The dot-com challenge in Indonesia; is the race over before it begins?

By Charlie Taylor

JAKARTA (JP): Even the most casual observer of Indonesia's business scene would have noticed a conspicuous flurry of activity in the dot-com sector this year.

The first quarter in particular witnessed a seemingly endless stream of new e-commerce initiatives and dot-com announcements. Some began to quietly wonder whether those investments could really generate adequate returns.

Recently, global capital markets have brought that question to the forefront, as worldwide investment in dot-coms has slowed drastically. What does this mean for Indonesia's embryonic e- business sector? Is the race over before it began? Not necessarily.

Based on our work with e-commerce ventures around the world, we at McKinsey & Company have been helping a wide range of e- businesses adapt to the recent shift in investor expectations.

In Indonesia, we believe that Internet start-ups can transition to business models that will attract continued investment and ultimately achieve profitability -- although doing so will require innovation and, in many cases, a willingness to sacrifice existing strategies.

The major shift confounding dot-coms is that investors now expect start-ups to demonstrate revenue prospects much earlier in their life cycles.

Before the NASDAQ crash, dot-coms could simply issue vague revenue forecasts for the distant future and still succeed in attracting funds. The focus was on growing the business quickly and attracting loyal visitors to a website, with the assumption that these visitors could be "monetized" -- i.e., translated into revenues -- at some point in the future.

But as enthusiasm for dot-coms waned, investors have begun increasingly demanding business models that clearly generate revenues and have strong prospects for profitability.

This paradigm shift presents tremendous problems for Indonesia's e-business sector. Most of the recent e-business activity has focused on the business-to-consumer (B2C) sphere, yet the potential revenues from B2C plays in Indonesia are negligible.

Even as late as 2003, Indonesia's online B2C revenues are expected to reach only a mere US$500 million. By comparison, a single U.S. company -- Amazon.com -- generated 1999 revenues of over US$1.5 billion.

But by no means does this spell the doom of Indonesian e- ventures. Rather, it simply means that local dot-coms must innovate to expand revenue prospects. Fortunately, there are still a host of ways in which this can be accomplished.

One option is to pursue a bricks-and-clicks strategy, in which products are sold online, but are paid for and retrieved at a physical location, such as a retail outlet in a mall. By allowing payments to be made in cash, the bricks-and-clicks approach circumvents the challenge of Indonesia's credit card penetration rate, which at under 1 percent is among the lowest in Asia. Using cash also cuts out the high credit card processing fees associated with online purchases; these fees currently reach 6 percent to 10 percent of the sales price.

The bricks-and-clicks approach creates a wealth of opportunities for dot-coms to partner with established retailers and other traditional businesses.

In fact, this type of "referral" business may prove highly viable in Indonesia. Under this model, a dot-com whose website had attracted a large pool of loyal visitors could partner with a traditional retailer to sell that company's products over the website. Ordering would occur through the website while payment and collection could take place at the retailer's physical locations. The dot-com would earn a commission on each sale.

Granted, bricks-and-clicks approaches do not capitalize on the full cost savings that the Internet offers. But since 80 percent to 90 percent of all transactions in Indonesia are currently made in cash, providing a physical location for cash payment and the collection of goods will be critical to most local e-commerce efforts. Over time, companies can move payments online as credit card penetration increases and e-payment processing improves.

Another option for dot-coms is to seek opportunities in the growing field of m-commerce -- online commerce transacted through mobile platforms, such as cellular phones and portable digital assistants.

The number of cell-phone users in Indonesia doubled last year -- and the total is expected to exceed nine million by 2005. By then, cell-phone users will account for roughly half of all telephone subscribers in Indonesia. McKinsey firmly believes that the cell phone will eventually become the primary form of Internet access for most Indonesians (and, indeed, for most Asians).

Local dot-coms have extraordinary opportunities for exploiting this fast-growing access mode. A major benefit of m-commerce is that it can circumvent the aforementioned constraints of low credit card use and expensive online payment processing.

Consumers can use their cell phones to purchase information- based products such as stock tips and news flashes, while billing takes place through their monthly invoices from cellular service providers.

Indeed, Satelindo and Detik.com are already offering regular news updates, delivered to cell-phone screens for Rp 200 each. While the sale of physical products over a cell phone will be problematic -- complicated by issues of delivery and fulfillment -- these challenges do not offset the potential generated by m- commerce.

A final option is for dot-coms to leverage the skills developed through B2C work and apply them to the fast-growing business-to-business (B2B) arena, which offers much better prospects than B2C. By 2003, B2B is expected to account for over 90 percent of worldwide e-commerce revenue.

Indonesian B2B e-commerce is poised for dramatic growth in the years ahead, largely because of the country's high volume of international trade. As trading partners in the U.S. and Europe increasingly move toward online purchasing, they will expect their Indonesian counterparts to follow suit. This will create strong demand for systems integrators and B2B solutions providers in Indonesia.

Furthermore, B2B creates opportunities for Indonesian dot-coms to sell their services regionally. Asia is expected to experience an explosion in B2B activity in the next several years, creating opportunities for solutions providers throughout the region.

Given Indonesia's large pool of skilled programmers and competitive labor costs, the country could become a regional "center of excellence" in one or more B2B niches -- much in the same way that Bangalore, India, has become a global hub for the software industry.

Overall, the recent investor skepticism regarding e-business is far from disastrous for Indonesia's dot-com sector. In fact, Indonesia is fortunate that the reality check came at a relatively early stage in the local development of e-commerce.

Indonesian e-businesses have not invested as richly as their American counterparts in business models that now appear unsustainable.

Local e-businesses are, therefore, better positioned to adjust their business strategies and enhance their long-term profitability and viability. Making these changes will not be easy, but the alternative -- inaction -- is simply not an option.

The writer is a principal with McKinsey & Company's Jakarta office. This article was adapted from a speech delivered at a seminar entitled e-Indonesia hosted in Jakarta by Van Zorge, Heffernan, & Associates.