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5 huge challenges any tech business faces in Indonesia

Jakarta

Several stats and buzzwords get thrown around when global investors talk about Indonesia’s tech startup potential. Often, they cite the country’s six percent economic growth rate in recent years, or the population of more than 250 million; more than 50 percent of whom are people under the age of 29, a demographic more inclined to adopt tech products and drive consumption to a new level in less than a decade.

It’s true, the numbers are appetizing. But venture capitalists and angel investors who actually have real experience in Indonesia may tell you a different story – the archipelago is an attractive marketplace, but it can be elusive and frustrating too. Many startups fail in Indonesia. This is not because the ideas, executions, or founders are bad, but because the the country poses several counterintuitive market challenges.

Founders have to think about cultural biases, incongruent education levels that often separate an otherwise singular audience into many factions, the unreliable state of local infrastructure, and a lower than average trust level for ecommerce businesses (although a large part of the startup community does believe those trust issues are slowly changing). Here is a list of five unique challenges investors need to think about before jumping into Jakarta’s new venture shark tank.

1. A shallow talent pool

As with a few of its Southeast Asian neighbors, Indonesia suffers from a lack of skilled professionals. According to the International Labour Organization (ILO), Indonesia is finding it increasingly difficult to respond to the skills needed of its workforce in a time of increasing globalization, new technology, and changing work patterns. The ILO also claims this shortage is compounded further due to elements such as the emigration of skilled professionals, an aging workforce, and the lack of capacity to provide sophisticated training.

Talent Pool

The World Bank cites (PDF link) poor education as the cause, claiming gaps in thinking and behavioral skills are particularly critical given their overall level of importance for employers. This is compounded by the fact that young workers in Indonesia seem to experience a low sense of preparedness for their job or professional life in general. As a way to avoid this talent pool pitfall, many entrepreneurs turn to outsourcing the technical skills they need to more developed countries.

See: 10 questions to ask before outsourcing work at your startup

2. An abundance of red tape

AFP says Indonesia is one of the worst countries in the world for startup facing “red tape” issues. Startups.co.uk defines red tape as codes of practice, laws and regulations that exist when starting a new business. The Organisation for Economic Co-operation and Development (OECD) says on average that five procedures and five days are necessary to establish a corporate entity in nations like the US. In Indonesia it takes nine procedures and 47 days.

Red Tape

A survey conducted by the Political and Economic Risk Consultancy (PERC) ranked 12 key countries on a scale from one to 10, with 10 as the worst possible score relating to procedural difficulties for foreign investors. Indonesia was almost the worst, scoring an 8.59, just ahead of India, which came in last place at 9.41. Indonesia was beaten by other developing nations like the Philippines (8.37), Vietnam (8.13), and Thailand (5.53).

3. A slippery target audience

Indonesia, the world’s fourth most populous country, is currently the last of Asia’s top five ecommerce markets by sales. The country’s population of internet users grew to 74.6 million last year and should almost double to 125 million by 2017. But don’t get too excited about investing just yet. First, consider the following.

Local market research company Markplus Insight says less than half of Indonesia’s internet users spend three hours or more online each day, or enough to place them in the unofficial “netizen” category (ie: those who are very active online and form an important segment of online shoppers). In addition, the number of home internet users remains low because fixed-line internet access is slow and costly in the archipelago. Until local internet service providers become fast enough for Indonesians to browse the web more often at home (as opposed to at work), there may be a limit to how willing they are make purchasing decisions online.

See: Indonesia’s ecommerce market only 0.7% of total retail sales: report

4. Unreliable logistics for ecommerce

Further referencing the country’s online shopping obstacles, MarkPlus Insight says it’s hard to pay for goods, and to get them delivered. Indonesia’s poor transportation infrastructure is one reason that ecommerce here has potential, as urbanites can avoid traffic and still shop in remote areas. But poor roads and unclear addresses also mean that shipping is challenging. Payment is another obstacle. Many online retailers require an ATM transfer before goods can be delivered. This makes online shopping in Indonesia only slightly more convenient than brick and mortar stores.

ecommerce

5. Bandwagon consumers

Investors who want to bring the latest and most culturally nuanced innovations from Silicon Valley to Jakarta may want to think again. Studies show Indonesian audiences are more partial to products and services that have already gained traction in other markets. Incidentally, this also places many Indonesians into the “late adopters” category, those who are weary of new and unproven brands.

Netizens

Global management consultancy firm McKinsey & Company says, “The Indonesian urban consuming class is growing by five million people every year and will reach 86 million by 2020. These Indonesians are family-oriented, risk-averse, and brand loyal, particularly in favor of local brands (though it is only the perception of being local that matters).”

Jakarta image via Flickr user The Diary of a Hotel Addict, talent pool image via Flickr user Ikhlasul Amal, red tape image via Flickr user Carrie Morris, logistics and ecommerce image via Flickr user Daniel Foster, bandwagon consumers image via Flickr user Fauzan Alfi.

Editing by Steven Millward

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