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Unlocking Indonesia's Digital Opportunity

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Unlocking Indonesia's Digital Opportunity 1 Unlocking Indonesia’s digital opportunity McKinsey Indonesia Office October 2016 Authored by: Kaushik Das Michael Gryseels Priyanka Sudhir Khoon Tee Tan 2 3 4 Unlocking Indonesia’s digital opportunity By going digital, Indonesia can unleash the next growth—10 percent of GDP—by 2025. Digital level of economic growth—to the tune of USD 150 technologies offer ways to boost productivity billion in annual economic impact by 2025. across sectors and expand participation in the economy to all segments of the population. But accelerating Indonesia’s digital progress will Due to the rapid pace of technological require businesses to step up to the challenge advancement, countries that harness digital and fundamentally transform themselves. technologies stand to reap significant economic benefits in the long run. However, nations that are slow to embrace digital run the risk of To win in a digital age, Indonesian businesses falling further behind in short order. should pursue five strategic imperatives that will spearhead growth and efficiency: How far along is Indonesia in the digital revolution? Not far enough yet—but herein lies 1. Define customer-centric experiences to the opportunity. differentiate on design and agility. 2. Develop omnichannel engagement to link the online and offline worlds. To gauge Indonesia’s digital progress, McKinsey 3. Leverage big data to drive real-time conducted research and analysis on 20 select decisions across the value chain. markets in the world. Our findings indicate that 4. Double down on cybersecurity to protect Indonesia is in a nascent stage of digitization. information capital in a connected world. However, the country presents a curious 5. Build digital capabilities to develop the paradox: its digital denizens are among the organization of the digital age. world’s most active, and it has a vibrant start- up ecosystem, but overall the country lags in embracing the benefits of modern technology. The world is going digital The digital age is commonly hailed as the fourth ICT infrastructure is weak and digital usage industrial revolution—except this revolution is uneven within and among various business has the potential to transform every facet of sectors. Indonesia's connected citizens are tech- daily life, from reshaping how people make savvy, but Internet penetration is low. In short, decisions, enhancing customer experiences, Indonesia has a long way to go in the digital age. and creating new business models to optimizing value chains for unprecedented levels of If Indonesia embraces digitization, it can efficiency. realize an estimated USD 150 billion in “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 5 The digital revolution is driven by four types of and unleashing new business and operating technologies that, while not new, have advanced models, including innovative products such in recent years to significantly increase their as driverless cars and smart homes. impact on the global economy: Big data and advanced analytics: In 2016, Internet traffic reached 1 zetabyte— Mobile Internet: Mobile devices have 3 overtaken fixed-line devices as the main equivalent to 1 trillion gigabytes. Everyday gateway through which people access the objects are transmitting information every Internet. Around the world, 60 percent of all second of their operation, and computers online traffic now originates from mobile with advanced analytical horsepower are devices.1 enhancing human decision-making and unleashing the power of big data to optimize supply chains and business processes in Cloud technology: Cheaper and faster sectors as far ranging as healthcare and retail connections through the Internet have to energy and mining. enabled more computing power to be accessed remotely. In 2014, for the first time more information workload was processed Indonesia in the digital age via the cloud than in the traditional IT space. The four disruptive technologies are intertwined and complementary. And taken in combination, these four disruptive technologies Internet of Things (IoT): In 2015, there were 18.2 billion Internet-connected devices. By are the keys to accelerating the impact of 2020, this number is expected to increase digital in Indonesia. Indonesia has experienced threefold, to 50 billion.2 Cheaper sensors increasing adoption of each, effectively laying and actuators as well as faster, reliable a solid foundation for future investments and Internet connections are spurring more productivity gains (Exhibit 1). Indeed, while connected and remotely controlled devices these are early days, the digital revolution has arrived in Indonesia. EXHIBIT 1 The digital revolution has arrived in Indonesia. Mobile Internet Cloud technology Internet of Things Big data and Total mobile Internet Total cloud services Total connected advanced analytics users, million vendor revenues,1 devices, million units Internet protocol traffic $ million per month, petabyte 73% of total Internet users 448 access via mobile 364 60% 1.4× 67 269 277 55 12 million 39 32 7 million 2014 2015 2014 2015 2014 2015 2014 2015 1 Revenues from public cloud services and cloud IT infrastructure. 2 1 petabyte = 1 million gigabytes. Source: WCIS, Machina, IDC worldwide public cloud services and cloud IT infrastructure tracker, World Robotics report 6 Despite Indonesia's progress in each of the four processing times, leaner operations, and better disruptive technologies, the country still has a customer satisfaction. As such, there is a strong long way to go. To benchmark Indonesia’s digital correlation between the level of digitization and standing, McKinsey conducted research and labor productivity—but Indonesia is behind the analysis on 20 select countries in the world (see curve when compared with the selected group sidebar, “About the research”). (Exhibit 2). Overall, McKinsey finds that Indonesia lags Amid all the challenges, three mega-trends come behind other select markets in capturing its to the fore that will enable Indonesia to capture digital potential. The country's performance its digital potential: infrastructure, consumers, across the various metrics is uneven. and businesses. Digitization is an important driver of Massive infrastructure opportunity productivity. Deployment of digital technologies Mobile data in Indonesia is very affordable, such as remote sensors, intelligent machines, costing just 50 percent4 of what consumers big data, and real time communication in some ASEAN neighboring countries pay. enhances process efficiencies, improves However, quality—defined as the average quality of products and services, and enables connection speed and Internet bandwidth—can optimal resource allocation, resulting in faster be very low (Exhibit 3). EXHIBIT 2 Improvement in digitization results in increased labor productivity. Labor productivity,1 Asian peers Asian pioneers Rest of world peers Rest of world pioneers PPP, USD per worker 110,000 Asia and rest of world pioneers United States 100,000 90,000 Hong Kong 80,000 Canada France Australia United Kingdom Spain 70,000 Italy Singapore Germany Japan 60,000 Korea 50,000 Asia and rest of world peers 40,000 Malaysia Russia 30,000 Brazil 20,000 Thailand China Philippines Indonesia 10,000 India 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Relative score, rank 1 S-curve is based on polynomial regression. Source: McKinsey analysis, IHS WIS 2015 7 EXHIBIT 3 Internet is inexpensive—but average quality is poor. Internet access is affordable . however, quality is poor compared with other countries. Mobile broadband pricing,1 Internet bandwidth, Average connection speed,3 $/500 megabytes Kb/s per user Mbps India 1.6 Hong Kong 3,721.8 Korea 26.7 Indonesia 3.4 Singapore 616.5 Japan 17.4 Russian United 5.2 429.8 Hong Kong 16.8 Federation Kingdom United Thailand 6.1 France 221.7 14.2 States China 6.2 Germany 146.0 Singapore 13.9 United Hong Kong 6.4 Canada 129.2 13.9 SAR Kingdom Span 6.6 Spain 111.5 Canada 13.1 Philippines 6.7 Italy 92.5 Germany 12.9 Brazil 8.5 Australia 75.1 Spain 12.1 United Korea 10.4 71.0 Russia 11.6 States Singapore2 11.8 Thailand 54.8 Thailand 9.3 Germany 13.1 Japan 48.6 France 8.9 France 13.3 Korea 45.2 Australia 8.2 Australia 13.5 Brazil 43.0 Italy 7.4 United 16.4 Russia 29.9 Malaysia 5.2 Kingdom Malaysia 26.0 Philippines 27.7 China 4.8 Italy 38.5 Malaysia 27.2 Brazil 4.1 Japan 42.8 Indonesia 6.2 Indonesia 3.9 United 48.9 India 5.7 Philippines 3.2 States Canada 61.3 China 5.0 India 2.8 1 Prepaid tariff for all countries except for China, Japan, and Korea, where postpaid tariff is used. 2 Singapore data price dropped sharply since 2014. 3 Average connection speed from all IPs. Peak average speeds can be higher, especially with at-scale 4G rollout. Source: ITU (International Telecommunication Union) 2014, World bank 2015, Akamai 2015 8 Indonesia’s size and geographic complexity capacity is limited, with only 0.01 megabytes compound the challenges. While the country’s per second (mbps) per user compared performance has dramatically improved in the with Singapore with 2.74 mbps per user.5 past 12 months with the introduction of 4G, Connectivity is also concentrated, with most there are three clear opportunities to further lines going through Singapore—a situation improve Indonesia’s infrastructure in the near that leads to less than competitive pricing term: (Exhibit 4).6 40 percent of landing points are located in just three cities (Batam, Dumai, and Jakarta). 1. International linkages. With a large portion of Indonesia’s traffic going to international sites such as Facebook and 2. Domestic cable network. Data traffic Google, international bandwidth is an in Indonesia is expected to rise sixfold by important consideration for planning 2020, placing pressure on the capacity of Indonesia's digital future.
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