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ICT

2015

EIBN Sector Reports

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Table of Contents

METHODOLOGY ....................................................................................................................... 2

EXECUTIVE SUMMARY ........................................................................................................... 3

INTRODUCTION ....................................................................................................................... 4

1. THE ICT MARKET IN INDONESIA ...................................................................................... 6

1.1. ASEAN OUTLOOK ................................................................................................................. 7 1.2. ICT PRODUCTS ..................................................................................................................... 9 1.3. ICT INFRASTRUCTURE IN INDONESIA .....................................................................................10 1.4. ICT SUPPLY ........................................................................................................................13 1.5. ICT DEMAND BY BUSINESSES ...............................................................................................14 1.6. ICT DEMAND BY HOUSEHOLDS AND INDIVIDUALS ...................................................................16

2. MARKET STRUCTURE AND REGULATORY OVERVIEW ..................................................17

2.1. TELCOS ...............................................................................................................................17 2.1.1. XL AXIATA .......................................................................................................................19 2.1.2. TELKOMSEL .....................................................................................................................20 2.1.3. INDOSAT ..........................................................................................................................21 2.1.4. NETWORK MODERNIZATION AND SPECTRUM REFRAMING ......................................................22 2.1.5. DATA ................................................................................................................................23 2.1.6. TELECOMMUNICATIONS INFRASTRUCTURES ........................................................................24 2.3. MOBILE DEVICES ..................................................................................................................25 2.4. MANUFACTURING .................................................................................................................26 2.5. POLICY FRAMEWORK ............................................................................................................28 2.6. INNOVATION AND RESEARCH .................................................................................................30

3. TRENDS AND BUSINESS POTENTIAL ...............................................................................31

3.1. FINANCIAL SERVICES ...........................................................................................................31 3.1.1. M-BANKING ......................................................................................................................32 3.1.2. I-INSURANCE IN INDONESIA ................................................................................................34 3.2. E-COMMERCE ......................................................................................................................36 3.3. E - LOGISTICS ......................................................................................................................40 3.4. E-GOVERNMENT ..................................................................................................................40

4. FINAL RECOMMENDATIONS ..............................................................................................43

5. RELEVANT CONTACTS .......................................................................................................44

6. LIST OF ABBREVIATIONS ...................................................................................................51

7. REFERENCES .....................................................................................................................53

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Methodology

The goal of this market study is to provide an overview of the potential of Indonesia’s ICT industry. This desk research highlights the opportunities for European companies, and contains the industry characteristics (e.g., market size, growth potential), the structure of the market, key stakeholders and major providers, future trends, regulations, and existing challenges.

While preparing this report, EIBN made use of a variety of literature, data sources and methods. General information about the ICT market and main stakeholders was gathered from publicly available sources: news articles, official company websites, publications (e.g., Indonesian Telecommunications Report, Ernst & Young, Oxford Business Handbook, etc). EIBN also interviewed key player sources from the State Ministry of National Development Planning, and the Indonesian Internet Service Provider Association.

Where updated official data was not yet publicly available, we reverted to the latest data on hand. For example, for annual data, results and figures which are not entirely available for 2014, the data and figures for 2012 and 2013 were used. Any data included has been mentioned in the report.

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Executive Summary

The purpose of the EIBN ICT Sector Report is to provide an overview of the ICT market in Indonesia using analytical data for the market, local mobile operators, government ongoing and future projects, and the potential business opportunities for European companies.

With a population of about 250 million, Indonesia is a huge market attracting investments from both domestic and foreign telecommunications companies. The market is further supported by the fact that within the economy, telecommunications is one of the most prominent sectors with a contribution for more than 3% of ASEAN GDP at the value in excess of $32 Billion. In addition, Indonesia has become the largest spender on IT in South East Asia and is ranked 19th globally1.

The Government of Indonesia has implemented different projects for the ICT industry in the framework of the Indonesian Broadband Plan (IBP), operational policy document to develop the Indonesian broadband sector with the ultimate goal of increasing the citizens’ welfare. The IBP has planned Internet connectivity with the ability to send voice, images and data at one time (triple-play) with a minimum speed of 2Mbps for fixed network and 1Mbps for mobile access. The flagship initiative of the IBP, the “Palapa Ring”, is an initiative to foster the fiber connectivity between islands in Indonesia.

Parallel with the development of ICT infrastructure, new e-services platforms are being implemented in the financial sector. However, the lack of complete network integration and relatively unstable infrastructure are impeding e-services players to retain their prospective customers. The number of Indonesians covered by health insurance was 176 million by June 2013. 28% of Indonesians were still uncovered and, from a numbers of vehicles totaling 104,2 million in 2013, only 0.5% was fully insured. The e-commerce sector offers great potential, not only within the context of the success of the industry in mature markets, but due to the key advantages that it offers to a market such as Indonesia. Infrastructure and logistical constraints in Jakarta, secondary cities and outlying islands make online shopping an ideal and convenient alternative by providing access to goods that are not available in the immediate vicinity of many consumers.

Social networking is growing fast in Indonesia, making Jakarta the 1st Twitter city in 2013 and Indonesians the 4th largest group of Facebook users in the world. Meanwhile, the number of Internet users in Indonesia is expected to rocket from 40 million in 2011 to 175 million by 2016, accompanied by a boom in data connection subscribers’ growth from 52 million in 2011 to 167 million in 2016.

Overall, it is expected that with the market size, Internet penetration growth, new consumption patterns and strategic position in ASEAN, Indonesia will continue to attract global players especially in the e-commerce, e-logistics and financial services sectors.

1 International Data Corporation, 2013

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Introduction

Indonesia is part of the Association of Southeast Asian Nations (ASEAN) market with over than 600 million in total population. With the planned establishment of an ASEAN Economic Community (AEC) in 2015, the region is expected to witness increased trade flows and experience greater competition for firms to invest in Member Countries.

In 2013, Indonesia registered an increase of 27.3% of total investment year-on-year (YoY),Foreign Direct Investment (FDI) realization in 2014 was up 16.2% from the previous year. A remarkable 6% economic growth on average in the last 7 years was sustained by an abundant and cost-efficient labor force.

Recent ICT development is often seen as the beginning of a more promising period. Indeed, much of its potential in fact is still to be unleashed, rendering Indonesia as one of the most promising e-commerce markets in the upcoming years. In spite of concerns that could impact the future growth, like high inflation, elevated interest rates and fiscal policy adjustments for fuel budget cut, ICT in particular for the financial sector is believed to be one of the most prospective sectors yet to be fully developed.

With over than 169.7 million mobile phone users in 2014, 34% of which used Smartphones, the central government monopoly in the Telco business seems light years away. The whole population Internet literacy will reach 83.6 million in user numbers in 20152, and will keep growing thanks to the shift towards digital connectivity with the “Palapa Ring Program”, covering 33 provinces, comprising 21,921 miles of under water and 13,489 miles of underground fiber-optic network. The country is presently experiencing a period of political stability and steep consumption growth. Indonesia is the world’s fourth most populated country, and 43% of the population is under 25 years old.

In an era of modern technology where only 47% from the total population have a bank account, branchless banking is being implemented on a large scale. Thus, financial institutions and IT solution firms are well aware of the prospects of e-commerce, banking and insurance in Indonesia and have been actively involved in the segment. In regards to the overall high potential, IDC predicts Indonesian IT spending will continue to record double digit YoY growth, (US$ 18.5 billion in 2014)3.

However, the capacity of infrastructure and its supporting platform are still a few steps behind. Thus, the Government obliged all telecom and broadcast system operators to complete a digital migration from analog by 2018. As foreseen in the Master Plan for the Acceleration and

2 Indonesian Internet Service Provider Association (APJII) is pessimistic that Indonesia would be able to meet the target set by the Millennium Development Goal`s (MDG'S) more than 50% Internet penetration of the total population by the end of 2015. However, based on APJII survey in cooperation with the PusKaKom UI (University of Indonesia), Internet users in Indonesia in 2014 is recorded at 88.1 million, penetrating 34.9%. In 2014 there were an additional 16.2 million Internet users as it was recorded at 71.9 million users at the end of 2013. (Indotelko, Indonesian Internet Penetration Dificult to Meet MDGs Target, http://www.indotelko.com/kanal?c=ev&it=Indonesian-Internet-Penetration-Dificult-to-Meet-MDGs-Target); 3 East-West Center, 2014

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Expansion of Indonesia’s Economic Development (MP3EI), ICT, together with Logistics and Transportation development, will unleash Indonesia’s full economic growth.

Nevertheless the ICT market development could be hampered due to various factors that still need to be addressed. Among relevant issues are: complicated administrative procedures, complex technical regulations, poor infrastructure, lack of facilities and low fiscal incentives.

This market report aims to provide an overview of the Indonesian ICT market potential, through an in depth analysis of its structure, main drivers and obstacles. The information complied is the product of the work of the EIBN’s market research team, in cooperation with the Business

Development Departments of three Bilateral Chambers of Commerce in Jakarta (Germany, France and the Netherlands).

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1. The ICT Market in Indonesia

Indonesia is the fastest growing mobile telephone market in the Asia-Pacific region, predicted to reach 391 million mobile accounts in 20154. The market is dominated by three major mobile telecommunication providers, Telkomsel, Indosat and Xl Axiata; 95% of mobile users are prepaid subscribers5.

Figure 1: Indonesia Mobile Phone Subscriptions vs Internet Penetration 6

Indonesia in 2014 registered 36 mio smartphone subscribers, and the total number of users is estimated to have grown by 34% over 20127.

Social networking is a fast growing, and blogging is widespread, providing a powerful marketing tool for consumer businesses8. In Indonesia, 67%of online consumers pay attention to online advertising and 96% are affected by online advertising through friends or relatives. With substantial growth in the use of social media applications, Google, Facebook and Twitter recently decided to establish representative offices in the capital city of Jakarta. Total Indonesian Internet users are expected to reach 139 million users in 20159.

Cloud services have emerged as a key part of IT strategy for most businesses in Indonesia, especially for small and medium enterprises (SMEs). The most recent government data show 70 per cent of 56.5 million of Indonesian SMEs do not use IT solutions. Indonesia’s cloud

4 Austrade, ICT to Indonesia, 19 Dec 2014, http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; 5 Business Monitor International, Indonesian Telecommunications Report, 17 Nov 2014; 6 Indonesian Internet Governance Forum, 2013; 7 Oxford Business Group, Indonesia, 2014 8 Austrade, ICT to Indonesia, 19 Dec 2014 http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; 9 The Association of Indonesian Internet Providers, ‘Internet Users in Indonesia’, Jan 2014;

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computing market is expected to reach more than US$120 million by 2017 and Software-as-a-Service (SaaS) is expected to be a popular choice for Indonesians10.

However, the growth of Internet penetration in Indonesia is quite modest in comparison to number of mobile subscribers per 100 inhabitants. One of the reasons is lack of infrastructure development for higher speed connection on a nationwide scale, in particular in the rural area and islands. Net-security might also hinder the progress of financial transactions compared to chat and social media usage. Measured high churn rates among mobile phone operator subscribers is also believed to have delayed e-commerce and m-banking development.

1.1. ASEAN outlook

ASEAN region at the moment has become a favourable place for investment in view of its demographic consumer base. ASEAN showed 313% increase in GDP on Purchasing Power Parity per capita in just over a decade.

Figure 2: ASEAN GDP Growth Comparison to Global Players 2001-201311

ASEAN in 2014 registered a combined GDP of US$2.4 trillion which was larger than Australia, Korea and India independently. With more than 350 million inhabitants in the productive maturity range, the ASEAN market is extremely attractive to European companies especially those in search of market diversification

The European Union (EU) and ASEAN have built a foundation of strong trade partnership and total FDI flow to ASEAN is more than US$2.3 billion from the EU28. Total exports from ASEAN into the EU28 in 2013 were valued at US$122 billion. The EU is already the third largest ASEAN trading partner behind China and Japan. ASEAN should be the 5th largest finance market by 2019 behind the US and BRIC.

10 Frost & Sullivan, The Rise of Cloud Computing in Indonesia, Sep 2013; 11 International Data Corporation, 2014

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Moreover, the occurrence of the ASEAN Economic Community (AEC) at the end of 2015 will transform ASEAN members into a single market with the platform of Free Trade Agreements in the e-ASEAN Framework. The growth expectation is high for the certain sectors like ICT as indicated in the ASEAN ICT Masterplan 2015. ICT sector so far contributed more than 3% of ASEAN GDP at the value above US$32 Billion and employs around 11.7 Million people. The ICT Masterplan is intended to develop ASEAN as one of the fastest growing markets for mobile banking and e-commerce industry in Asia along with China and India. A liberalization pact of ICT since 2008 has been able to eliminate barriers and tariff on ICT products in the region. The enhanced access to smart technologies in mobile finance and e-commerce are in line with facilitating cross border trade and transactions. Thus, establishment of AEC would place Indonesia in an ideal position in the global information society considering its geographic, demographic and purchasing power parity advantages. On one condition: successful integration of the ICT Masterplan.

Figure 3: ASEAN ICT Network Readiness Index12

The ASEAN ICT network readiness with respect to a few members exhibits high performance levels in terms of political, regulatory environment and business innovation in addition to infrastructure and digital content promptness. Affordability and man power skills level scores are also high aside from three marginal countries: Cambodia, Lao PDR and Myanmar. While the economic impacts of ICT achievement in Thailand, Vietnam and Indonesia are bit lower when compared to their social impacts.

12 World Economic Forum compiled by IMC Institute, 2014

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ASEAN specifically plays an important part in the development of mobile ICT globally, with total active mobile subscribers of more than 688 million, with more than 22.5% of these being dynamic Internet users. More than 50% of ASEAN mobile subscribers are located in Indonesia and according to one survey conducted by AC Nielsen, 70% of those Indonesian Internet users intended to make an online purchase. In longer term, the creation of the AEC and the harmonization of the technical standards based on ASEAN Finance Mutual Recognition Agreement will facilitate transfer of goods and know-how among its member States. The region successful transformation into a free trade zone will be determined by specific factors such as development of infrastructures.

Figure 4: ASEAN Mobile Phone Users 201413

1.2. ICT Products

ICT goods must either be intended to fulfill the function of information processing and communication by electronic means, including transmission and display, or use electronic processing to detect, measure and/or record physical phenomena, or to control a physical process.14 International Data Corporation (IDC) in 2014 reported that ICT spending in Indonesia would hit US$ 18.5 billion charting a 12.5% growth YoY15.

13 US Census Bureau, InternetWorldStats, Facebook, ITU, 2014 14 OECD (2011); 15 Jakarta Post, IT spending to grow 12.5% amid tough economy, says report, http://www.thejakartapost.com/news/2014/01/17/it-spending-grow-125-amid-tough-economy-says-report.html;

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The same study, added that individual consumers would contribute an estimated $7.81 billion to overall ICT spending this year16. As for the companies, the top three spenders by sector would be media and communications; banking, finance and insurance; and manufacturing.

These sectors would spend a combined US$ 6.27 billion, with media and communications spending nearly $4 billion, consumption by banking, finance and insurance would hit US$ 1.2billion, with manufacturing reaching US$ 1.08 billion, breaking an import threshold (US$ 1bn), to be attributed to the increase in FDI in that sector. However ICT solution providers still consider banks and telecommunication providers as their primary clients.

1.3. ICT Infrastructure in Indonesia

ICT infrastructure is a crucial resource for an information society. As newer technologies emerge, they create the challenge of establishing infrastructure able to meet demand. For this reason, measurement of infrastructure may precede measurement of products or usage17.

Indonesia has one of the slowest Internet connection speeds in the Asia-Pacific. Indonesia's complex geographical island structure makes the build-up of cable infrastructure difficult and costly. Following Presidential Decree No 96 Year 2014, The Indonesia National Development Planning Agency (BAPENNAS) launched the IBP 2014 – 2019 in mid-October 2014. This IBP is defined as Internet connectivity with the ability to send voice, images and data at one time (triple-play) with a minimum speed of 2Mbps for fixed network and 1Mbps for mobile access. This goal is to be achieved through linking broadband with other priority sectors in the economy, namely e-Government, e-Health, e-Education, e-logistics and e-Procurement18.

The Ministry of Communication and Information Technology, recognizing the importance of high-speed Internet to economic and social development, launched the Indonesia Connected program to boost connectivity in border and remote areas. The fiber-optic Palapa Ring network is being implemented throughout Indonesia to accommodate this growth. The ministry estimates that construction of the Internet backbone has reached 80 percent, covering Nangroe Aceh Darussalam (Sumatera) Ring, Java-Kalimantan-Sulawesi-Denpasar-Mataram Ring, and Mataram-Kupang Ring. Several companies are involved in the project.

Nevertheless in 2014 many participants pulled out from it, leaving the state owned enterprise (SOE) Telkom alone to implement the project. The Palapa Ring project consists of 35,280 km of undersea cable. Many of these cables connect to Singapore (see Figure 4), which sits at the crossroads between Asia Pacific and Europe and serves as major hub for submarine cables used for Internet and telecommunications infrastructures, via one of Indonesia’s submarine

16 Jakarta Post, IT spending to grow 12.5% amid tough economy, says report, http://www.thejakartapost.com/news/2014/01/17/it-spending-grow-125-amid-tough-economy-says-report.html; 17 OECD (2011); 18 State Ministry of National Development Planning (Bappenas), Ministry of Planning / Bappenas Indonesia Launches Broadband Plan 2014-2019,Oct 2014;

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cables, the SEA-ME-WE-3, which is the longest optical submarine cable in the world with landing points in Medan and Jakarta, Indonesia.19

Figure 5: Currently active Indonesia-connected submarine cables 20

Telkom invested US$ 71.1 million to build a backbone network of fiber-optic cables which connects the islands in eastern Indonesia21.

At the end of 2019, fixed broadband access infrastructure in urban areas is expected to reach 30% of the population and 71% of households with a speed of 20 Mbps, while fixed broadband infrastructure in rural areas is expected to reach 6% of the population and 49% of households with a speed of 10 Mbps. As for mobile broadband, access infrastructure is expected to reach the entire population in urban areas and 52% of the population in rural areas, each with a speed of 1 Mbps.By the end of 2019, the price of the service is set to be a maximum of 5% of the average income per capita per month 22.In Indonesia there are six operators using GSM23/WCDMA24, one using CDMA25, one using LTE26, and one using WiMAX27.

19 IGF 2013: An Overview of Indonesian Internet Infrastructure and Governance, https://citizenlab.org/2013/10/igf-2013-an-overview-of-indonesian-Internet-infrastructure-and-governance/; 20 interactive version: http://submarinecablemap.com/#/country/indonesia 21 Detik, Jokowi Resmikan Palapa Ring, Telkom Ingin Pangkas Kesenjangan Digital, http://inet.detik.com/read/2015/04/28/155450/2900489/328/2/jokowi-resmikan-palapa-ring-telkom-ingin-pangkas-kesenjangan-digital 22 Detik, Jokowi Resmikan Palapa Ring, Telkom Ingin Pangkas Kesenjangan Digital, http://inet.detik.com/read/2015/04/28/155450/2900489/328/2/jokowi-resmikan-palapa-ring-telkom-ingin-pangkas-kesenjangan-digital 23 GSM (Global System for Mobile Communications, originally Groupe Spécial Mobile), is a standard developed by the European Telecommunications Standards Institute (ETSI) to describe protocols for second-generation (2G) digital cellular networks used by mobile phones. As of 2014 it has become the default global standard for mobile communications - with over 90% market share, operating in over 219 countries and territories. 24 W-CDMA or WCDMA (Wideband Code Division Multiple Access), along with UMTS-FDD, UTRA-FDD, or IMT-2000 CDMA Direct Spread is anair interface standard found in 3G mobile telecommunications networks. 25 Code division multiple access (CDMA) is a channel access method used by various radiocommunication technologies.

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Figure 6: Telecom operators’ technologies28

The 4G Long Term Evolution (LTE) service is expected to answer the need for high-speed broadband connection that will ensure a seamless flow of data in today’s era. Cellular communication provider Telkomsel, a subsidiary of PT Telkom, disclosed that intensive efforts were underway to develop its broadband services. Telkom is set to expand its broadband infrastructure within its Digital Network 2015 program.

The company plans to deploy Nodes B29 covering all districts in the country and make use of third-carrier spectrum for big cities. “Telkom is ready to implement 4G Long-Term Evolution technology across Indonesia which is supported by DNA [Device-Network-Applications] ecosystem,” CEO of Telkom; Alex Sinaga, said recently in an interview with Jakarta Post30.

According to the World Bank, for developing markets, a 10 percent increase in broadband penetration would spark a 1.38 percent increase in gross domestic product (GDP) per capita31.

The lack of the development in 4G services is partly a result of bureaucratic indecision. The government has been slow to publish specifications. The government backed WiMax in 2011, betting on a system that has been overtaken globally by LTE. It is now treading carefully while trying to rearrange the spectrum for LTE.

26 LTE, an abbreviation for Long-Term Evolution, commonly marketed as 4G LTE, is a standard forwireless communication of high-speed data for mobile phones and data terminals. It is based on theGSM/EDGE and UMTS/HSPA network technologies, increasing the capacity and speed using a different radio interface together with core network improvements. 27 WiMAX refers to interoperable implementations of the IEEE 802.16 family of wireless-networks standards ratified by the WiMAX Forum. 28 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 29 Node B is a term used in UMTS equivalent to the BTS (base transceiver station) description used in GSM. 30 Jakarta Post, ICT businesses to tackle policy at global forum in Bali, http://www.thejakartapost.com/news/2013/03/02/ict-businesses-tackle-policy-global-forum-bali.html#sthash.P0ZAoKEf.dpuf ; 31 Jakarta Post, ICT businesses to tackle policy at global forum in Bali, http://www.thejakartapost.com/news/2013/03/02/ict-businesses-tackle-policy-global-forum-bali.html#sthash.P0ZAoKEf.dpuf ;

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The market seems to be maturing, and it may no longer make sense to hold back on faster services requiring large investments. There are signs that a turnaround in pricing is on the horizon due to data demand32.

1.4. ICT Supply

In Indonesia the market in new technologies is led by imports, meaning that initial penetration takes place through imports; however, growth in local supplies will price out imported goods over time. The Indonesian government’s long term policy is to protect the local manufacturing

businesses, aiming at incentivizing this value added industry.

Another consideration is the Smartphone price tag around the country: only 23% of mobile phone subscribers own Smartphone device in Indonesia. The relatively high price might be holding back the commercial penetration progress. Recently with the entrance of new Original Equipment Manufacturers (OEM) from China and Taiwan in the Smartphone market, the greater class segment have a better chance to be integrated in the global commerce network, not to mention the introduction of some local Smartphone manufacturers.

The products valuation seemed to be quite remarkable and the promotion is extensive. Previously unheard foreign brands like Xiaomi and Oppo; and local ones like Smartfren, Evercoss, Himax, Mito, Polytron, Nexian, and Advan; have invested heavily in the region. With aggressive promotion, competitive pricing and bundling business model, they could make a significant impact on the next stage of Internet penetration and electronic business in a short amount of time.

Figure 7: Global Smartphone vs Standard Phone Subscriptions33

32 Oxford Business Group, Indonesia, 2014; 33 The Nielsen Company Survey, 2013

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Indonesian consumers are hungry for new and innovative products and are gearing up towards a complete digital lifestyle, where innovators are driving demand for multiple devices use.

Figure 8: Telecom operators – Subscribers, Smartphone owners, Data Users34

The latest Accenture digital consumer survey research states 41% of Indonesians either like to be the first to own, or try out latest products and services. Compared to other emerging markets, consumers are generally more interested in emerging digital devices and applications. The survey showed that 55% of Indonesian consumers state they will increase their spending on buying gadgets in the next 12 months. For example, 81% plan to buy a smartphone and 61% plan to opt for larger screens in the next year35.

1.5. ICT Demand by Businesses

It is assumed that the benefits of e-business will be realized where there is a greater degree of integration between functions. The model system36 has patterns associated with e-commerce, that is, whether systems used to receive/place orders over computer networks are linked with internal systems, customers’ systems and/or suppliers’ systems. There is an emphasis on e-commerce linkages because of the significant interest still in e-commerce and the potential productivity gains from automatically linking electronic transactions with downstream processes such as inventory ordering, delivery, accounting functions, etc37.

34 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 35 Indotelko, Indonesia has Higher Interest in Digital Services, http://www.indotelko.com/kanal?c=ev&it=Indonesia-has-Higher-Interest-in-Digital-Services; 36 OECD (2011); 37 OECD (2011);

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More work needs to be done on so-called “integrated e-business processes”, in particular, to

probe areas of integration that are often referred to using terms such as “supply chain

management”, “enterprise resource planning” and “customer relationship management38.

Frost & Sullivan predicts that enterprises’ IT spending in Indonesia will reach US$3.8 billion in 201939. In 2014 IT spending among domestic companies stood at around $1.6 billion.

The increase in IT spending would be driven by better economic conditions and the growing number of people who connect to each other digitally. Indonesia will have around 1.7 billion connected devices by 2020 with over 470 million mobile subscribers and over 200 million active Internet users, according to the research firm.

With higher fixed-broadband penetration, as planned in the project road map, the country would have faster Internet — which would encourage more investment in ICT.

Frost & Sullivan also mentioned that cloud and data center services will be the growth engine for the enterprises’ ICT spending, which registered a growth rate of 605 percent in 2014 and 317 percent in 2013, respectively. The growing spending in cloud services was mainly due to ready adoption by small and medium enterprises. Indonesia’s Internet-based startups were also expected to grow significantly in the near future as there was likely continuing investment for e-commerce players in the country’s growing market, said Frost & Sullivan associate director for

ICT consulting in the Asia Pacific, Spike Choo.

Some things that can encourage SMEs to take advantage of ICT are affordability, infrastructure and assistance. To support micro- and small- businesses to use ICT, measures have been set by the government:: telecommunications provider PT Telkom in 2014 launched the so-called SME Indonesia Bisa (SIB), a program aimed to equip 1 million SMEs with ICT skills by 2015.

Data from the Cooperatives and Small and Medium Enterprises Ministry shows Indonesia has more than 56 million SMEs and over 200,000 cooperatives.

ICT is useful for SMEs, not only in terms of connectivity services, but also for more effective business operations such as identifying new opportunities. Assistance is still needed to create more ICT awareness so that micro- and small-businesses can choose among related products, technologies and applications40.

Indonesia is among the world’s top-five countries with the highest mobile Internet penetration after India and China, according to an Ericsson mobility report. A survey conducted by the Central Statistics Agency (BPS) and the Indonesian Internet Service Providers Association

38 OECD (2011); 39 Jakarta Post, Growth and infrastructure to boost IT spending, http://www.thejakartapost.com/news/2015/02/05/growth-and-infrastructure-boost-it-spending.html#sthash.TYXDdJUw.dpuf; 40 Jakarta Post, Rising ICT usage among SMEs to generate opportunities, http://www.thejakartapost.com/news/2014/05/13/rising-ict-usage-among-smes-generate-opportunities.html#sthash.AidFowWq.dpuf;

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(APJII) shows that by the end of 2013, 71.19 million Indonesians were connected, representing about a third of the country’s population41.

1.6. ICT Demand by Households and Individuals

In the majority of developing economies, household access to, and individual use of, computers and the Internet remains low. Community access potentially plays an important role in helping to overcome this divide – especially in rural areas42. Indonesia is taking steps to address this gap by increasing the number of public Internet access points, including in schools, libraries, cultural and other community centres.

In the higher education market, Indonesia is predicted to grow five times from US$3 billion to US$15 billion by 203043. The advent of technological advancements in education has provided a number of benefits to the institutions as well as corporate trainers (e.g. multi-modal training, online tests and tutorials and live video streaming). By 2017, ten countries in Asia will be spending more on Mobile Learning than on eLearning: India, Laos, Nepal, Malaysia, Indonesia, Cambodia, Pakistan, Bangladesh, Sri Lanka, and Thailand44.

A fundamental element in enabling the benefits ICT can bring to the economy and society is the confidence users have in platforms, applications and services. Creating an online environment that builds trust amongst the users of ICT is an increasing priority for industry and governments45.

According to research from the Indonesian Internet Service Provider Association (APJII), 78.5% of the total Internet users in Indonesia are living in Indonesia's western region. Internet users are dominated by those who live in urban areas of the country. Internet users in Indonesia ranging 18-25 years old, account for almost half of the total number of Internet users in Indonesia (49%). Female users account for 51% of all users. This means that the Internet users segment is typically made of those who are categorized as millennial digital natives, or the generation born after 1980, when the Internet began to be used widely in the society. As a proportion of Internet users, those that have and use the social networking content/app are 87.4%; those who use the Internet for searching things of interest are 68.7%; instant messaging users are 59.9%, those who are looking for the latest news are 59.7%; and those who download and upload videos are 27.3%. Online purchases grew by 11% compared to the previous year’s growth of about 5%. It shows that the level of trust for online transactions, has improved.

41 Jakarta Post, XL to digitize lives of fishermen, http://www.thejakartapost.com/news/2015/03/02/xl-digitize-lives-fishermen.html; 42 OECD (2011); 43 e27, Ed-Tech Startups in Indonesia Helping Fill Education Need-gap, Apr 2014; 44 Ambien Insight Research, Abstract: The Asia Mobile Learning Market: 2012-2017 Forecast and Analysis, Mar 2013; 45 OECD (2011);

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2. Market Structure and Regulatory Overview

In general, according to OECD an ICT Provider can be divided into two specific sectors: Hardware from OEM, and Software from the service application or operating system. The combination of products and services result in a total ICT Solution.

Figure 9: ICT Sector Business Cycle and Categories

2.1. Telcos

Previously Indonesia was under a duopoly operator model with two state owned incumbent enterprises (PT.Telkom and Indosat). These companies no longer benefit from the exclusive rights previously enjoyed. Following deregulation there was a sudden rush of entrances from local and international corporations into the Indonesian telecommunication industry including an acquisition of Indosat by ST Telemedia and later Qtel, and a strategic partnership between SIngtel and PT.Telkom as majority shareholders in Telkomsel. Following this, the Indonesian Government declared a policy for operators to avoid the abuse of dominant market position by implementing regulation in 2010 for Merger and Acquisition Prohibition.

At the moment there are nine licensed operators providing services at national level in Indonesia. This makes it the third largest number of mobile operators in Asia-Pacific, below India (15) and Bangladesh (12)46, though the market is dominated by three of them: PT Telkomsel with its products Halo and Simpati, PT Indosat with Matrix and Mentari, and XL Axiata with XL.

46 GSMA & Kearney, 2008

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Figure 10: Telecom operators market share and GSM/CDMS Market Share47

As of 2013, Telkomsel had nearly 40% of the subscriber market share with the other two players having 17-18% each according to the report from Ministry of Telecommunication (Ditjen Sumber Daya dan Perangkat Pos Informatika). Telkomsel is the mobile arm of the main incumbent PT Telkom. 65% of Telkomsel is owned by Telkom and the remaining 35% by Singapore Telecommunications (SingTel). Indosat is 20.1% owned by the public, 65% by Qtel Ooredoo from Qatar and 14.9% by the Indonesian government. XL Axiata belongs to Axiata Group Berhad (66.5%), and Etisalat (16%). The remaining operators are privately owned by international and domestic firms48. The nature of the competition and spectrum regulatory change has lead to M&A among the players, which occurred with Axis and XL in relation to GSM, and Bakrie (Esia) with Sampoerna Telecommunication (Ceria) in relation to CDMA.

Based on the foreseeable trends of the ICT provider industry globally, regardless of which service categories providers belong to at the beginning, whether fixed line/wireless, Mobile, or Broadband Communication, providers tend to enter other categories as well. There has no exact separate line in terms of corporation structure as displayed all over the world by well known telecom operators like Verizon, O2, T-Home or T-Mobile, Vodafone, Telstra, Starhub, Optus, etc. Each one has entered all three of the categories as technology progresses towards 4G LTE and Wimax.

LTE is 4thgeneration technology-evolution of GSM that has peak data rate up to 100 Mbps. The frequency allocations deemed suitable for LTE are 1800 MHz and 2100 MHz. The number of sites (eNodeB) to deploy will be determined by planning both expected coverage and capacity. LTE network planning in the Greater Jakarta Area shows that the number of sites for 2.02 million subscribers required 2546 sites on bandwidth of 10 MHz. 49

47 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 48 Digital Media, 2014 49 Puslitbang Kominfo, Case Study PT. Telkomsel, LTE Network Planning in Jabotabek, Sri Aryanti, , Nov 2014

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Like Telkomsel, XL Axiata and Indosat are also gearing up to improve their broadband infrastructure, allocating US$ 524 million and US$ 613 million, respectively, of their capital expenditure to this area. XL Axiata has completed the acquisition of Axis which will immediately stock up its efforts in developing more infrastructures to move towards full 4G LTE. In 2013 only, the company deployed more than 2,000 Nodes B.

On the other hand, average revenue per user (ARPU) is still among the lowest in the world50 because the market is so crowded. It is generally believed that the ideal size of a telecoms market is two or three major operators (able to guarantee a functioning oligopoly structure).

Figure 11: Indonesia’s telcos ARPU51

2.1.1. XL Axiata 52

With 49m subscribers, XL in 2014 posted an increase in gross revenue of 10% YoY to US$ 1.77 billion primarily driven by a surge in Data and VAS revenues of 42% and 50% YoY respectively. Data revenue contributed 29% to XL’s total usage revenue compared to 23% in the preceding

year. In addition, XL achieved a 3% growth YoY in Voice and SMS revenues respectively.

Over 16,000 Node Bs were strategically positioned to cater for consumers’ demand for Data. At the same time, XL continues to modernize its network in key cities and this is expected to deliver greater stability, expand network capacity and improve quality for both voice and data services to its consumers. 50 Oxford Business Group, Indonesia, 2014 51 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 52 Indotelko, XL Revenue Rose 10% in 2014, http://www.indotelko.com/kanal?c=ev&it=XL-Revenue-Rose-10-in-2014;

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Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) was stable at US$ 644 million with EBITDA margin at 37%. In 2014, Digital Service’s revenue contribution to XL

increased 52% YoY through the eight lines of Digital service which are Digital Entertainment, Mobile Advertising, Mobile Payment, Mobile Banking, Machine to Machine, Cloud Business Development and Elevenia which experienced an increase in all areas including active subscribers, corporate clients’ partnerships, applications, transactions and products.

On 23 December 2014, XL completed the 3,500 tower sale to PT Solusi Tunas Pratama Tbk. (“STP”) and will lease back these towers from STP under favorable conditions for a period of 10

years, in line with XL’s ambition to focus on its core business. The proceeds received of US$ 420 million will be used to pare down debt and improve its capital position.

XL is very optimistic about the prospects of the 4G LTE era in Indonesia, following its successful 4G LTE trial run during October 2013’s APEC Summit.

2.1.2. Telkomsel 53 Telkomsel is the world’s 6th largest cellular operator by number of subscribers and the market

leader in Indonesia’s telecommunication industry that serves more than 140 million subscribers. With 85,000 Base Transceiver Stations (BTS) Telkomsel provides the largest network coverage in Indonesia, reaching almost all of Indonesia’s population.

As a pioneer in the development of Indonesia’s mobile telecommunication industry and to enter

the advanced stage of mobile broadband services, Telkomsel provides cellular services through GSM Dual Band (900 & 1800), GPRS, Wi-Fi, EDGE, 3G, HSDPA, and HSPA+ networks throughout Indonesia, and is testing Long Term Evolution (LTE) technology. Telkomsel is supported by a 24-hour call center and 410 service centers throughout Indonesia.

Telkomsel almost doubled its subscriber numbers over four years - from 65m in 2008 to 140.6m in 2014 – and growing ARPU in 2014 by 2.8% to US$ 2.9254.

Telkom market cap has reached US$ 22.5 million. This figure has grown rapidly from mid-October 2014 when the market cap was around US$ 21 million. Currently, for the telecommunications sector issuers, Telkomsel has the largest market cap, while XL's market cap is US$ 3.3 million and Indosat’s market cap is US$ 1.6 million.

Telkom who owned 65% of Telkomsel shares set a target in 2015 to become a market leader in all business lines with improvements in two main segment: cellular line (through Telkomsel) and cable-based services (with the Fiber To The Home service IndiHome).

Following a period as of phenomenal growth in the early 2000s, the saturation of voice and Short Message Service (SMS) has led to a slowing of revenue growth in the cellular industry 53 Indotelko, Telkom`s market capitalization exceeds Rp300 trillion, http://www.indotelko.com/kanal?c=ev&it=Telkom-market-capitalization-exceeds-Rp300-trillion; 54 Oxford Business Group, Indonesia, 2014

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over the last five years. Advances in broadband data technology, particularly digital services, now offer a new opportunity for the cellular industry to drive the next curve of revenue growth.

To meet this challenge, Telkomsel undertook a digital strategy built around four key portfolios: digital lifestyle services, mobile payment and digital money, digital advertising, and enterprise digital services. This strategy aims to develop the digital business as the principal source of revenue growth going forward, while maximizing opportunities to monetize the legacy businesses of voice and SMS. To realize this strategy, Telkomsel continues to upgrade its IT infrastructure in line with the demands of the new business while consolidating the existing infrastructure to support greater efficiency and cost leadership

With data traffic increasing sharply by 142.9% YoY, driven by fast-growing smartphone adoption and the abundance of data intensive applications, Telkomsel continued to be the leading network supplier. More than 15,000 new BTS deployed in 2014, of which 76% were 3G BTS, to bring total BTS to more than 85,000 (+22.3% YoY), of which 45% are 3G BTS. Continuous strong growth in smartphone adoption and easier access to content and applications will result in a big surge in data traffic consumption that will continue to drive digital business revenue, as experienced in the last two years55..

Telkomsel spectrum position will be strengthened with the additional spectrum from Telkom Flexi in 800 MHz following the Conditional Business Transfer Agreement (CBTA) between Telkomsel and Telkom in 2014. At the end of December 2014, Telkomsel had 40.4 million smartphone users, representing around 28.8% of the Company’s total subscribers. The figure

was 70.8% higher than last year, at 23.7 million smartphone users or around 18.0% of the total subscribers. The higher penetration of smartphones along with the availability of various applications is critical to increasing data traffic56.

2.1.3. Indosat 57

Indosat is a fully integrated telecommunications network and services provider in Indonesia. The company is the second-largest cellular operator in the country, as well as its leading provider of international call services. It also provides multi-media, data communications, and Internet services. Indosat is 65% owned by Ooredoo Q.S.C. (previously known as Qatar Telecom, A2/negative).

Indosat’s ARPU fell from US$ 2.06 to US$ 2.03 over 2014, as subscriber numbers rose from 59 mio to 63 mio.

Ooredoo Group's Indonesian subsidiary Indosat and Facebook have jointly launched the Internet.org initiative in Indonesia. Facebook's Internet.org seeks to make Internet services more accessible through free Internet access to a set of basic services, including health,

55 Telkomsel Annual Report, 2014 56 Telkomsel Annual Report, 2014 57 Moody’s, Moody's: Indosat's Improved Performance in 2H 2014 Offsets a Weaker 1H,

https://www.moodys.com/research/Moodys-Indosats-Improved-Performance-in-2H-2014-Offsets-a-Weaker--PR_322042;

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education, social media for communication and news58. Reported revenue grew by 1% YoY to US$ 1.8 million, with strong growth in data and value added services compensating declines in voice, SMS and Interconnection revenue.

Despite revenue growth, Indosat's reported EBITDA declined by 3.1% to US$ 756.84 million, mainly on account of higher cost of services, marketing expenses especially on handsets associated with its aggressive data services campaigns, as well as one-off bad debt provisions.

Indosat is striving to improve its UMTS 900 MHZ network, part of its ongoing efforts to enhance its subscribers’ experience. Indosat said that UMTS 900 MHz offered connection to spots where the UMTS 2100 MHz network could not reach59.

Management has set 2015 capex of about US$ 487-562 million, as the company looks to complete its network modernization program, having rolled out 3G in the major cities in Indonesia. These investments are imperative for Indosat to remain competitive, especially against its closest competitor, PT XL Axiata Tbk which has gained significant market share over the last year.

2.1.4. Network modernization and spectrum reframing

Mergers will take place, if not for the networks, customer bases and technology then for the spectrum. Indonesia has a shortage of spectrum and mergers are the best way for a company to increase its service60. Spectrum it is also important because it reduces the number of base transceiver stations (BTS) needed, reducing capital costs. The worry is that rearranging channels will be costly and disruptive61.

Between 478 MHz and 806 MHz spectrum is used for analogue television, and a dividend of 112 MHz is booked for digital TV, when will be rolled outin the large cities and nationwide. At 2600 MHz, the spectrum is used by satellite TV and broadband wireless. At 1800 MHz, operators have non-contiguous blocks - Telkomsel has three blocks and Indosat two - and it is not known whether reframing could be done to support newer technologies. At 850 MHz, four operators are providing CMDA services, each with only 5 MHz, too narrow for newer technologies62.

58 The Teleconomist, Indosat, Facebook Launch Internet.Org In Indonesia, http://telecomist.com/2015/04/indosat-facebook-launch-Internet-org-in-indonesia/ 59 Jakarta Post, Operators on their way to developing broadband, http://www.thejakartapost.com/news/2014/04/15/operators-their-way-developing-broadband.html; 60 Oxford Business Group, Indonesia, 2014 61 Oxford Business Group, Indonesia, 2014 62 Oxford Business Group, Indonesia, 2014

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Figure 12: Existing 1800 MhzSpectrum Configuration63

Indonesian Ministry of Communications and Information Technology (Kemenkominfo) recently formed a Task Force to oversee the 1800 MHz frequency allocation restructuring process so that 4G technology can run smoothly. Currently, the 1800 MHz frequency is inhabited by four operators. The total bandwidth used is 75 MHz, where the current composition is 22.5 MHz for Telkomsel, 20 MHz for Indosat, 22.5 MHz for XL Axiata, and 10 MHz for Hutchison 3 Indonesia (Tri). Post-frequency arrangement, the four mobile network operators will hold a Long Term Evolution Frequency Division Duplexing (LTE-FDD) technology based 4G64.

Figure 13: Spectrum overview of 4 top cellular operator65

2.1.5. Data

Currently the quality of data service is low, because operators want to get data service to more people, in order to grab market share. In Indonesia a megabyte of mobile broadband costs about US 8 cents. In Singapore it is about US 15 cents and in Malaysia about US 30 cents.

The result is a vicious circle which makes more difficult for operators to justify investment on their data networks, which contributes to a weak service66.

63 Puslitbang Kominfo, Case Study PT. Telkomsel, LTE Network Planning in Jabotabek, Sri Aryanti, , Nov 2014 64 Indotelko, Indonesia to form task force to oversee 4G in 1800 mhz, http://www.indotelko.com/kanal?c=ev&it=Indonesia-to-form-task-force-to-oversee-4G-in-1800-mhz 65 Indosat Annual Report, 2014 66 Oxford Business Group, Indonesia, 2014

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PT Indosat is optimistic that it can reach new heights in data traffic following the completion of its network modernization across the country. The data quality increase hit more than 100% after the first modernization of 2012Indosat’s data traffic grew by more than three times to

55,467 terabytes in the first nine months of 2014 from only 17,646 terabytes in the same period in 2013. Revenue from the firm’s multimedia, data communication and Internet services rose by 8.3 percent to US$ 205.4 million in the January-September period in 2014 from US$ 180 million during the same period in the previous year67.

Increases in data traffic have also been enjoyed by other two major cellular operators, PT XL Axiata and PT Telkomsel. XL recorded a 126.7 percent surge in data traffic from 54,615 terabytes in 2013 to 123,824 terabytes last year. Telkomsel’s data traffic posed a 146.1 percent growth in the first nine

months of last year compared with the same period in 2013. The skyrocketing data traffic in the country is mainly driven by the greater number of people with access to the Internet, particularly those living in big cities.

2.1.6. Telecommunications Infrastructures68

In order to support the rapid expansion of Mobile Network Operators, basic foundation infrastructure mainly consists of continuous Telco Towers erected in a certain area range. However, the three leading tower operators – Profesional Telekomunikasi Indonesia (Protelindo), Tower Bersama Infrastructure (TBI), and Solusi Tunas Pratama (STP) – currently have divergent financial profiles, leading to differences in their abilities to make large acquisitions. Currently, the three own 45% of Indonesia’s 72,000 telecommunications towers.

Ownership changes in the Indonesian telecommunications tower sector continue over the medium term as leading telecom operators are looking to monetize additional tower assets over the next 12-18 months. Their expansion will be boosted by organic growth as they build towers in response to the push by telecom operators to expand their 3G/LTE networks.

67 Jakarta Post, Indosat foresees data traffic surge after network upgrade, http://www.thejakartapost.com/news/2015/02/17/indosat-foresees-data-traffic-surge-after-network-upgrade.html#sthash.liP3FoqQ.dpuf; 68 TowerXchange,2015;

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Table 1: Telecommunication tower sector – financial metrics 69

2.3. Mobile devices

Recent data from GfK70 declared that the value of smartphone sales in the Southeast Asian countries reached $16.4 billion in 2014, an increase of 33 percent from the previous year. Number of units sold also increased by 44 percent annually. A total of 120 million smartphones and tablet were sold in August 2014 in Southeast Asia.

In Southeast Asia alone, there are approximately 345 different branded model smartphones, and those coming from Chinese manufacturers are able to sell at a price 58% cheaper than other international brands. In ASEAN, Indonesia leads the country with the highest sales growth between 2013 and 2014, of up to 70%, followed by Vietnam 56%, and Thailand 44%. While in terms of valuation, Vietnam topped the valuation growth of up to 52%, Indonesia 32%, and Thailand 31%. Equally important is the data showing that Indonesia is the only market in the region of Southeast Asia where local brands are able to compete closely with foreign brands71.

From 4.5 million in the first quarter of 2014, smartphone shipments in Indonesia surged to 7 million in the third quarter. Meanwhile, tablet shipments more than doubled during the same period, from 747,000 in the first quarter to 1.76 million in the third quarter. Aggressive marketing by local vendors coupled with assistance from Chinese and Taiwanese makers were responsible for the leap in Indonesian sales.

Moreover personal computers are being displaced by smartphones and tablets. In fact, in Indonesia PC sales (based on shipment data) fell in 2015, while In Singapore, Thailand, and Vietnam, PC sales appear to be on a solid upswing72.

69 Company Information, Moody’s Financial Metrics, Moody’s Investors Service Estimates; 70 Dailysocial, GfK: Pertumbuhan Penjualan Smartphone di Indonesia Tertinggi di Kawasan Asia Tenggara, https://dailysocial.net/post/gfk-pertumbuhan-smartphone-indonesia-tertinggi-asia-tenggara; 71 Dailysocial, GfK: Pertumbuhan Penjualan Smartphone di Indonesia Tertinggi di Kawasan Asia Tenggara, https://dailysocial.net/post/gfk-pertumbuhan-smartphone-indonesia-tertinggi-asia-tenggara; 72 Forbes Asia, Indonesian Smartphone Shipments Surge 55% in 2014, http://www.forbes.com/sites/susancunningham/2014/11/21/indonesian-smartphone-shipments-surge-55-in-2014/

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Figure 14: Mobile handset brands in Indonesia73

Local brands are very aggressive in marketing. Evercross was the sponsor of the most watched TV program in Indonesia. Maxtron, Cyrus, S-Nexian, Tiphone, Pytron can be seen on many billboards spread all over the country. Their successful deals with telcos, offering data bundling are one of the major reasons of their success. Evercoss ships 16 million phones annually and has 40 models on the market. Smartfren Andromax phones can only be used on the Smartfren network. The Baidu Browser is preinstalled in Maxtron and Andromax phones74.

2.4. Manufacturing

Accommodating the government’s latest regulation on the level of local components in local devices, Taiwanese Asus partners with PT Sat Nusapersada collectively established an assembling factory in Batam. The factory is projected to produce up to 200.000 units in a month. Asus factory is reportedly ready to serve two production lines with capacity as big as 150.000 to 200.000 units per month with up to US$ 1.5 million-worth investment. The scheme is supposedly enough to meet the local market’s demand75.

A couple of other smartphone vendors have also applied such scheme in the past year:

73 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 74 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014; 75 DailySocial, Asus Builds Smartphone Assembling Factory in Batam, https://en.dailysocial.net/post/asus-builds-smartphone-assembling-factory-in-batam/;

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Oppo PT Indonesia Oppo Electronic’s CEO Jet Lee mentioned that the factory is going to be located in Tangerang and will start producing 500 thousand devices per month by March 2015; it’s reportedly ready to spend US$ 30 million76.

Asiafone is projected to spend US$ 7.5 million to have its factory built at a 3500 square meters area in Pluit, North Jakarta77.

The holder of the brand Polytron, PT. Hartono Istana Teknologi, has even confirmed that the factory, which would be located in Kudus, is expected to start producing this year. This company looks to produce 2.4 million units of smartphones in a year at the 130.000 square meters-sized factory78.

Huawei raced in establishing its production factories in Indonesia. Huawei is attempting to avoid its importing permit from getting abolished should it has yet had its own factory standing in Indonesia by the end of 2015. Huawei announced that after the partnership with PT Panggung Elektronik comes into force, there would be 50.000 units of smartphones being produced each month. The production activities will be done at PT Panggung Elektronik’s facility in Surabaya, East Java79.

Evercoss Aries PT Indo Global, is building a phone assembly plant in Semarang, Central Java.80.

Xiaomi itself is known to be a rapidly growing Chinese company whose Android smartphones are sold exclusively online. Having been established only in 2010, the company has provided a strong competition to smartphone companies like Samsung and Apple by taking a significant portion of the Chinese market. This year it began its expansion to several Southeast Asian countries including Singapore and Malaysia. Chinese phone maker Xiaomi’s step in expanding its market to Indonesia and Brazil is reportedly being hampered by complicated certification process81.

Another primary factor that drives the establishment of factories in Indonesia is the Ministerial Decree number 82 year 2012 which regulates cellular devices importation. In this regard, importers who do not yet possess factories in Indonesia by the end of 2015 will have their

76 DailySocial, Looking to Produce 500,000 Devices per Month, Oppo to Establish Factory in Indonesia, https://en.dailysocial.net/post/looking-to-produce-500000-devices-per-month-oppo-to-establish-factory-in-indonesia; 77 DailySocial, Asiafone to Invest 100 Billion Rupiah for Factory in North Jakarta, https://en.dailysocial.net/post/asiafone-to-invest-100-billion-rupiah-for-factory-in-north-jakarta; 78 DailySocial, Polytron to Establish a Smartphone Factory in Kudus, https://en.dailysocial.net/post/polytron-to-establish-a-smartphone-factory-in-kudus; 79 DailySocial, Looking to Reduce Its Import Volume, Huawei Assembles Phones in Indonesia, https://en.dailysocial.net/post/looking-to-reduce-its-import-volume-huawei-assembles-phones-in-indonesia; 80 DailySocial, Berniat Menggeser Samsung, Pabrik Evercoss Akan Produksi Satu Juta Unit Ponsel Tiap Bulan, https://dailysocial.net/post/berniat-menggeser-samsung-pabrik-evercoss-akan-produksi-satu-juta-unit-ponsel-tiap-bulan; 81 DailySocial, Smartphone Certification Process Hinders Xiaomi’s Plans for Indonesia,

https://en.dailysocial.net/post/smartphone-certification-process-hinders-xiaomis-plans-for-indonesia;

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import license abolished. Moreover the Ministry of Industry Regulation No. 69/2014 makes mandatory for local electronic devices to contain at least 40% of local components

After the beginning of 2014 the Taiwanese company, Foxconn confirmed the planned opening of a plant in Indonesia, although the realization was waiting for the appointment of the new government. Now mobile phone manufacturing giant South Korean Samsung is reportedly keen to take the same step82.

2.5. Policy framework

The ICT sector in Indonesia is highly regulated by the Ministry of Telecommunication and Information Technology.

Based on the regulation of Minister of Communications and Information Technology No. 21/2013, telecommunication content providers are mandated to manage the re-registration process. This new regulation was designed to respond to issues of premium mobile subscription package providers overcharging customers in 2012 and 2013. With deadline of August 2014, 56 of 79 content providers have finally been granted a new license to operate. Some content providers applications for new licenses were rejected because more than 49% of their share capital was foreign owned. The Indonesian Investment Coordinating Board (BKPM) through its latest revision of investment negative list, has stated firmly that local ownership must be a minimum of 51%83.

In Apr 2013, the authorities in Indonesia made the decision to effectively prohibit cross-border e-commerce activity, ruling that all firms will need to register a local domain if they wish to have a presence in the country. As one of the many implementing regulations mandated by the Trade Law, the upcoming government regulation (PP) on e-commerce is expected to protect the interests of parties involved in electronic transactions and provide guidance in performing e-commerce84. Under Presidential Decree No. 39/2014, the government included e-commerce among the industries closed to foreign investment, requiring e-commerce businesses to be wholly owned by local players.

The regulation is thought to have been motivated by acquisitions of key Indonesian e-commerce players over the last few years, such as that of Dealkeren.com by US-based LivingSocial Inc. and Disdus by US-based Groupon. Indonesia’s e-commerce market is projected to have a total value of US$ 22.7 billion next year, a huge increase from US$ 7.1 million in 2013, according to Indonesian E-Commerce Association (idea). As April 2015 Indonesian eCommerce Association has submitted a proposal to the Directorate General of Tax in order to request online-retail sales

82 SocialDaily, Pabrik Ponsel Samsung di Indonesia Kemungkinan Direalisasikan Akhir Tahun, https://dailysocial.net/post/samsung-pabrik-indonesia; 83 Austrade, ICT to Indonesia, 19 Dec 2014 http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; 84 Austrade, ICT to Indonesia, 19 Dec 2014 http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE;

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transactions to be treated similarly as retail sales transactions. IdEA also requested the government not to implement the of Government Regulation (PP) No. 46/2013, which requires the payment of income tax for the e-commerce businesses with a turnover of less than US$ 359.5 million per year. Moreover to exclude the need for examination by the Directorate General of Tax for startup e-commerce companies with less than 5 years of life, and still not gaining profits.

The government has stated its intention to clamp down on piracy and in June 2013, the Directorate General of Intellectual Property Rights launched a roadshow to raise awareness about the issue. The government will take its message about the risks of using counterfeit software into shopping malls, although a lack of enforcement capabilities continues to be a problem85. The Indonesian legal system presents a number of challenges to conducting IP enforcement. The IP laws in Indonesia are compliant with the Agreement on Trade-related Aspects of Intellectual Property (TRIPs).

However, these IP laws are not yet matched by an efficient criminal enforcement or customs border protection system. Piracy rates remain high according to surveys by rights owner associations such as the Business Software Alliance. In Indonesia there are two main IP enforcement routes: civil and criminal enforcement however in many cases private mediation via legal professionals could be more effective and should be considered as a viable option particularly for SMEs with budget constraints86.

The push for data center business in Indonesia was provided in October 2012 by the issuance of Government Regulation No.82/2012 on the management of electronic transactions and systems. The regulation mandates Indonesian businesses and others conducting electronic transactions in the country to set up data center sites in the country87.

Based on Minister's Decree (Ministry of Industry) No. 69/2014 on Terms and Procedures for Calculating the Local Content Level Value on Electronics and Telematics Industry, the value determination is divided into two, namely 80 percent for manufacturing and 20 percent of local content development88. For what concerns the application of this rule to the 4G network, 30 percent of the local content for the network is expected to be applied by 2015, which expected to increase to 40 percent by 2017, as for the local content level for consumer devices is expected at 20 percent by 2015 and increase to 30 percent by 2017.

The Indonesian Government plans to change the licensing model criteria with mobile operators in an effort to improve consumers’ overall experience. According the Minister of Communication and Information Technology, under the new licensing model, mobile operators’ focus will have

to move towards quality of service (in terms of speed), as well as coverage. “Previously, the

85 Austrade, ICT to Indonesia, 19 Dec 2014 http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; 86 Eurocham ASEAN IPR SME Helpdesk, Indonesia Fact Sheet, 2014; 87 Austrade, ICT to Indonesia, 19 Dec 2014 http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; 88 Indotelko, Indonesia Demands 40% Local Content in 4G Networks, http://www.indotelko.com/kanal?c=ev&it=Indonesia-Demands-40-Local-Content-in-4G-Networks;

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license agreement was mainly based on the number of base transceiver stations the mobile operators had to build. We would like to change it so that it encompasses coverage and quality of service,” Minister Rudiantara said89 in a recent interview.

More than 95 percent of Indonesia’s businesses are startups or small and medium-sized companies. Nevertheless, startups are given very little support by the government. The Jokowi administration has appointed four ministries to coordinate all entrepreneurship related issues in Indonesia. However, no concrete actions have been taken so far to provide things like resources, network capital, or mentorship to Indonesian startups90.

2.6. Innovation and research

Although Indonesia has had Law No. 18 of 2002 on the National System of Research, Development and Application of Science and Technology, the level of technological development and innovation in Indonesia is still low. This is one of the explanations as to why the Indonesian economy is still driven by consumption, rather than by production.

Levels of innovation in Indonesia can be measured from the proportion of total funding for research and development (public and private) to gross domestic product (GDP); the number of patents; the lack of reliable researchers; weak synergy between relevant institutions (government, universities, industries and institutions funding research) in the implementation of research.

Currently, Indonesia is one of the countries with a very small amount of funding for research, reaching only 0.1 percent of GDP in 2010. This amount did not change much with an estimated 0.2 percent (of GDP) spending in 201491.

The number of patents registered in Indonesia is also very low, totaling only 409 patents in 2010, compared with 50,990 in Japan and 1,361 in Malaysia. In the first ten months of this year, Indonesia recorded only 76 patents (World Intellectual Property Organization).

In order to increase the power of innovation in Indonesia, the government must facilitate the flow of technology and the flow of public information needed by stakeholders consisting of

89 Digital News Asia, Indonesia to change licensing model for mobile operators, https://www.digitalnewsasia.com/mobile-telco/indonesia-to-change-licensing-model-for-mobile-operators#sthash.rIFZoK11.dpuf; 90 Tech in Asia, Indonesia’s support for entrepreneurship is not up to scratch. Here’s how the government can get

serious, https://www.techinasia.com/indonesia-government-support-startups-entrepreneurship/?utm_source=TiA+Insights+Members+%28Weekly+Report%29&utm_campaign=ce373d8386-Insights_Weekly_Report_22_2_2015&utm_medium=email&utm_term=0_ec67b3bcd3-ce373d8386-93604125; 91 Jakarta Post, Innovation should be increased to generate high economic growth, http://www.thejakartapost.com/news/2015/01/02/innovation-should-be-increased-generate-high-economic-growth.html#sthash.XU5GO7kA.dpuf;

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technology developers (academia-A), technology users (business-B) who are also producers of goods and services, and the government (G) 92.

E-learning and the digital education industry is currently very niche with around 20 players existing largely in the online K-12 education, content platform and online English learning and vocational training space and virtual classroom tutoring. The opportunities lie with the many educational institutions that do not have Learning Management System (LMS). In particular, language course where government agencies and companies are scrambling to get their employees proficient in English93.

3. Trends and Business Potential

The significant Indonesian market growth translates into business opportunity for mobile operators and companies providing Internet-based services to consumers and enterprises; services oriented in i-insurance, m-banking and e-commerce.

3.1. Financial Services

An IFC survey conducted in 2010 showed that more than 170 million of Indonesians didn’t

own a bank account.

Mobile penetration has provided a mean of access to banking and financial services. Mobile financial operations like P2P transfers, payments and top-ups or online shopping are in the early stage of adoption in most ASEAN countries. It is worth pointing out that the deployment of new payment methods like Credit Card and Debit Card took more than a decade to be finally accepted regionally and nationwide.

92 Jakarta Post, Innovation should be increased to generate high economic growth, http://www.thejakartapost.com/news/2015/01/02/innovation-should-be-increased-generate-high-economic-growth.html#sthash.XU5GO7kA.dpuf; 93 Austrade, ICT to Indonesia, Dec 2014, http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VTT07TnkkoE;

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Figure 15: Banking Penetration across ASEAN94

3.1.1. M-Banking

Mobile banking has been made available to Indonesians that already have bank accounts. M-banking users are concentrated in larger developed urban areas such as Jakarta, Surabaya, Medan, Bandung and Denpasar. Early movers in this business came not only from the leaders in banking sectors, but also operators from the telecom industry and start up software service providers. Thus, there are three distinct models for m-banking which can be drawn from these: bank-led model, carrier-led model, and the third party-led model. According to a 2013 study from Sharing Vision published by Bank Jatim, around 9% of the Internet users are regular clients for M-banking which equates to a total of 5.7 million users.

In order for Banking and Financial services to reach all corners of Indonesian archipelago, it is a necessity to find a solution as efficient and effective especially in rural areas. An over-the-air model could be an instant answer for more than 125 million unbanked people in Indonesia.

Demand for these services can be defined in five areas: Top-up, Billing, Transfers, Remittance, and Transactions. All can be accomplished with or without regular bank savings account Based on a report from the IFC, one third of the Indonesian population is unable to create savings, thus creating informal financing services typically in rural areas is a challenging task that needs to adapt to the local environment.. Moreover formal financial systems are

94Euromonitor, 2012

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simply inconvenient for SMEs. Figure 15 shows the primary reasons hindering the penetration of M-Banking services.

Figure 16: Survey Result for Rationalization of m-Banking and e-Commerce services95

Nevertheless, the indication of how this business is highly prospective not only visible from the number of available subscribers, but also by the value of total transaction from combined credit card and ATM/debit card. By 2012, Credit and Debit/ATM card transactions reached US$ 277.1 mio, compared to US$ 259.5 mio via Internet banking. The E-banking research conducted only via four major bank channels, even with the low percentage of Internet banking users at that moment, the comparison in total amount of transaction is at par. The million dollar question now is to find the perfect marketing mix to increase economies of scale in order to extend the access and adapt price and product portfolios for E-banking and other financial service providers such as third party start ups and MNOs.

95 Sharing VisionTM , 2013

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Figure 17: Value of Credit Card and ATM/Debit Card vs i-Banking Transactions96

3.1.2. I-Insurance in Indonesia

According to the latest report from the Ministry of Health, the proportion of the total Indonesian population covered by health insurance was around 176 million by June 2013. That means around 28% from total population is still uncovered. With the implementation of National Health Care starting January 2014, the numbers of insured are expected to reach 100% by 2019. Yet, the government set as a priority theneed to digitize the provision of such insurance services.

Table 2: Registered Insured Population Composition Indonesia97

96 Bank Indonesia, 2012 97 Ministry of Health Republic Indonesia, June 2013

• JAMKESMAS (National Health Security) : 86.400.000 (36,3 %)

• JAMKESDA (Regional Health Security) : 45.595.520 (16,79 %)

• ASKES PNS (Civil Servant Health Insurance) : 16.548.283 (06,69 %)

• TNI/POLRI/PNS KEMHAN (Authority Agency) : 1.412.647 (00,59 %)

• JPK JAMSOSTEK (Labour Pension Fund) : 7.026.440 (02,96 %)

• COMPANY SELF INSURANCE : 16.923.644 (07,12 %)

• COMMERCIAL INSURANCE : 2.937.627 (01,2 %)

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Figure 18: Indonesia as #1 in Forecast of Life Insurance Growth98

With the numbers of vehicle sales booming at 104,2 million total cars and motorcycles all over the country in 2013 and 11 million registered cars, only 0.5% are fully insured according to Ernst & Young’s latest report. It is an open opportunity for insurance companies to offer simple and instant coverage via web-portals.

Figure 19: Indonesia as #2 in Forecast of Property & Casualty Insurance Growth99

Based on the research conducted by Munich Reassurance Company, for P&C insurance business Indonesia has 9.5% growth volume CAGR projection and that puts Indonesia just below India. According to number of cars registered within the country, the number of insured vehicles is close to 25%, motorcycles less than 10% are covered. 98 Munich RE Economic Research, May 2014 99 Munich RE Economic Research, May 2014

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The most popular insurance web-portal is called RajaPremi.com which focuses only on vehicles and personal insurance. Customer can compare pricing from some insurance companies made available as partners on their website and buy personal or vehicle insurance instantly.

3.2. E-Commerce

Indonesia’s e-commerce market is fast becoming one of Asia’s most attractive sector for investment. Among the most promising areas of e-commerce in Indonesia are electronic goods and online fashion.

Currently, e-commerce only accounts for less than one percent (~US$ 2 billion per year) of Indonesian retail spending, analysts believe that the country’s fast growing middle class and

proliferation of smartphones will soon raise that share to eight percent (US$ 8 billion) in just a few years. Indonesia’s e-commerce market would be the largest in Southeast Asia by then.

E-commerce sales in Indonesia are admittedly somewhat low, but sales are expected to triple by 2016. Like most countries, the top category for online shopping is clothing and apparel. In 2014, around 60 percent of online shoppers bought items in this category. Interestingly, 27 percent of all e-commerce transactions occurred via social media.

According to an analysis conducted by the Boston Consulting Group late last year, 74 million Indonesians live in households that spend more than US$ 200 per month – this number is predicted to grow to 141 million by 2020. Furthermore, according to SingPost, a global logistics firm, there will be 20 percent year on year growth in Internet users through the year 2016101.

100 Austrade, ICT to Indonesia, Dec 2014, http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VTT07TnkkoE; 101 AseanBriefing, Indonesia Online: A Guide to E-commerce, http://www.aseanbriefing.com/news/2015/01/28/indonesia-online-guide-e-commerce.html#sthash.NsQQ3rtO.dpuf;

E-commerce readiness indicators100

E-readiness: preparing the technical, commercial and social infrastructures necessary to support e-commerce. E-readiness indicators allow each country to construct a statistical picture of the state of readiness of the infrastructure necessary to engage in e-commerce.

E-intensity: the state of e-commerce use, volume, value and nature of the transactions. E-intensity indicators permit countries to profile who is exploiting e-commerce possibilities and who is not, and to identify leading sectors and applications.

E-impact: the value added potentially created by e-commerce. Statistics are needed to evaluate whether and to what extent e-commerce makes a difference in terms of efficiency and/or the creation of new sources of wealth.

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Figure 20: Historical Timeline and Milestones in Indonesian e-Commerce102

In terms of Business-to-consumer, in the six Southeast Asian countries only, B2C has reached value of US$7.0bn in 2013 and it is estimated to grow at CAGR of 37.6% to reach US$34.5bn by 2018.

Figure 21: Global Comparison of Online Retail in Percentage of Total Retail 2013103

102 UBS Global Research, June 2014 103 Frost & Sullivan, July 2014

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According to survey conducted by Google “Our Mobile Planet”, Indonesian Smartphone

owner usages for Local Information and Product Research were 94-95%, while usage leading to a final purchase via gadgets was 57%.

Figure 22: Internet Retailing in Indonesia Actual vs Projection104

Companies like Lazada are already operating within Indonesia. Lazada, which has been in the country since 2013, became the largest business to consumer site in Indonesia during 2014 (taking the top spot from Amazon). The company reportedly averages around 6.5 million views a month105.

Other sites operating in the country include Alibaba (with 3.9 million views/month) and eBay (with 2.2 million views/month).

Tokopedia, one of top Indonesian local companies consumer to consumer marketplace; has reportedly received over US$100 million in funding from venture capitalist firms Softbank and Sequoia Capital.

According to the head of Rakuten Indonesia people conduct their online shopping primarily while at work (Rakuten reports its peak shopping time at 11am) since this is the place where shoppers have access to reasonably reliable Internet connection.

One problem that companies must overcome in order to operate in the e-commerce space in Indonesia, is finding a way to deal with the country’s poor shipping networks106. Below are categorized the existing e-commerce websites according different business models: online forums and classifieds, business to consumers (B2C) sites, consumer to consumer (C2C) marketplaces, and others107:

104 Euromonitor Retailing In Indonesia, 2012 105 AseanBriefing, Indonesia Online: A Guide to E-commerce, http://www.aseanbriefing.com/news/2015/01/28/indonesia-online-guide-e-commerce.html#sthash.NsQQ3rtO.dpuf; 106 AseanBriefing, Indonesia Online: A Guide to E-commerce, http://www.aseanbriefing.com/news/2015/01/28/indonesia-online-guide-e-

commerce.html#sthash.NsQQ3rtO.dpuf; 107 Tech in Asia, 18 popular online shopping sites in Indonesia (2014 edition), https://www.techinasia.com/popular-online-shopping-platforms-in-

indonesia/

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Table 3: Comparison Indonesian E-commerce websites

Online forums and classifieds

B2C sites Marketplace Others

1. Kaskus

2. Tokobagus

3. Berniaga

1. Lazada Indonesia

2. Bhinneka

3. Agoda

4. Zalora Indonesia

5. Tiket

6. Groupon Indonesia

1. Tokopedia

2. Bukalapak

3. Qoo10 Indonesia

4. Elevenia

5. Lamido Indonesia

6. Ratuken Belanja Online

1. Indonetwork

2. Indotrading

3. Bibli

Cyber security threats are of increasing concern for the development of the Indonesian e-commerce market. In October 2013 Akamai produced its latest State of the Internet report and found Indonesia was the largest source of cyber-attacks, overtaking China (despite a far smaller base of IP addresses). This opens the door to firms ready to bring in capital, technology and security solutions who are willing to work with local companies to launch their own e-commerce arm. Growth demand for digital content applications would be on secured transactions, payment security systems and delivery services, particularly in mobile platforms.

Table 4: Payments methods used for digital purchases108

108 Jana, “Online Shopping in Emerging Asia” July, 2013;

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3.3. E - Logistics

The transportation & logistics market in Indonesia is expected to grow at CAGR 15.2 % in 2015109. The industry is set to record strong double digit growth over the period due to the continuous growth of the Indonesian economy driven by resilient domestic demand. Meanwhile, sea freight in Indonesia accounted to 97.1% of total freight in 2014 and is expected to grow 5.1% by end of 2015.

High logistic cost corresponds to 24% of national GDP, forming a serious impediment to economic growth.

Intelligent logistic solutions like ITS, electronic freight, intelligent cargo, are the main catalysts for innovative Transport Logistics and Supply Chain Management. Intelligent logistic solutions are mainly determined by increased use of inter-connected information and communication technology (ICT) including data sharing, knowledge transfer, cooperation and collaboration.

In order to realize electronic-based business processes, state-owned port operator IPC Pelindo II in collaboration with key national organizations such as Telkom and the Ministry of Transportation has spearheaded a new approach to shipping and customs clearance procedures in Indonesia with the roll out of the Inaportnet System.

Inaportnet has been successfully piloted at Tanjung Priok port, Indonesia’s busiest container

port, and will be rolled out to IPC’s additional ports in Palembang, Pontianak and Jambi. The system, which cost US$ 53 billion to develop and implement further enhances the efficiency of the company’s ports as well as serving to lower administrative logistical costs and streamlining

associated bureaucratic procedures. Ship docking time has now been reduced by up to 15% and total dwelling time is on course to reach the target of only three days. It has also enabled greater transparency throughout all the departments involved in the shipping and customs process in Indonesia. For the future, further innovations within ICT logistical infrastructure will be introduced by IPC to facilitate online payments and other procedures.

Meanwhile, Telkom's role is to build broadband infrastructure in 6 main ports (Belawan, Batam, Tanjung Priok, Tanjung Perak, Makassar and Sorong).

3.4. E-Government

World E-Government Development Ranking has graded Indonesia e-government readiness, showing a decrease in its positions from 2004 to 2012. From rank 85 in 2004, 96 in 2005, and 106 in 2008, Indonesia occupied position 109 in 2012.

109 http://www.gbgindonesia.com/

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Public spending on ICT makes a significant contribution to overall ICT spending as state ministries and government bodies look to prepare their internal infrastructure for Indonesia’s

further economic expansion110. One such area is e-procurement under the e-GPS (Electronic Government Procurement System) scheme, which was launched in 2007 as part of the ongoing efforts to improve transparency and which is now in operation in 25 state owned enterprises (SOEs).

In terms of ICT application in public services, toll roads are a major focus of the country’s

infrastructure investment drive. Toll road operators, such as the state owned company Jasa Marga, are therefore investing heavily in electronic toll payment systems as well as traffic control systems.

The smart City concept has gained popularity thanks to the growth of smart phones and the availability ofcustom made applications. DKI Jakarta province has launched its Smart City program in December 2014.

One of the actual realizations of smart city program in the daily life for the people is the newly placed electronic parking terminals (TPE) on city streets. Parking reform is a must for Jakarta not only as a lucrative source of income for the city but also as an important tool to control the traffic. Good parking management is deemed to be more effective in controlling traffic jams according to Institute for Transportation and Development Policy Indonesia (ITDP) which was appointed by the Jakarta administration to set up a parking system in Pasar Baru, Central Jakarta.

According to the Jakarta Police’s traffic unit, the number of vehicles in Jakarta continues to grow

rapidly. It reached 14.6 million units in 2012 and raised nearly a tenth to 16 million units last year. Nevertheless, increase in parking revenue compare to the growth number of vehicles has not been adequate. Local transportation office says parking revenue in 2012 amounted to US$ 16,4 million with an increased by 23 percent to US$ 20 million in 2013 which means each vehicle paying just US$ 1,1 to the Jakarta administration for parking throughout 2012 and US$ 1,2 throughout 2013.

A Public Private Partnership (PPP) investment model recently implemented with a pilot project planned in five major streets in Jakarta for e-payment parking system in cooperation with major e-banking providers and Sweden digital parking machine vendor and local partner who won the tender for the procurement of TPE via e-government from Institution of Procurement Policy for Government Goods and Services (LKPP) cooperates with Institution of State Codes for document encryption, and Audit and Development Supervising Agency for audit sub-system. 111

The government involvement comes with new policy to control intensify traffic volume and illegal on-street parking which also contributes to road lane congestion caused by side barriers from curbside parking that interfere with provision of public transportation via good parking management solution.

110 http://www.gbgindonesia.com/ 111 Mata Biru, Smart City: Parking Solution, 2014

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Figure 23: Comparison of Parking Rates in World Major Cities 2014112

With the smart city implementation and revenue sharing with B2G in PPP model, the local government can focus on law enforcement while the private sector as operators responsible for parking management and fee collection. The Jakarta municipality is targeting revenues from parking this year as high as US$ 75 million, or more than triple last year’s take.

112 Mata Biru, Smart City: Parking Solution, 2014

5.25

4.41

3.81

2.838

2.335 2.106

1.2 1.174 1.143

0.704 0.265

0.215 0.15

0.128

US

$/

Ho

ur

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4. Final Recommendations

ICT development in Indonesia is seen as the beginning of a more promising period. Indeed, much of its potential is in fact still to be unleashed, rendering Indonesia as one of the most promising ICT markets in the coming years. The market potential for providing enterprises with ICT services in Indonesia is expected to reach US$ 3 billion by 2015, while the potential for consumer services is estimated at approximately US$ 1.5 billion. The country’s population of Internet users grew to 74.6 million in 2013 and should almost double to 125 million by 2017. There is a growth demand for digital content applications and electronic platforms in providing financial services such as M-banking, in a country where only around 9% of the Internet users are regular clients for i-banking - a total of 5.7 million users. In parallel, i-insurance will be a big hit since only 0.5% of vehicles are fully insured, from a total of 104.2 million throughout the country, of which 11 million are registered cars. Opportunities for European businesses thrive in the fields of IT, software and telecommunications in the form of direct investment, partnership ventures, technology export, consulting and training. However, European companies are strongly advised to invest time and effort in finding a good and reliable local partner, as serving the Indonesian market requires cooperating with an Indonesian agent and/or distributor. Beyond market entry, a local partner can offer valuable know-how to in terms of negotiating with potential domestic clients. Advices to ICT companies exploring the Indonesian market:

• Culture adoption - understand the local business characteristics, need to think realistic, long term and flexible on business models

• Find reliable local business partners through channels such as chambers of commerce and trade agencies.

• The market is very price sensitive, especially with intense competition with Korea, Japan and USA companies, worldwide leaders in the ICT market

• Participate in major trade exhibitions and showcase products / services to relevant audiences to build connections and in-depth knowledge.

• Contact EIBN (www.eibn.org) and participate in a pan-European Trade Mission or work with EIBN to find the right partner and assist you in navigating the Indonesian market.

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5. Relevant Contacts Council of Information and Communication Technology Agency (DETIKNAS) Is the executive coordinating institution established and chaired by the President of the Republic of Indonesia. DETIKNAS first inaugurated by the President on November 13, 2006 at the Bogor Palace. DETIKNAS vision is to accelerate the growth of information and communication technology (ICT) in Indonesia efficiently by making the national ICT policy through synchronization ICT programs across Ministries / Institutions Address: Sekretariat Dewan TIK Nasional Wisma Bakrie 2, Lantai 3A Jl. HR. Rasuna Said Kav. B-2, Jakarta Selatan sekretariat@detiknas.go.id -- Indonesian ICT Society (MASTEL) Is a non-profit organization where all of Indonesian business players in telecommunications and multimedia, industry/manufacturers, associations, professionals, analysts and enthusiasts in the field of ICT share their thoughts and ideas, and serves as a bridge to connect and unite all the interests between the government and the entrepreneurs and enthusiasts in the field of ICT. Mastel Secretariat Building Jalan Tambak Raya No.61, Menteng Jakarta Pusat 10320 Tel. + 62 31908806, + 62 31908812 Fax. + 62 31908812 Email : info@mastel.or.id -- TELECOMMUNICATION PROVIDERS ASSOCIATION INDONESIA (ATSI) ATSI is an organization that brings together the Telecommunications Operator in Indonesia in a container, wherein the container has a purpose which is to unify the vision and mission, improve cooperation between organizers of Telecommunications, promote and develop services and provide the widest possible support for the implementation of telecommunications operations in Indonesia. Cyber Building Lt. 3A Jl. Kuningan Barat No. 8 Jakarta 12710 phone: (021) 5290 5152/5122 fax: 021-52905123 email: info@atsi.or.id -- Indonesian Mobile and Online Content Provider Association (IMOCA) Tower Palma Lt. 12 Jl. HR Rasuna Said, Kav. 6, Block X2, Jakarta 12050 021-29391195 witprahesti@gmail.com --

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ASPILUKI (Association of Indonesian Computer Software Industries) The organization was formed in 1990, members representing software developer and IT services. The activities of the organization are to offer communication, consultation, training and advocacy to its members. Chairman: Mr. Djarot Subiantoro d/a PT. INDONET Gedung Cyber, Lt. 8 Jl. Kuningan Barat No. 8, Mampang Prapatan Jakarta Selatan 12710 Ph:+62-21-93640738 Fax:+62-21-73882626 Email: aspiluki@indo.net.id Website : www.aspiluki.or.id -- APTIKOM (Informatics and Computer Science University Association) The organization was formed in 1990, members representing software developer and IT services. The activities of the organization are to offer communication, consultation, training and advocacy to its members. Chairman: Prof. Dr. Ir. Richardus Eko Indrajit M.Sc., MBA., Mphil., MA Email: aptikompusat@yahoo.co.id Website : www.aptikom.or.id -- IDA (Indonesian Digital Association) Founded by 11 Indonesian Internet Portals. They promote, foster, and preserve unity among proffesionals and individuals on the rising digital sector in the country Executive Director: Edi Taslim Gedung High End Lt. 3 (Kompleks MNC) Jl. KebonSirih Raya Kav 17-19 Jakarta Pusat 10340 Tel: 021-3924706 E-mail: info@ida.or.id -- IDICTI (Indonesian ICT Institute) The organization is a think-thank for promoting ICT in Indonesia through research, empowerment and stakeholders discussions with numbers of forums, M2M and digital payment.

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Executive Director: Ir. Heru Sutadi, Msi Jalan Villa Cemara No. 22 Sawangan, Depok 16417 E-mail: heru@idicti.com -- ICCA (Indonesian Contact Center Association) The organization was established in 2003 and currently has 92 members of wide range companies, including ICT, Banking, Insurance, Retail, Manufacturing, Energy and Government Sectors. ICCA also hosts annual “Best Contact Center Indonesia” competition, domestic and

international contact center benchmarking, sharing activities, certification, training, seminars and exhibitions. Chairman: Andi Anugrah Jalan Asem Baris Raya No. 8B Jakarta 12830 Kebon Baru, Tebet, Jakarta Selatan 12830 E-mail: andi@icca.co.id -- INDOGLOBIT

Indoglobit is an association Indonesian ICT Companies seeking international business cooperation. Secretary General: Gun Gun Gunawan Bandung Techno Park Kawasan Pendidikan Telkom Jl. Telekomunikasi Terusan Buah Batu, Dayeuhkolot Bandung, Jawa Barat, Inodnesia 40257 Ph: +62 22 8888 4199 Email: info@indoglobit.org Website: www.indoglobit.org -- FTII (Indonesian Information Technology Federation) The organization is non-profit and tasked with grouping national IT associations in a single form to support IT development in Indonesia and increase wider utilization of IT, as well as supporting greater integration and efficiency Chairman: Sylvia Sumarlin Level 38 Tower A, Unit GH30 Kota Kasablanka Jl. Casablanca Raya Kav 88 Jakarta 12870

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Tel.: +62 21 2963 8030 Fax.: +62 21 2963 8088 E-mail: ftii.info@gmail.com -- EuroCham Finance Working Group The European Chamber of Commerce in Indonesia EuroCham’s finance working group is composed of all the major European OEM and suppliers

active in Indonesia. The overall objective of the working group is to facilitate the communication within the European business community and the Indonesian sector associations, inform them on the regulatory changes, and establish a constructive dialogue with the Indonesian Government. The working group meets once a month in order to update the industry on any changes which could affect their business and determine further action to be taken towards the Government of Indonesia. Executive Director: Mr. Jan Rönnfeld Wisma 46, Kota BNI, 25th Floor Jl. Jenderal Sudirman Kav. 1 Jakarta 10220 Tel.: +62 21 572 2056 Fax.: +62 21 572 2057 Email: info@eurocham.or.id Website: http://www.eurocham.or.id/ -- National Standardization Body - BSN National Standardization Body was established by Presidential Decree No. 13 of 1997, later amended by Presidential Decree No. 166 of 2000 regarding Position, Duties, Function, Authorities, Organization Chart as well as Working Conditions of Non-departmental Government Institutions. A further modification by Presidential Decree No. 103 Year 2001 made BSN a non-departmental government institution with main responsibility to develop and conduct standardization activities in Indonesia. This agency was established to replace the function of National Standardization Council – DSN. In performing its tasks, the National Standardization Agency refers to the Government Regulation No. 102 of 2000 regarding National Standardization which set out its responsibilities: Assessment and preparation of national policy in the field of standardization; Defining Indonesian National Standards (abbreviated SNI) Organizing national and international collaboration in the field of standardization Provide information systems on national and international standards; Serve as WTO-TBT notification and enquiry point

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Chairman: Prof. Dr. Ir Bambang Prasetya Manggala Wanabakti Blg. Block IV, 4th Floor Jl. Jenderal Gatot Subroto Jakarta 10270 Tel.: +62 21 574 7043 – 574 7044 Fax.: +62 21 574 7045 Email: bsn@bsn.go.id Website: http://www.bsn.go.id/ -- Coordinating Ministry for Economic Affairs The Coordinating Ministry for Economic Affairs has the key task of assisting the President in synchronizing and coordinating the planning, preparation, and implementation of all policies in the field of economy. They are therefore coordinating the activities of all Ministries involved in the strategy they designed. The Coordinating Minister for Economic Affairs, Mr. Charul Tanjung, is assisted in his tasks by several Deputy Ministers each of them in charge of specific topics. The Deputy Minister for Industry and Trade Affairs is a major counterpart of the finance industry in Indonesia. Minister: Mr. Sofyan Djalil Gedung Utama Lantai 5 Jl. Lapangan Banteng Timur No. 2-4 Jakarta Pusat 10710 Tel.: +62 21 352 1835 Fax.: +62 21 351 1643 Email : humas@ekon.go.id Website:http://www.ekon.go.id/about-us -- Ministry of Industry Among other industrial product sectors, the Ministry of Industry of the Republic of Indonesia is responsible for mandatory marking of communication products with the SNI label and the SNI number it refers to. The Ministry of Industry of the Republic of Indonesia is divided into several Directorates General each handling specific product sectors. Minister: Mr. Saleh Husin Jl. Jenderal Gatot Subroto, Lt. 9 Jakarta Selatan 12950 Tel.: +62 21 525 2693 – 525 5509 Fax.: +62 21 525 2893 Website: http://www.kemenperin.go.id --

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Ministry of Communication and Informatics The Ministry of Communication and Informatics is responsible to formulate, develop and implement standardization and policies in the fields of community empowerment for telematics and postal industries within the information society and the applications. They also formulate and implement standards, norms, guidelines, criteria and procedures in all the fields listed above as well as provide technical guidance. Minister: Mr. Rudiantara Jl. Medan Merdeka Barat No. 9 Jakarta 10110 Website: http://www.depkominfo.go.id -- Ministry of Trade The Ministry of Trade of the Republic of Indonesia is responsible for the following: Trade standardization (labeling) Quality control of export/import products. (registration of import/export licenses) Consumer Protection Directorate General for International Trade Cooperation Jl. M.I. Ridwan Rais No. 5, Main Building, 8th Floor Jakarta 10110, Indonesia Tel: +62 21 2352-8601, 385 8171 Fax: +62 21 2352 8610 E-mail: djkpi@depdag.go.id Website: www.depdag.go.id -- Directorate General of Customs and Excise Under the Ministry of Finance of the Republic of Indonesia, the institution has the responsibility to: Formulate the technical policies in the field of customs and excise, in accordance with the

policy determined by the Minister and the prevailing government regulations and laws. Plan, implement, control, evaluate, and secure the traffic of goods entering and leaving the

customs’ territory. Plan, implement, control, evaluate and secure the operations of import duty and excise

levies. Ministry of Finance, Building A, 1st Floor Jl. Jend. A. Yani 108, By Pass Jakarta 13230 Tel: +62 21 489 1581 Fax: +62 21 489 2859 E-mail: perpen@beacukai.go.id Website: www.beacukai.go.id --

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Indonesia Investment Coordinating Board - BKPM The Indonesia’s Investment Coordinating Board (BKPM) is the primary interface between foreign companies interested in investing in Indonesia and the Government of Indonesia. BKPM has a ministerial status (reports directly to the President of the Republic of Indonesia) and is mandated to boost domestic and foreign investment by creating a conducive investment climate. The agency also plays a role of matchmaker for investors. Prior to investing in an Indonesian company, any foreign business must apply for a registration approval from BKPM, and inform the agency of the nature of the intended investment (investment source, line of business of the Target Company, production capacity, etc.). More information on the procedures can be found on their website. Chairman: Mr. Franky Sibarani Investor Relations’ Unit Jl. Jenderal Gatot Subroto No. 44 Jakarta 12190 Tel.: +62 21 5292 1329-30/5292 1334-35 Fax.: +62 21 5264 211 Email: info@bkpm.go.id Website:http://www.bkpm.go.id/ --

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6. List of Abbreviations

AEC ASEAN Economic Community

AFTA ASEAN Free Trade Area

APEC Asia Pacific Economic Cooperation

ARPU Average Revenue Per User

ASEAN Association of South-East Asian Nations

ASEAN MRA ASEAN Mutual Recognition Agreement

ATPM Agen Tunggal Pemegang Merk

(Trademark Holding Sole Agent)

BAPPENAS Badan Perencanaan dan Pembagunan Nasional

(National Development Planning Agency)

BKPM Badan Koordinasi Penanaman Modal

(Indonesian Investment Coordinating Board)

BSN Badan Standardisasi Nasional

(National Standardization Bureau)

BPS Badan Pusat Statistik (Statistical Centre Bureau)

BTS Base Transceiver Stations

CBU Completely Built Unit

CEPA Comprehensive Economic Partnership Agreement

CEPT Common Effective Preferential Tariff

CKD Completely Knocked Down

CNG Compressed Natural Gas

DPD Regional Representation Council

DPR People’s Representative Council

EPA Economic Partnership Agreement

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EuroCham The European Chamber of Commerce in Indonesia

FDI Foreign Direct Investment

GAIKINDO The Association of Indonesia’s Finance Industries

GDP Gross Domestic Product

GIAMM Indonesian Finance Parts and Components Industries Association

HMI Human machine Interface

IKD Incomplete Knocked Down

KADIN Indonesian Chamber of Commerce and Industry

KAN Komite Akreditasi Nasional - National Accreditation Body of Indonesia

LCE Low Carbon Emission

LCGC Low Cost Green Car

LTE Long-Term Evolution

MP3EI Masterplan “Acceleration and Expansion of Indonesian Economic Development”

MPV Multi-Purposes Vehicle

NAM Non-Aligned Movement

NGO Non Governmental Organization

NTB Non Tariff trade Barrier

OEM Original Equipment Manufacturer

OIC Organization of the Islamic Conference

SME Small and Medium-sized Enterprise

SNI Standar Nasional Indonesia (Indonesian National Standard)

SUV Sport Utility Vehicle

TBT Technical Barriers to Trade

UN/ECE United Nations Economic Commission for Europe

WTO World Trade Organization

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7. References

International Data Corporation, 2013 East-West Center, 2014

Frost & Sullivan, The Rise of Cloud Computing in Indonesia, Sep 2013;1 International Data Corporation, 2014 World Economic Forum compiled by IMC Institute, 2014 AEM-METI Economic and Industrial Cooperation Committee, Harmonization of Technical Regulations for Finance, 12th AMEICC WG on Finance Industry meeting, Presentation, January 2011 ASEAN Finance Federation, Statistics 2013. Available at: www.asean-autofed.com/statistics.html US Census Bureau, InternetWorldStats, Facebook, ITU, 2014 Austrade, ICT to Indonesia, 19 Dec 2014, http://www.austrade.gov.au/Export/Export-Markets/Countries/Indonesia/Industries#.VO2K5_vqHgE; Business Monitor International, Indonesian Telecommunications Report, 17 Nov 2014; Indonesian Internet Governance Forum, 2013; Oxford Business Group, Indonesia, 2014 The Association of Indonesian Internet Providers, ‘Internet Users in Indonesia’, Jan 2014OECD (2011); The Nielsen Company Survey, 2013 World Economic Forum compiled by IMC Institute, 2014 GSMA & Kearney, 2008 UCWEB, Dec 2014, http://www.slideshare.net/andryan1/indonesia-mobile-market-research-dec-2014 Telkomsel Annual Report, 2014 Puslitbang Kominfo, Case Study PT. Telkomsel, LTE Network Planning in Jabotabek, Sri Aryanti, , Nov 2014 Company Information, Moody’s Financial Metrics, Moody’s Investors Service Estimates; Dailysocial, GfK: Pertumbuhan Penjualan Smartphone di Indonesia Tertinggi di Kawasan Asia Tenggara, https://dailysocial.net/post/gfk-pertumbuhan-smartphone-indonesia-tertinggi-asia-tenggara; Forbes Asia, Indonesian Smartphone Shipments Surge 55% in 2014, http://www.forbes.com/sites/susancunningham/2014/11/21/indonesian-smartphone-shipments-surge-55-in-2014/

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Moody’s, Moody's: Indosat's Improved Performance in 2H 2014 Offsets a Weaker 1H,

https://www.moodys.com/research/Moodys-Indosats-Improved-Performance-in-2H-2014-Offsets-a-Weaker--PR_322042; The Teleconomist, Indosat, Facebook Launch Internet.Org In Indonesia, http://telecomist.com/2015/04/indosat-facebook-launch-Internet-org-in-indonesia/ Bank Indonesia, 2012 Ministry of Health Republic Indonesia, June 2013 Munich RE Economic Research, May 2014 UBS Global Research, June 2014 Euromonitor Retailing In Indonesia, 2012 AseanBriefing, Indonesia Online: A Guide to E-commerce, http://www.aseanbriefing.com/news/2015/01/28/indonesia-online-guide-e-commerce.html#sthash.NsQQ3rtO.dpuf

http://www.gbgindonesia.com/ Mata Biru, Smart City: Parking Solution, 2014 Jakarta Post, IT spending to grow 12.5% amid tough economy, says report, http://www.thejakartapost.com/news/2014/01/17/it-spending-grow-125-amid-tough-economy-says-report.html;

Jakarta Post, IT spending to grow 12.5% amid tough economy, says report, http://www.thejakartapost.com/news/2014/01/17/it-spending-grow-125-amid-tough-economy-says-report.htmlBank of Indonesia, Website. Available at: http://www.bi.go.id/en/perbankan/suku-bunga-dasar/Contents/Default.aspx State Ministry of National Development Planning (Bappenas), Ministry of Planning / Bappenas Indonesia Launches Broadband Plan 2014-2019,Oct 2014; IGF 2013: An Overview of Indonesian Internet Infrastructure and Governance, https://citizenlab.org/2013/10/igf-2013-an-overview-of-indonesian-Internet-infrastructure-and-governance/; interactive version: http://submarinecablemap.com/#/country/indonesia Detik, Jokowi Resmikan Palapa Ring, Telkom Ingin Pangkas Kesenjangan Digital, http://inet.detik.com/read/2015/04/28/155450/2900489/328/2/jokowi-resmikan-palapa-ring-telkom-ingin-pangkas-kesenjangan-digital Bisnis, Indonesia’s Finance Industry gets stronger, 24 June 2014. Available at: http://m.bisnis.com/en/read/20140624/163/29841/indonesias-finance-industry-gets-stronger Bosch, Press Release: Expanding footprint in Southeast Asia, 27 June 2013. Available at: http://www.bosch.co.jp/en/press/pdf/rbjp-1306-03-release.pdf Eurocham Indonesia, Finance Working Group, Presentation, February 2014 EuroCham Indonesia, Import Duty Compared to other ASEAN Countries, Position Papers 2012, Chapter 8 – Finance, 2012.

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Frost & Sullivan, Indonesia Finance Outlook 2013. Vivek Vaidyia. Available at: http://www.slideshare.net/FrostandSullivan/frost-sullivan-2013-indonesia-finance-outlook-briefing?qid=4b746c1b-c074-415b-a3dd-e546e53e3009&v=default&b=&from_search=1 Global Business Guide Indonesia, Indonesia’s Finance Industry, 2013. Available at : http://www.gbgindonesia.com/en/manufacturing/article/2014/indonesia_s_finance_industry.php IMF, World Economic Outlook Database, April 2014, June 2014. Available at: www.imf.org Ipsos Business Consulting, Finance Parts Industry in Indonesia, 2013. Available at: http://www.ipsosconsulting.com/pdf/Research-Note-Finance-Parts-Industry-in-Indonesia.pdf KPMG, Indonesia’s Finance Industry: Navigating 2014, 2014. Available at: http://www.kpmg.com/ID/en/IssuesAndInsights/Documents/Indonesias-Finance-Industry-Navigating-2014.pdf Marklines, Finance Industry Portal, Market and Technology Report. Available at: http://www.marklines.com/en/report/ McKinsey Global Institute, The archipelago economy: Unleashing Indonesia’s potential, 2012 Oxord Business Group, The Report: Indonesia 2013 The Jakarta Post: Indonesians spend most time on smartphones in the world, Khoirul Amin, June 5 2014. Available at: http://www.thejakartapost.com/news/2014/06/05/indonesians-spend-most-time-smartphones-world.html

Trademaps. Available at: www.trademaps.org

World Bank, World Statistics, Available at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOPULATION/EXTDATASTATISTICSHNP/EXTHNPSTATS/0,,contentMDK:21737699~menuPK:3385623~pagePK:64168445~piPK:64168309~theSitePK:3237118,00.html

other resources http://www.slideshare.net/s_jeruk/indonesia-digital-landscape-2014-pdf?related=1

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About EIBN

The EIBN is a partnership project between five European bilateral chambers of commerce in Indonesia (BritCham, EKONID, EuroCham, IFCCI, INA) and two counterparts in Europe (EUROCHAMBRES, CCI Barcelona). The EIBN’s aim is to promote Indonesia and ASEAN as

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