Revving up the e-commerce engine

As it picks up speed, regulatory changes and improvements are vital to help online commerce do a better job in helping Indonesia’s economic development.

Revving up the e-commerce engine AFP Photo/Adek Berry

For several years, there has been much talk about Indonesia as the next big thing in e-commerce. It has the market, with a population estimated at 268 million in 2019, a figure Indonesia’s statistics bureau projects to increase to 279 million by 2023. And Indonesia’s e-commerce sector has indeed been on a roll. According to the management consulting firm McKinsey, Indonesia has the most billion-dollar tech startups in Southeast Asia, with that herd of unicorns including e-commerce giants such as Tokopedia, Bukalapak and Traveloka. But there is still a lot of room to grow.

McKinsey reports that e-commerce in Indonesia was an $8 billion industry in 2018, and predicted almost eightfold growth to as much as $65 billion per year by 2022. 

While Indonesia’s Internet penetration rate, according to World Bank figures, has increased impressively, from 17 percent in 2014 to 32 percent in 2017, that still leaves a lot of room for new Internet connections. According to the Association of Southeast Asian Nations (Asean), e-commerce sales in Indonesia represented just 3 percent of total annual retail sales in 2017. Compared to its Asean counterparts, Indonesia’s e-commerce market is still relatively small in relation to its population. According to Asean statistics, Indonesia’s e-commerce market size per capita in 2017 was only $5, compared to $43 and $309 for Malaysia and Singapore, respectively. So all the numbers point to the potential for immense growth of Indonesia’s e-commerce market.

This potential has not escaped the notice of investors. In recent years, we have seen an aggressive push into Indonesia’s e-commerce sector by investors from Asian giants such as Japan, China and South Korea, joining investors from the United States and Europe.

All the elements seem to be in place for e-commerce in Indonesia to live up to the expectations and become a real driver of economic growth in the country, but there are a number of significant challenges to be overcome. The first and most obvious is that no laws or government regulations have been specifically written and issued for the implementation of e-commerce. This absence of a specific regulation means that Indonesia does not even have a working legal definition for e-commerce, although an indirect definition can be worked out from the 2017 presidential regulation on the national electronic commerce system, which is often referred to as the E-Commerce Roadmap. This roadmap is seen as a document providing guidelines and steps for the preparation and implementation of – and here is where the working definition of e-commerce is obtained – trade transactions through a series of devices and electronic procedures. The E-Commerce Roadmap provides a list of suggested or desired programs and stakeholder activities to accelerate the development of e-commerce, covering everything from financing and taxation to consumer protection, education and human resources, communication infrastructure, logistics, cybersecurity and the establishment of an Executive Agency of the E-Commerce Roadmap. The E-Commerce Roadmap is an ambitious document that covers a huge swath of territory and seeks to develop a whole ecosystem to nurture and grow the sector. Achieving its ambitions will require the commitment of the government and every stakeholder.

There are several main elements of e-commerce that will play a significant role in determining the development of the sector in Indonesia, and all of these elements, to one extent or another, face regulatory challenges that will require a thoughtful and measured response from the authorities if e-commerce is to reach its full potential in Indonesia. 

Data protection and location

Data protection is essential for the successful expansion and use of e-commerce platforms. Eimear Dodd, an Irish Tech News writer, reports that half of Internet users said a lack of trust was a major reason for avoiding online shopping. A big reason for this lack of trust is consumer fear of their personal data being misused or shared with other entities for fraud, such as phishing scams and identity theft. With this lack of trust playing a big role in hampering the development of e-commerce, laws and regulations to strengthen the protection of information commonly stored by e-commerce platforms such as customer details and transaction data are of utmost importance.

In this respect, Indonesia has a long way to go. There is no specific law in place specifically for data protection, just a handful of laws and regulations that touch on the idea of data protection. The main regulations are the Electronic Information and Transactions Law, which was originally issued in 2008 and amended in 2016; a 2012 government regulation on the implementation of electronic systems and electronic transactions; and a regulation issued by the Ministry of Communication and Informatics in 2016 for the protection of personal data in electronic system.

In essence, consent is the foundation of data privacy and protection under Indonesian law. Any process involving personal data can be implemented only after the consent of the person whose data it is has been obtained. The 2016 Ministry of Communication and Informatics regulation stipulates that displaying, announcing, sending, disseminating or providing access to personal data in an electronic system can only be done with the approval of the owner of the personal data, and this consent must be “accurate and suitable to the purpose of acquiring and collecting the said data.” The regulation requires consent to be in writing, whether manually or electronically. Noncompliance could subject an electronic system provider (ESP) to administrative sanctions provided under the regulation.

The 2008 Electronic Information and Transactions Law as amended prohibits the use of any information that has been acquired through electronic media and which contains personal data related to an individual without the consent of that person. It also provides criminal sanctions for any person who transfers or transmits electronic information owned by another person without having such right. And under the 2012 government regulation, to conduct an electronic transaction in Indonesia, a party must consider the security, reliability and efficiency of the electronic system, store the transaction data in the country, utilize a national gateway if the operation involves more than one ESP and use a domestic electronic system network.

Onshore data center requirement

Under the 2012 government regulation, ESPs for public services are obliged to place data centers and disaster recovery centers within Indonesian territory for the purposes of law enforcement, data protection and the enforcement of state sovereignty over the data of citizens. “ESP” is defined in the regulation as any person, state entity, business entity or community that provides, manages or operates an electronic system, whether independently or collectively, for its own use or another party’s use. No definition of “public services” is provided but in practice the Ministry of Communication and Informatics has interpreted the term very broadly to mean any local ESPs that generally provide their services to the public or make their services available to the public, such as social media companies, financial institutions, banking services and insurance companies.

The onshore data center requirement took effect in 2012 with the enactment of the government regulation, but existing ESPs were given five years to comply. But even with the five-year grace period, ESPs have had trouble fulfilling the requirement for any number of reasons, one being that multinational companies tend to have global data center arrangements with their offshore group entities. But one of the main difficulties with the onshore data center requirement is the absence of clarity over what is defined as a “public service” under the regulation. The broad interpretation of “public service” can be seen as hampering the progress of ESPs in Indonesia, as every multinational ESP that provides services to the public or makes its services available to the public is required to adjust to the onshore data center requirement, no matter the type of data being kept offshore or its strategic importance, or otherwise, to the state.

The government is working on a draft amendment to the 2012 regulation, with the main focus to bring clarity to what constitutes a “public service” and the type of data that will need to be kept exclusively within Indonesia. The draft amendment divides data into Strategic Electronic Data, High Electronic Data and Low Electronic Data, and only data centers for Strategic Electronic Data would be required to be located onshore. Strategic Electronic Data is defined as electronic data that has a strategic impact on the smooth running of the state, as well as the defense and security of the state. This means that under the draft amendment, ESPs would be allowed to store all data that is not Strategic Electronic Data offshore. The draft amendment’s clear classification of data and its leniency toward the onshore data center requirement is important to finally create a balance between the government’s objective to protect strategic data and the business goals of ESPs in Indonesia, and most importantly to provide clarity to all parties. Note, however, that the draft amendment is still a work in progress and subject to change.

Unclear procedure for data transfer

According to Article 22 of the 2016 Ministry of Communication and Informatics regulation, an ESP domiciled in Indonesia that wants to transmit personal data it manages to outside Indonesian territory must coordinate the transmission with the ministry or the authorized officials/agencies. This coordination is to involve reporting the planned transfer of personal data, including at least the name of the receiving state, the name of the receiver, the date of the transfer and the reason or purpose of the transfer. The transferring ESP is also required to request “advocacy,” if necessary, and report the result of the transfer. It must also apply the provisions of laws and regulations on the cross-border exchange of personal data. The problem is that no further regulations have been issued to provide guidance on how exactly this coordination is to be carried out or to clarify, for example, what is meant by “advocacy.” The result is that business actors have very little actual understanding of how to fully satisfy their obligations. Furthermore, since there are currently no laws and regulations on the cross-border exchange of personal data it is not possible for an ESP to comply with this requirement.

In practice, it is not clear whether every cross-border transfer of personal data must comply with the coordination obligation under Article 22 of the 2016 ministry regulation. For the e-commerce sector in particular, the transfer of an individual’s personal data to outside Indonesia by an ESP as part of its business activities is not required to fulfill the coordination obligation under the regulation. This kind of transfer is exempted from the coordination obligation because it is usually done at the individual’s request, and the ESP only acts as an intermediary between the individual and the recipient of the data overseas as part of its business. For example, an ESP conducting business as a hotel/accommodation marketplace platform provider that transfers customers’ personal data (such as name, nationality and passport number) to hotels overseas to make the necessary reservations purchased by customers is not required to fulfill the coordination obligation. However, this exemption may not apply if the ESP wants to transfer its employees’ personal data to its holding company overseas, which is not part of its business activities as a hotel marketplace platform provider.

With the lack of further regulations to clarify the coordination obligation, few businesses have attempted to comply with the obligation, all on their own volition as the Indonesian communications ministry has never sought to enforce the rule. It is important that further regulations be issued to clarify the

procedures for the coordination obligation, and possible exemptions. As a reference, in Singapore personal data is comprehensively protected under its 2012 Personal Data Protection Act (PDPA). The Singapore PDPA comprises various rules governing the collection, use, disclosure and care of personal data, including the transfer of personal data outside of Singapore. A 2014 implementing regulation further stipulates that to transfer personal data to a territory outside of Singapore, the transferring organization must take appropriate steps to ensure that it complies with the Singapore PDPA while the transferred personal data remains in its possession or under its control. It must also take steps to ensure that the recipient of the personal data in the country or territory outside Singapore is bound by legally enforceable obligations to provide to the transferred personal data a standard of protection that is at least comparable to the protection under the Singapore PDPA.

The transferring organization is taken to have satisfied the requirements of the second point in respect of an individual’s personal data if the individual consents to the transfer of the personal data to that recipient in that country or territory and the transfer is necessary for the performance of a contract between the organization and the individual. Although Singapore does not impose any coordination obligation for cross-border personal data transfers, the Indonesian government, in particular the communications ministry, could try to adopt Singapore’s comprehensive criteria for personal data transfers that may be exempted from the coordination obligation, and also further enact provisions to regulate the procedure for the overseas transfer of data.

E-commerce tax

As e-commerce businesses begin to replace traditional retail businesses, it will be necessary to clarify the taxes each business in the e-commerce sector is obliged to pay to protect the country’s tax revenues. To this end, the Indonesian Ministry of Finance this past New Year’s Eve enacted a regulation on the taxation of e-commerce, which was scheduled to go into effect on April 1 (after Strategic Review went to press). The regulation does not introduce new taxes on e-commerce businesses, but seeks to clarify the existing taxes each business in the sector is obliged to pay and create equal treatment between e-commerce and brick and mortar businesses. The regulation applies a vendor collection model where marketplace platform providers are liable for the collection and remittance of the taxes of their vendors.

The regulation does not provide a definition of e-commerce. However, it is noteworthy that the regulation at least provides certain working legal definitions in the e-commerce sector. A marketplace platform provider is defined as a party, whether an individual, entity or permanent establishment that resides or is domiciled in or has business activities in the Indonesian customs area, that provides a platform in the form of a marketplace, including over the top services in the field of transportation, such as Go-Jek and Grab, which operate in Indonesia. Platform is defined as an application, website or other internet-based content service used for transactions or the facilitation of e-commerce.

Unclarified tax obligations 

While the tax obligations of marketplace platform providers, including traders and service providers that conduct business through marketplace platforms, are clarified under the finance ministry regulation, the tax obligations of traders and service providers that sell through online retail, classified ads, daily deals or social media are not yet clarified.

Under the regulation, the imposition of value added tax (VAT), sales tax on luxury goods and income tax on e-commerce in the form of online retail, classified ads, daily deals or social media is done according to the provisions of laws and regulations in the field of taxation. We have discussed the issue with tax officials, who told us these provisions refer to the current applicable laws and regulations on VAT, sales tax on luxury goods and income tax, meaning there is no further clarification on the taxation obligations of traders or service providers who sell through online retail, classified ads, daily deals or social media that may be implemented to ensure their taxation compliance. Indonesia’s E-Commerce Association has criticized the new regulation, saying online sellers would now instead choose to sell their products through social media rather than marketplace platforms.

Given the situation, further regulations clarifying the tax obligations of traders or service providers who sell through online retail, classified ads, daily deals or social media and the procedures to ensure their taxation compliance are needed to ensure that marketplace platforms and other platforms such as online retail, classified ads, daily deals and social media receive equal treatment and are equally attractive to business players.

Consumer protection

According to Investment Indonesia, business to consumer transactions are growing at a faster pace than business to business and business to government transactions in Indonesia. To support e-commerce growth, trust and confidence must be built among businesses on the one hand and, most importantly, among consumers on the other. One of the ways to build consumer trust is by ensuring that their rights, as the weaker party in any business to consumer transaction, are adequately protected.

The tax obligations of traders and service providers that sell through online retail, classified ads, daily deals or social media are not yet clarified.

General consumer protection rules are found in the Consumer Protection Law. Specific provisions that may be relevant to e-commerce can be found in other laws and regulations, including the 2014 Trade Law, 2008 Electronic Information and Transaction Law as amended, and a 2012 government regulation, which taken together we will refer to as the Consumer Protection Laws and Regulations.

The Consumer Protection Law sets out general obligations for business actors, including people and companies engaged in e-commerce activities. These obligations include acting in good faith when doing business, providing accurate, clear and honest information concerning the conditions and guarantee of goods and services, and providing an explanation regarding the use, repair and maintenance of goods. Businesses must treat or serve consumers properly and honestly without discrimination, guarantee the quality of their goods and services according to the standard quality of the goods and services, and let consumers test or try certain goods and services. Finally, they must provide compensation, indemnity or replacement for goods and services that are not as agreed, and for any losses caused by the use of the goods or services. The Consumer Protection Law prohibits business actors that produce or trade goods to make misleading offers or advertisements, or to insert clauses harmful to consumers in any document or agreement.

A key article of the law stipulates that “business actors shall be responsible for providing compensation for damages, contamination and/or losses to consumers due to the consumption of goods and/or services produced or traded.” The compensation may be in the form of a refund or replacement goods. Business actors are released from responsibility if, for example, the damage was the result of the negligence of consumers or there has been a lapse of at least four years from the time the goods were purchased.

The 2014 Trade Law requires every business actor who trades goods or services using an electronic system to provide complete and correct information that at a minimum includes the identity of the company and proof that the company is legally allowed to act as a producer or distributor, the technical

requirements of the goods or services sold through the electronic system, price information and payment methods, and delivery methods. A business that fails to provide complete and correct information could lose its licenses. The 2012 government regulation also provides certain protections for consumers by, among other steps, requiring sellers to provide complete and correct information on the contract, the offered products and the producers of the products. It also requires contracts to be made in the Indonesian language and to contain at least the identity of the party, the object of the transaction and specifications, the conditions of the transaction, price and other costs, procedures for cancellation, right to return the goods or demand replacement goods (within a certain period of time) in the event of hidden damage to the goods and choice of governing law. 

‘Know your customer’

Under the Consumer Protection Laws and Regulations, there is no specific obligation for an ESP to verify the identity of its traders/merchants. This lack of verification is often one of the reasons for the lack of satisfaction with e-commerce platform transactions.

However, under the 2018 finance ministry regulation on the taxation of e-commerce, which was scheduled to come into effect on April 1, traders and service providers who sell through a marketplace platform will be obliged to report their tax or ID number to the marketplace platform provider. This obligation will, in essence, serve as a verification step and may be considered part of the “Know Your Customer” principle. As marketplace platform providers will be liable for the collection and remittance of the taxes of their vendors, this obligation will allow the Indonesian director general of tax, through its access to the population data from the Directorate General of Population and Civil Registration, to obtain and track the identity of the vendors. This should help prevent fraud and the misuse of data, and help improve consumer protection on e-commerce platforms.

However, this Know Your Customer obligation does not apply to traders and service providers who sell through platforms other than a marketplace platform, such as social media. The government is preparing a draft regulation on e-commerce that will supposedly require every e-commerce business actor to possess and submit all legal information such as ID card, business license, the Ministry of Law and Human Rights approval for the establishment of their company and the registration identity number from the Ministry of Trade. At this point, there has been no confirmation on when this draft regulation will be passed.

Electronic payments 

In practice, the methods of electronic payment in e-commerce are bank transfers; electronic wallets, which are, according to Bank of Indonesia regulation, electronic services that save payment instrument data such as payment instruments using cards or electronic money; electronic money (e-money), which, pursuant to Bank of Indonesia regulations is a payment instrument issued based on the value of money deposited in advance to the issuer, the value of money stored electronically in a server or a chip, and the value of the e-money managed by the issuer shall not be considered as savings as referred to under prevailing banking laws; cash on delivery; credit card; and payment coupons, where a payment code is provided and payment is made at designated and participating venues (eg, Indomaret).

Presently, the use of these electronic payment methods is regulated through various regulations issued by the central bank. For example, a 2016 Bank of Indonesia regulation and an accompanying circular letter oblige payment service providers to obtain a service provider license from the central bank.

Payment service providers include payment gateway providers, defined as parties providing an electronic service allowing traders to process payment transactions by using payment instruments including cards, electronic money and a proprietary channel, which is a payment channel developed and owned by a bank for its customers using, among others, technology based on short message service and mobile web. It also imposes a licensing requirement on parties operating electronic wallets if they have or plan to have at least 300,000 active users. A bank circular letter puts a 10 million rupiah limit on electronic wallet funds.

Lack of regulation

One of the key challenges to the growth of e-commerce in Indonesia is the low adoption of cashless payments due to concerns over the payment safety of electronic transactions. According to market surveys by Statista, a prominent online statistics portal, the most common form of payment in e-commerce transactions is bank transfer, followed by cash on delivery. The number of unbanked people in Indonesia, about 49 percent of the population in 2017, according to the World Bank, also plays a large part. Increased use of cashless payments goes hand in hand with e-commerce growth because faster payment processing and greater convenience for both vendors and customers naturally encourages e-commerce transactions.

One way to increase consumer confidence in the use of cashless payments is to implement regulations with stronger fraud prevention and detection provisions. While the Bank of Indonesia regulations discussed impose certain obligations on payment service providers regarding the security of customer funds, such as the requirement to implement a fraud detection system to detect the misuse of user data and information, the regulations do not go further. They remain silent on the details and requirements of such a fraud detection system, and do not provide additional measures to prevent the perpetration of fraud, so the standard and quality of fraud detection systems implemented by payment service providers may not be sufficient to prevent the perpetration of fraud against users.

With the potential growth of e-commerce and the need to increase consumer confidence in cashless payments, Indonesia requires more specific and stronger regulations aimed at the protection of consumer information and funds for providers of electronic payment services such as electronic wallets and e-money.

It is worth considering for Indonesia to issue specific guidelines for fraud prevention and detection that are standardized and applicable to relevant service providers. Look at the Bank of Indonesia guidelines issued to commercial banks for the implementation of anti-fraud strategies for a starting point. However, the circular letter containing the guidelines uses broad and general language that could be challenging for parties providing electronic payment services because the industry is still in its infancy and includes many startups as opposed to established and experienced institutions such as banks that may have already developed best practices regarding fraud prevention and detection. Also, there is a whole set of other risks posed by the use of new technology, so the guidelines for electronic payments should be more specific.

Indonesia could learn from other jurisdictions that have begun to implement such guidelines. For example, the Monetary Authority of Singapore has issued the “E-Payments User Protection Guidelines,” which specifically identify the obligations of payment service providers. These include providing transaction notifications to consumers, providing methods to confirm payment transactions and the credentials of payment recipients, implementing a reporting channel for the unauthorized use or erroneous transactions and crediting accounts for losses arising from unauthorized transactions as soon as investigations are completed.

Electronic signatures

The Electronic Information and Transactions Law defines an electronic signature as a signature with electronic information attached, associated or related to other electronic information used as a verifying and authentication instrument. Indonesia recognizes two forms of electronic signatures, namely certified and uncertified. An electronic signature, according to the law, will have legal force and legal effect as long as it meets certain requirements. In practice, it must be noted that there is a range of electronic signatures in terms of evidentiary value, from a manual signature that is scanned to become an electronic signature up to a digital signature issued by a nationally accredited electronic certification administrator.

The use of electronic signatures in Indonesia is still in its infancy, as is its regulation, so the absence of clarity and relevant challenges are to be expected. It is notable that in e-commerce transactions in Indonesia, electronic signatures are rarely used. Instead, it is more common that agreements in e-commerce transactions are made through “clickwrap” agreements, which are contracts where a user indicates acceptance or approval by clicking a button labeled “accept,” “agree” or an equivalent term at the end of a set of terms.

While current Indonesian laws and regulations do not specifically address whether clickwrap contracts are enforceable here, these types of contracts are common without any objection from the government, in this case the Indonesian communications ministry. The legal basis and the relevant provisions governing the validity of such “electronic contracts” are found in the 2008 Electronic Information and Transaction Law, as amended, and the 2012 government regulation on the implementation of electronic systems and electronic transactions, but having a detailed and comprehensive regulation on electronic signatures would be invaluably positive for the development of e-commerce in Indonesia.

At the current stage of e-commerce in Indonesia, where most e-commerce activity is comprised of the buying and selling of goods, clickwrap contracts are an efficient and convenient means to conclude such relatively simple, and in most cases, standard agreements. But increasing the use of electronic signatures may be necessary to propel the growth of e-commerce into more complicated transactions that require the conclusion of agreements using electronic signatures; for example, for the provisions of health care services. Such contracts executed over the Internet would require greater measures to ensure the valid identity of the person entering into the agreement than a click of a mouse, such as requiring a certified electronic signature. More complex agreements also have a greater possibility of dispute and certified electronic signatures have evidentiary value that clickwrap contracts do not. The increased regulation and use of electronic signatures would thus help to develop e-commerce growth.

Micro, small and medium enterprises

Many merchants on e-commerce platforms in Indonesia are individual sellers and small businesses. Definitions of micro, small and medium enterprises can be found in the 2006 MSME Law. Enterprises are classified as micro, small or medium if they are independent, not a subsidiary or branch of a larger enterprise, and have net asset or annual sales levels as defined in the law. There are a number of benefits afforded to MSMEs in various laws and regulations and in some government programs. One of the most significant benefits is the reduction in the final tax rate for MSMEs by half, from 1 percent to 0.5 percent, under a 2018 government regulation. The decrease in taxes would leave e-commerce MSMEs with more income they could use to grow their business, expanding the e-commerce market. 

Lack of obligation 
According to a 2014 presidential regulation on the licensing of micro and small businesses, the purpose of business licenses for micro and small enterprises is to provide legal certainty and protection in doing business. Licenses are also a prerequisite to gain assistance for business development and access to bank and non-bank financial institutions for financing.

However, under the existing regulations, and as confirmed by an official at the Ministry of Trade, while small-scale and larger enterprises are obligated to obtain a business license, micro-scale enterprises are not. In the context of e-commerce, micro-scale enterprises include individual vendors on e-commerce marketplaces with net assets of less than Rp 50 million ($3,550) or annual sale proceeds at a maximum of Rp 300 million. This lack of obligation for micro-scale enterprises to obtain a business license could undermine the goal of helping these enterprises access financing, business development support and government assistance.

Indonesia could impose an obligation for micro-scale enterprises engaging in the e-commerce sector and that meet certain criteria to obtain a business license. While it may be argued that imposing such an obligation could deter these enterprises from participating in e-commerce activities and hurt growth in the sector, that may not be the case because the government has already begun to streamline the licensing process through the Online Single Submission system, where MSMEs can apply for licenses online. And pursuant to the 2014 presidential regulation, licenses for micro and small-scale enterprises should be issued without charge.

There are also further benefits from having a business license. For instance, many government programs require a business license to participate in them. There are training programs provided by the Indonesian government, together with e-commerce platforms and micro-credit programs such as Kredit Usaha Rakyat to help micro-enterprises obtain financing from bank and non-bank institutions.

Another challenge in the current legal framework is the lack of obligation for marketplaces to ensure that vendors, most of which are MSMEs, have obtained their requisite licenses before they are able to operate as vendors on that marketplace. To this end, Indonesia could impose an obligation for e-commerce marketplaces to check the business licenses of merchants who want to sell goods and services on the marketplace, including MSMEs. This is something that we believe is likely to be included in the draft regulation for e-commerce, especially as e-commerce continues to grow, to allow the government to monitor businesses in the sector. This would allow the government to implement certain regulatory measures that could further support the growth of e-commerce. For example, requiring marketplaces to check the business licenses of vendors would ensure the validity of vendors, increasing consumer protection and leading to a safer environment for e-commerce.   

Logistics and warehousing 

According to numerous reports, one of the biggest challenges for e-commerce growth in Indonesia is logistics and warehousing. This is not necessarily a regulatory matter, but more a lack of infrastructure and quality logistics service providers and warehousing, resulting in inefficiencies and high costs. Essentially, the problem is that Indonesia is an archipelagic country made up of 17,000 islands spanning more than 3,000 miles from east to west, faced with poor infrastructure and underdeveloped logistics and warehousing services. Thus, the focus should be on targeted government programs to improve the state of logistics and warehousing, as opposed to laws and regulations that govern, for example, the licensing of logistics and warehousing businesses.

In the E-Commerce Roadmap, the government recognizes logistics as one of the aspects Indonesia needs to develop for e-commerce and identifies a number of programs to do so. These programs

According to the World Bank, logistical costs account for up to 25 percent of Indonesia’s gross domestic product.

include strengthening local logistics service providers and developing logistics systems between city and rural/village areas. Part of this would include activities such as improving road infrastructure, which could, for example, allow for delivery of goods from e-commerce transactions to previously inaccessible locations.

Looking beyond the E-Commerce Roadmap, there are already other programs being implemented by the government that may improve logistics and warehousing operations in Indonesia, and indirectly boost the e-commerce market. These programs include President Joko Widodo’s Village Fund Program, which every year since 2015 has allocated and utilized funds for the improvement of village infrastructure, with about Rp 187 trillion allocated by 2019. The Rp 1.9 trillion Trans-Papua road development project is helping to build roads in Papua, and the New Priok Development Project was introduced in 2014 to expand one of Indonesia’s main seaports, Tanjung Priok, in Jakarta, and increase its cargo-handling capacity. Separately, the government has taken steps to expand the network and capacity of seaports around the archipelago, an important initiative for moving goods around and among the country’s thousands of islands. The government has introduced sea tolls, essentially toll roads built on top of bodies of water, to connect Tanjung Priok port in Jakarta and Tanjung Perak port in Surabaya, East Java Province, with 41 new ports throughout Indonesia and up to 15 routes established as of 2018. Indonesia received a $400 million loan in 2016 and $300 million in 2018 from the World Bank to improve connectivity and infrastructure, using the money to introduce educational, fiscal and monetary reforms in the logistics sector. 

Weaknesses and improvements 

While the government seems to be making a considerable effort to improve infrastructure to aid in the transport of goods, there is still a long road ahead to improve logistics, but it is a road that must be travelled. According to the World Bank, logistical costs account for up to 25 percent of Indonesia’s gross domestic product. 

Further, there still exists a shortage and underdevelopment of warehousing throughout Indonesia. The government could fund projects to build more warehouses across Indonesia or provide incentives, such as tax breaks or subsidies, for private companies to encourage them to build warehouses for their businesses. For example, Lazada Indonesia, the online retailer, has started building warehouses in Indonesia and could be encouraged to expand its efforts with government incentives.   

E-commerce future trends

The e-commerce landscape in Indonesia is likely to see the emergence and growth of a new group of players: traditional street vendors, known as warung. These traditional street vendors are starting to get online through the support of both startups and big e-commerce companies. For example, the startup Warung Pintar was founded in 2017 with the goal of digitizing traditional street vendors by providing digital kiosks for $5,000, and had reached 1,500 vendors in Jakarta by 2018. Warung Pintar has started to expand into other areas of Indonesia and looks likely to continue its growth after it recently raised more than $35 million of funding. In January, online marketplace Bukalapak invested Rp 1 trillion in a program called Warung Naik Kelas. This program was founded in 2017 to increase technology penetration among traditional street vendors and has since reached about 500,000 vendors. Warung Naik Kelas helps traditional street vendors gain scale through online orders, for example, by providing an application allowing warung vendors to directly place orders through a call order delivery feature. These developments to digitize traditional vendors will help expand the reach of Indonesia’s e-commerce sector and its attendant benefits, such as greater access to consumers and suppliers and more efficient processes, to groups of small-business owners who might have otherwise been left out of these market developments. In other words, modern e-commerce will transform the business of Indonesia's traditional street vendors.

Online pure-play e-commerce is also expected to make moves offline. Love, Bonito, an online-first fashion brand from Singapore, has officially launched its permanent flagship store at Orchard Road after seven years of being an e-commerce pure-play. Lazada Group’s chief executive officer, Max Bittner, hinted at the possibility of opening physical stores in Indonesia during a conference in 2018. These offline movements of online pure-play e-commerce companies have introduced a brand new shopping experience to customers. Pomelo, which has attempted to reach offline customers over the last few years, recently opened its biggest pop-up to date in Siam Square, a fashion center in Bangkok. The store offers a combination of online and offline shopping experiences called “click-and-collect,” letting customers order items online and try them on in the store before deciding which ones to keep or return. The emergence of this offline-online shopping experience will likely be seen in Indonesia soon.

At the moment, in Indonesia the majority of e-commerce purchases involve goods and services for personal use by end consumers, but it may be a different story moving forward. One example of this is

The emergence of this offline-online shopping experience will likely be seen in Indonesia soon.

AdsDax, a rich-media advertising platform with offices in Wales, London, Mumbai and Jakarta, which aims to leverage block chain technology to provide a platform specifically designed for the advertising industry. AdsDax’s future marketplace will focus on engaging players in the advertising industry: advertisers, publishers, consumers and other creative outlets. By connecting advertisers directly to consumers and their mobile devices, the ecosystem that is supported by block chain technology and AdsDax’s own utility token aims to provide a much better service to the advertising industry. Advertisers will have full transparency regarding the fees used for their campaigns and direct relationships with consumers, publishers can monetize more and sell directly at lower cost, creative developers can earn more from completing creative work and managing accounts, and consumers can take control and monetize their time and data. This is one example of the shared economy. 

Winnie Y Rolindrawan is a senior associate at the corporate law firm SSEK Legal Consultants in Jakarta, where she focuses on e-commerce, data protection and financial services.
Harry Kuswara is an associate at SSEK Legal Consultants. He works mostly with clients in the areas of e-commerce, data protection, payment systems and financial technology.

You need to login to write a comment!