Connecting CommerceBusiness confidence in Indonesia’s digital environmentA report from The Economist Intelligence Unit

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Indonesia

When it comes to digital development, the mood in Indonesia’s capital Jakarta, is decidedly optimistic, according to Andi Boediman, who is managing partner of Ideosource, an Indonesian venture capital firm. That optimism is clearly reflected in the Digital Cities Barometer, in which overall business confidence in the digital environment is eighth highest of 45 cities. On a 1-10 scale, the confidence level of Jakarta executives is measured at 7.25, and it reaches even higher in sub-categories such as support for innovation and entrepreneurship and the development of new technologies.

Such enthusiasm is remarkable for a city in which the digital ecosystem is nascent, according to Albert Lucius, chief executive of Kudo, an online payments firm, especially in comparison with Silicon Valley or Singapore. It clearly has weaknesses, such as universities that have not yet adapted to future skill needs

(see below) and ICT infrastructure that compares unfavourably with other cities in terms of high-speed Internet access1 (although mobile Internet adoption is expanding rapidly).

Business optimism, Mr Boediman believes, derives partly from the visible growth that the Jakarta digital ecosystem is experiencing. “There was no ecosystem at all when I first became involved in e-commerce in 2009,” he recalls. It may also be influenced by enthusiasm about what he perceives as a business-friendly national government that is serious about fostering digital entrepreneurship.2

Score (out of 10) Rank (out of 45)

0 5 10 15 20 25 30 35 40

Overall

Innovation andentrepreneurship

Financialenvironment

Supply of peopleand skills

Development ofnew technologies

ICT infrastructure

Score (out of 10) Rank (out of 45)

7.25

7.29

7.18

7.29

7.10

7.14

8th

8th

9th

9th

12th

7th

1 For example, in the ICT Development Index 2016, produced by the International Telecommunications Union (ITU), Indonesia ranks 115th of 175 countries overall, and 107th in the sub-index which measures Internet access. See ITU, Measuring the Information Society Report 2016.

2 See, for example, “Widodo promises digital economy boom for Indonesia”, Nikkei Asian Review, March 3, 2016.

Finding the right people The local ecosystem’s weaknesses, along with restrictive government regulation and limited funding for investment, represent difficulties for Jakarta-based firms pursuing digital initiatives. The toughest problem of all, however, is the limited availability of talent and skills, which is at the top of respondents’ list of digital transformation challenges.

A majority of surveyed executives in Jakarta believe that its universities and other educational institutions are doing an effective job of training students with adequate skills. Mr Boediman, however, doubts whether these are the future-oriented skills that local companies will need to compete in the digital era. The educational system, he says, produces technology-oriented graduates in large numbers, yet businesses still complain of talent shortages at managerial and lower levels. As a result, some fast-growing

Figure 1: Barometer readings—Jakarta

Figure 2: The toughest challenges organisations face in pursuing their digital transformation initiatives

Limited fundingfor investment

Lack of access to a strong technology ecosystem

Government policiesor regulations

Cyber security concerns

Talent/skillsshortages 36%

31%

20%

17%

15%

2 Telstra — Connecting Commerce © The Economist Intelligence Unit Limited 2017 3

digital start-ups (and the venture capital firms that support them) are recruiting overseas specialists or outsourcing some roles to other Asian locations.3

A major weakness of the educational system, according to Mr Lucius, is that it trains students to work in a hierarchical system that emphasises “following orders”, without encouraging creativity, teamwork or other “soft” attributes. When it comes to the start-up environment in particular, “We need people to be open, to challenge ideas and to question the status quo more often,” he says. A related problem, says Mr Boediman, is that universities and technical institutes are geared toward training traditional IT workers rather than digital professionals.

When asked the most important skill gaps their companies must fill to support their digital initiatives, security is the most frequent response of the survey group. It is also a need felt keenly by the government, which recently launched a national competition to identify cyber-security talent to meet its own and businesses’ future needs.4 Change management is another area of expertise cited by survey respondents, which reflects the difficulties that larger organisations in particular encounter in trying to drive through digital transformation initiatives.

Figure 3: The skills most needed to support digital transformation

Business changemanagement

Product/service offering

Big data analytics

Business network

Internet of Things

Digital security

25%

41%

24%

22%

15%

22%

3 “Talent shortage stymies Indonesia’s tech scene”, Reuters, June 8, 2016. 4 “Ministry seeks cybersecurity talent through national competition”, The Jakarta Post, January 26, 2017.

The current shortage of skilled digital talent experienced in Jakarta as well as other Indonesian cities results from a variety of adverse circumstances. One, as discussed above, is a mismatch between university and technical institute curricula and the rapidly evolving needs of companies. A broader problem is a relatively low level of what Accenture, a consultancy, calls “digital fluency”—people’s familiarity with digital devices and applications in both work and home environments. In a global study Accenture published in 2016, the firm’s researchers found that digital fluency amongst adult Indonesians was the second lowest of 26 countries, ahead of only India.5 The study found that this situation particularly hindered the career potential of Indonesian women.

In recognition of this underlying weakness, the national government is

planning to make coding a compulsory subject in primary and secondary schools. It is also boosting investment in vocational schools with a focus on improving young people’s computer skills.

To meet their immediate needs for digital talent, however, companies in Jakarta frequently seek to recruit specialists from other countries in Southeast Asia or further afield, usually on temporary contracts. But restrictive immigration rules mean that, for most firms, this is a limited and short-term solution.

Mr Boediman offers a few policy recommendations that he believes would particularly help the country’s innovative start-ups address their needs for talent in the short and longer terms. One is to do more to attract the diaspora of young, talented Indonesians studying and working abroad to return home.

Reducing the red tape required to start a new business would be a start, something the current government has promised to do. To help keep talented students in the country, the government should encourage Indonesian universities to partner with US, Australian and European counterparts to establish high-quality digital and business training at home. Vocational and technical training for high school age youth should be expanded to include such subjects as software programming, web development, and the use of CAD/CAM (computer-aided design and manufacturing) applications. Lastly, says Mr Boediman, the government should ease immigration rules to make it easier for firms to hire skilled employees from other countries in the region.

Tackling the digital talent challenge

5 Accenture, Getting To Equal: How Digital is Helping Close the Gender Gap at Work, 2016.

© The Economist Intelligence Unit Limited 2017 54 Telstra — Connecting Commerce

External sources of supportImproving business operations with the help of digital technology, whether in supply chain management, back-office processes, customer service, web development, customer analysis and segmentation, or other areas, are complex undertakings that companies cannot always manage with their own resources. In many cities, large and small firms alike often turn to local support structures for advice and ideas about how to address technology challenges they are facing. Formal and informal structures such as accelerators, innovation labs, meet-up groups and university networks are frequent sources of such advice. This element of the digital ecosystem is not as developed in Jakarta as in Singapore, Beijing, Shenzhen or Western technology hubs. But, according to several observers and participants, including Mr Lucius, it is expanding fast.6

Jakarta survey respondents say that traditional structures such as business associations and the events they organise are particularly useful sources of assistance and advice for their digital initiatives (cited by 32% of respondents). Also high on their list are informal communities and networks, such as meet-up groups, as well as innovation labs (both cited by 24% of respondents). Mr Boediman is sceptical of the value of some local incubators and accelerators, describing them as little more than “marketing gimmicks” staged by their

corporate founders. Other accelerators, including those launched by overseas companies, offer more to entrepreneurs in the form of networking and events, he says. These include local branches of Plug and Play and the Founder Institute, both of Silicon Valley, Google Launchpad (launched recently) and GnB, a Japanese-US venture.

Co-working spaces are a fast growing component of Jakarta’s digital ecosystem. The city administration itself launched one such centre earlier in 2017 (the Jakarta Creative Hub) and more recently announced plans to build five more in 2018.7 Mr Lucius says that digital and coding hubs, such as “data science bootcamps” and workshops, are also valuable elements of the ecosystem. An ingredient that is missing, though, in his view, is a sufficient number of experts with global experience to speak at local forums and share international best practice.

Help from the halls of governmentMore than in any other city in the study, Jakarta business executives are hopeful that the municipal government will play a more positive role in developing the digital ecosystem. This sentiment is expressed by 95% of Jakarta respondents who say that city support for digital transformation will grow in importance in the next three years. A majority also believe that the city governments should, in principle, be more influential than the national one in supporting the digital transformation initiatives of businesses operating there. A majority, however, also believe there is currently a disconnect between national and city governments when it comes to support for innovation, amongst other policy areas.

Until a few years ago, digital development and entrepreneurship received scant government support at either national or city level. The pro-business agenda pursued since 2015 by the national government in particular has done much to fuel the digital optimism of business leaders in the city. It remains to be seen if any momentum will be lost should the site of the national capital be moved to another city, which the government intends to start preparations for in 2018.8 If our survey respondents are any judge, the current digital optimism in Jakarta looks likely to remain strong.

Figure 4: The most valuable inputs obtained from external groups

Advice on technology

Referrals tosources of data

Referrals to potential sources of talent

Referrals to sources of funding

New ideas forproducts or services 58%

41%

31%

31%

17%

8 This decision has reportedly been made with a view to alleviating the enormous pressure of a large and fast-growing population on Jakarta’s civic infrastructure. “Government to prepare capital’s relocation”, The Jakarta Post, July 4, 2017.

6 See, for example, “The Ecosystem Builders: An Exhaustive List Of Accelerators And Incubators In Indonesia”, Inc42, November 26, 2016. 7 “More city-run co-working spaces to be built”, The Jakarta Post, September 13, 2017.

6 Telstra — Connecting Commerce © The Economist Intelligence Unit Limited 2017 7