The Four Faces of Indonesia
Indonesia: A land of promise, if you know where to look
I wrote this article to help people understand the uneven distribution of economic power in Indonesia. Understanding this distribution is critical, because it allows you to assess the purchasing power of your target consumer. Indonesia is an alluring market, but it can be unforgiving, particularly to foreign entrants. If you want to have a chance at winning in Indonesia you need to understand what your target market can and cannot afford, and why, this is my attempt to help you do that.
Note: All facts and figures here have been cited with references at the end of the article. All the analysis in this article, unless referenced otherwise, is proprietary. All opinions in this article are my own and do not reflect the views of other companies I am affiliated with. All errors and omissions are also my own.
Introduction
Indonesia is a land of incredible promise. One of the only functioning democracies in Southeast Asia, the archipelagic nation has grown consistently since 2000 and was one of only three G20 nations with positive GDP growth during the 2008 financial crisis[i]. Indonesia has the 4th largest population in the world (268 million) [ii], a growing middle class, a large, young workforce whose median age is 29[iii], and a rapidly growing digital economy worth approximately $40bn USD in 2019[iv].
Figure 1: Indonesia Annual GDP Growth (2000–2015).
These exciting statistics have brought a horde of established firms, startups, and investors into the Indonesian market. Yet, when you speak to them, many new entrants privately express a deep frustration with their prospects in Indonesia. Where is the disconnect?
In their rush to enter the market, many make the critical error of treating Indonesia as a homogeneous market. A quick glance over Indonesia’s modern history makes it clear why this is a mistake. We forget that as recently as 80 years ago Indonesia did not even exist as a nation-state. Then, as it is now, the country is a patchwork of diverse groups with vast internal variation across economic, social, and cultural dimensions.
To succeed in Indonesia, you need to look past the headline numbers to understand the economic reality as it is for most Indonesians on the ground.
One of the most common mistakes I have seen made is to assume that Indonesia’s GDP per capita of $3,893 USD (in 2018) is a valid representation of the spending power of most Indonesians. This is a gross error because it does not consider the wealth distribution caused by Indonesia’s stark income inequality.
The top 1.0% of Indonesians own 49.0% of the total wealth of the nation, while the poorest 40.0% own a meager 1.4%.
In terms of wealth distribution, Indonesia is the 6th most unequal country in the world. The top 1.0% of Indonesians own 49.0% of the total wealth of the nation, while the poorest 40.0% own a meager 1.4% [v].
With these economic inequalities in mind we can develop a far more accurate view of per capita GDP:
Figure 2: Distribution of GDP per Capita by Class.
$1,045 is the real GDP per capita for 80% of the population.
If the goal is to understand the real spending power of most Indonesians, the $3,893 figure we referenced earlier is far off the mark. A more appropriate figure is $1,045, which is the weighted average GDP per capita for 80% of the population.
Breaking the nation up according to concentrations of wealth, we identify four distinct economic groups. These groups diverge radically from each other in terms of their purchasing power, economic growth potential, urban/rural split, and their spending patterns. Understanding the nuances of each group and identifying which ones are relevant are the most important tasks any new player in Indonesia must undertake.
The Economics of the Four Major Groups:
A glance at Indonesia’s income stratification in figure 2 makes it clear that the country does not have a homogeneous economic identity. Instead, it is useful to think of Indonesia as an amalgamation of four different economies all operating at different stages, within one country.
The Top 1.0% — The Elites: An Economy 40.0% larger than Singapore.
The largest group by far in terms of spending power and wealth are the elites. Constituting a mere 1.0% of the population, Indonesian elites control close to half of the nation’s wealth. If we use their share of wealth to calculate the GDP of the elite economy we arrive at a figure in excess of $511 billion (slightly larger than Thailand which is at $505 billion[vi]), the citizens of which have a per capita GDP more than double that of Singapore, one of the richest countries in the world ($134.8K vs. $64.5K).
Indonesian elites have a GDP per Capita more than double that of the average Singaporean
The elite market is the largest and fastest growing market in Indonesia. Responsible for over 25% of all domestic consumption since 2010[vii] it should come as no surprise that the growth in the spending power of the elites has eclipsed every other segment in Indonesia. Prior to 2010, in real terms, the per capita consumption of elites grew at an average of 6% for a decade, while the per capita consumption of the bottom 40.0% grew at a meager 2.0% over the same period[viii].
While 3.8 million people is a small proportion of Indonesia’s total population, the massive economic size of this segment makes Indonesia a compelling market for businesses catering to an upmarket population (this helps explain why there are so many Louis Vuitton stores in Jakarta). Looking forward, the prospects for consumption growth in this segment remain strong due to their share of private consumption relative to others.
Figure 3: Indonesian Gini Coefficient Trend.
The Indonesian Middle Class: Growing in size but handicapped in purchasing power.
Following the elites are the middle class. This group represents 20.0% of the population and controls approximately 30.0% of the nation’s wealth. The implied per capita GDP of people in this economy is $5,821, which is significantly higher than the national average and closer to Thailand’s national average of $7,274.
Over the last decade a lot has been written about the “massive potential” of the Indonesian middle class, and on the surface, these claims appear substantiated. In terms overall size and spending power, the Indonesian middle class has grown meaningfully over the past 2 decades. In 2002, the middle class made up approximately 6% of the population and was responsible for 21% of all private consumption.
Over a period of 14 years the middle class population grew at an average rate of 10.0% and by 2016 made up 20.0% of the overall population and was responsible for 43.0% of all private consumption (reflecting an average consumption growth of 12.0% in real terms over 14 years)[x].
Figure 4: 2002–2016 Population CAGR% by Group.
While these middle class growth rates are compelling at a macro level, from the perspective of the individual the improvements have been marginal. While 20.0% of the population now qualify as “middle class” the growth in their per capita spending power has been negligible. Between 2002 and 2016, while overall consumption for the group rose at a CAGR of 12.0%, per capita consumption only grew at an average of less than 2.0% per year.
The middle class as a group has grown impressively, but per capita growth for middle class citizens has been dismal
This is bad news for businesses focused on the middle class that rely on purchasing power growth to grow. This also helps explain the extreme competition among businesses targeting this segment. With limited growth in per capita purchasing power the only way a business can access above average growth is by trying to take market share away from incumbents.
Figure 5: Middle Class Per Capita Consumption Growth (2002–2016).
The Aspirational and Poor: Where the masses lie.
At the bottom of the economic pyramid are the aspiring and poor, they are also the largest group in Indonesia representing 80.0% of the population. The largest group in Indonesia is also the poorest group controlling a mere 20.0% of the nation’s wealth. Using the wealth distribution of this group as a proxy for share of GDP, the citizens of this economy have a GDP per capita in the range of $627 to $1,368 (or $1,045 on a weighted average basis, which is 1/3 the national average).
The largest group in Indonesia is also the poorest group controlling a mere 20.0% of the nation’s wealth.
In addition to being the poorest segment of society, this group also has the worst prospects for consumption growth. This is a result of their low share of private consumption, which is unlikely to change in the medium term, and the relatively higher population growth rates of this group (poorer families tend to be larger than richer ones). The pie is not growing as fast as the number of mouths to feed[xi].
The relative poverty of this group and their lack of disposable income explain why most Indonesians are extremely price sensitive and why most of their share of wallet is focused on essential goods and services.
Where do these 4 economies live?
As one might expect, the elites and middle class are heavily concentrated in urban areas while the poorer classes are more evenly distributed between cities and the countryside. This has been the case consistently from 2002 through to 2016. In general, the poorer you are the more likely you are to live in a rural area.
Figure 6: 2002 Urban / Rural Split by Class (mm).
Figure 7: 2016 Urban / Rural Split by Class (mm).
For the middle class, the ratio living in urban/rural areas has been consistent at 75%/25% from 2002 through to 2016. In terms of the overall population makeup of cities however, the middle class is now more prominently represented. In 2016 the middle class represented 31% of the population of cities areas vs 11% in 2002. As a result of this, and the fact that most elites live in cities, urban spending power in Indonesia is almost 4x that of rural areas.
Figure 8: Estimated Purchasing Power of Urban vs. Rural Areas.
Urban spending power is 4x rural spending power
Mirroring the trend in spending power, at least 60% of the nation’s GDP is concentrated in urban areas, however the distribution of this wealth across cities is highly unequal[xii]. The greatest concentration of wealth can be found in cities in Java, specifically in Jakarta, which contributes almost a quarter of the nation’s GDP.
Figure 9: Top 10 Indonesian Cities by GDP Contribution.
In fact, 6 of the top 10 cities ranked by GDP are in Java, and together they are responsible for approximately 37% of Indonesia’s overall GDP. Unsurprisingly, the cities in Java are also where the greatest concentration of elites can be found, especially in Jakarta.
Jakarta alone is responsible for 25% of the nation’s GDP
Relative to the elites, the middle class is better distributed (in cities) across the archipelago with strong presences in places like Pekanbaru (Sumatera), Denpasar (Bali), and Makassar (Sulawesi).
Figure 10: Middle Class and Aspiring Class Populations in Major Indonesian Cities.
Spending Habits by Class:
The Poor and Aspiring Classes: Limited disposable income and incredibly price sensitive.
For a citizen of the poor and aspiring classes almost all of their income is being used to feed and house themselves (60% for food, 20% for housing). The disposable income (after accounting for food and housing) of a citizen of these classes is estimated to be less than 60 cents (USD) per person per day[xiii]. As a result, the many “promising” sectors in Indonesia such as health, education, automotive, insurance, etc. are not being driven by the masses but rather by the elites (and to a smaller extent, the middle class).
The poor have less than 60 cents per day to spend on things outside of food and housing
The Middle Class: Connected and focused on entertainment.
The middle class differentiates itself from the masses by spending more on non-food items than food. As Indonesians join the middle class a disproportionate share of wallet is spent on entertainment. Representing close to 0% of total spend for the poor, by the time an Indonesian reaches the middle class, entertainment is responsible for 4–9% of spending[xiv].
The middle class also enjoys greater internet access. 55% to 80% of middle class households have internet access while less than 30% of poor and aspiring households are online. Interestingly cell phone penetration is far higher than internet penetration across all classes. 50% to 73% of poor and aspiring families own a cellphone, while middle class and elites own 90% and 100%, respectively. Given that all cellphones today can connect to the internet, there is vast potential for internet penetration growth in Indonesia as data costs continue to decline[xv].
Figure 11: Consumption Patterns Across Classes.
Elites: Spend on cars, healthcare, and education.
Car ownership seems to be the great divider between the elites and the rest of society. Over 60% of elite households own a car, while less than 20% of any other segment do. In addition to spending more on cars, elites also spend significantly more on private healthcare; the rapid growth of private hospitals in Indonesia is thus a reflection of elite preferences.
Elites overwhelmingly prefer private healthcare and education options
Elites have a strong preference for private education and are willing to spend for it. The children of elite households compose most of the students attending the growing number of expensive (tuition fees in the top 10th percentile of schools nationwide) international schools in tier 1 Indonesian cities. Elites also reach far higher levels of educational attainment than other classes. Almost every member of the elite class completes high school and 55% of them have at least a bachelor’s degree; they also make up the growing number of Indonesians travelling abroad for a better education[xvi].
Figure 12: Educational Attainment by Class, Ages 25–34, 2016.
Conclusion:
By now I hope it is clear how radically different these four classes are from each other. Companies operating in Indonesia need to think carefully about which classes they are targeting when they enter the market and they need to plan their strategy accordingly.
For instance, an FMCG business focused on the poor should prioritize offline vs. online advertising, since most of their consumers do not have access to the internet. They may focus on single-use products or something else which is cheaper because their customers are extremely price sensitive. They should use simple and direct language because most of their customers have low levels of educational attainment, and they may invest in rural expansion since that is where most of their customers live.
A company with a luxury product focused on the elite market would have a completely different approach, so too would another business that was focused on selling goods or services to the middle class.
By optimizing in this way new companies can give themselves the greatest chance of success in Indonesia and in turn help enrich the entire nation. This is how the Indonesian promise can be fulfilled.
References:
[i] https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
[ii] As of 2018, based on Worldbank data (https://data.worldbank.org/country/indonesia?view=chart)
[iii] https://www.visualcapitalist.com/wp-content/uploads/2019/04/median-age-population-every-country.html
[iv] https://www.blog.google/documents/47/SEA_Internet_Economy_Report_2019.pdf
[v] Oxfam, “Towards a More Equal Indonesia”, 2017, pg 8, link: https://www.oxfam.org/en/research/towards-more-equal-indonesia
[vi] As of 2018, based on Worldbank data (https://data.worldbank.org/country/indonesia?view=chart)
[vii] Oxfam, “Towards a More Equal Indonesia”, 2017, pg 10, link: https://www.oxfam.org/en/research/towards-more-equal-indonesia
[viii] The World Bank, “Indonesia’s Rising Divide”, 2015, pg 7, link: http://pubdocs.worldbank.org/en/16261460705088179/Indonesias-Rising-Divide-English.pdf
[ix] A.A. Yusuf (n.d). Has Prosperity Been For All? Revisiting the Trend of Various Dimensions of Inequality in Indonesia, p.9 (author’s calculations based on National Socio-Economic Survey (SUSENAS) data). Center for Economics and Development Studies (CEDS). http://csnbricsam.org/wp-content/uploads/2013/08/Buku-RisetKetimpangan-Pak-Arief-Ok-1.pdf
[x] The World Bank, “Aspiring Indonesia — Expanding the Middle Class”, 2019, pg 13, link: https://openknowledge.worldbank.org/bitstream/handle/10986/33237/Aspiring-Indonesia-Expanding-the-Middle-Class.pdf?sequence=1&isAllowed=y
[xi] The World Bank, “Indonesia’s Rising Divide”, 2015, pg 13, link: http://pubdocs.worldbank.org/en/16261460705088179/Indonesias-Rising-Divide-English.pdf
[xii] The World Bank, “Time to Act: Realizing Indonesia’s Urban Potential”, 2019, pg 78, link: https://openknowledge.worldbank.org/bitstream/handle/10986/31304/9781464813894.pdf
[xiii] Proprietary calculation based on 2018 Worldbank GDP and population data and the assumption that the Poor and Aspiring classes control approximately 21% of national wealth, and represent 78% of the population
[xiv] The World Bank, “Aspiring Indonesia — Expanding the Middle Class”, 2019, pg 14, link: https://openknowledge.worldbank.org/bitstream/handle/10986/33237/Aspiring-Indonesia-Expanding-the-Middle-Class.pdf?sequence=1&isAllowed=y
[xv] The World Bank, “Aspiring Indonesia — Expanding the Middle Class”, 2019, pg 15, link: https://openknowledge.worldbank.org/bitstream/handle/10986/33237/Aspiring-Indonesia-Expanding-the-Middle-Class.pdf?sequence=1&isAllowed=y
[xvi] https://www.worldbank.org/en/country/indonesia/publication/aspiring-indonesia-expanding-the-middle-class
