By going digital, Indonesia can unleash the next level of economic growth — Indonesia Digital Opportunity to the tune of USD 150 billion in annual economic impact by 2025.
Due to the rapid pace of technological advancement, countries that harness digital technologies stand to reap significant economic benefits in the long run. However, nations that are slow to embrace digital run the risk of falling further behind in short order.
How far along is Indonesia in the digital revolution? Not far enough yet—but herein lies the opportunity.
To gauge Indonesia’s digital progress, McKinsey conducted research and analysis on 20 select markets in the world. Our findings indicate that Indonesia is in a nascent stage of digitization. However, the country presents a curious paradox: Its digital denizens are among the world’s most active, and it has a vibrant start-up ecosystem, but overall the country lags in embracing the benefits of modern technology. ICT infrastructure is weak and digital usage is uneven within and among various business sectors. Indonesia’s connected citizens are tech-savvy, but Internet penetration is low. In short, Indonesia has a long way to go in the digital age.
If Indonesia embraces digitization, it can realize an estimated USD 150 billion in growth—10 percent of GDP—by 2025. Digital technologies offer ways to boost productivity across sectors and expand participation in the economy to all segments of the population. But accelerating Indonesia’s digital progress will require businesses to step up to the challenge and fundamentally transform themselves.
To win in a digital age, Indonesian businesses should pursue five strategic imperatives that will spearhead growth and efficiency:
1. Define customer-centric experiences to differentiate on design and agility.
2. Develop omnichannel engagement to link the online and offline worlds.
3. Leverage big data to drive real-time decisions across the value chain.
4. Double down on cybersecurity to protect information capital in a connected world.
5. Build digital capabilities to develop the organization of the digital age.
The world is going digital
The digital age is commonly hailed as the fourth industrial revolution—except this revolution has the potential to transform every facet of daily life, from reshaping how people make decisions, enhancing customer experiences, and creating new business models to optimizing value chains for unprecedented levels of efficiency.
The digital revolution is driven by four types of technologies that, while not new, have advanced in recent years to significantly increase their impact on the global economy:
Mobile Internet: Mobile devices have overtaken fixed-line devices as the main gateway through which people access the Internet. Around the world, 60 percent of all online traffic now originates from mobile devices.
Cloud technology: Cheaper and faster connections through the Internet have enabled more computing power to be accessed remotely. In 2014, for the first time more information workload was processed via the cloud than in the traditional IT space.
Internet of Things (IoT): In 2015, there were 18.2 billion Internet-connected devices. By 2020, this number is expected to increase threefold, to 50 billion. Cheaper sensors and actuators as well as faster, reliable Internet connections are spurring more connected and remotely controlled devices
and unleashing new business and operating models, including innovative products such as driverless cars and smart homes.
Big data and advanced analytics: In 2016, Internet traffic reached 1 zetabyte—equivalent to 1 trillion gigabytes. Everyday objects are transmitting information every second of their operation, and computers with advanced analytical horsepower are enhancing human decision-making and unleashing the power of big data to optimize supply chains and business processes in sectors as far ranging as healthcare and retail to energy and mining.
Indonesia in the digital age
The four disruptive technologies are intertwined and complementary. And taken in combination, these four disruptive technologies are the keys to accelerating the impact of digital in Indonesia. Indonesia has experienced increasing adoption of each, effectively laying a solid foundation for future investments and productivity gains (Exhibit 1). Indeed, while these are early days, the digital revolution has arrived in Indonesia.
Despite Indonesia’s progress in each of the four disruptive technologies, the country still has a long way to go. To benchmark Indonesia’s digital standing, McKinsey conducted research and analysis on 20 select countries in the world (see sidebar, “About the research”).
Overall, McKinsey finds that Indonesia lags behind other select markets in capturing its digital potential. The country’s performance across the various metrics is uneven.
Digitization is an important driver of productivity. Deployment of digital technologies such as remote sensors, intelligent machines, big data, and real time communication enhances process efficiencies, improves quality of products and services, and enables optimal resource allocation, resulting in faster processing times, leaner operations, and better customer satisfaction. As such, there is a strong correlation between the level of digitization and labor productivity—but Indonesia is behind the curve when compared with the selected group (Exhibit 2).
Amid all the challenges, three mega-trends come to fore that will enable Indonesia to capture its digital potential: infrastructure, consumers, and businesses.
Massive infrastructure opportunity
Mobile data in Indonesia is very affordable, costing just 50 percent4 of what consumers in some ASEAN neighboring countries pay. However, quality—defined as the average connection speed and Internet bandwidth—is very low (Exhibit 3).
While Indonesia’s size and complexity compound the challenges, the infrastructure opportunity covers three main areas:
1. International linkages. With a large portion of Indonesia’s traffic going to international sites such as Facebook and Google, international bandwidth is an important consideration for planning Indonesia’s digital future. Indonesia’s international capacity is limited, with only 0.01 megabytes per second (mbps) per user compared to Singapore with 2.74 mbps per user. Connectivity is also concentrated, with most lines going through Singapore—a situation that leads to less than competitive pricing (Exhibit 4). Forty percent of landing points are located in just three cities (Batam, Dumai, and Jakarta).
2. Domestic cable network. Data traffic in Indonesia is expected to rise sixfold by 2020, placing pressure on the capacity ofthe domestic network—that is, the linkages through submarine and overland fiber optic cables. In order to raise fixed broadband penetration beyond the current low level of 2.5 percent, it is vital to expand the availability beyond the greater Jakarta area by strengthening connectivity in western and central Indonesia and expanding into eastern Indonesia.
The fiber optic network needs to be increased by the timely execution of the 35,000-kilometer Palapa ring project, an undersea and terrestrial cable network spread from Sumatra to West Papua.
3. 4G infrastructure. Finally, Indonesia’s last-mile 4G coverage is lacking, with only 23 percent coverage. Growing e-commerce, mobile entertainment, and gaming content has increased the need for speed for the 73 percent of Indonesia’s Internet users that access the Internet through mobile broadband. The country must enhance 4G/LTE tower infrastructure outside Java to enable users to take advantage of falling 4G handset prices and increase 4G penetration beyond the current level of 7.6 percent.
Small but growing base of digital consumers
At 34 percent, overall Internet penetration in Indonesia is very low. The current rate is half that of ASEAN neighbor Malaysia and far behind that of leaders such as the United Kingdom, Japan, and Canada. Indeed, its relatively larger population means that Indonesia is home to the world’s third-largest population of individuals without access to the Internet. Geographically, digitization is uneven across Indonesia, with Internet penetration strongly correlated to income per capita; poorer regions have lower penetration. Only the large population centers such as Jakarta and Yogyakarta have a penetration rate above 45 percent.
However, connected Indonesians are very digitally savvy. They are netizens in every sense of the word, with a need for constant connectivity, instant information, and a growing appetite for digital content. They spend a higher-than-average amount of time on the Internet, primarily engaging in heavy social media usage and e-commerce (Exhibit 5). Their social media usage is among the highest of any population in the world; Jakarta is widely considered the Twitter capital of the world. In 2016, revenue of e-commerce in Indonesia amounted to USD 6 billion, and 78 percent of current Internet users made online purchases. The industry is expected to grow by approximately 18 percent annually in the next five years, reaching a market volume of USD 16.4 billion by the end of 2020.
Furthermore, Indonesia is a mobile-first nation; approximately 75 percent of the online purchases are made via mobile devices. The usage statistics far exceed that of digitally mature countries such as the United States, where these media have been around longer and are firmly established.
Furthermore, Indonesia’s Internet population is set to boom due to the growing accessibility of the mobile Internet as well as the increasing availability of inexpensive phones. Indonesia is expected to add 50 million new Internet users from 2015 to 2020, reaching a penetration rate of 53 percent (Exhibit 6).
“E-commerce in Indonesia is growing rapidly but is constrained by limited access to technology, a lack of technological savviness, and the absence of credit cards.”
— Agung Nugroho, Cofounder and Chief Operating Officer, Kudo 
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 Taken from “Unlocking Indonesia’s digital opportunity” written by McKinsey & Company. McKinsey & Company is a worldwide management consulting firm. It conducts qualitative and quantitative analysis in order to evaluate management decisions across the public and private sectors. McKinsey & Company is the trusted advisor and counselor to many of the world’s most influential businesses and institutions.