Urban Java - Majority of Urban Population in Indonesia

This is a continuation of the subject 'consumer segmentation'. Yesterday, I reached to a conclusion that Urban and Rural segmentation is a good starting point and listed down few major urban concentrations. Today I will dive deeper in one of the largest urban concentrations i.e. Java Island.

Urban Java has the highest concentration of wealthiest consumers in Indonesia due to which it is the most important market for almost all the marketers, especially in consumer goods and services.  Of the top 5 largest cities, top 4 are on Java Island.

Total population of Java is around 140 million, which is more than two times of Thailand, or more than Mexico, or equal to that of Russia's population. Of this 140 million people Urban population is over 80 million, which is more than overall population of Turkey.

Even by ethnicity Javanese constitute the largest at 45%+ of the total population.

It would be good to have data specific to population in Java but due to its unavailability I will use overall Indonesia's data as a proxy. GDP per capita of the country is expected to be around USD 5000 in 2014, which will form the basis of my calculation. It might seem that the GDP per capita of Urban Java would be higher than the national average due to concentration of higher earning urban population. However, the highest GDP per capita is of resource rich East Kalimantan, which is around 3.5x the national average. Apart from Jakarta, which is around 2.5x the national average, no other city from Java appears in the list of top 10 provinces based on GDP per capita. Thus, overall numbers for Java should be considered at some discount over the national average, while analyzing Java separately.

Expenditure: Around 30% of the total Urban population spends over $30+ per month and around 70% less than $30 per month for consumption. I am not writing the full breakdown of segmentation, which is available on the below mentioned source - Statistics Indonesia, but I have only considered the break-off point of dollar a day. Thus, in Urban Java around 24 million people spend over dollar a day on consumption.

Next topic would be to analyze the expenditure basket.


Note: Java is divided into four provinces - East Java, Central Java, West Java, and Banten. And two special regions -Jakarta and Yogyakarta.

Sources:
Statistics Indonesia
World Bank

Consumer Segmentation

I returned today from my travel, due to which the gap in writing the post.

Today's topic is related with consumer segmentation. Indonesia is a large country and for a marketer it is essential to categorize the consumers to be able to target effectively. In some countries ethnicity is an important determinant, while in other religious preferences play a dominant role. Given the geographical spread of the country it is possible to categorize the consumers based on the different islands or provinces.

However, in spite of the geographical spread, various ethnicity and religious preferences the consumer preferences correspond more closely to the income group than any other factors. This means that the purchasing decisions of a consumer is more due to the income than lifestyle or local culture.

Thus, the urban and rural classification is a good starting point for segmentation. Urbanization is on the rise in this country, steadily increasing from 31% in 1990 to 51% in 2012 (Comparative numbers - In 2012 China's and India's urban population stood at 51% and 32% respectively). And the rate of urbanization is around 2.45% (Source: https://www.cia.gov/library/publications/the-world-factbook/fields/2212.html). As per the UN the urban population of Indonesia is expected to increase to 68% by 2030.

Top 5 of the largest cities are - Jakarta, Surabaya, Bandung, Bekasi, and Medan - which accounts for around 17-18% of the total urban population.

Consumers Characteristics

While scanning for business opportunities one of the important requirements is to try and understand the consumers. It is not recommended to characterize and box the consumers of any country as it needs a granular understanding. However, there are some broad characteristics which would apply to most of the consumers in Indonesia. They are as follows:

1) FOCUS ON FAMILY: As many people I have interacted with and inquired about their purchase decisions, what strikes as a common thread is that most of the people have their family on top of their mind while making purchase decisions i.e. most of them would first make the purchase for family members than for themselves.

2) SHOPPING AVENUE: I have interacted with mostly all age group people and of different classes. Though it is bit different in case of the young generation but most of the Indonesians prefer to shop at small shops called Warungs (in picture below) and Minimarts. Though, many young people prefer the new shopping malls' stores, but it seems like majority still favors small shops that are conveniently located and apparently their prices are lower than the supermarkets in the malls.

3) MEDIA AND WORD OF MOUTH: This again is changing in case of the young generation but most of the Indonesians still prefer the traditional media, advertisements, and recommendation by friends or salespeople. Though, younger generation is looking for recommendation over the Internet.

4) BARGAIN HUNTING: This characteristic

is quite similar to the Indian consumers, as they also enjoy hunting for bargains and is independent of the person's wealth. When I talked to people they seem to enjoy when they are able to make a purchase by striking a bargain and would not mind going to wet (and messy) market for that purpose.

5) INTERCONNECTED: In one way this is a derivate of their family focus. But why I prefer to mention it separately is the fact that they have used the digital platform to strengthen the connection. There are around 64 million facebook users roughly the same number of Internet users. So it is important for any marketer to target the digital media.

Based on the above if one were to think of a new product or service then something that improves the lives of family members (say focused on elderly or children) could be a good idea.

Demographic Dividends

Not only Indonesia’s population is large and economy is growing rapidly, the demographic trends are also in the country’s favor. There are 240 million people out of which around 75 million are middle or above class, whose monthly household spend is IDR 2 million or above (i.e. around USD 180 p.m.+ or USD 2200 + per annum). And this class is expected to increase by 8 to 9 million every year (McKinsey report).

More than 60% of its residents are in their principal working years i.e. between 20-65 years. And another 27% is below 15 years i.e. low dependency ratio and large incoming workforce.

Granular look - half of 75 million reside in the five most-populous provinces in Java. 12 cities with more than 1 million of middle and above class, but this is expected to disperse and by 2020, the number of cities with 1million + middle class is expected to be 22, as per McKinsey. Key emerging cities are - Palembang, Makassar, Batam, Semarang, Pekanbaru, and Padang)

Taxation

Today I will cover some key taxation requirements.

Income Tax: All residents are required to pay income tax, which is progressive with top tax rate @ 30% applicable on the income over IDR 500 million per annum (appx USD 45k).

Corporate Tax: The rate of corporate tax on profits is 25%. The regime encourages share listing, as the corporate tax rate is lower at 20% for entities with 40% or more shares listed. SMEs with a turnover of less than IDR 50 billion (appx USD 4.5 million) are entitled to a discount of 50% of the tax rate.

Withholding Tax: There are varieties of withholding taxes. Generally @ 20% is applicable on payments to non-residents.

VAT is applicable @10% on transactions involving goods and services with few notable exceptions mentioned on the following link (http://www.kpmg.com/global/en/issuesandinsights/articlespublications/vat-gst-essentials/pages/indonesia.aspx).

Stamp Duty is minimal at IDR 3000 to 6000

Property Tax is 0.5% of the property value. However, effective rate would be 0.1% (if property value is below IDR 1 billion) or 0.2% (if the value is above IDR 1 billion).

Land and Building transfer attracts 5% of gross transfer value as income tax payable by the seller and 5% as acquisition duty payable by the purchaser.

Legal Framework

In this post I will cover some legal aspects more relevant from foreign investors' standpoint. Most of the legal system follows European Law.

About convertibility - IDR (Indonesian Rupiah) is fully convertible without any restrictions. Though there are certain rules such as notification to BI (Bank of Indonesia) if the amount is more than USD 10,000. Channeling of funds should be through Indonesian resident banks. But nothing restrictive.

Similarly entities are allowed to avail foreign loans though notifications and regular reporting is required. In some cases pre-loan notification is also required such as when the loan tenor is more than a year.

Company Structures for an investors: Primarily 4 types - 1) Limited Liability 2) Representative Office 3) Direct Participation in a listed company, and 4) Direct Participation in certain sectors.

Similar to European Civil Law the companies in Indonesia have two layers of management and shareholders (supervisors) - wherein management is called board of directors and supervisors are called board of commissioners. 

How to establish a company: At least two shareholders are required and the process, though simple, takes around two months. Following are the broad steps:

1) Take an approval from BKPM (Foreign Investment Coordinating Body). This can be done either before or after formation of a company. 

2) Send the Articles for approval by Ministry of Law and Human Rights (MoLHR)

3) After obtaining above approvals register the company with Department of Trade. 

Representative Offices: Foreign investors can also open a rep office instead of registering the companies if the purpose is mainly to liase, after sales services, or market research. As this entity is allowed to enter into agreements with staff and lease premises, but is not allowed to conduct any business activities. 

Restricted Structures: Partnerships and to large extent Co-operatives are not open to foreign participations.  

Macro Economic Factors

This is my first post with respect to Indonesia, and this is mostly about the macro economic factors. It is possible that one would find different numbers from different sources and it can be all over the places. For an example GDP per capita figure ranges between USD 3680 to USD 5000 by some accounts. However, it does not change the fact that the 240 million population based economy has either crossed or just about to cross $1 trillion mark. The growth rate is healthy since 2010, growing over 6% and is estimated to grow at the rate of 6.2% in 2014. The growth is driven by the real consumption, which is growing at the rate of around 5% y-o-y. Unemployment rate is low and has reduced from a high of 8% in 2009 to 6% in 2013. 

However, on trade front there is an increase in the imports and decline in the exports resulting in a significant decline in the trade balance. In 2013, current account is estimated to be in deficit (3% of GDP) as comapred to 2% surplus in 2009. 

S&P has rated BB+, which the country is expected to maintain in the medium term.