Indonesia's E-Commerce Market Will Grow to $65b by 2020: McKinsey

Online sales of physical goods in Indonesia are projected to increase more than eightfold to $65 billion annually by 2020, a study by global business consultancy McKinsey & Company shows. (Reuters Photo/Aly Song)

By : Sarah Yuniarni | on 3:21 PM September 01, 2018
Category : Business, Economy, Featured

Jakarta. Online sales of physical goods in Indonesia are projected to increase more than eightfold to $65 billion annually by 2020, a study by global business consultancy McKinsey & Company shows.

The report titled, "The digital archipelago: How online commerce is driving Indonesia's economic development," concludes that government support, large numbers of young, digitally savvy consumers and increased participation by micro, small and medium enterprises in e-commerce will drive the digital economy and boost online sales over the next five years.

"We think there will be leapfrog growth for Indonesia's e-commerce sales in the coming years, which is boosted by the number of internet users," McKinsey Indonesia president director Philia Wibowo told reporters in Jakarta on Wednesday (29/08).

According to the Indonesian Internet Service Providers Association (APJII), there were 143 million internet users in the country last year, with about 44 percent of them using mobile devices to go online.

McKinsey noted that e-tailing, or business conducted online through e-commerce firms such as Blibli, Tokopedia, Bukalapak and Lazada, will likely amount to $40 billion by 2020, while transactions on social media platforms, including Facebook, Instagram, Line, WhatsApp and Blackberry Messenger, may reach anything between $15 billion and $25 billion.

Total e-commerce sales in Indonesia amounted to around $8 billion last year, with $5 billion of that from e-tailing.

McKinsey also noted that 83 percent of internet users are expected to make online purchases by 2020, compared with 74 percent currently.

The business consultancy interviewed 60 experts, ranging from chief executives of publicly listed companies, small and medium business owners, startup owners, former ministers to heads of government agencies, across the archipelago.

The company also surveyed nearly 3,500 people, including 700 online merchants, 500 offline merchants, 2,000 online buyers and 250 dropshippers.

"We conducted this research because we saw that there are rarely surveys out there that offer comprehensive reports on e-commerce. This particular sector has a real impact on the country's economy," Philia said.

This is McKinsey Indonesia's first e-commerce survey.

Social Impact

McKinsey said e-commerce has had a positive impact on job creation and social equity in Indonesia.

As the largest e-commerce market in the region, Indonesia could generate about $20 billion in online sales by 2020, compared with $2.5 billion today.

This projection shows that online sales in the coming years will also come from regions in Indonesia that are currently untapped.

The business consultancy projects that e-commerce will support 26 million jobs both directly and indirectly by 2020, compared with 4 million now.

Meanwhile, buyers can also save money through e-commerce. People living outside Java can expect to pay between 11 percent and 25 percent less for goods online, compared with brick-and-mortar shops.

Buyers living in Java can save between 4 percent and 14 percent, McKinsey said.

The business consultancy said e-commerce can also improve gender parity and financial inclusion.

Challenges

McKinsey noted that there are five key challenges if Indonesia wants to boost its e-commerce sector.

The government should ensure that logistics and infrastructure are reliable. Indonesia still trails behind many other countries in terms of infrastructure development and it ranked in 63rd place among 160 countries globally in 2016, according to the World Bank data.

Online payment systems meanwhile also play an important role in the growth of e-commerce. However, only 49 percent of Indonesians currently have access to financial services, compared with 85 percent in Malaysia and 82 percent in Thailand.

McKinsey said while the internet is key to building a strong digital ecosystem, only around 60 percent, or 36 million small and medium business in Indonesia currently have an online presence. Of those, only about 15 percent have online ordering and payment systems, which shows an urgent need for small business owners to implement reliable technology and payment systems.

Aside from that, McKinsey said Indonesia also faces a technical skills shortage. The country only produces eight science, technology, engineering and mathematics graduates per 1,000 citizens, while China produces 34 and India 20.

Supportive Policies

McKinsey further noted that supportive government policies also play an important part in boosting the country's digital economy.

Indonesia revised its negative investment list in 2016 to allow 100 percent foreign direct investment in e-commerce, if the investment exceeds Rp 100 billion ($6.8 million).

The government is also committed to improving the country's infrastructure, prioritizing the building and upgrading of ports and roads to lower logistical costs.

"The focus on infrastructure projects must be continued, especially to improve access to rural areas," Philia said.

The government further established several agencies to support the digital economy, including the Bank Indonesia Fintech Office last year and the National Creative Economy Agency (Bekraf) in 2015.

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