Indonesia

An IT ProfileMIS 680 Fall 2004

Rick Fenster

Steve Dudas

Marty Gagnier

Carolyn Moroz

The People

• Over 238 million people in 2004 (4th largest country in the world)

• 1.5% annual population growth rate• Median age is approximately 26• Life expectancy around 70 years• Age Structure

– 29.4% 0-14yrs– 65.5% 15-64 – 5.1% 65 and over

Ethnic Groups

• Javanese people 45% • Sudanese people 14% • Madurese people 7.5% • Costal Malays 7.5%• Other 26% (many small groups)• No indication that ethnicity issues would

impact the IT investment decision

Religious Groups

• Islamic 87% (worlds largest Islamic nation) • Protestant 6% • Catholic 3% • Hindu 2%• Buddhist & Other 2%• Does the religious make-up affect the

potential for IT investment?

Languages

• 583 languages and dialects spoken• Bahasa Indonesian is the official language• English• Dutch• Local dialects (most widely spoken is Javanese) • Although Bahasa Indonesia has become the

official language, local languages and dialects continue to be spoken and will not be abolished

• However the common use of Bahasa Indonesian has helped unify the country since independence in 1949

Geography

• Located in Southeastern Asia• Archipelago between the Indian ocean and

Pacific ocean• Close to 2 million square miles in area (almost 3

times the size of Texas)• Comprised of 5 main islands (Sumatra,

Java/Madura, Kalimantan, Sulawesi, Irian Jaya) and 17,000 smaller islands

• Population highly concentrated in these main islands

• Capital city is Jakarta• Bridges 2 continents, Asia and Australia

Geography

CIA Factbook

Indonesia

History

• Early inhabitants were primarily Indian from Southeast India who adopted the Hindu religion

• Spread of Islam began to take root in the 13th century and culminated with the capture of the capital city (Jaya Karta) in 1527

• Dutch merchants in quest for spices arrive in 1600’s and begin period of Dutch Colonialism

• Dutch rule characterized by ruthless exploitation and monopolization of resources

• Portuguese control Eastern part of Indonesia• Dutch repel numerous attempts to gain control of

Indonesia, resulting in large casualties

History-2• Numerous revolts ensued between 1816-1908 against

Dutch colonial rule• Nationalistic movements of a more organized nature

took root in 1908 with the forming of the “Boedi Oetomo” (noble conduct).

• Dutch embark on restricting Indonesia civil liberties further by eliminating freedom of assembly, speech and expression

• Indonesian Nationalist Party (PNI) formed in 1927 adopting a militant policy against Dutch colonialism

• 1931-1940 characterized by the formation of many political parties demanding independence

History-3• Japanese occupation from WWII 1942-1945• Independence achieved August 17, 1945 with the

formation of the Republic of Indonesia• Dutch formally surrender in 1949 and agree to

withdrawal• Sovereign nation status achieved in 1950• 1950-1967 The Sukarno era characterized by political

and economic disorder • President Suharto begins formation of New Order

Government in 1967. Rules for 32 years as dictator.• 1999 – Fall of New Order and the removal of Suharto

from power pave way for free elections

Government• Republic of Indonesia (Unitary Multiparty Democratic Republic) • Elected People’s Consultative Assembly (Legislative body)• Current parties in House of Representatives:

– Golkar Party: (21.6%) 128 seats (New Order party of the wealthy and upper-class)

– PDI-P: (18.5%) 109 seats (Indonesian Democratic Party supported by nationalists and working class voters)

– PPP Party: (8.2%) 58 seats (Moslem supported)– PD Party: (7.5%) 57 seats (working class, social-democratic)– PKB Party: (10.6%) 52 seats (Moslem supported)– PAN Party: (6.4%) 52 seats (Urban middle-class)– PKS Party: (7.3%) 45 seats (Moslem puritans)Note: Due to election rules, the number of seats won does not

always correspond to the number of votes received.

Government

1949

Independence

2004

First Free Elections

1998

End of Suharto Dictatorship

1967

New Order Gov’t of Suharto

3 different leaders between 1998 and 2004

Almost 55 years after Independence is declared from the Dutch before the first truly democratic free elections are held.

1950

The Sukarno era

Politics• World’s third largest democracy

(http://news.inq7.net/world/index.php?index=1&story_id=12539)

• Sept 20, 2004 elections could see 4th leader since Suharto was ousted in 1998– President Megawati Sukarnoputri, incumbent– Retired General Susilo Bambang Yudhoyono

• Official results available October 5• Predictions:

• General Yudhoyono won by a “landslide” (60% to 39%)(http://news.inq7.net/world/index.php?index=1&story_id=12539)

• 80% voter turnout (122 million people)(http://news.inq7.net/world/index.php?index=1&story_id=12539)

Natural Resources

• Petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold, silver.

• Agriculture products:Rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra, poultry, beef, pork, eggs

Economy

GDP

$0

$200

$400

$600

$800

GDP

GDP $610 $654 $687 $663 $758

1999 2000 2001 2002 2003

GDP shown as purchasing power parity (in billions)

• Economy not good, but is improving

Economy

Real Growth Rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Real Growth Rate

Real Growth Rate 0.0% 4.8% 3.3% 3.5% 4.0%

1999 2000 2001 2002 2003

Economy

GDP Per Capita shown as purchasing power parity

GDP Per Capita

$2,600

$2,700

$2,800

$2,900

$3,000

$3,100

$3,200

$3,300

GDP Per Capita

GDP Per Capita $2,800 $2,900 $3,000 $3,100 $3,200

1999 2000 2001 2002 2003

Economy

Inflation Rate

0.0%

5.0%

10.0%

15.0%

Inflation Rate

Inflation Rate 2.0% 9.0% 11.5% 11.9% 6.6%

1999 2000 2001 2002 2003

EconomyUnemployment Rate

0.0%

5.0%

10.0%

15.0%

20.0%

Unemployment Rate

Unemployment Rate 17.5% 8.0% 10.6% 8.7%

1998 2001 2002 2003

Economy• Economic Aid: $43 billion

• Indonesia finished its IMF program in December 2003 but still receives bilateral aid through the Consultative Group on Indonesia (CGI), which pledged $2.8 billion in grants and loans for 2004. (2003 est.)

Source: http://www.cia.gov/cia/publications/factbook/geos/id.html

Business & Culture• Indonesia is a very stratified and hierarchical society• Time is considered limitless and they view hurrying as a

sign of impoliteness• Flexibility and patience are critical for success• Strong relationships are essential for business to succeed• Harmony is a major cultural value for achieving consensus• Aggressiveness and conflict are avoided at all costs• Embarrassment is also avoided thus only positive

information is passed on to superiors• Government widely involved in business affairs• Chinese dominate much of Indonesian business

Education• Literacy - 92.5% of Males / 83.4% Females are Literate

– http://www.cia.gov/cia/publications/factbook/geos/id.html

• System Overhauled in 1989– Compulsory Education Increases from 6 to 9 Years– Right to an Education For All– Decentralization of the Curriculum– http://www.worldedreform.com/intercon/kedre9.htm

• 2001 - 220,000 Schools Transferred to Local Govts.• Significant (>US $1Billion) Internal Funding Increases in 2001/2002

– http://www.thejakartapost.com/special/os_21.asp

• Next Generation at Risk Due to Economic Crisis– Millions of “economic-orphans” and 2.5 Million Drop-Outs

• http://www.unicef.org/sowc00/panel2.htm

• USAID – $700 Million in Contributions Targeted Primarily at Education

• Currently Approx. 5000 Native Graduates in IT Annually

Education

Source: Central Bureau of Statistics, Indonesia.

Challenges

• Alleviating widespread poverty (In 1999, 27% of population lived below the poverty line)

• Terrorism (Bali / Jarkarta Embassy)• Transition from authoritarianism to elected

governments• Banking sector reforms• Cronyism and corruption• Human rights violations by military and police• Electricity

– Only 60.5 percent of the population on the islands of Java and Bali have electricity, and only 44.6 percent in other regions of Indonesia

IT-Telecommunications• Fixed line teledensity is 4%, one of lowest in the

region. Cellular teledensity is 10% and growing fast.• Country has a poor telecommunications infrastructure.

Why?1. Challenges due to geography (see map)– More than ½ of 70,000 villages have no public telephones.

2. Lack of funding.– Joint Operating Service hit hard by Asian economic crisis.– $330 million (US) to raise teledensity 1%. (www.worldbank.org)

3. Overregulation and Monopolies.– Telkom provided domestic services, Indostat and Satelindo

provide international.– Lack of competition has resulted in high rates, slow growth.– Recent deregulation and privatization to increase competition.

IT – Internet Growth

0

5,000,000

10,000,000

15,000,000

1998 1999 2000 2001 2002 2003 2004(est)

Subscribers UsersSource: Indonesia Internet Service Provider Association (APJII)

IT – Internet Usage

• Top 25 worldwide in terms of number of Internet users.• But less than 5% penetration – one of lowest in Asia.

– poor infrastructure, low PC ownership, high ISP charges

• Access: kiosks (43%), offices (41%), homes (12%), schools/universities (4%) (source: APJII)

• 90 operational ISP’s, 10 of which own 80% market share. Largest is the state owned TELKOM.

• Access is slow dial-up – broadband is too expensive or simply not available.

• Most use for chat and email -- few citizen services (e-government, e-health, e-education)

IT – Warnet (Cyber Cafés)

• Extension of the Wartel model – Telephone Cafes• ~ 4,000 public kiosks (1/2 in Jakarta).• Average of 8 PC’s, almost all use dial-up service.• Most users are young, many located near colleges.• Access is ~ $1(US) per hour• Is this the answer to Indonesia’s large digital divide?

– Overcomes issues related to low PC ownership, lack of connectivity, and high ISP costs.

– But limited to where adequate infrastructure already exists.– And competition is tough, and many struggle to be profitable.

IT - Internet Programs

• Government policy: Let competition play out in commercial regions, but assist other regions.– But government has had trouble providing adequate financing.

• USO– Provide telephony to 43,000 villages by end of 2005– Sometimes a single public phone per village.– Funded with 0.75% telephone usage tax

• School 2000– Provide Internet access to 2,000 schools per year.

• OSOL– “One School, One Computer Lab”

IT – e-Commerce Use

• Large potential -- Internet users growing fast!• Only 5% use Internet for shopping (APJII, 2002)• Global reputation for credit card fraud results in

many international sites boycotting Indonesian orders/deliveries.

• Other barriers to e-commerce use:– Low Internet usage– Low credit card use– Culture – Shopping is considered an act of leisure or

recreation.– Delivery costs to rural areas

IT – e-Commerce Development

• Hundreds of commercial sites, few making any money – high operational costs, low advertising revenue, poorly skilled human resources.

• Many dot.com start ups failed during the NASDAQ crash in 2001.

• New generation focus on mobile phone business and tourism.

• Barriers to e-commerce development:– Government regulation– Banks won’t secure Internet transactions– Weak infrastructure

Foreign IT Investment

• Intel – 5 Employees / Opened in 1996• IBM – Initial Presence in 1937.

– Formally Incorporated as PT IBM Indonesia in 1999.

• Hardware Manufactures– MAG Innovision – Computer Monitors– Sony – Closed Audio Component Factory due

to Wage Hikes

IT - Economy

• 65% of PCs Sold are Locally Assembled– Top 6 PC Sellers Account for 32% of Sales

• http://strategis.gc.ca/epic/internet/inimr-ri.nsf/en/gr121741e.html

• Little Software Development– Very Little Done due to Piracy and IP Issues

• Y2000 - Exports of Approx. US$30 Million using 4500 software engineers in roughly 90 companies

• Office XP Costs about $4 US on Streets• http://www.ejisdc.org

• Pilot Project to make Bandung a “High Tech Valley”– Located Close to the Largest Number of “IT” Capable

Universities.

IT Workforce– Limited IT Experience (Low Internet Usage)– Significant Freedom Granted to Workers in

1998• 2001/2002 – Back to Back Minimum Wage

Increases of 30% and 39% in Jakarta

http://www.ecatt.com/country/indonesia/inhalt_id.htm

IT - Govt. Policy and Regulation

• Intellectual Property Problems– Software Piracy Estimated at +80%– Enforcement / Punishment is Rare

• Heavy Regulation of Telecommunication Industry

• Legal System has a History of Corruption

• Loose Bankruptcy Laws

Comparison: The Philippines and Indonesia

• Much smaller in size and population• slightly larger than Arizona (3 times the size of Texas)• 86 million people (238 million)

• Speak two languages, Filipino and English (583 languages)

• Not as severely impacted by Asian financial crisisSource: http://en.wikipedia.org/wiki/Asian_financial_crisis

• In 2001, 40% of population lived below the poverty line (compared to 27% in 1999 for Indonesia)

• Higher unemployment rate estimate for 2003 of 11.4% (8.7% in 2003)

• 2003 GDP (est): • Purchasing power parity $390.7 billion ($758.1 billion)• Real Growth Rate 4.5% (4.0%)• Per capita: purchasing power parity $4,600 ($3,200)

• Strength comes from cultural affinity with U.S– Highly westernized– 3rd Largest English speaking country– Safety net to larger locations political tensions

– India

– Russia

Comparison: The Philippines and Indonesia

Comparison: The Philippines and Indonesia

• Ports and Harbors:

Indonesia - 8 Philippines - 15

Strategically located along major sea lanes from Indian Ocean to Pacific Ocean

Favorable location to many of the main bodies of water in Southeast Asia: the South China Sea, Philippine Sea, Sulu Sea, Celebes Sea, and Luzon Strait

Comparison: The Philippines and Indonesia

• Telecommunications– Philippines

• 78 private telephone companies in the Philippines• 40 lines per 1000 people• 4 million Internet users, approx. 46 per 1000 (end of 2002)

– Indonesia• 1 private and 2 stated owned in Indonesia• 33 lines per 1000 (2002)• 8 million Internet users, approx. 33 per 1000 (2002)

Source: CIA Factbook and www.american.edu

Comparison: The Philippines and Indonesia

• Cell Phone vs. Land Lines• 3 million land lines in use in 2002, compared to 15

million cell phones

• 7.75 million land lines in use in 2002, compared to 11.7 million cell phones

Source: CIA Factbook

Comparison: The Philippines and Indonesia

Number of ISPs (2000):

•Philippines: 33 Internet Service Providers• Indonesia: 24 Internet Service Providers

Analysis / Summary

• Is Indonesia a Good Investment for IT?

Maybe

Facts Positive Neutral Negative238 million people 1young - Median age of 26 1Numerous Ethnic Groups 187% Islamic 1583 languages 1geography 1history 1Government Model 1numerous leadership changeovers 1natural resources 1Economy 1culture - avoids conflict 1Strong relationships 1Government is involved in business transactions 1Literacy (Which Language?) 1School system transitions 1USAID Contributions 1Economic Orphans / Drop Outs 1School System Funding Improvements 1Acts of Terrorism 1Human Rights Violations 1Electricity Issues 1Limited Telephone Access 1Lack of Telco Competition 1growth of Internet users 1Software Piracy 1Bandung High Tech Valley 1IT Workforce - 5000 IT grads per year 1Legal system corruption 1Loose Bankruptcy Laws 1

11 5 14

37% 17% 47%

Analysis / Summary

IT Industry Pros ConsSoftware Dev. • Potential of a Vast

market•Low Skilled Workforce

•IP Laws

•Software Piracy

Hardware Dev. /

Complex Manufacturing

•Limited Skillset

•IP Laws

•Limited Power Availability

Component Assembly

•Highly Skilled Work Force

•Recent Wage Increases

E-Commerce Hosting

•Limited Communications Infrastructure

•Corruption

Help Desk •Highly Skilled Work Force

•Potential Language Barriers

Predictions

Source: Global Information Technology and Electronic Commerce, Palvia/Palvia/Roche

Some Indonesia Websites

• News Portal: www.detik.com and www.indocenter.com

• Newspapers: www.kompas.com and www.jawapos.co.id

• Internet Banking: www.bankbii.com

• Retail: www.plazaindonesia.com

• Travel: www.indo.com

Links

http://www.cia.gov/cia/publications/factbook/geos/id.html

http://www.asianinfo.org/asianinfo/indonesia/about_indonesia.htm

http://www.encyclopedia.com/html/section/Indonesi_Economy.asp

http://abc.net.au/ra/federasi/tema6/pol_parties_indon.htm

http://www.nationsonline.org/oneworld/

http://www.aiccusa.org/cultas.htm

http://www.gimonca.com/sejarah/sejarah09.shtml

http://www.bps.go.id/sector/population/table1.shtml

Questions and Comments?