Indonesia's trade market's gross merchandise value saw a steady growth of 3.4 percent compounded annual growth rate, or CAGR, from 2010 to 2019, crossing Rp 2,400 trillion.

After a period of contraction of almost 20 percent in 2019-2021 through Covid, the retail sector is bouncing back. The industry still has the potential to double or even triple growth to 7-10 percent.

However, major issues hinder Indonesia from maximizing the sector's potential growth. 

Indonesia's trade sector encompasses a variety of players, including about 70 percent of the country's micro, small, and medium-sized enterprises (MSMEs).

Four major issues affect the ability of MSMEs to grow and thrive: lack of financing access, ineffective business operations, fierce sales, and marketing competition, and low adoption of cashless transactions.

These issues are intertwined with the structure of Indonesia's trade sector. A digital transformation of the sector is a critical enabler in resolving these issues. It opens opportunities for trade-sector players, especially MSMEs, to improve productivity with more effective business operations.

In our report, "Capturing the growth of Indonesia's digital trade sector," we found that accelerating digital transformation adoption will retain Indonesia's competitiveness against regional peer countries, such as India, Singapore, and Malaysia. 

Adequate funding sources and investments are essential to spurring a digital transformation in Indonesia's trade sector. In 2021, information and communication technology (ICT) investments in the trade sector were limited to Rp 5.5 trillion, and 2030 estimates are only Rp 15.5 trillion – equivalent to 0.03 to 0.04 percent of GDP.

The average ICT investment in regional peer countries and leading countries with effective digital transformation - the United States, China, and Japan – is 0.45 percent of GDP.

By expanding ICT investment for the trade sector to benchmark countries' levels, Indonesia can expect the retail market to grow to Rp 6,500 to 7,000 trillion in 2030, with a significant acceleration in the e-commerce market (20 percent CAGR, reaching Rp 3,700 trillion to Rp 4,100 trillion).

Learning from the best practices of benchmark countries, the report identified four buildings blocks and initiatives to transform Indonesia's trade sector digitally:

Accelerate advanced digital services adoption in key trade-sector players' operations 

Digital adoption in Indonesia's trade sector is not evenly distributed; adoption is currently limited to large players. Digitalization will benefit retail players with improved business operation effectiveness and an enhanced customer shopping experience.

Opportunities for expanding an item assortment, such as online-to-offline integration and predictive analytics, still need to be utilized in Indonesia's trade operations.

Strengthen the digital industry with a robust MSME platform and enhance its digital competencies.

Indonesia super-app players, including Tokopedia and Bukalapak, have started to build MSME platforms. However, there are still opportunities to improve their platforms by expanding service coverage to the entire value chain.

In addition, super-apps will benefit from the government establishing a national MSME platform to receive integrated data of MSMEs across the country. In addition, there is still room to enhance digital competencies among MSMEs with high-quality training and tailored solutions.

Expand tech players' regional market reach beyond tier-1 cities

Indonesian tech companies have a substantial opportunity to expand into tier 2-4 cities, offering them access to a broader range of customers and more room to grow. Indonesia's tier 2-4 cities have a sum population of 230 million, much larger than tier 1 cities' population of about 40 million.

Enable conducive governance, funding, and regulatory environment

The government already provides direct investments to early-stage tech players through Startup Inovasi Indonesia. However, the government can leverage private investments by creating a supportive environment. For example, by incentivizing subsidies for MSME's digital adoptions and angel investors with tax credits.

It is also critical for government agencies to collaborate and develop a single integrated digitalization program that provides more explicit guidance and training for MSMEs.

Currently, Indonesia's government is implementing a variety of programs, such as UMKM Go and PaDi UMKM. Most importantly, the government needs to urgently refine data security policies to enable safe and straightforward data-sharing between institutions and super-apps.

To achieve the government's Vision of Indonesia 2045, Indonesia should implement proper nationwide initiatives to refine the structure of the trade sector, especially in improving MSMEs
and customer services, expanding the trade-sector ecosystem, and strengthening the governance, funding, and regulatory environment.

A digital transformation will significantly impact GDP and lead to national digital trade growth in gross merchandise value.

By Ishan Nahar  --  a principal in Kearney Singapore, a global management consulting firm with over 3,600 people working in more than 40 countries.

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