Hadi Wenas, Chief Executive Officer (CEO) of MatahariMall.com, informed reporters that the online retailer (which is owned by the Lippo Group, one of Indonesia's biggest conlomerates) has successfully expanded to 93 percent of Indonesian cities and districts, creating an online-to-offline business model. He explained that the company managed to grow rapidly because the webshop offers the best services, while it also constitutes a local player (with 80 percent of employees being Indonesian citizens).

Furthermore, its online-to-offline business model forms evidence of the company's innovative efforts. Consumers in Indonesia can now easily buy goods online and pick it up at, for example, the local post office, train station, or shopping center. MatahariMall.com currently has a network consisting of 649 online-to-offline points spread across a large part of the archipelago.

The online retailer has also been engaged in major discount offerings. For some of its products it slashed prices by a whopping 99 percent during the Idul Fitri celebrations in early July. Such moves have also been key to gain market share in Indonesia and compete with foreign online retailer giants such as Amazon.com and Alibaba.com.

In 2014 turnover in Indonesia's e-commerce business was estimated to have reached IDR 150 trillion (approx. USD $11.5 billion). The Indonesian government targets to see turnover grow to at least IDR 1,500 trillion (approx. USD $114.5 billion) by 2020, particularly on the back of expansion of Indonesia's Internet infrastructure. Recently, the government of Indonesia started with the construction of the Palapa Ring project. This project is one of the nation's priority infrastructure projects and involves a huge undersea fiber-optic cable network that will offer faster broadband to the entire archipelago.

The Palapa Ring project should particularly support online businesses outside the island of Java. Currently, there is a rather big gap between the availability (and quality) of Internet between the islands of Java and Bali versus the rest of Indonesia (the further you go to the east of the country, the more difficult and expensive Internet usage becomes). The Palapa Ring project, expected to be completed by 2019, should close - or narrow - this gap.

Indonesia's E-Commerce Industry

Meanwhile, recently released joint research conducted by Google Inc. and Temasek Holdings Pte claims that Southeast Asia's digital economy (which includes a variety of segments including e-commerce, online games, and online advertising) will surge to USD $200 billion by 2025. Indonesia's digital market is forecast to account for 40.5 percent - or USD $81 billion - of this total market in the region. With an estimated USD $46 billion, Indonesia's e-commerce sector will contribute most to the total. As such, the projection of Google and Temasek Holdings is not as optimistic as the projection of the Indonesian government.

MatahariMall.com CEO Hadi Wenas said there are three factors that contribute to Indonesia's rapidly growing e-commerce industry: (1) demographic composition, (2) rapidly rising mobile phone as well as smartphone penetration, and (3) rising Internet penetration. Indonesia contains a young population with about half of the total population being below 30 years of age. For these younger generations of Indonesians it is easier to absorb an online lifestyle compared to the older generations. Moreover, with nearly 100 million smartphones in use in Indonesia and Internet penetration reaching 50 percent of the population, the younger generations obtain the tools to become online customers.

Most Popular E-Commerce Products in Indonesia:

Airplane Tickets
Mobile Phones/Smartphones
Vehicle Accessories

Source: Bisnis Indonesia

Daniel Tumiwa, Chairman of the Indonesian E-commerce Association (idEA), said the offline and online retail segments are actually supporting or completing each other rather than being competitors. Although online retail currently only forms a fraction (0.6 percent) of total retail business in Indonesia, Tumiwa expects the online retail subsector to expand rapidly over the next couple of years. Over the next decade, the idEA wants online retail to account for 20 percent of total retail in Indonesia. This is important to make the domestic economy more efficient.

However, infrastructure remains the biggest obstacle to online retail industry. Indonesia's quality and quantity of infrastructure development is inadequate and therefore logistic costs are very high giving rise to expensive online products. But if the government remains committed to its ambitious infrastructure development plans then the online retail business of Indonesia is in a great position to grow rapidly. Another obstacle is that access to financial institutions (and credit card penetration) remains low in Indonesia.

Foreign Investment in Indonesia's E-Commerce Industry

In May 2016 it was announced that foreign investors are to be allowed full 100 percent ownership in e-commerce firms in Indonesia. Through Presidential Decree No. 44/2016 on the Negative Investment List authorities have opened room. The Indonesia Investment Coordinating Board (BKPM) informed that a 100 percent foreign stake will be allowed for those foreign investors who invest at least IDR 100 billion (approx. USD $7.4 million) for the establishment of an e-commerce company in Indonesia. Pratito Soeharyo, BKPM's Director for Business Empowerment, added that an e-commerce business can also be fully-owned by a foreign investor in case the investment is below the IDR 100 billion level provided that the number of new employment positions (for local workers) that are created through the foreign investment exceeds 1,000. Generally, however, foreign investment in Indonesia's e-commerce industry below the IDR 100 billion level will be limited to a maximum 49 percent stake.