10 Things Startups Should Know Before Entering Indonesia

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10 Things Startups Should Know Before Entering Indonesia

SMART Legal Consulting

smartcolaw.com

Entrepreneurs grinding it out in Jakarta are unlikely to tell you Indonesia is an easy market to win. On the surface, the world’s largest archipelago is attractive to foreign founders. And why not? Indonesia has a lot of problems to be solved, with greenfield opportunities that tend to encompass several links on a given value chain. This wide open nature of the market alone makes it a conducive environment for building full-stack ventures. On top of that, the population is big. So the saying goes, if you can win Indonesia, you may not need to expand regionally.

Tech firms can grow fast in Indonesia, with a young population embracing the web faster than ever before. Fun fact: each year, Indonesia pops out more babies than the entire population of Singapore. Singaporean startups salivate when thinking about an Indonesian market entrance as it’s undeniably the largest and most important market in Southeast Asia – the final frontier in terms of regional defensibility, some say.

Indonesia is the next hotspot for investor activity after China, the US, and India. This is due to an economy that’s consumption-driven and a tech market that’s still relatively immature. There are a lot of reasons to take your startup to Indonesia. But alas, Indonesia is as elusive as it is attractive; a mirage for some. While there are many reasons to come here, there’s really only one reason to stay: the opportunity to challenge yourself.

Local investors and founders are likely to agree – if you can crack Jakarta, you can crack any market. In reality, it’s only for those with true grit.

In no particular order, here are ten things foreign founders should chew on before stocking up on batik shirts and parachuting into Indonesia.

A. TOUGH GEOGRAPHY

Indonesia is made up of more than 17,000 islands. This means things like logistics and internet penetration rates are major hurdles for any web business.

Things are changing, however, and startups are quick to adapt. With Indonesia’s three major telcos getting more aggressive with 4G coverage and many locals coming online for the first time on mobile devices, consumers have a healthy thirst to get plugged in – no matter how far they are from the capital or Java island.

But the situation is still far from perfect. Getting Indonesians online in rural areas is just the first step toward converting them into paying customers. Looking specifically at the ecommerce space, operating in a nation that’s divided by water is a challenge in and of itself when considering timely and reliable delivery.

B. JUICY DEMOGRAPHICS

Indonesia has a population of more than 250 million. Over 50 percent of people are under the age of 30, making them statistically ripe in terms of understanding and adopting new tech. Additionally, Indonesia’s economy is pillared by people buying stuff. An emerging middle-class has been the focus of many ecommerce firms, both foreign and domestic. Current hot verticals include automotive, real estate, fashion, lifestyle, financial, and on-demand services.

However, capitalizing on Indonesia’s favorable demographics is easier said than done. Currently, online shopping still accounts for less than 1 percent of the nation’s retail sector. This is small compared to China, where ecommerce makes up roughly 10 percent of all retail transactions (PDF link). Additionally, Indonesia’s demographics are also divided by religion, culture, and socioeconomic standings, which inevitably lead to the need for a variety of different marketing tactics for the same product.

C. WEAK PAYMENTS INFRASTRUCTURE

The majority of the Indonesia’s population has not entered the banking system. Further, less than 5 percent own credit cards. Developed markets, like the US for example, have efficient payments infrastructures that rest on the backbone of the Euro pay, MasterCard, and Visa (EMV) technology and network.

Indonesia, on the other hand, is primarily a cash-based economy. Electronic payments solutions are forced to cope with the nation’s unbanked and underbanked. This drives startups to explore creative avenues that involve things like ewallets, alternative payment gateways, and mobile phone credit.

Fun fact: While broadband usage is at less than 30 percent of the population and the underbanked population is more than 70 percent, mobile penetration is somewhere near 130 percent. This means everyone in Indonesia has a cellphone, sometimes two or three. The phenomenon presents opportunities for savvy founders who want to think creatively in the payments game.

D. TWO BANKS RUN THE SHOW

Bank Mandiri and Bank Central Asia (BCA) are the two major financial institutions in Indonesia. These two banks have only made online payments possible since 2012. If you plan on starting up and getting paid in Indonesia, you will eventually bump into these guys.

Mandiri and BCA affect everything from the top down. Effectively, the pair acts as a duopoly on Indonesia’s formal finance landscape. This creates bottlenecks and inefficiencies as both corporations are gunning to make superior solutions for the same problems. However, any startup that can cope with this ― or create more elegant solutions for payments and financial inclusion ― will find itself in a strong position in Jakarta.

E. BUREAUCRACY YOU WOULDN’T WISH ON YOUR WORST ENEMY

It takes one to two days to set up a business in Singapore. In Indonesia, it takes an average of 47 ― and that’s assuming you’ve done the paperwork right. The World Bank and the International Finance Corporation ranks Indonesia in 155th place in the world for ease of starting up a business, citing complex and drawn out processes involved in starting up as the main headaches.

Businesses must get cleared with the state treasury, the Ministry of Law and Human Rights, and the Ministry of Manpower, as well as complete several other registrations.
Traditionally, there are enormous tax payments to be made each year. Companies spend around 259 hours of company time each year dealing with taxes. Corporate income tax of 25 percent takes 75 hours to process, and social security contributions and VAT add another 184 hours to the total.

Depending on your particular business, there is likely a unique set of rules you must follow. Additionally, laws in Indonesia are always changing.

F. WHAT LANGUAGE DO YOU SPEAK?

There are more than 726 languages spoken across Indonesia today. Most of these are regional dialects of the overarching official language, Bahasa Indonesia, though they vary immensely and often incorporate completely different vocabulary. In theory, all startups really need to do is make their product in the universal Indonesian language and it’s all good, right? Wrong.

In order to truly localize a product, companies need to be able to reach Indonesian consumers in their everyday lives. In practice, deals will sometimes only close when representatives and customers can get on the same page with a dialect. A conversation between a consumer from Aceh and a business in Jakarta is very different than a conversation between two Jakartans. As a foreigner who hasn’t even mastered Bahasa Indonesia, you’ll be put at an even greater disadvantage. Wise founders will find sharp local partners to help them out.

G. SOCIAL MEDIA IS A WAY OF LIFE

Social media is a force that can’t be circumvented in Indonesia. It’s a must. Twitter and Facebook to one degree or another affect everything from entertainment and business to politics and news. The archipelago is one of the top five global users of social media, and political candidates are aware that failing to engage voters via social media could mean a lower tally at the ballot box.

Indonesia has 72 million active social media accounts, 62 million of which are on mobile. The most popular ones in Indonesia are Facebook, Twitter, and Google Plus. Although Indonesia has become the main market for Path, data suggests that Instagram and Pinterest are more popular.

H. INDONESIANS LOVE THEIR MALLS

Southeast Asian countries, and Indonesia in particular, have a true affinity for shopping malls. This is perhaps just an inexplicable idiosyncrasy of the region. Jakarta alone has more than 173 malls, which is something nearly unheard of in markets like the US or UK.

Unlike western cultures, however, Indonesians don’t typically stroll down the sidewalk and pop into a boutique store to try on one-of-a-kind fashion items. Instead, they flock en masse to giant malls where everything is in one secure, air-conditioned location. If tech startups can find ways to make their online products applicable to offline shopping malls in Indonesia, they might have a fighting chance at regional defensibility.

I. REGULATION IS WILD

If you’re planning to incorporate your business in Indonesia, you’ll need to be aware of the legal limitations imposed on foreign-owned companies. Indonesia’s Negative Investment List specifies sectors of the economy in which foreign ownership is limited or even prohibited completely. These limits range anywhere from zero percent to 95 percent ownership allowance. Some of the sectors include advertising and pharmaceuticals. But more relevant to us in the tech space is e-commerce.

In recent years, the minimum capital requirement to set up a foreign investment limited liability company (also known as PT Penanaman Modal Asing, abbreviated as PT PMA) was INR 10 billion (roughly US$1 million). The amount needs to be part of a company’s official investment plan with a quarter of it paid up front into the company’s Indonesian bank account.

Most early-stage startups won’t have that kind of cash. Many entrepreneurs looking to target the Indonesian market prefer to incorporate their business in Singapore, where it’s so much quicker, the fees are next to nothing, and the political climate is stable. However, companies that need to be licensed in Indonesia would do well to do their homework extensively before buying a plane ticket.

J. THE TAXI IS YOUR OFFICE

If you’re a tech entrepreneur and you plan to move to Jakarta, it might be worth your while to invest in a plug-and-play wifi modem. The reason is that Jakarta has the worst traffic conditions in the world and you may end up stuck in a taxi or an Uber for several hours trying to get across town for your next meeting.

Instead of stressing out about time you’re wasting, it’s often more practical to just pull out your laptop in the car and catch up on emails on the go. Indonesia’s traffic conditions may also be another factor that plays into the nation’s rapid smartphone and social media adoption.

Writer : Leighton Cosseboom
Editor : Steven Millward and Michael Tegos

Source

HOW CAN SMART LEGAL CONSULTING HELP YOU?

SMART Legal Consulting has extensive experience in assisting Foreign Investors to establish FDI Company in Indonesia. If you need immediate assistance, please contact the SMART Help Desk at:

E: info@smartcolaw.com
H: +62821-1234-1235

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