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

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.