Transformations in Indonesia: Three Industries Shaping Venture Capital Investments in 2024

Author: Erwin Arifin (Director of Research at Foundry) | Co-author: Nicole Madeline

Since the turn of the decade, the tech industry has faced turbulence and disruption over multiple cycles. However, turbulences have also provided us with essential details: few sectors have been growing against the macroeconomic headwinds.

Foundry deep dive into the 3 sectors that have seen massive growth and gaining momentum in 2024: Healthcare, Food Security/ Agritech, and Renewable Energy - all 3 can and should also be empowered by AI. In the past 2 years, the three sectors have accumulated USD 655 Million of VC investments, or equivalent to 15% of the total funding in Indonesia within the same period.?

Healthcare: A Dose of Resilience

Plenty of momentum is going on in Indonesia’s healthcare ecosystem, boosted by new government regulations and a new-found urgency post Covid-19 pandemic. The market is expected to attain a CAGR of 9.46% in the next 5 years and the positive response from investors is displayed by the 8.6x increase in funding for healthtech startups from 2022-2023. Furthermore, Indonesia has seen its government healthcare spending grew by 55.5% from 2020-2024, amounting to USD 12.4 Billion per annum in 2024 (~10% increase from 2023).?

On top of that, new initiatives such as SatuSehat (“One Health” in english - national electronic medical record/EMR of Indonesia) will be a catalyst for digitalization of healthcare service providers. Currently only 30% of hospitals are digitized and approximately 32,000 clinics needs to be digitized.

Another momentum is a move towards precision medicine or “pharmacogenomics” - providing tailored treatments, drugs, and diagnostics according to a patient’s genomic data. Through the launch of BGSi (Biomedical and Genome Science Initiative), Indonesia is building its own national biobank - collaborating with 9 national hospitals as hubs. This will see new innovations being enabled in Indonesia. For instance, despite being home to at least 1,300 different ethnicities, we currently have close to zero biobanks. Having access to the genomic data will facilitate and expedite both local and global pharmaceutical companies to create drugs with higher efficacy rate, tailored for Indonesians.

Additionally, another condition that can be addressed through technology is in democratizing access to doctors. Indonesia currently has 0.7 doctors per 1,000 population - below the 1 per 1,000 population minimum standard given by WHO. Moreover, the majority of these doctors are concentrated in tier-1 cities. Investment in technologies that can utilize artificial intelligence (AI) to help doctors with clinical decision support (CDS) will be interesting as they will help one doctor to serve more patients, given the time being freed in doing the mundane / repetitive diagnostic work for the doctors.

Comparison: Number of Doctors per 1,000 population

From the payors standpoint, there are opportunities in increasing the penetration of private health insurance. Currently, according to OJK (Indonesia Financial Authority), private life and health insurance penetration rate is 1.19% of the total population in 2022, with the insurance premium high-cost being the main reason for the stagnancy. Additionally, 68.48% of the insurance premium in Indonesia consists of unit link products - which are not directly correlated to the health policy benefits needed by the population. Another blocker is the fee being paid to insurance agents. This problem may open up an opportunity for a “virtual insurance” model that can cut off these hefty unit-link and agent fees to focus on providing affordable and easy to understand insurance products.?

However, the challenge still remains in finding great IPs and local innovation. Healthcare is one of the sectors where technical expertise is a key requirement in a founder's background. Finding the intersection of great technical expertise and entrepreneurial skill is a key challenge that investors must address.

Agritech: Cultivating Food Security

Indonesia is an economy driven by its agriculture. The sector contributes around 12.4% to the total GDP with farmers and fishermen making up around 27% of the total workforce in the country. Moreover, despite the size, agriculture is still a fast growing industry - recording a 39.7% CAGR from 2016 - 2021, with an expected continuous growth of 31% CAGR from 2022 - 2026.

However, problems still persist within its supply chain. An agricultural product in Indonesia has to go through 6-8 different middle-men before it can get to the consumer’s table. This results in 70-80% price inefficiency in the sector. Plenty have tried to cut-off these middle-men in their efforts to increase the price efficiency, however, plenty also have failed in doing so.

Could it be that the problem persists in Indonesia’s geographical landscape? The country has a divergent landscape with under-developed infrastructures that it requires multiple middle-men, which concepts have been implemented since the Dutch colonized Indonesia.?

Simply implementing “technology” to cut-off the century-old best practices may not be as easy as it sounds. A pragmatic alternative would be to collaborate with the middle-men, capture the data, and utilize the information to optimize the agricultural produce logistics and supply chain.

There has been a whooping USD 224.25 Million investments into the agritech sector by VCs up to 2023 - or equivalent to 32% of the total funding deployed this year and a total of USD 1.12 Billion within the past 5 years.?

However, if we exclude outliers such as eFishery (that would be categorized as upstream agritech), 76.44% of these investments were made towards downstream-focused companies where they can only capture up-to 20% of the total value of the agricultural value chain. Meanwhile, the upstream and midstream players only receive 23.56% of the investments, despite capturing up-to 80% of the values. Perhaps, more investments would be targeted towards these 2 sub-sector.

Agritech Investment Distribution

The next question would be - which vertical should investors focus on? There are several nutritional intakes that the country is lacking to meet WHO’s FAO (Food and Agriculture Organization) standard. Namely, Indonesia needs to increase its meat, eggs, fruits, and vegetables consumption by 5.94x, 2x, 6.91x, and 2.39x, respectively.

We will see more Innovations in this sector, such as precision farming, automation, and AI-driven analytics, which will help to increase crop yields and reduce environmental impact. Furthermore, the adoption of vertical farming and lab-grown food could offer new investment opportunities. However, this sector may face challenges related to regulatory hurdles, technology adoption rates, and potential ethical issues surrounding genetic modification and data privacy.

Renewable Energy: Harnessing the Power of Sustainability

Ever since the Paris Agreement (Paris Climate Accords), countries in Europe have been striving to push their respective carbon offset to be net zero by 2050. In parallel, the Southeast Asia countries are also catching up, showing a CAGR of 7% in 2022 - 2027.?

Globally, peatlands and mangroves are excellent natural carbon-absorbent, as they can absorb up to 600 and 21 billion tonnes of carbon per year, respectively. Indonesia being rich of these 2 nature-based solutions, sprouts potential for growth.?

Projects such as the Katingan Mentaya Project in Borneo (Kalimantan) have been able to produce carbon credits, offsetting 7.5 million tonnes of carbon annually or equivalent to taking off 2 million cars off the road each year.?

On the downstream side, the growth of renewable energies have been apparent in the electric vehicle adoption. According to Foundry’s previous white paper on electric vehicles (in partnership with Deloitte), Indonesia recorded around 2,100 EV on the road in 2020. Fast forward to 2022 and this number has grown 15.3x to ~33,400 EV on the road. This massive adoption is mainly driven by the growth of electric motorcycles where it contributes 77% of the total EV on the road (25,782 e-motorcycles on the road in 2022). Moreover, e-motorcycles adoption is driven by battery swapping technology that grew from 0% to 55% market share within the same period of time.

Number of EV in Indonesia: 2020-2022A & 2030 government target

The circular economy will also be a popular topic, given the volume of waste in Indonesia reaching a level of 20.93 million tonnes. Food waste contributes 41.5% to the mix, while retail and other waste makes up 58.45% of the total transactions in the country. More than just being environmentally friendly, this model can prove to be very profitable. Businesses are already struggling to take care of their waste, purchasing these sources at a massively discounted price (positioned as salvaged value for businesses) and selling it again with a hefty gross-profit margin will be a lucrative business opportunity. The challenges though, will come from capturing a consistent level of supply.

Addressing the elephant in the room: AI as Enablers

The obvious talk of the town is generative AI, thanks to Open AI (backed by Microsoft), Bard (Google’s technology), etc. pouring resources into this technology. Very rarely has a new technology comes in and opens up doors for opportunities in such a nature for other sectors, playing its role as an enabler.?

Indonesia, however, does not have enough data scientists and engineers to spearhead the creation of AI innovations. Hence, leveraging existing platforms to create innovations is the go-to strategy for the time being.

One intriguing application can be seen in the field of healthcare. Doctors are required to make timely and accurate diagnostics, this is where AI-based CDS comes in to assist healthcare practitioners endorse the two needs. Grail, a company from the US has managed to grasp USD 2 Billion in equity funding, eventually acquired by Illumina (NASDAQ: ILMN). The company developed an AI-based multi-cancer early detection technology to screen 50 types of cancer, a big leap as previously there were only 5 types of cancer that had a recommended screening test. Thanks to its innovation, Grail’s technology can improve cancer patients' survival rate by 4x.?

Implementation of AI in navigating the multivariate clinical pathway will see doctor’s productivity go up and enable them to reach more patients. Moreover, AI can also be implemented in the discovery of new modalities - speeding up the pace for clinical research by utilizing genotype and phenotype data in biobanks. AI can also be utilized to help health insurance in creating a better actuarial engine to lower their claim/loss ratio.

Bigger picture: This is only based on the data from the US, imagine if it were to be adopted to a country with 1,300 biodiversity such as Indonesia.

In other sectors such as food security and agriculture, AI can be utilized to enhance farmers and fishermen's existing knowledge to optimize their expertise, instead of replacing them. For instance, areas such as precision farming to monitor crops and livestock's health by controlling their soil, temperature, and other growth factors. While in the energy sector, optimization using AI is viable to save energy in power generation sites, procuring more green energy with less input.?

The future remains an open book. Economic forecasts, while valuable, are not impeccable. By adopting a well-informed, strategic approach, we hope you can navigate the complexity of 2024's investment landscape and pursue long-term financial goals with confidence.?

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