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“On the banking side, digitization is largely driven by customer pull…Banks to a large extent have been pulled into this because people are using the phone for everything from transport to booking their travel to chatting. You have to follow the trend.”


— Peterjan Van Nieuwenhuizen, Incubation Head of Digital Banking, Bank Tabungan Pensiunan Nasional (BTPN)


A thriving start-up culture

Across all of Indonesia’s key sectors, IT spending lags behind not only developed countries but also peer countries, which indicates a low level of digital intensity (Exhibit 7). While labor-heavy sectors such as financial services and business services fare slightly better due to the digitization of the workforce and driven by the emerging financial technology (fintech) boom, the asset-heavy backbone industrials sectors—which include mining, manufacturing, and natural resources and contribute approximately 50 percent of the country’s GDP—lag far behind those of other countries.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

In Indonesia, these industries lack the customer pull to digitize—the driving force behind the digitization of financial institutions and retail. Even in these industries, customer interactions are the first to be digitized, while adoption of Internet in factories, in other physical assets, and in business processes is even slower. The availability of cheap labor and the poor quality of Internet access, discussed earlier, are key reasons for low digitization among Indonesia’s businesses. Social sectors such as government and healthcare also have a long way to go in digitization—mirroring a global trend.

Despite low digitization across Indonesia’s key sectors, start-ups are proliferating and thriving across the board. E-commerce start-ups such as Alfacart.com and MatahariMall.com; financial services companies Kartuku and HaloMoney;

and transportation companies Go-Jek and Traveloka are just a few examples, backed by angel investor and venture capital firms like CyberAgent, Mountain Kejora, and Ideosource, among others. In 2016, the total disclosed funding of start-ups in Indonesia is estimated to have reached USD 1.7 billion. Along with Jakarta, Bandung and Surabaya are emerging as innovation hot spots.


Indonesia’s digital opportunity: USD 150 billion by 2025

In the first decade of the millennium, Indonesia’s real GDP growth rate increased steadily in most years, from 3.6 percent in 2001 to 7.4 percent in 2008. But this growth has slowed, dropping to 4.8 percent in 2015. From 2016 to 2020, the economy is forecast to grow at a modest 5 percent. This decline will continue as the contributions from the two components of GDP growth, labor inputs and productivity, continue to slacken.

If Indonesia is to return to a growth trajectory of 7 percent a year, there is no other choice but to boost both labor participation and productivity in Indonesia. Through a combination of these elements, digital technologies can achieve a total impact of approximately $150 billion by 2025 (Exhibit 9).

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Increasing labor inputs through digitization

In recent years, labor force participation has held steady at 70 percent, and unemployment rates have dropped to an all-time low of 5.5 percent. The next level of improvement will require a breakthrough—one that is impossible to achieve without digital leverage. There are many ways digital can boost labor supply in Indonesia, increasing participation and reducing total unemployment. Firstly, with the emergence of on-demand work, social and online platforms connect members of the nonproductive and partially productive segment—for example, stay-home spouses and the informally employed—who are active on the mobile Internet with jobs. The International Labor Organization (ILO) estimates that there are more than 35 million non-working female citizens between 15 and 64 years old in Indonesia. Our estimate indicates that with online platforms, Indonesia can activate 3 percent of this population, adding 1 million people to Indonesian workforce.

Secondly, online job platforms can facilitate faster and better matches between employers and job seekers, replacing traditional methods such as newspaper classifieds. This will essentially reduce the effective period of unemployment by lowering search and match time.


Finally, online platforms have access to much more data on both job seekers and employers. An analytics engine will help the job matches to be more effective, linking the right people with the right job and improving the productivity of the labor force overall.

By converting informal employment, employing the inactive population, and reducing unemployment, digital technologies have the potential to add 3.7 million jobs and USD 35 billion a year to Indonesia’s economy by 2025 (Exhibit 10).

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.


Increasing productivity through digitization

Indonesia also needs to boost its labor productivity. The labor productivity in Indonesia is ranked second lowest among our 20 selected markets, ahead of only India. While one may argue that this is partially driven by the larger population in Indonesia, the counter-example is China, which has a labor force almost seven times larger than Indonesia’s—but which achieves labor productivity of almost twice that of Indonesia. This finding indicates that there is a large opportunity for Indonesia to catch up, with significant growth potential in the future.

The use of technology has increased productivity in a wide array of business settings. Productivity improvements from digital can generate cost savings and increase efficiency across the value chain, from product development to operations to sales and services. Industry 4.0 can revolutionize operations with the combination of IoT sensors, advanced analytics, and autonomous machines. For example, equipment with sensors can conduct self-diagnostics to enable predictive maintenance, translating into lower overall equipment downtime. With unprecedented access to operational data, advanced analytics can play a key role in offering new insights into optimizing yield, energy, and resources while delivering on non-negotiable work necessities like health and safety. Swiss technology giant ABB, for instance, used a computer-based system that mimics the actions of an “ideal” operator in an Australian cement kiln, using real-time metrics to adjust kiln feed, fuel flow, and fan-damper position. This resulted in a throughput boost by up to 5 percent.

In the aspect of human health and productivity, digital technologies provide new opportunities to increase workforce productivity. Use of biosensors and chips can allow companies to better measure, monitor, and understand employee productivity and the factors influencing it. By using such insights, companies can reallocate human resources, redesign human-related processes, and restructure organizations.

Digital can also provide new ideas in developing new products and increasing sales. Component suppliers can collect customer usage data to understand key features used and key failure modes, then channel R&D resources to develop new and more customized product for customers. Companies can understand their customers better than ever before and will be able to offer targeted promotion, advertising, and increasing opportunities for cross-selling and up-selling. Amazon now plans to go beyond their “recommended” products for their customers and is testing “anticipatory shipment”—sending promotional goods to customers even before ordering, such as shipping diapers to expecting parents based on their purchase history and other information.

Each digital lever delivers varying levels of impact for Indonesia’s economic sectors. Our bottom-up analysis indicates that the operations optimization lever has the highest impact given the large size of the industrials sector in Indonesia, with low productivity and low IT spend. Operations optimization alone can add USD 98 billion to Indonesia’s economy in 2025, with manufacturing standing to gain the most. Other sectors such as retail, transport, mining, agriculture, telecom and media, healthcare, the public sector and utilities, and the financial sector could also generate value through digital-enabled productivity improvements. In all, improved productivity from digitization could provide a boost worth USD 120 billion annually by 2025 (Exhibit 11).

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

To reimagine what the future of four key sectors could look like, the following infographics depict several scenarios of digital use cases in manufacturing, retail, mining, and farming. [1]


Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

Pie, Chart, Diagram, Illustration Courtesy McKinsey & Company.

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References Sources:

[1] Taken fromUnlocking 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.

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