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Indonesia aims to build its own Silicon Valley

JAKARTA — When tech entrepreneur William Tanuwijaya was negotiating with venture capitalists over the biggest investment in an Indonesian start-up, they kept asking him to move his e-commerce company, Tokopedia, to business-friendly Singapore.

The proportion of Internet users in Indonesia, which has a population of 250 million, is expected to more than double over the next four years, said market researcher Frost & Sullivan. PHOTO: REUTERS

The proportion of Internet users in Indonesia, which has a population of 250 million, is expected to more than double over the next four years, said market researcher Frost & Sullivan. PHOTO: REUTERS

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JAKARTA — When tech entrepreneur William Tanuwijaya was negotiating with venture capitalists over the biggest investment in an Indonesian start-up, they kept asking him to move his e-commerce company, Tokopedia, to business-friendly Singapore.

“They were worried about the lack of legal certainty in Indonesia, the complicated administrative procedures and the tax implications for an initial public offering (IPO) or other exit strategy,” he said. “But I insisted on staying in Indonesia because I want us to step up our game and develop our own Silicon Valley.”

His persistence paid off when leading tech investors SoftBank and Sequoia Capital agreed in October to invest US$100 million (S$132 million) in his online marketplace, which has been dubbed the Alibaba of Indonesia. He plans to use the funding to expand his staff from 150 to 1,000 over the next two years and build a Google-style campus.

The tale underlines both the roadblocks facing Indonesia’s nascent tech sector and the willingness of investors to overlook them as they try to get a foothold in one of Asia’s most promising e-commerce markets.

The proportion of Internet users in this nation of 250 million people is predicted to more than double over the next four years to 68 per cent, said market researcher Frost & Sullivan, because of rising incomes and the availability of ever cheaper Chinese smartphones.

Mr Bao Jianlei, Indonesia’s managing director for Chinese search engine Baidu, says that 80 per cent of Indonesians are using mobile phones that cost less than 3 million rupiah (S$322) but that 40 per cent will upgrade in the next year.

This shift will drive an online retail revolution, with e-commerce revenues in Indonesia surging from an estimated US$1 billion last year to US$10 billion by 2016, said Frost & Sullivan — faster growth than in any other country in South-east Asia.

Until recently, many investors were deterred by government red tape, the lack of online payment systems and the shortage of skilled engineers.

Now, a growing number of venture capitalists are setting up Indonesia-focused funds, following the lead of pioneers such as Germany’s Rocket Internet, which has backed online retailers such as Zalora and Lazada.

United States Internet companies Facebook, Twitter and Uber are all opening offices in Jakarta.

And the local conglomerates that dominate South-east Asia’s biggest economy are following suit, with the billionaire Bakrie, Hartono and Widjaja families all setting up funds to invest in start-ups.

“We’re here to invest in a country with huge potential, with a large middle class and many brands that want to target this audience,” said Mr Rick Mulia, who will lead Twitter’s Indonesian office when it opens next month, with around 20 salespeople.

As its user growth slows in the US, Twitter is trying to generate more revenue from large markets such as Indonesia that it is yet to monetise fully.

Mr Mulia says that Jakarta is the Twitter capital of the world, with more tweets generated in the city than any other, and he is confident that leading international brands will pay to advertise to this audience.

But Indonesia still has numerous quirks that force fast-moving tech companies to take a pause.

Many Indonesian Internet users connect only through basic feature phones and do not have email accounts, forcing Twitter and other companies to develop verification by phone number or SMS message rather than email.

Mr Paul Leishman, the co-founder and chief operating officer of Jakarta-based Coda Payments, said many people are surprised to learn of the one piece of technology without which his mobile payments company could not survive: A typewriter.

“It seems crazy, but we need it to fill in certain government forms,” he said. “You cannot rush in this country.”

Xiaomi, the fast-growing Chinese smartphone maker, has had to adapt its approach for the Indonesian market as well, said Mr Hugo Barra, the vice-president for global expansion.

The company usually sells its phones online only, but less than 5 per cent of smartphones are purchased on the Internet in Indonesia, so the company has experimented with physical store sales.

Indonesian officials take longer to approve its phones for distribution than in any other market, said Mr Barra, but in spite of the delay in launching new products, Xiaomi still sold more than 100,000 units in the first two-and-a-half months.

“Indonesia’s e-commerce market is in its early days compared with India and China,” he said. “There is so much potential, especially because there is a lot of fresh, progressive thinking from the new government.”

But other tech executives fear that the government will continue to stand in their way, after Indonesia banned foreign companies from investing directly in online retail in May.

“The government says it’s helping Indonesian tech companies by limiting foreign competition, but they’re making it harder for them to get much-needed capital and advice,” said an executive at a leading Valley company.

“The risk is that this backfires and Indonesian start-ups flee to Singapore, where they won’t pay any Indonesian taxes and they will employ far fewer Indonesians.” THE FINANCIAL TIMES

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