Z individuals are estimated to account forabout 34 percent and 29 percent of the total populationrespectively13.At the same time, Indonesian consumers also appear tobe avid Internet users. One study, for instance, revealedthat some 58 percent of users spend between two toeight hours, and nearly one-fifth or about 20 percent ofthem spend eight hours or more on the Internet on adaily basis (see Figure 1)14.“Internet Usage in Indonesia – Statistics and Facts”. Statista. 15 June 2020.“Generasi Milenial dalam Industri 4.0: Berkah bagi Sumber Daya Manusia Indonesia atau Ancaman?” Deloitte. September 2019.14“Laporan Survei Internet APJII 2019-2020 (Q2)”. Asosiasi Penyelenggara Jasa Internet Indonesia. 2020.121322

Deloitte Indonesia Perspectives Second Edition, February 2021Accelerating e-commerce marketGiven Indonesia’s sheer market size and digitallysavvy consumers, it is perhaps not surprising that itse-commerce market has emerged as the largest inSoutheast Asia, accounting for nearly 50 percent of theregion’s total market size15.This shift towards e-commerce was further underscoredduring the COVID-19 pandemic, when Indonesia alsoemerged as one of the region’s highest adopters ofe-commerce and mobile e-commerce: in the monthof October, approximately 78% of Indonesia’s Internetusers bought something online using a mobile device;when this is extended to any device, the figure goes up to87%16,17 (see Figure 2 and 3).Figure 2: Mobile e-commerce adoption across selected Southeast Asian countries inJuly and October 202078% 79%71% 71%69%66%64%61%57%55%57%55%52% SingaporeWorldwideOctoberSource: We Are Social, 2020.Figure 3: e-Commerce adoption across selected Southeast Asian countries inJuly and October 202089%87%83% July78%76%71%PhilippinesSingapore74% 74%WorldwideOctoberSource: We Are Social, 2020.A resilient digital economyIn 2019, Indonesia’s digital economy contributed to about2.9 percent of its Gross Domestic Product (GDP). Thisfigure is higher than most Southeast Asian economies,with the exception of Singapore (3.2 percent) andVietnam (4 percent)18.Increasingly, Indonesia’s dynamic and innovativetechnology start-up sector is also becoming a hotbedof investments as its decacorns and unicorns continueEven amidst the pandemic, these investment flowscontinue. For instance, homegrown agriculturetechnology start-up TaniHub Group, which operatesan e-marketplace that enables consumers to buy fresh“e-Commerce connectivity in ASEAN”. Economic Research Institute for ASEAN and East Asia (ERIA). April 2020.“Digital 2020: October Global Statshot”. We Are Social. October 2020.17“More than half of the people on earth now use social media”. We Are Social. July 2020.18“Ekonomi Digital Menyumbang 2,9% PDB Indonesia”. Katadata. 4 September 2019.19“Indonesia's unicorns lure US tech giants from Google to Facebook”. Nikkei Asia. 4 December 2020.20“Ada Kode Keras, Tokopedia Siap IPO & Ini Valuasinya”. CNBC. 23 October 2020.151623to attract the attention of global technology giants andventure capitalists19. One of the largest e-commerceoperators, Tokopedia, for example, has an estimatedcompany valuation of about USD7.5 billion, and countsGoogle and Temasek amongst its shareholders20.

Deloitte Indonesia Perspectives Second Edition, February 2021 produce directly from farmers, managed to secure aninvestment of about USD17 million earlier in April 2020 toexpand its services to up to 100,000 farmers by 202121.Indeed, for many business, participation in the digitaleconomy is the key to greater resiliency: while 42 percentof MSMEs operating offline were forced to halt operationsat some point in time during the pandemic, only 24percent of online MSMEs had to cease operations22.Anecdotally, many businesses have also shared thatmigrating their operations online even before the onsetof the pandemic enabled them to remain resilient evenduring the crisis. For example, a Yogyakarta-basedsocial agriculture was able to maintain its sales turnoverthrough the use of social media campaigns, where itsfounders were able to engage potential customersby sharing their views on topics such as farmerempowerment, and organic-natural ingredients23.Supporting the backbone of Indonesia’seconomyMSMEs have been the subject of a growingdiscourse within Indonesia’s digital economy. Giventhat they account for some 60 percent of Indonesia’sGDP24, it should therefore be a priority that MSMEsare active participants in the digital economy, andembrace digital transformation to keep up with theevolving times.Prior to the onset of the pandemic, only about8 million or 13 percent of the nation’s 64 millionMSMEs had digital operations in place25, and this lackof a digital presence has resulted in especially tryingtimes for many MSMEs: the Ministry of Cooperativesand Small and Medium Enterprises estimates thatIndonesia’s MSMEs have experienced a 23.4 percentdecrease in demand as a result of COVID-1926.While there have been some promising signs thatMSMEs are increasingly going digital – estimatessuggest that about 15 to 20 percent of themmigrated online during the pandemic27– thereremain a number of barriers that continue to hindertheir progress. Businesses in more rural areas, forexample, may lack access to technology that is notonly affordable, but also simple to understand anduse.In response, the government recently launched aseries of initiatives to support MSMEs in buildingtheir digital presences. These include: Pasar Digital (PaDi): Established by the Ministryof State Owned Enterprises (SoEs), PaDi aimsto encourage four SoEs – PT Telkom Indonesia(Persero) Tbk, PT Pertamina (Persero), PT WaskitaKarya (Persero) Tbk, and PT Wijaya Karya (Persero)Tbk – to utilise their budgets on expenditures with540,000 MSMEs in Indonesia28. Belanja Pengadaan (BELA): Launched by theGovernment Goods and Service ProcurementAgency (LKPP), this program aims to includeMSMEs in the government’s procurementprocess29. Laman UMKM (MSMEs Page): Introducedby the Ministry of Cooperatives and Small andMedium Enterprises, this initiative consists of ane-catalogue portal that has been designed tosupport MSMEs operating digital businesses30.“TaniHub Group raises 17m to expand services to 100,000 farmers by 2021”. The Jakarta Post. 2 April 2020.“Online MSMEs can reduce economic burden: Report”. The Jakarta Post. 10 July 2020.Interview with Asri Saraswati, Co-Founder of Agradaya, 6 December 202024“Di Tengah Pandemi, Kontribusi UMKM terhadap PDB Diperkirakan Naik”. Media Indonesia. 12 November 2020.25“Jokowi: Potensi Ekonomi Digital Harus Dipercepat di Indonesia”. Antara. 18 November 2020.26“Kemenkop UKM Bidik 10 Juta UMKM Go Digital Akhir 2020”. CNN Indonesia. 11 August 2020.27“Accelerating MSMEs’ digital transformation supports RI economy”. The Jakarta Post. 10 October 2020.28“UMKM Ingin Ikutan Pengadaan Barng dan Jasa Pemerintah? Simak Ini”. 12 November 2020.29Ibid.30Ibid.21222324

Deloitte Indonesia Perspectives Second Edition, February 2021Realising the potentialIn order for Indonesia to realise the full potential of itsdigital economy, we believe that there are a few prioritiesthat businesses and government alike should consider.Firstly, addressing connectivity issues should be atthe top of Indonesia’s to-do list. Despite the nation’srapidly increasing Internet penetration rates, Indonesiaranks only 57th out of 100 countries in the EconomistIntelligence Unit’s Internet index based on its combinedscores on Internet availability, affordability, relevance, andreadiness31.logistics costs from 24 percent of GDP in 2016 to 19percent of GDP by 202436.This issue is particular acute in many disadvantagedcommunities in the outermost frontier of the archipelago,where some 12,500 villages continue to lack reliableaccess to the Internet32. Estimates suggest that onlyaround 43 percent of businesses in villages are able tomarket their products online, as compared to 57 percentin the cities33, as the low reliability of telecommunicationsnetworks, including cellular phone signal strengthsand Internet connections, continue to present majorstumbling blocks for MSMEs trying to taking fulladvantage of growing online platforms and the widermarketplaces that they offer.An upcoming, long-awaited bill addressing personaldata protection issues is also expected to require themandatory establishment of data protection officers incompanies, amongst other measures38. Looking ahead,these steps should go some way towards strengtheningthe governance of data held by e-commerce players, andin building consumer trust in the sector.It must be noted, however, that the government currentlyhas plans to resolve some of these connectivity issuesby building base transmission stations in 5,000 villages,while also expanding the 4G network and increasingInternet connection speeds nationwide.Secondly, there is also the need to address the issueof logistics and high shipping costs in Indonesia. As anarchipelago with a massive land mass, Indonesia hashighly complex logistic networks, and the nation alsofaces some of the highest shipping costs in the region34.In the World Bank’s logistic performance index, forinstance, Indonesia was ranked 46th place out of 163countries, with a total score of 3.15 that was relativelyfar behind that of other Southeast Asia markets, suchas Malaysia (3.22), Vietnam (3.27), Thailand (3.41), andSingapore (4.0).35Thirdly, data privacy and cybersecurity issues continueto present roadblocks. As the increasing integrationof MSMEs into the digital economy increases theprobabilities of these risks, merchants and consumersalike must be better informed and protected. Currently,phishing issues are some of the most commone-commerce-related complaints received by the NationalConsumer Protection Agency (BPKN)37.Finally, we must not neglect the all-important issue ofhuman capital. According to the Minister of Cooperativesand Small and Medium Enterprises, Teten Masduki, thetechnology gap is one of the main contributing reasonsfor MSMEs’ failures in the digital economy. After all, forMSMEs to embrace the digital potential, they must firstpossess the know-how of using digital platforms, be ableto analyse market needs, and possess knowledge of howto run an online business. In fact, statistics show that onlyabout 15 percent of MSMEs who ventured online havemanaged to successfully conduct their operations39.To accelerate the digital economy, Indonesia needs some9 million individuals to step up to the role of what isknown “digital talent”40. While digital talent may comprisemany specific roles, Indonesia is focusing on developingan adequate pool of talent in the fields of science,technology, engineering, and mathematics (STEM), witha target to produce about 3.7 percent of global STEMgraduates by 203041.Editorial TeamEnabling digital players to more efficiently reach their endmarkets or suppliers will therefore require the supportof a more streamlined logistics infrastructure, includingreliable and affordable transport networks. Towards thisend, the government is also targeting to reduce overall“The Inclusive Internet Index 2020”. The Economist Intelligence Unit.“12.538 Desa di Indonesia Belum Tercover Jaringan Internet 4G”. 9 November 2020.“Lack of Awareness, Infrastructure Limit Business Digitalization in Rural Areas”. The Jakarta Post. 22 September 2020.34“Indonesia’s e-commerce landscape: Bigger market, bigger challenges”. TechWire Asia. 16 August 2018.35“Logistic Performance Index: Global Rankings 2018”. The World Bank. 2018.36“e-Commerce connectivity in ASEAN”. Economic Research Institute for ASEAN and East Asia (ERIA). April 2020.37“BPKN: Pengaduan dari Sektor E-Commerce Melonjak di Masa Pandemi”. Kontan. 2 November 2020.38"The significance of Personal Data Protection Law". ELSAM. 2 September 2019.39“Banyak Soal Membelit UMKM sehingga Hanya 15% yang Sukses Masuk Digital”. Katadata. 8 October 2020.40“Jokowi Sebut Percepatan Ekonomi Digital Perlu Dukungan SDM”. Merdeka. 18 November 2020.41“Innovate Indonesia: Unlocking Growth through Technological Transformation”. Asia Development Bank and Ministry of Finance of the Republic of Indonesia. March 2020.31323325

Deloitte Indonesia Perspectives Second Edition, February 2021Deloitte IndonesiaPublicationsAre you interested in ourDeloitte Indonesia Publications?We have three Publications on Indonesia’s Business and Industry Updates asin the following. You may find other issues in our website.If you have any queries, please contact us at [email protected] new Mining Law No. 3/2020 has been enacted on 10 June to amendMining Law No.4 /2009. The law paves the way for several changes includingon matters related to mining areas determination, centralization of authorityas well as licensing of mining businesses, among others. Given the changesalong with potential impacts that follow, mining companies may soon need torevisit their licensing, business structures, and operational practices to ensurethat they are in full compliance with the law. Please contact us if you areinterested to receive a copy of this rticles/id-mining-law-2020.htmlThe Indonesian food and beverage industry has shown its support to theeconomy growth during the COVID-19 pandemic. The sector is facing manychallenges including food safety issues. In this article some of the key impactsof COVID-19 on the food and beverage sector in Indonesia, and the pivotalrole of trust in future-proofing businesses will be discussed to make surethat they thrive in the new normal. Please contact us if you are interested toreceive a copy of this COVID-19 pandemic encourages Indonesia’s consumers to favor the use ofdigital payment. This opens more opportunities for micro, small, and mediumenterprises (MSMEs) to adopt cashless payment systems through QuickResponse Code Indonesia Standard (QRIS), which was introduced by BankIndonesia earlier in 2019. This article discusses how QRIS is universalisingdigital payments in Indonesia by enabling interoperability amongst differentdigital payment system service providers while highlighting its other potentialuse cases. Please contact us if you are interested to receive a copy of tml

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Deloitte Indonesia Perspectives Second Edition, February 2021Contact usTo learn more about how your organization canbecome secure, vigilant, and resilient, please contact:Claudia Lauw Lie HoengDeloitte Indonesia Country Leadere: [email protected] Uli SinagaAssurance Leader and Financial ServicesIndustry Leadere: [email protected] LauwrenzTax Deputy LeaderDeloitte Touche Solutionse: [email protected] ImeldaAudit LeaderImelda & Rekane: [email protected] David KiantiongTax Deputy LeaderDeloitte Touche Solutionse: [email protected] AtmawidjajaConsulting LeaderPT. Deloitte Consultinge: [email protected] Christi PratiwiConsumer Industry Leadere: [email protected] Private Deske: [email protected] WirawanFinancial Advisory Leader and Government & PublicServices Industry LeaderPT. Deloitte Konsultan Indonesiae: [email protected] B. JuniartoSenior Partner of Hermawan Juniarto & Partnerse: [email protected] Johannes IndradjajaRisk Advisory Leader and Technology,Media & Telecom Industry LeaderPT. Deloitte Konsultan Indonesiae: [email protected] HimawanTax LeaderDeloitte Touche Solutionse: [email protected] SukimanEnergy, Resources & Industrials Leadere: [email protected] AdityaLife Science & Health Care Industry Leadere: [email protected] Yu Ying LiChinese Services Deske: [email protected] WidjajaJapanese Services Deske: [email protected] Chi YoungKorean Services Deske: [email protected] WoodleyUS & European Services Deske: [email protected]

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Indonesia's digital economy With predictions suggesting that Indonesia's digital economy is poised to grow to size of about USD133 million within the next five years11, realising its full potential has become a priority for both the government and businesses in recent months, especially as the COVID-19 pandemic continues to drive digitalisation