Indonesian startups must start preparing strategies to tap into the country’s tier-2 and tier-3 cities as these locations will outpace growth in metropolitan areas, according to a report recently released by venture capital firm Alpha JWC in collaboration with consulting firm Kearney. Titled “Unlocking the next wave of digital growth: Beyond metropolitan Indonesia,” the report says that lower-tier cities’ share of the national gross domestic product will go from 3% to 5%, or from USD 46 billion to USD 77 billion, by 2030.
Two or three potential unicorns in e-commerce and lending will emerge in the next five years on the back of this growth. “[Startups should] gain sufficient local knowledge. Depending on the product or segment you’re targeting, you might need a tweak in the overall strategy in capturing potential customers outside of the metros,” Alpha JWC’s co-founder and general partner Jefrey Joe told KrASIA.
While some products like online lending can use a general approach, other things that change people’s behavior—like social commerce—need more profound research to create a go-to-market strategy. “By understanding the local behavior, startups then can focus on consumer education, so they can bring clear value propositions and adapt to local customs,” Joe said.
The report defines tier-1 or metropolitan cities as densely populated areas with significant economic, cultural, and political influence, such as Greater Jakarta, Surabaya in East Java, and Bandung in West Java. Tier-2 cities, termed the “rising urbanites,” and tier-3 cities, labeled as the “slow adopters,” have a growing number of middle-class consumers and offer promising growth opportunities for digital development.
Indonesia’s population reached more than 271.3 million by the end of last year, with nearly 60% living in Java, according to data by the Ministry of Home Affairs. When it comes to digital adoption, tier-2 and tier-3 cities are three to five years behind metropolitan areas. They are slow to take up digital innovations due to a lack of familiarity, as well as concerns about expensive prices and product quality.
Even so, the report predicts that digital adoption will accelerate in non-metro cities along with economic growth, which will also get the attention of investors. “Expansion and growth potential is always a key factor in determining investment decisions,” said Joe. “We think that as these cities grow in importance, this factor would be even more important for investors.”
Limited potential for food delivery
While health tech and edtech are logging increasing usage in metro areas, they are still nascent in lower-tier cities compared to more mature sectors like e-commerce and fintech, the report says. The barriers are mostly hesitation to change current behavior and the lack of relevant infrastructure. The growth potential for food delivery will also be limited as convenience is less important in lower-tier cities, where people generally don’t mind spending more time cooking or visiting local eateries in person rather than placing orders through an app.
While most startups are based in Jakarta and other metro cities in Java, founders in smaller cities also have opportunities to cultivate their companies without having to relocate, said Chandra Tjan, a co-founder and general partner with Alpha JWC. “They might need to come to the capital sometimes for business or to widen their network, but we don’t see the necessity to move to Jakarta, especially if their operations are based outside.”
There are challenges that need to be addressed by startups based in smaller cities, such as the lack of tech talent in non-metro areas. Partnerships between government agencies and the private sector are important to develop and improve a digitally enabled workforce. Boot camps and specific university courses can foster talent for the local digital ecosystem. “Startups also need to expand their talent pool to these cities and invest in developing them,” said Tjan.
The Indonesian government is behind a major push to digitize tier-2 and tier-3 cities. The plans include the construction and expansion of infrastructure like fiber optic cable and 4G networks, and investing in public infrastructure like industrial parks beyond Java. Public officials also create regulatory framework to support tech startups, and have formulated initiatives to provide entrepreneurs with access to capital and means to educate consumers.
However, there is much to be done, according to Tjan. Internet connectivity is still far from ideal in many corners of the country, especially in rural areas, and local digital ecosystems are often disconnected from the broader regional network.