Barriers to Indonesian ecommerce – separating fact from friction

Adrian Li is founder and managing partner at Convergence Ventures, a venture capital fund that invests in early stage technology ventures in Indonesia. He is also a mentor at several local startup accelerators.

The last three months have seen a massive increase in overseas institutional investor interest in the potential of Indonesia. This makes sense as it’s been spurred by the maturity and realized returns from China and the US. Investors are now thinking where next? Having fielded many questions from such investors, one query is invariably asked of me over and over again – “Aren’t logistics and payments a barrier to ecommerce?” Another is, “Will this prevent the growth of the market?”

My answer is to encourage investors to focus on the ecommerce opportunity and that logistics and payments are not barriers, just friction points. That frequently raises eyebrows. Here I’ll explain why I give that answer.

Inconvenience isn’t a barrier

I categorize true barriers to the growth of ecommerce as access, adoption, and spending. These three factors will truly prevent buyers from going online because they’re more than just an inconvenience. By “access,” I mean the ability of people to go online. Clearly if individuals cannot even get online, there will be no internet economy. Indonesia, however, is well clear of this with a connected internet population of more than 85 million and a forecasted 165 million by 2020. That’s from a total population of 250 million.

I define “adoption” as whether people with access to the internet spend time online or are prepared to transact online. Again, Indonesia has shown incredible adoption of internet products and services. Already it boasts the world’s fourth largest Facebook population, and Jakarta is the most engaged Twitter city in the world. Based on the 2014 State of the Internet report, the most screen minutes consumed globally per active user come from Indonesia.

This brings us to the final barrier – “spending.” In other words, are people wealthy enough to be spending on products and services online (or are such products being priced cheap enough to entice people to spend online)? Indonesia’s GDP per capita on a nominal basis is now quickly approaching the critical threshold of US$4,000 per year, which economists have seen as a tipping point for the rise of the middle class and ensuing consumer business opportunities.

To reinforce this, the phenomenal growth of ecommerce sites like Tokopedia, Lazada, and Traveloka in the last three years bears testament to customers’ willingness to not only access the internet, but also to spend online. If you ask me: “Are there big barriers to the growth of the Indonesian internet economy?” I would answer no.

What remains is a huge opportunity as growth in access, adoption, and spending continue and transactional friction is reduced.

Friction is just an inconvenience

So what’s friction? I would call payments and logistics friction points because typically it’s not that goods and services online cannot be paid for or that they cannot be delivered. Rather, it is more that these enabling layers of payments and logistics are not as well developed as they could be.