ICEF 2021 HIGHRES

The 4th ICEF 2021: Towards Smart and Sustainable Cities through Circular Economy

Photo Credits: The 4th Indonesia Circular Economy Forum (ICEF) 2021

Pandu Sjahrir, Founding Partner at AC Ventures, gave the opening speech at the 4th Indonesia Circular Economy Forum (ICEF) 2021. The opening session was also attended by Dody Rahadi, Head of Industry Research and Development Agency, Ministry of Industry; H.E Lars Bo Larsen, Ambassador of Denmark to Indonesia; and Arsjad Rasjid, Chairman of KADIN.

The 4th ICEF 2021 is a side event of the World Circular Economy Forum (WCEF) 2021. This session focused on the theme Towards Smart and Sustainable Cities through Circular Economy: Building Resilience During COVID-19 Recovery.

Here are our key takeaways:

The COVID-19 pandemic has accelerated the adoption of technology in Indonesian society which continues to increase significantly. This behavior change occurs in all institutions in any sector and changes all market behavior.

In the investment sector, many young Indonesians use technology to have easy access to learn about investment, how to be a new investor in the Indonesian Stock Exchange.

Recently, Single Investor Identification (SID) has reached 5.3 million, and millennial retail investors dominate 3/4. The number is predicted to continue growing until the end of the year.

“It’s because of the enthusiasm of investors that even IPO, the first unicorn company Bukalapak had tremendous enthusiasm from retail investors. This will open the path for other extensive technology-led companies to list in the market,” said Pandu.

As a commissioner of the Indonesian Stock Exchange, Pandu sees a growing appetite by millennial investors and global investment trends that support sustainable business implementation.

On the stock exchange itself, the ESG LEADERS index and SRI-KEHATI index will be one of the options for investors to support sustainable investments. 

Starting next year, they mentioned Stock Exchange, were encouraged all issued on the exchange to provide ESG reports. The purpose is for investors to see the social and environmental reports of the listed companies in Indonesia,” explained Pandu.

Next is how the financial technology industry in Asia has rapidly grown in recent years due to the increasing convenience of Indonesian people using gentle transactions and digital lending.

Even though the industry was hit by COVID-19 in Q2 and Q3 last yearPandu has seen growth and improvement started in Q4 2020 previous year. The sector’s recovery has exceeded the highest achievement since even before the pandemic begins.

Financial Technology (FinTech) can help our society to take advantage of the new economic sector.

According to recent data, only three-fourths of Indonesians are either unbanked or do not have proper access to financial services (underbanked). Most occur in the Java region.

“This is undoubtedly a problem that we need to solve with technology, which would reach a wider area. And in the end, it brings tremendous benefit to society. Services such as digital loans, technology that makes it easier for MSMEs to develop businesses, conduct digital buying and selling transactions, record transactions, and much more will bring great benefit to Indonesia,” Pandu added.

He believes this pandemic teaches us about the importance of sustainable business for the environment and to each other as a community. And the use of technology can help us to achieve this in a short period of time.

WhatsApp Image 2021-07-28 at 6.51.44 PM

Digitalisasi UMKM Jadi Mesin Pertumbuhan Ekonomi Pasca-Covid-19

Photo Credits: The Economist Indonesia Summit 2018

Original post by Media Indonesia

KEHADIRAN consumer-focused platforms atau platform yang berfokus pada konsumen di Indonesia, seperti Gojek, Tokopedia, dan Traveloka telah membuka peluang besar bagi usaha mikro, kecil, dan Menengah (UMKM) di Indonesia untuk bertumbuh.

Namun terdapat sejumlah tantangan yang dihadapi sektor UMKM di Tanah Air.

Perusahaan dana modal ventura atau venture capital (VC) terkemuka yang berfokus pada investasi start-up di tahap awal, AC Ventures meyakini, teknologi dapat menjadi solusi dalam membantu menciptakan nilai tambah dan dampak yang sangat besar untuk sektor UMKM.

Selain itu, hal itu sekaligus menjadi peluang bagi pemain bisnis teknologi maupun investor jika mereka mampu menjembatani tantangan ini.

“Pemanfaatan platform berbasis teknologi dapat menekan biaya operasional menjadi lebih rendah, efisiensi yang lebih besar, hingga volume penjualan yang lebih tinggi,” ujar Co-Founder & Managing Partner AC Ventures, Adrian Li, di Jakarta, Rabu (28/7/2021).

Adrian melihat bahwa peluang yang ada tidak hanya terbatas pada kemampuan pemain bisnis untuk memberikan solusi bagi UMKM, melainkan dapat pula membantu pelaku bisnis untuk memasuki pasar konsumen Indonesia melalui UMKM ini.

Karena, meskipun pertumbuhan daring sangat besar, namun sebagian besar penjualan masih dilakukan secara luring atau off line, terutama di saluran tradisional.

“Sayangnya, rantai pasokan yang menghubungkan jutaan pengecer ini ke prinsipal dan distributor sangat terfragmentasi sehingga menimbulkan banyak masalah bagi pengecer,” jelasnya.

Menurut Adrian, terdapat dua hambatan utama bagi UMKM untuk mendapatkan pembiayaan.

Pertama, UMKM umumnya tidak dianggap layak kredit oleh bank karena mereka biasanya tidak memiliki aset yang dapat digunakan untuk agunan.

Kedua, cabang bank sangat terbatas di kota-kota tier-2 dan tier-3 yang mempersulit UMKM bahkan untuk mengajukan pembiayaan.

“Indonesia telah melihat banyak pemain fintech mencoba mengatasi masalah ini. Namun, bahkan dengan pemberi pinjaman teknologi finansial, ada sedikit informasi untuk memahami kesehatan keuangan calon peminjam,” jelasnya.

“Alhasil, data OJK (Otoritas Jasa Keuangan) pada 2020 menunjukkan, perusahaan fintech lending hanya mengucurkan total US$5,0 miliar pada 2020. Jumlah ini masih jauh dari mengatasi gap pembiayaan,” papar Adrian.

Menurut data Kementerian Koperasi dan UKM, UMKM adalah mesin pertumbuhan bagi perekonomian Indonesia. Terdapat lebih dari 60 juta UMKM terdaftar, dan menyumbang sekitar 61% dari PDB negara.

Sementara itu, Badan Pusat Statistik (BPS) tahun 2018 merilis, kategori besar ini telah mempekerjakan lebih dari 116 juta orang atau setara dengan 97% angkatan kerja Indonesia.

Kontribusi dan signifikansi UMKM terhadap perekonomian Indonesia jauh lebih besar dibandingkan dengan perekonomian besar lain, seperti India yang hanya menyumbang 30% dari PDB.

“Ini sekaligus merupakan salah satu alasan mengapa usaha teknologi yang berfokus pada UMKM di Indonesia dapat muncul sebagai bisnis yang bahkan lebih berharga daripada di pasar negara berkembang lain yang lebih matang,” tambahnya.

AC Ventures sendiri telah melakukan analisis terhadap peluang-peluang tersebut, dan sejauh ini telah berinvestasi kepada empat start-up yang dinilai mampu menjembatani masing-masing masalah yang dihadapi UMKM seperti startup marketplace Ula, startup fintech BukuWarung, startup food technology ESB, serta startup yang menyediakan perangkat digital lengkap untuk UMKM seperti Majoo.

Jakarta downtown skyline with high-rise buildings at sunset

The evolution of VC in Indonesia: An eyewitness’ perspective

Jakarta downtown skyline with high-rise buildings at sunset

Original Post by The e27

 

“So much has changed in the local VC ecosystem since I first started working on a fund in 2014. Here is my take on where it is going,”
Adrian Li, Co-Founder and Managing Partner of AC Ventures

 

The Indonesian Venture Capital landscape has evolved dramatically in the past ten years, creating enormous opportunities. In a podcast with IndoTekno’s Alan Hellawell, I shared 15 years of my experience in technology entrepreneurship and venture investment from China and Indonesia’s markets.

So much has changed in the Indonesian VC ecosystem since I first started working on a fund in 2014. From an investor’s perspective, among the most apparent challenges previously was finding entrepreneurial talent and significant downstream funding risk.

But back then we were pioneering and starting venture capital as an asset class in Indonesia along with several other players in the market.

However, entrepreneurs faced bigger challenges than just securing funding. The entire market for the online space, payment, and logistics infrastructure was still very nascent. Smartphone capabilities were also far from where they are now, and of course, without the penetration of Gojek, Grab, and Shopee, consumer confidence was much lower.

Just seven years on, things have entirely changed. The majority of consumers do not think twice about buying online given the prevalence of online shopping apps.

In addition, the hardware used in smartphones is far better, including all the supporting infrastructure for e-commerce, payments, and logistics.

When it comes to the talent ecosystem, we’ve also seen extensive recycling of talent, not just promising returnees; but also early team members who have graduated from Tokopedia, Gojek, Grab, Shopee and decided to start their own businesses. And this has fuelled the growth of new companies in the ecosystem.

Now, while Indonesia still is some ways away from receiving the capital attention that a market like India has received; nonetheless, we’ve seen multiple funds raised, successive funds, as well as top-tier global investors plugging this gap in both Series B and Series C and onwards.

So, the environment and ecosystem investing in venture businesses are far more mature than several years ago.

Focus on growth over monetisation

When looking at Indonesia, VC cites many superlatives about how significant Indonesia’s potential is as the fourth most populous country in the world.

However, the question that then arises is whether this large market can be monetised?

For me, it’s important to understand that while tech companies often take time to monetize, they are often disrupting traditional incumbents through their better and more efficient models. So, the potential revenue cake or monetisation potential can sometimes be seen in their conventional counterparts.

If you want to understand in the future how big that pie is and how big these technology companies can become, you can look at some of the traditional incumbents they are seeking to disrupt.

For example in the banking industry, BCA is one of the most valuable businesses in Indonesia and Southeast Asia. Meanwhile, if we look at the consumer category (FMCG), there are companies such as Indofood or Gudang Garam. These companies are among the largest publicly listed companies worth multibillion dollars.

And so we can see from the traditional counterparts, whether we’re tackling fintech or e-commerce, that it is possible to build companies of this size.

However, like China, and many other markets, at the early stages of many technology-enabled businesses, their focus is on adoption and growth instead of monetisation.

Most companies, certainly prior to Series C businesses, are much more focused on their growth trajectory than monetisation.

The most promising investment opportunities

One sector that we have a vast amount of confidence in is MSMEs or micro, small and medium enterprises. However, it’s pretty hard to drive meaningful subscription revenue from these small-medium enterprises on a SaaS (software-as-a-service) basis from what we’ve seen so far.

And because of their small size, they also have a low willingness to pay for software or tools that they may be using. So this is one area that’s yet to see some solid monetisation.

If we talk about how big this market is based on reports, there are over 63M MSMEs in Indonesia that employ over 97 percent of working adults.

Clearly, there is a massive market here as well as multiple ways of monetising in the future, in particular through the quality collection of data to provide financial services to the unbanked and underbanked.

Comparison between Indonesia and China

There are several similarities when talking about the Indonesian and Chinese markets. For example, China is a large, homogeneous market enabling massive scaling of technology-enabled businesses. This is the reason why we focus on Indonesia, not ASEAN or SEA.

We believe that founders in this region should start through building in the single largest market in SEA and not think regionally too early. Almost all of Indonesia’s billion-dollar tech companies focus exclusively on the Indonesian market.

The second thing, as we’ve seen in China, there’s the massive importance of localisation. Even though we’re identifying disruptive; proven disruptive business models that we see in markets, such as India or China; it’s not a simple copy-paste.

On the other hand, there are some clear differences. For example, in China, certain industries are highly regulated such as search and social media. Hence in China can see the emergence of companies such as Baidu and Tencent.

But in Indonesia, this is not possible because of the open market. So you’ve seen the dominance of Facebook, TikTok, and global players take dominant market share in these areas.

The second thing is the role of government. The Indonesian government has worked in a very inclusive and proactive manner to support the growth of the digital economy.

We can see this very clearly in terms of how the Indonesian government has approached regulation in fintech compared to how it happened in China.

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Current Figure:
AC Ventures
Founding Partner Adrian Li

后疫情时代,科技如何赋能印尼中小微企业 ?

Original Post by 7.5 degrees

在印尼,以消费者为中心的平台企业如Gojek、Tokopedia和Traveloka等表现突出,使东南亚这个最大经济体中的中小微企业得到的关注黯淡了很多。然而,当我们仔细看看中小微企业的数量和他们面临的挑战,就会发现服务于中小微企业的技术平台影响力巨大,且有机会创造数十亿美元的巨大价值。

这就是为什么AC Ventures一直非常关注围绕着解决中小微企业面临的问题的技术型方案,也是为什么我们强烈敦促企业家和投资人持续关注和评估这个领域的机会。在这篇文章中,我回顾了中小微企业面临的主要挑战,以及技术型企业如何解决这些挑战的几个例子。

根据印尼共和国合作社和中小企业部的数据,UMKM(即中小微企业)是印尼经济增长的引擎。印尼的中小微企业包括资产从5000万印尼盾以下(约3500美元)的微型企业,到资产为5亿印尼盾–100亿印尼盾(3,5000美元-69,0000美元)的中型企业,其中微型企业占中小微企业总数的98%,超过6000万登记的中小微企业占印尼国内生产总值的61%。 与印度等其他大型经济体相比,中小微企业对印尼经济的贡献和意义要大得多。以印度为例,中小微企业的贡献仅占国内生产总值的30%。与此同时,印尼中央统计局(BPS)2018年发布的数据显示,中小微企业雇佣的员工数量超过1.16亿人,相当于印尼劳动力的97%。

因此,与其他更成熟的新兴市场相比,在印尼,专注于为中小微企业提供技术解决方案的企业可能更具价值。虽然这些中小微企业面临类似的挑战,但它们在规模和业务性质上都有很大的差异。所以,解决方案必须根据规模和行业进行定制,才能创造出更多的商业机会。

中小微企业面临的挑战主要包括:产品采购渠道效率低下、易发生人为错误的线下管理系统、缺乏信贷支持来扩大业务,以及由于依赖小型实体零售空间而导致的销售风险等。而这些核心挑战都可以通过技术平台得到解决。因为技术平台可以通过提高效率来降低成本,最大限度地减少对人工操作的依赖,并使中小微企业获得金融服务的渠道,来进一步提升销量。

从前,科技公司为中小微企业服务的一个重要障碍是企业所有者对技术的接受度。虽然印尼互联网普及率大幅增长,但企业所有者仍对技术的应用犹豫不决(通常是出于对可靠性的怀疑和不愿意接受改变)。然而,疫情迫使中小微企业不得不适应新的环境,这是推动企业采用技术解决方案的关键因素。在2020年底,印尼30%的在线消费者是新用户,为在线支付、电商交付和销售以及线上贷款等领域带来了巨大的增长。

对于中小微企业来讲,科技的赋能主要体现在以下几方面:

解决供应链碎片化问题

根据欧睿的数据,传统零售商占印尼3000亿美元零售市场的70%-80%,预计到2025年零售市场规模将再增加1200亿美元。因此,尽管在线商务有了巨大增长,大多数零售业务仍然是主要通过传统线下渠道进行的。

很遗憾的是,将这数百万零售商与快消品负责人和分销商连接起来的供应链高度分散化,导致零售商面临许多痛点,如定价不透明、SKU有限、交货不可靠和效率低下(通常零售商必须关店补货)。而与此同时,快消品负责人则希望提高产品分销的成本效率,并开拓利润丰厚的新市场。

B2B电商平台Ula就是一家致力于解决这些问题的公司,它为传统零售商带来可靠的交货、最优的价格、广泛的产品种类和融资选择等服务,使他们能够专注于服务客户和业务增长。Ula向数千家零售商开放了渠道,也无需他们承担高昂的分销成本(如仓库资本支出或向运输车队投资)。

为缺乏银行服务的中小微企业融资

中小微企业的另一个关键痛点是难以获得信贷。据估计,印尼中小微企业的融资缺口为500-700亿美元,仅这一部分的缺口就损失了1300多亿美元的价值创造。可以说,中小微企业融资主要面临两大障碍:

首先,银行通常认为中小微企业不具有信誉,因为它们通常没有可用于抵押的资产。其次,银行在二三线城市的分行非常有限,这使得中小微企业想要申请融资更加困难。

印尼有许多金融科技公司试图解决这个问题。然而,即使是金融科技贷款机构,也缺乏了解潜在借款人财务状况的信息。因此,印尼金融服务管理局(OJK)2020年的数据显示,金融科技贷款公司在2020年仅发放了50亿美元贷款,离解决融资缺口还很远。

历史上,许多中小微企业,尤其是微型企业或夫妻店,只是在“产品进出”的基础上运行,没有库存或交易跟踪。印尼金融科技企业BukuWarung看到了一个可以为这些企业主提供基本记账应用程序的机会。该应用程序使企业主能够方便地输入销售信息,从而提供有关这些企业交易规模和频率的数据。此后,BukuWarung在其核心应用程序上进行了扩展,包括帮助商家建立在线商店和支付等功能,这有助于为中小微企业创建全面的企业财务健康视图。通过这些功能,BukuWarung允许中小微企业建立财务档案,供银行和/或金融科技公司评估信用风险,从而使中小微企业更好获得金融服务。

扩大销售范围并提高运营效率

对于规模较大的中小企业来说,技术平台可以带来显著的好处有:节省运营成本、精简工作流程、更好地了解客户以及获得更多的销售渠道等。考虑到中小企业业务的性质和规模,需要更全面的软件解决方案。这意味着销售和实施通常需要现场团队来执行,导致交付周期更长,而且扩展速度较慢。

虽然软件解决方案市场规模庞大,许多投资人往往认为,以收取软件订阅费为主要盈利模式的企业收入有限,因而并不太认可这些机会与企业。毕竟,印尼与成熟市场不同,许多中小企业仍然不愿为软件支付费用。

其实,这里真正的机会在于建立能够产生收益的附加业务,这些业务可以通过技术平台覆盖到广泛的中小企业用户。这往往为中小企业带来一种更具有成本效益的方式,通过上下游渠道来扩大收入。

例如,印尼餐厅管理平台ESB与印尼数千家餐饮机构合作,提供了一个完整的端到端平台,用于管理订单、支付和库存。此外,它也提供了一个有价值的功能—即餐厅能够为顾客提供非接触式点单,这提高了运营效率,也成为了疫情之后一个必要的组成部分。ESB的另一项功能把供应商直接和餐厅对接起来,以减少缺货,提高废物管理效率。这些特性表明了ESB可以随着客户的增长而收入也不断增长的多种办法。

另一个例子是印尼SaaS企业Majoo,它为美发师、自助洗衣店和一般零售商等独立中小企业等提供全套数字工具。这个一站式平台运行着从销售到企业管理和支付工资等方方面面。最终,为了实现中小企业的数字化,他们将通过让商家建立在线商店,并无缝对接在线市场来增加收入。

印尼零售市场每年对GDP的贡献超过3000亿美元,而中小微企业占了其中的大部分。通过让这些企业实现数字化,大量价值会得到释放。我们相信,这一领域将涌现出多家公司,解决价值链的不同部分以及中小微企业面临的问题。这些企业本身将成为有价值的企业,并对印尼广大民众产生巨大影响,使中小企业能够高效、快速地扩大规模。

Konter Pulsa

Tech Enabling Indonesia’s 63M MSMEs the Engine of Growth for the Post-Pandemic Recovery

Photo Credits: Bukuwarung

The prominence of consumer-focused platforms in Indonesia such as Gojek, Tokopedia, and Traveloka have historically eclipsed the MSMEs opportunity in SEA’s largest economy.

However, a closer look at the numbers and challenges faced in this promising sector quickly reveals the vast potential for technology platforms to create massive multi-billion-dollar value and impact. This is why AC Ventures have a core thesis around technology-enabled solutions addressing the MSME category and why we strongly urge both entrepreneurs and investors to evaluate more opportunities here. 

In this AC Insights post, we review the key challenges MSMEs face and several examples of how technology-enabled businesses are solving them.

According to the data from the Ministry of Cooperatives and SMEs of The Republic of Indonesia, UMKM (MSMEs) are the engine of growth for the Indonesian Economy, with over 60M registered MSMEs contributing approximately 61% of the country’s GDP. Meanwhile, the Central Bureau of Statistics (BPS) in 2018 released, this enormous category employs over 116M people, which is equivalent to 97% of Indonesia’s labor force.

Adrian Li, ACV’s Founder & Managing Partner, believes there is tremendous value in providing solutions to MSMEs and opportunities to enter the Indonesian consumer market through these MSMEs.

“The contribution and significance of MSMEs to the Indonesian economy are much more significant than other large economies such as India, where this sector only contributes 30% of GDP. This is one of the reasons why technology ventures focused on MSMEs in Indonesia can emerge as more valuable businesses than in other more mature emerging markets,” Adrian said.

Fixing Fragmented Supply Chains, Financing the Underbanked, and Expanding Limited Sales Reach

Asian Indonesian women, the owner of small local family-owned business store, or locally called warung, calculating profit by her desk. Photo Credits: 123rf

MSMEs in Indonesia range from Micro-enterprises with assets under 50M IDR (~US$3,500), which make up 98% of these businesses, to Medium enterprises with IDR500M-10BN in assets. There is great diversity in these businesses, both in terms of scale and nature of industries. While they mostly face similar challenges, the product solutions must be tailored to the size and specific industry, creating an opportunity to generate multiple ventures. 

MSMEs owners face several challenges in their businesses ranging from inefficient sourcing channels for their products, offline management systems prone to human error, lack of access to credit to support or expand their operations, and small sales exposure due to reliance on small physical retail space.

These core challenges can be addressed through technology platforms, which can drive lower costs through greater efficiency, minimize dependence on human operation, open up access to financial services and generate higher sales volumes. 

Previously, one of the significant hurdles for technology companies to serve MSMEs was the receptiveness towards adopting technology. 

“While Indonesia had seen massive internet penetration growth, owners were still hesitant to implement technology (often driven by doubts in reliability and an unwillingness to change). However, COVID-19 placed MSMEs in the position where they needed to adapt, and this has been a critical factor in driving forward the technology adoption of these enterprises,” Adrian said.

At the end of 2020, 30% of the online consumers in Indonesia are new users providing massive growth in the technology sector such as online payment, eCommerce delivery, eCommerce sales, and online lending. This phenomenon is an opportunity, and there is still plenty of room to accelerate business growth by adopting more efficient technology for MSMEs.

AC Ventures tries to bridge this problem by focusing on helping develop startups that have the best and innovative solutions for MSMEs. AC Ventures tries to enable MSMEs to have a better business ecosystem. This is done by investing in Ula companies that focus on improving a fragmented supply chain, BukuWarung, which wants to solve the underbanked problem of MSMEs, to ESB and Majoo, which can help MSMEs expand sales reach improve operational efficiencies.

Fixing Fragmented Supply Chains

View of a Logistic organisation on a warehouse background 3d rendering. Photo Credits: 123rf

According to Euromonitor data, traditional retailers contribute to 70-80% of Indonesia’s US$300BN retail market, which is expected to gain another US$120BN by 2025. Hence, despite the enormous growth of online commerce, most business is still offline and primarily in traditional channels. 

Unfortunately, the supply chain connecting these millions of retailers to FMCG Principals and Distributors is highly fragmented, resulting in a myriad of pain points faced by retailers such as low pricing visibility, limited SKUs, unreliable and inefficient delivery (often retailers must shut their store to restock inventory). 

Meanwhile, principals are looking to increase cost efficiencies in product distribution and, more importantly, to expand into new lucrative new markets. 

Ula is an example of a company that solves both of these issues, bringing reliable delivery, best prices, broad assortments, and financing options to traditional retailers to focus on their customers and grow their business. Ula opens up access to thousands of retailers without having to incur high distribution costs (such as CAPEX for warehouses or investing in fleets) for principals.

Financing the Underbanked MSMEs

Asian Indonesian women arranging eggs inside small local family-owned business store, or locally called warung. Location is in Tasikmalaya, Indonesia. Photo Credits: 123rf

Another key pain point for MSMEs is access to credit. There is an estimated financing gap of US$50-70BN to MSMEs in Indonesia, resulting in over US$130BN in lost value creation in this sector alone. There are two major roadblocks for MSMEs to get financing. 

Firstly, MSMEs are generally not considered creditworthy by the banks since they typically do not have assets that can be used for collateral. Secondly, bank branches are very limited in tier-2 and tier-3 cities, making it harder for MSMEs to apply for financing. 

Indonesia had seen numerous fintech players trying to address this issue. However, even with fintech lenders, there is scarce information on which to understand the financial health of their potential borrowers. As a result of this, data from the Financial Services Authority (OJK) in 2020 shows, fintech lending companies only disbursed a total of US$5.0B in 2020, still far from addressing the financing gap.

Photo Credits: Bukuwarung

Historically many of these MSMEs, especially those at micro or “warung” scale, were run simply on a “product in and out” basis with no inventory or transaction tracking. Bukuwarung saw an opportunity to start providing a fundamental ledger app that made it easy for owners to enter sales information and thus provide data around the scale and frequency of transactions at these businesses. 

The business has since expanded on its core application to include payments and features that help merchants instantly set up an online store, which contribute to creating a comprehensive, holistic view of the financial health of the businesses. With these features, Bukuwarung allows MSMEs to make a financial profile that can be used by the banks and/or fintech companies to assess credit risk and thereby bridging the gap for MSMEs to get financial service access.

Expanding Sales Reach and Improving Operational Efficiencies

a man pays for food via a transfer app. Photo Credits: 123rf

For larger SMEs, technology platforms can provide significant benefits such as operational cost savings, more streamlined work processes, a better understanding of customers, and access to additional sales channels. 

Given the nature and scale of these businesses, the software solutions may need to be more comprehensive to address the pain points fully. Sales and implementations often require on-the-ground teams to execute, resulting in longer lead times and a slower scale-up rate. 

While the market is sizable, many investors often pass on these opportunities citing perceived revenue ceiling from subscription fees. Many SMEs are still reluctant to pay material fees for software, unlike in more mature markets. 

The real opportunity here lies in building revenue-generating adjacencies that can be layered onto a platform that has a strong SME user base. This often leads to a more cost-efficient way to scale revenues through downstream and upstream channels for SMEs. 

For example, ESB works with thousands of F&B establishments across Indonesia, providing a complete end-to-end platform managing orders, payments, and inventory. However, they also provide a valuable feature that enables restaurants to offer dine-in contactless ordering for customers, which boosts operational efficiency and has become an essential part of the post-pandemic procedure. Another feature will connect suppliers directly to the restaurants to reduce stockouts and gain efficiency in waste management. These features represent scalable ways for ESB to increase revenues as their clients grow. 

Another example is Majoo which provides a full suite of digital tools to stand-alone SMEs from hairdressers, laundromats, and general retailers. The full-service platform runs everything from the point of sales to business management and payroll. Ultimately, to digitize SMEs, they will augment their revenues by enabling their merchants to set up online stores and connect seamlessly to online marketplaces. 

With Indonesia’s retail market contributing over US$300BN annually to GDP and MSMEs making up the majority of this, there are substantial value pools to be unlocked through greater digitization of these businesses. We are confident that multiple companies will emerge from this sector, tackling different parts of the value chain and problems faced by MSMEs. These ventures will become valuable businesses themselves and create enormous impact for the broader Indonesian, enabling SMEs to scale up efficiently and rapidly. 

Get the latest news, insights, and updates about us and our portfolio companies from the AC Ventures websiteLinkedInInstagram, or Twitter.

Credit Photo: e27

How tech can empower Indonesia’s 63M MSMEs in the post-pandemic era

Credit Photo: e27

Original post by e27

Written by Adrian Li

The prominence of consumer-focused platforms in Indonesia such as Gojek, Tokopedia, and Traveloka have historically eclipsed the MSMEs opportunity in SEA’s largest economy. However, a closer look at the numbers and challenges faced in this promising sector quickly reveals the vast potential for technology platforms to create massive multi-billion-dollar value and impact.

This is why AC Ventures have a core thesis around technology-enabled solutions addressing the MSMEs category and why we strongly urge both entrepreneurs and investors to evaluate more opportunities here.

In this post, I review the key challenges MSMEs face and several examples of how technology-enabled businesses are solving them.

According to the data from the Ministry of Cooperatives and SMEs of The Republic of Indonesia, UMKM (MSMEs) are the engine of growth for the Indonesian Economy, with over 60 million registered MSMEs contributing approximately 61 per cent of the country’s GDP.

Meanwhile, the Central Bureau of Statistics (BPS) in 2018 released, this enormous category employs over 116 million people, which is equivalent to 97 per cent of Indonesia’s labor force.

There is tremendous value in providing solutions to MSMEs and opportunities to tap into Indonesia’s consumer market through these MSMEs. The contribution and significance of MSMEs to the Indonesian economy are far more significant than that of other large economies like India, where the sector forms just 30 per cent of GDP.

This is one reason why MSME-focused technology ventures in Indonesia may emerge as even more valuable businesses than in other more mature emerging markets. 

MSMEs in Indonesia range from micro-enterprises with assets under IDR50 million (~US$3,500), which make up 98 per cent of these businesses, to medium enterprises with IDR500 million – IDR10 billion in assets.

There is great diversity in these businesses, both in terms of scale and nature of industries. While they mostly face similar challenges, the product solutions must be tailored to the size and specific industry, creating an opportunity to generate multiple ventures. 

MSMEs owners face several challenges in their businesses ranging from inefficient sourcing channels for their products, offline management systems prone to human error, lack of access to credit to support or expand their operations, and small sales exposure due to reliance on small physical retail space.

These core challenges can be addressed through technology platforms, which can drive lower costs through greater efficiency, minimise dependence on human operation, open up access to financial services and generate higher sales volumes. 

Previously, one of the significant hurdles for technology companies to serve MSMEs was the receptiveness towards adopting technology. While Indonesia had seen massive internet penetration growth, owners were still hesitant to implement technology (often driven by doubts in reliability and an unwillingness to change).

However, COVID-19 placed MSMEs in the position where they needed to adapt, and this has been a critical factor in driving forward the technology adoption of these enterprises. At the end of 2020, 30 per cent of the online consumers in Indonesia are new users providing massive growth in the technology sector such as online payment, e-commerce delivery, e-commerce sales, and online lending.

 

Fixing fragmented supply chains

According to Euromonitor data, traditional retailers contribute to 70-80 per cent of Indonesia’s US$300 billion retail markets, which is expected to gain another US$120 billion by 2025. Hence, despite the enormous growth of online commerce, most business is still conducted offline and primarily in traditional channels.

Unfortunately, the supply chain connecting these millions of retailers to FMCG Principals and Distributors is highly fragmented, resulting in a myriad of pain points faced by retailers such as low pricing visibility, limited SKUs, unreliable and inefficient delivery (often retailers must shut their store to restock inventory). 

Meanwhile, principals are looking to increase cost efficiencies in product distribution and, more importantly, to expand into new lucrative new markets. Ula is an example of a company that solves both of these issues, bringing reliable delivery, best prices, broad assortments, and financing options to traditional retailers so they can focus on their customers and on growing their business.

Ula opens up access to thousands of retailers without having to incur high distribution costs (such as CAPEX for warehouses or investing in fleets) for principals.

 

Financing the underbanked MSMEs

Another key pain point for MSMEs is access to credit. There is an estimated financing gap of US$50-70 billion to MSMEs in Indonesia, resulting in over US$130 billion in lost value creation in this sector alone. There are two major roadblocks for MSMEs to get financing.

Firstly, MSMEs are generally not considered creditworthy by the banks since they typically do not have assets that can be used for collateral. Secondly, bank branches are very limited in tier-2 and tier-3 cities, making it harder for MSMEs to even apply for financing.

Indonesia had seen numerous fintech players trying to address this issue. However, even with fintech lenders, there is scarce information on which to understand the financial health of their potential borrowers. As a result of this, data from the Financial Services Authority (OJK) in 2020 shows, fintech lending companies only disbursed a total of US$5.0B in 2020, still far from addressing the financing gap.

Historically many of these MSMEs, especially those at micro or warung scale, were run simply on a “product in and out” basis with no inventory or transaction tracking. BukuWarung saw an opportunity to start providing a fundamental ledger app that made it easy for owners to enter sales information and thus provide data around the scale and frequency of transactions at these businesses.

The business has since expanded on its core application to include payments and features that help merchants instantly set up an online store, which contribute to creating a comprehensive, holistic view of the financial health of the businesses.

With these features, Bukuwarung allows MSMEs to make a financial profile that can be used by the banks and/or fintech companies to assess credit risk and thereby bridging the gap for MSMEs to get financial service access.

 

Expanding sales reach and improving operational efficiencies

For larger SMEs, technology platforms can provide significant benefits such as operational cost savings, more streamlined work processes, a better understanding of customers, and access to additional sales channels. 

Given the nature and scale of these businesses, the software solutions may need to be more comprehensive to address the pain points fully. Sales and implementations often require on-the-ground teams to execute, resulting in longer lead times and a slower scale-up rate.

While the market is sizeable, many investors often pass on these opportunities citing perceived revenue ceiling from subscription fees. Many SMEs are still reluctant to pay material fees for software, unlike in more mature markets. 

The real opportunity here lies in building revenue-generating adjacencies that can be layered onto a platform that has a strong SME user base. This often leads to a more cost-efficient way to scale revenues through downstream and upstream channels for SMEs.

For example, ESB works with thousands of F&B establishments across Indonesia, providing a complete end-to-end platform managing orders, payments, and inventory. However, they also provide a valuable feature that enables restaurants to offer dine-in contactless ordering for customers, which boosts operational efficiency and has become an essential part of the post-pandemic procedure.

Another feature will connect suppliers directly to the restaurants to reduce stock outs and gain efficiency in waste management. These features represent scalable ways for ESB to increase revenues as their clients grow. 

Another example is Majoo which provides a full suite of digital tools to stand-alone SMEs from hairdressers, laundromats, and general retailers. The full-service platform runs everything from the point of sales to business management and payroll.

Ultimately, to digitalise SMEs, they will augment their revenues by enabling their merchants to set up online stores and connect seamlessly to online marketplaces. 

With Indonesia’s retail market contributing over US$300 billion annually to GDP and MSMEs making up the majority of this, there are substantial value pools to be unlocked through greater digitalisation of these businesses. We are confident that multiple companies will emerge from this sector, tackling different parts of the value chain and problems faced by MSMEs.

These ventures will become valuable businesses themselves and create enormous impact for the broader Indonesian, enabling SMEs to scale up efficiently and rapidly. 

PPS 2021 1- low res

AC Ventures Founding Partner Pandu Sjahrir Officially Becomes Chairman of AFTECH

Pandu Sjahrir as a Chairman of the Indonesia FinTech Association (AFTECH) for 2021-2025.

Founding Partner of AC Ventures, Pandu Sjahrir, was officially elected as Chairman of the Indonesia FinTech Association (AFTECH) for 2021-2025.

Pandu has a strong track record in the technology and financial industry and diverse experience across multiple industries, including serving as Chairman of SEA Group Indonesia and a member of the IDX Board of Commissioner. At AC Ventures, Pandu has supported leading fintech players such as Stockbit, Alami, and Finantier to grow and increase financial inclusion in Indonesia.

“Today, AFTECH has undergone a regeneration of its management for the next five years. Thank you for the trust given to me to lead and protect all members of the organization. Thanks to the previous general Chairman, Niki Luhur, and the founders. Hopefully, this baton can continue to run, following the original intentions of the founders for the advancement of financial services in Indonesia,” Pandu wrote on his Instagram profile.

Speaking about the future of fintech in Indonesia, Pandu is very optimistic and believes that this sector has excellent potential to reach the expansion seen in China and the U.S. In his capacity as Chairman, Pandu plans to increase AFTEC collaboration to spur innovation in developing market conduct-based digital infrastructure. Additionally, AFTECH will also embrace regulators to create a balanced control in the financial ecosystem in Indonesia.

These key initiatives are expected to increase innovation in financial services and to further strengthen the ecosystem, continuing the work of past AFTECH leadership to build a robust fintech sector and making high-quality financial services more accessible to Indonesians.

4

Leadership Speaker Series: How to effectively communicate and manage teams during COVID-19

Our fifth Leadership Speaker Series event featured a presentation and open Q&A session with Sanjay N. Bharwani & Anita Widjaja, CEO & Co-CEO of Bester & Co and Lily Surya & Henny Purnamawati, Partners of Egon Zehnder Indonesia, along with participation from Roderick Purwana, Managing Partner of SMDV, and Pandu Sjahrir, Founding Partner of ACV & Managing Partner of Indies Capital.

The goal of this session was to share feedback and advice to startups on how to promote agility, manage headcount, and demonstrate effective leadership during the COVID-19 crisis.

Here are our key takeaways from the session:

The COVID-19 crisis has led to businesses undertaking layoffs and, in extreme cases, permanently shutting down. Many leaders are struggling to mitigate the impact of the pandemic, as demonstrated by the large-scale layoffs and liquidations. in global markets after just a matter of weeks. Although many companies have made attempts to reduce their headcount costs through unpaid leave and other incentives, some companies have resorted to undertaking layoffs for business longevity and sustainability.

This is an opportunity for Founders to prove that your organisation can be agile. Businesses today should make the most of their operations and find new ways to be creative. Startups could consider making changes in organisational structure, negotiating more favourable terms with suppliers, exploring new revenue streams, entertaining M&A opportunities, and more, in order to achieve flexibility and agility.

There are three main phases of crisis management – managing the crisis, surviving the crisis and building for the future. First, businesses must manage the crisis (e.g. protecting employees, implement new SOP) and explore strategies for liquidity management to survive (e.g. cost reductions). Then, focus should be on building for the future through restructuring and exploring new ideas, markets, and strategies. Entrepreneurs should remain resilient and maintain cost discipline, but also monitor market conditions to adjust scenario analysis and continue to place emphasis on the future.

During a crisis, leadership and empathy is essential to strengthen culture and maintaining positive morale. Just as a pilot would focus on navigating turbulence and look for safe landing, entrepreneurs need to focus on how to manage the short-term challenges for steadiness, and then focus on what’s next in growing the business.

Crisis management typically involves changing habits as well as conserving cash to weather the storm. On a weekly basis, businesses should monitor how they are changing both external and internal processes, as well explore new ideas. The focus areas should include resolving short-term problems, making decisions quickly, communicating with team members, providing early support and maintaining team morale.

The framework below will help guide your thinking in crisis management:

Layoffs are never easy. Airbnb’s CEO Brian Chesky demonstrates strong empathy, gratitude and clarity in communicating the bad news, which is a testament to effective leadership. Chesky focused on expressing gratitude, ensuring employees feel valued whilst emphasizing that their departure is not their fault. Refer to the principals below for further support on managing layoffs:

Stay focused on the future by transforming processes. Remember that this crisis is a process that you need to overcome, but also presents an opportunity to engage better with employees, build stronger bonds and improve morale. Touchbase with your team more often and encourage team members to interact in new ways to share ideas and concerns. Find new ways to connect with existing stakeholders, such as customers and vendors.

The only way to survive is to become agile. Crisis is out of our control, but how we transform and change in light of it, is the ultimate challenge. Netflix imbeds flexibility and agility in their culture, which helped them tweak its offering to what it is today, surviving crisis in the past over the last 18 years, and becoming a household name. Crisis can provide impetus and inspiration for defining new business models or a new way of delivering value to your customers.

Here are some questions from our audience to our speakers and Q&A participants:

1. Some businesses are navigating the crisis relatively better than others. Do you have any inputs to young tech start-ups on how they could manage the crisis as they continue to operate their businesses?

For early stage companies, the immediate concern is around business sustainability. Could you continue the business in its current state? If not, it’s time to focus on cash reservation by making changes in costs, to reflect a stronger runway. The goal is to first steady yourself (like a pilot would make attempts to steady the plane during turbulence) quickly and decisively and then move on to the next steps of changing internal and external processes to cut down on any other inefficiencies.

When you focus on building an agile mindset as a leader, you’ll get even better at making quick decisions and anticipating changes that are required to mitigate the impact of a crisis.

2. For companies do not have sufficient cash to pay for mandatory exit packages to employees, what is the solution?

In Indonesia, exit packages are expensive, as a result of current regulations. For some companies, paying 5x of current salary will hurt the company’s bottom line drastically. Companies could potentially explore giving unpaid leave, reducing salaries and incentivizing through ESOP, compensate in other creative ways such as health benefits or insurance, or even voluntary leave.

The key strategy is performance negotiation & influencing, to perform creative and empathetic communication to employees and intensively build an urgency to support the company during survival mode.

3. What’s the view on the “new normal”? Are you expecting that companies will continue to work from offices, or have their employees all work from home indefinitely (as implemented by Twitter)?

The work from home (WFH) initiative has made businesses all over the world realise that employees do not need to always be physically present in their workplaces in order to effectively do their job. We are forecasting more of a hybrid scenario, where employees could both WFH and work in offices with their teams.

What could potentially happen in the mid-term is a rotation of employees, allowing people to work from home for a number of days a week, and communicate and work remotely for the rest of the week. This would help companies cut real estate costs through exploring flexible rental fees or partnering with co-working spaces.

In light of this, there is no doubt that Indonesia has been pushed to embrace digital. For example, the banking sector has seen roughly a 30% decline in customers going to bank branches. Through this, banks now have the opportunity to digitize, automate and simplify banking services, as well as reduce real-estate and staff costs to maintain branches.

Although businesses today have to prepare to go digital, the human factor is still essential for tasks that involve brainstorming and team-work. While we anticipate more flexibility in the workplaces and appreciation for remote working, we expect that the human interaction will still be required to build effective businesses.

Here are some additional questions from our audience that we unfortunately didn’t have time to respond to during the session however we’d like to share our responses with you now:

1. You presented the case of AirBnB and Netflix for their handling of crisis and agility. Do you have local (Indonesia or SEA) cases?

Yes, currently we are helping Manufacturing, Pharma and Financial Services companies that are trying to survive due to massive revenue reduction, long delayed customer payments and high customer churn. Thus, they have to manage their operational cost through creative solutions. Their board is now monitoring the company & people performance intensively during this time, on a weekly basis.

2. How would you suggest handling resistant employees?

The key here is to negotiate intensively, linking company performance to individual performance to ensure that enables the company to perform reward reductions. The employee will have to accept difficult conditions, as it will then also be a function of their performance. This is under the assumption that the company has a People Policy that includes performance-based rewards.

3. To what extent do you recommend sharing the extent and nature of the negative impact of COVID-19 on the business to employees? Is it better to be provide early warnings, or formalise communications from leadership until an event occurs, such as a salary reduction or layoff?

We definitely would recommend that it would be better to communicate the impact of COVID-19 on your business earlier, in order to set the expectations for the next couple of months for your organisation and employees. You could use published news to support your message. Communicating the company’s position early and effectively will put everyone on the same page and in alignment.

4. Remote working removes the ability to have signature on documents in real-time (which would typically allow for quick decisions and execution). Can you suggest solutions to this?

Based on our experience with clients, e-documents are still utilised, as long as there has been intensive communication through e-meetings or phone calls, prior to the document procedure. The key success factor here is to carry out consistent negotiation through intensive communication to influence well-scripted negotiation. Our clients faced these issues too, but what helped them become successful in delivering messages is consistent communication.

5. How do you recommended managing impact on decreasing employee morale due to a layoff event?

Layoffs will almost always negatively impact team morale. However, management accountability and attitude are essential to manage situations like this. Having clear and transparent communications is key to helping improve that well, as well as consistent engagement to continuously support employees if any concerns arise. Remind your employees that it’s what the organisation had to do in order to survive and is no fault of their own.

5

Leadership Speaker Series: Public and Private Sector Partnership in Managing COVID-19 Crisis in Indonesia

Our third Leadership Speaker Series featured a presentation and open Q&A session with Septian Seto, Deputy ad Interim of Investment and Mining Coordination to the Indonesia Coordinating Minister for Maritime Affairs and Investments and Jonathan Sudharta, CEO & Co-Founder of Halodoc, along with participation from Roderick Purwana, Managing Partner of SMDV, and ACV Partners Pandu Sjahrir, Michael Soerijadji, Adrian Li, and Donald Wihardja.

This session’s goal was to share insights on both the public and private sector’s involvement in building on Indonesia’s healthcare system and mitigating the impact of COVID-19.

Here are our key takeaways:

According to WHO, approximately 80% of COVID-19 patients will recover without requiring special treatment from hospital. This creates an opportunity for HaloDoc to help in managing the symptoms of these patients from home, preserving the capacity hospitals in Indonesia for those most at risk. Indonesia currently has 12 hospital beds for every 10,000 citizens, compared to China with 42 beds, or Italy with 34. HaloDoc facilitates the treatment of COVID-19 symptoms through their telemedicine consultation, e-prescription service and at-home medicine delivery. HaloDoc has also added more doctors into their ecosystem to reach more patients, and to strengthen the medical discussion communities around the region with the sharing of the latest developments on COVID-19.

HaloDoc’s adds additional support measures for managing COVID-19. In addition to telemedicine, e-prescriptions and medicine delivery, HaloDoc has also developed a self-assessment analysis tool via chatbot, as well as built Indonesia’s first drive-through rapid testing service for COVID-19. In the last month, HaloDoc has had 300K users on their platform (with a week-on-week growth of 300%), and now currently works with 500 hospitals in their joint mission to help Indonesia fight COVID-19.

In Indonesia, COVID-19 is classified into three segments – People under Monitoring, People under Surveillance and Positive Cases, as demonstrated below:

The Indonesian government continues to be proactive in further building on the country’s healthcare capabilities. The government is adding 17 labs for COVID-19 testing, as well as purchasing the machines required to increase test capacity to 17K samples a day. These laboratory facilities are essential, seeing that these testing machines been used by countries like China and Japan in the past, who have more relevant experiences in mitigating pandemics.

Indonesia is now experiencing a recovery rate that surpasses the fatality rate. Due to increase awareness, testing, and treatment, as of April 21 the recovery rate was at 12%, with the fatality rate at ~8.5%.

There are numerous activates that the government is doubling down on to continue to address the health impact of COVID-19. The key activities of focus begin with mass testing, which is currently targeted only to individuals presenting with strong COVID-19 symptoms. Once the testing capacity increases, individuals that are being monitored for mild COVID-19 symptoms will also be tested. After testing, the government will then focus on tracing positive test cases to understand who they have made contact with, and then test those individuals and provide treatment if needed. Positive cases with mild or moderate symptoms will be monitored and recommended to self-isolate at home. The next priority for the government is to improve healthcare facilities by acquiring more ventilators, protective equipment and increasing ICU capacity.

Indonesia has chosen to implement a large-scale social restriction over a lockdown. These restrictions include mandatory work from home (WFH), except for sectors such as healthcare, food production and logistics. School facilities will remain closed, with classes moved to online learning platforms. The government has limited public transportation operations and has placed a mandatory 14-day self-isolation period for those that travel from red zone areas. According to the Oxford Policy Stringency Index, Indonesia’s current restrictions in place are on par with Singapore and South Korea, as demonstrated below:

Indonesian’s are aware of COVID-19, with data to suggest that public awareness for the pandemic is high. On a national level, 97% of Indonesians believe that COVID-19 is infectious, and 92% believe that COVID-19 is deadly.

Although Indonesia’s main priority is to contain COVID-19, it cannot adopt the same government policies adopted by developed markets. To mitigate the impact of the pandemic successfully though social distancing and self-isolation, social assistance has to be adequate, for those who are losing daily income. Indonesia’s stimulus package is aimed at strengthening the economy, but more importantly, maintaining financial stability, with IDR 110T going towards the social safety net.

PERPPU no.1 is the foundation of regulation to help Indonesia take coordinated action towards mitigating COVID-19. This includes the issuance of government bonds, tax incentives for corporates, a national recovery program, and on the banking side, supporting banks, OJK and the financial system to help maintain stability.

Here are some questions from our audience to our speakers and Q&A participants:

1. What measure can be taken to resume work, especially for business sectors that suffer the most from closing, if the virus hasn’t been eradicated?

Based on the data that is available, there is no yet a clear indication as to when work and social activities can resume, as it is difficult to assess when the peak will take place. Based on several models, there are assumptions that the most optimistic case is that the peak will occur in the middle of May, whereas the pessimistic case is that the peak will take place in July. We need at least 60 days after the peak to witness the curve flattening. Regardless, social distancing is essential in ensuring that less individuals get infected.

2. What would you like to see to see in order to feel comfortable with removing large-scale social restrictions (PSBB)?

For the government to feel comfortable in lifting social restrictions or PSBB, we would have to see indications of the fatality rates decreasing, as well as recovery rates increasing. Additionally, we need to see a flatter curve, or indications that the number of new cases is decreasing every day. Once the government has comfort, through strong signals that COVID-19’s condition is improving, then perhaps PSBB can get lifted. Furthermore, we may have to wait for a vaccine, which is currently under clinical trials, to completely eradicate the virus.

3. Are there any challenges in providing social financial protection to people?

The challenge is reaching out to individuals that are difficult to find, especially since they tend to need it the most. Currently, the government is targeting the group in the lowest 40% of the population in terms of income, to provide social assistance. These households might not have clear names and addresses, but the government is currently crunching numbers to build a database, to effectively provide them with support.

4. Since we are low on hospital beds, what is the ideal number for hospital beds for Indonesia?

The ideal number is relative, the question is more around how we can optimize healthcare facilities so that we can approach the pandemic effectively. The issue at hand is that viral infections like this cannot be avoided, so the key here is to ensure that the public has confidence in the healthcare system. Governments must also stay open to public and private partnerships, to help mitigate this pandemic, and the next.

5. What’s key learning from this pandemic?Is it different from other countries?

One of the key learnings is that, the demographic of a country will help indicate the level of infection spread. For example, having a younger population will reduce the number of people that die from COVID-19, as 70% of individuals who are COVID-19 positive and die are those over 51. Another key insight is that countries with a mandatory BCG vaccine are experiencing lower fatality rates that countries that do not. Another key learning is that to truly eradicate COVID-19, participation from all citizens of the country is required.

6. How is the government collaborating with the mainstream media to keep reinforcing the importance of social distancing?

At the moment, the government is working on campaigns and have partnered with the media for programs to help prepare people on the dangers of COVID-19, and the health and safety protocols that should follow, particularly for the low to middle income areas for continuous education and support.

7

Leadership Speaker Series: How to manage the economic impact of COVID-19 in Indonesia

On April 13th, our Leadership Speaker Series featured a presentation and open Q&A session with M. Chatib Basri, Indonesia Minister of Finance 2013-2014 and Donald Wihardja, Partner at ACV, along with participation from Roderick Purwana, Managing Partner of SMDV, and ACV Partners Pandu Sjahrir, Michael Soerijadji, and Adrian Li.

This session focused on the latest insights and expectations on the economic impact of COVID-19, particularly in the banking and multi-finance sector in Indonesia.

Here are our key takeaways:

We have seen the number of COVID-19 cases escalate rapidly in Indonesia. Indonesia has ~4.5K total cases, with 48% of cases concentrated in DKI Jakarta, as of April 13th. The Centre of Mathematical Modelling of Infectious Disease predicts that there are 70K undetected cases on March 24th. On March 20th, Oxford Clinical Research Unit forecasts that Indonesia may reach 71K cases by end of April. According to Badan Intelijen Negara, Indonesia will reach its peak of COVID-19 cases on May 2020.

The Indonesian government has implemented changes to mitigate COVID-19, however, these initiatives will likely have a severe impact on businesses. The rapid increase in cases has resulted in several changes such as travel restrictions, extreme social distancing, rapid testing, and postponement of credit repayment; and these changes have in tern led to severe outcomes for business. Retail sales have already decreased significantly, and will continue to decrease, potentially by as much as 30-60% in 2020 from the previous year. Lebaran, which typically results in an increase in monthly revenue for many businesses by 1.5-2.0x, will likely not provide any significant increase to baseline monthly revenue. Due to this fall in consumer demand and revenue, we will likely witness further layoffs for staff, as companies fail to cover their expenses. On the banking side, financial institutions are estimated a 30-50% decrease in lending collection.

Despite the challenges, some sectors are experiencing growth, due to COVID-19. Although we have seen reductions in top-line for sectors such as travel, ride- sharing, and retail F&B, there are some sectors that have grown because of COVID- 19. Given businesses and schools have been forced to work and study from home, EduTech platforms have increased their revenue by ~70%. Video-streaming and gaming have also increased their engagement by ~60%, as a result of people staying at home and maintaining social distance. Medicine and food delivery have also experienced rapid growth, increasing by roughly 60%.

Many tech enabled companies have helped other businesses maintain “business as usual”. eCommerce platforms and marketplaces have allowed SMEs to continue to have a market and audience to sell to, facilitated by eLogistics and digital payment platform that reduce the need to leave home to purchase goods, or pay with cash. By the end of 2019, eLogistics were facilitating ~5M in parcel deliveries a day. In 2019, eMoney transactions reached US$10.4B, and in February 2020 alone, eMoney transaction were already at US$2.2B. FinTech lenders also help support businesses, by providing lending capital for financial support. As of February 2020, FinTech lenders had US$1B in loans outstanding. Despite providing the right kind of support for the current times, these tech companies are not yet profitable, and therefore would significantly benefit from continued government support.

From a FinTech perspective, the impact of COVID-19 varies depending on sector. On the lending side, OJK has anticipated that non-performing loans (NPL) will increase to 17% for banks. Banks have already experienced a 30-50% reduction in lending collections, however due to the current market conditions, more SMEs and consumers will likely require new or extended credit lines and capital bridging to improve their working capital position. Institutional and P2P lenders will be able to provide this form of finance, however they are encouraged to take caution and monitor their NPLs and loan collections. The payments segment of FinTech has so far seen a significant increase in activity due to the growth in eCommerce transactions, and this will likely further facilitate education and future adoption of eWallet payments. Payments for bills via online platforms have also increased by ~30%, as individuals can no longer use offline payment agents and mitras to pay facilitate bill payments. On the investing facet of FinTech, we estimate significant growth, due to new users looking for new avenues for financial returns, leveraging on market volatility. For insurance, this timing provides a good opportunity to sell health insurance, and bundle other insurance, whilst staying wary of the risks.

Tech companies are doing their part in supporting Indonesia during this challenging time. From helping distribute essential items to consumers, to delivering test kids, to providing lending capital to SMEs and consumers, we are proud to see Indonesia’s ecosystem of tech-enabled platforms playing an active role in mitigating the health, social and economic impact of COVID-19.

Although the government is playing a proactive role in containing the pandemic, Indonesia is not fully ready. Like many other countries, Indonesia ‘s infrastructure is under-developed if to fight a pandemic of this significance. Java has the highest number of hospitals and doctors, nonetheless, Java only has 1 hospital and 1 doctor per 1,000 individuals. This is why the government has to invest heavily to fund COVID-19 mitigation, which will go towards hospital and medical resources.

Unlike the global financial crisis, the impact of this Black Swan event has hit both demand and supply side. On the demand side, we’ve seen declines in travel, exports, retail sales, and overall purchasing power. However, we also experience a negative impact on the supply side, through local production cutbacks (as social distancing leads to factory closures) and disruptions in global supply chains (as China played a significant role in global production). During the 2008 crisis, Indonesia still maintained ~4.6% economic growth, as local production helped fuel production and consumption. The impact of both facets of the spectrum is what makes this crisis to unique, and far more challenging.

The likely impact on banking and market risk is that there is a high risk of default. The risk of default is high, as many companies will be unable to pay their debts due to worsening market conditions. As a result of this, NPLs will increase, which could then lead to banks and multifinance institutions putting a temporary halt on providing lending capital. If they instead choose not to maintain credit lines, businesses in Indonesia will collapse, leading to lay-offs and bankruptcy. The solution to this is that the banking sector should continue to take risks and provide credit lines, with the support of the government. Today, the banking sector is still healthy and liquid. The bigger issue at hand at the moment is the likelihood of a credit crunch. To facilitate this, Indonesia has launched an Emergency State Law (PERPPU), with articles on ideas of how they can support businesses.

There is no doubt that COVID-19 is responsible for this economic crisis, which is why mitigating COVID-19 should be the top priority. COVID-19 was the culprit of the global recession. A recent example is that the uncertainty resulted in foreigners selling Indonesian bonds and stocks, which lead to the depreciation of the Rupiah. MoF predicts a -0.4% – 0.25% GDP growth in Indonesia for 2020. Until the pandemic gets contained, the economic and financial sector will continue to be under pressure. Monetary and fiscal policies will help provide a foundation for the economy, but the pandemic must get contained first.

The government should focus its agenda towards containing the virus, as well as providing social protection. Notwithstanding that a vaccine needs to be made readily available in order to put COVID-19 behind us, for the time-being, the government should focus on flattening the curve of new COVID-19 cases in Indonesia. In order to do this successfully, social distancing is required, to keep people at home and stop the virus from spreading. In Indonesia, if people are to put work on hold and close their businesses, they need to be provided with a form of social protection. Whilst Indonesia’s social protection program is designed to protect the lowest income groups, it is not yet designed for low to middle income groups (e.g. UMKM, GoJek drivers, minimum wage workers).

The next focus area should be towards supporting local businesses. Today, companies are under financial pressure due to the decrease in consumer demand and supply chain disruptions. The government should work closely with financial institutions to facilitate the provision of lending capital and credit lines to businesses that are at risk of default. Another opportunity that arises in the light of COVID-19, is the potential for Indonesia to become a larger participant of global production. Focus for global production and import will likely shift towards Southeast Asia, as an alternative to importing from China.

Indonesia should stay open to receiving international support. Currently, the cap on budget deficit is set at 3%, with discussions of now increasing that figure to 5%, as of March 23. This would be ideal, as Indonesia will need resources from abroad to support COVID-19 mitigation plans. The goal should be to work with other countries to initiate support and to further facilitate foreign direct investment into Indonesia.

Here are some questions from our audience to our speakers and Q&A participants:

1. This crisis is not just a financial crisis like the global financial crisis in 2008. All the policies to boost liquidity by major central banks around the world is merely a relief effort to support the social safety net. What is the best way to re-start the economy with confidence, balancing between health vs economic vs the risk of a second COVID-19 attack?

As of now, that would depend on when the vaccine is made available in Indonesia, as this would be the final solution to the pandemic. While we wait for that, the government needs to focus on flattening the curve and getting the outbreak under control, which requires facilitation of social distancing. This will have a wide economic impact on people that rely on work and business to support their everyday lives, hence, the government should put in place strong social protection policies to facilitate social distancing, allowing people to stay at home. The order of focus should be: containing the virus and protecting health through social distancing, then providing social protection to facilitate it, and then continuing to support businesses going forward.

2. What is your view towards Indonesian stimulus package with regards to COVID-19? Is 2.5% of nation’s GDP sufficient? For instance, countries like Singapore and Australia have set aside 10% and 11% of GDP respectively for fiscal stimulus.

Yes – our stimulus package appears to be low in comparison to other markets such as Singapore and Australia. However, the issue is not about the magnitude or figure, but more around how we choose to allocate that funding amount. Once again, the government’s focus should be towards health, social protection, and supporting businesses at risk. Once these issues are covered, stimulus package funding can subsequently be increased to 5%, potentially 6%, depending on what the government can afford after considering inflation and other factors.

3. In your opinion, which country has mitigated the health and economic impact of COVID-19 successfully so far? What can we learn from them?

China and South Korea has managed to flatten the curve and reduce the number of new COVID-19 cases successfully. In terms of economic impact, most countries are still faced with economic challenges and are still in the process of implementing solutions.

4. Do you have any idea of what action OJK is taking to save the banking system?

At this stage, the banking sector appears to be liquid; perhaps small banks and lending institutions will struggle more. Indonesia’s emergency state law (PERPPU) has an article that mentions potentially supporting banks through consolidation.

Nonetheless, the most significant impact is on the non-financial sector, as they will struggle the most due to working capital challenges from demand and supply shocks. If banks become risk adverse due to volatility of market conditions and stop providing lending capital to businesses, then the economy will experience a credit crunch that will affect the non-financial sector the most.

5. Do you think that the tax relaxation can be provided to all or most industries? The latest regulation only covers certain sectors. Do these industries have to pay tax for last year’s profit, even though these industries currently have working capital challenges?

At this moment, it is still unclear, however we could expect tax relaxation extending to more sectors, and this will most likely still be for last year’s profit.

6. We know that government has issued the first batch of pandemic bonds and successfully raised an amount of funding. What’s your view on this as in whether a) the country is at liquidity risk, or b) this bond is issued as a liquidity reserve to stimulate national economy? What will be the impact to investors?

At the moment, there is a risk premium. Going forward, the risk premium will only be higher, especially in the next couple of months. Thus, issuing bonds at this point in time is an optimal solution. At the moment, our debt to GDP ratio is low, which means that the government is not at high risk or highly levered (even with a deficit of 5%). As long as growth is higher than our interest rates, then the debt to GDP will stay low.

7. For the non-financial sector, especially for SMEs (UMKM) that are receiving their loans from P2P fintech companies as opposed to conventional banks, what kind of regulation do you think the government should impose to continue lending activities? As many companies have started to experiences decreases in revenue and are now engaging in layoffs and shutdowns, what can the government do to ensure that they survive and pay back their loans?

The current expectation is that the bigger banks will not have a liquidity issue, but the smaller lenders such as multifinance and P2P lenders could experience liquidity challenges. As borrowers might not be able to pay their instalments, the government’s role should be to further support lenders, by working with lenders to help provide guarantees for their NPLs through subsidies that will enable risk- sharing. Ideally, the Central Bank could help support smaller financial institutions to help lower the cost of capital, in order to facilitate the provision of credit lines. As the lending capital is still provided by the P2P FinTech (or their lenders), the risk of moral hazard should be limited.

Here are some additional questions from our audience that we unfortunately didn’t have time to respond to during the session however we’d like to share our responses with you now:

1. Currently, the President has declared “Corona is Bencana Nasional”. If this means Force Majeur, we can expect to see impact to all industries in Indonesia. With the latest Government Bond, do you think that our government could overcome this pandemic?

Financially, we are in a good position to overcome this. Nonetheless, the priority falls on containing the virus first, before any fiscal/monetary policy can be effective.