Why Silicon Valley should be investing more in Indonesia

Kurt is based in Tokyo as the GM for Asia at Boku.

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Indonesia has quietly become a great place to do business. The country finally seems to have cast off many of the problems that plagued it for years. Investors are starting to notice. Ecommerce marketplace Tokopedia recently raised US$100 million from Sequoia and Softbank; fashion estore Zalora raised US$112 million from various investors; and GrabTaxi, which is based in Singapore but has growing operations in Indonesia, took US$250 million from Softbank.

Tokopedia CEO William Tanuwijay spent the first 10 years of his career taking jobs at various online and payments companies. None of these businesses excited him, so he spent a lot of time reading local web forums. He saw people complain loudly about problems they faced paying for goods online and receiving them offline. There was no trust between buyers and sellers. He set out to solve this problem by combining business models from eBay, Craigslist, and Google AdWords to form Tokopedia. He has one mission: to build a product that everyone in Indonesia can and wants to use.

But starting a business in Indonesia was not always so simple. Five major terrorist bombings from 2000 to 2003 killed hundreds and spooked both tourists and investors. Corruption was rampant. Inter-religious conflicts often flared.

This difficult past may explain why the country lacked much outside investment. Suharto, Indonesia’s president for more than 30 years, ruled Indonesia with a strong, centralized military government until 1998. Later that year, Bascharuddin Jusu Habibie started Indonesia’s truly democratic transition. He and the two presidents who followed encountered many internal conflicts and challenges. Then in 2004 Susilo Banambang Yudhoyono was elected, providing the first strong democratic president for Indonesia. He, too, was an army general but spent his eight years fighting corruption, establishing a political system of checks and balances, and forming free trade agreements (with Japan in particular). Despite this progress, last year the World Bank rated Indonesia 114 out of 189 countries for ease of doing business.

Next year, it will probably rank much higher.

Faster growth

Indonesia’s new president, Joko Widodo, a timber collector and furniture salesman by trade, wants to diversify Indonesian businesses and attract over US$500 billion in investment in the next five years. He has already pushed through a one-stop national office for business permits, created tax breaks for foreign nationals, and mapped out technology parks for high-growth industries.

Legal reforms are making the country a much safer place to invest, do business, and collect payments. In the past, if a business took a customer to court for not paying its bills, the winner was decided by how much the judge was bribed, said Ichiro Kawada, CEO of BA Partners, speaking at the Startup Asia Jakarta conference in November. Ten years ago, tax collectors would demand personal payment for tax reimbursement, he said. Kawada-san has been working in Indonesia with Japanese investment firms such as JAIC since 1998. He says that the environment has improved significantly and he is now much more comfortable advising his Japanese clients to invest there.

All these regulatory changes will benefit the country’s growing and increasingly tech-savvy middle class. Indonesia is home to 250 million people. Within the next 20 years it is projected to become the world’s third most populous country behind India and China. Indonesia’s per capita GDP of US$3,500 sits between India’s (US$1,500) and China’s (US$6,800), but it is growing faster than both, having doubled in the last five years. Widodo’s government has set a goal to increase GDP another five to seven percent by luring foreign investment for infrastructure and new industries.

Turning to tech

Technology companies will play a critical role in this planned growth. The new consumer class is demanding the best the market has to offer, and Silicon Valley is not blind to that. Of the 70 million Indonesians who access the Internet, about 22 percent are on Facebook, making the archipelago Facebook’s fourth-largest market.

Roughly 60 percent of Indonesia’s internet users access it only through mobile phones. It’s a fast growing market for mobile phones, as China’s Xiaomi is now learning. It has sold 100,000 phones online in Indonesia in the first three months since expanding to the country.