The Current State of Indonesia Digital Transformation and AI Adoption: A Comprehensive Explanation of Indonesia’s IT Development

Indonesia, with its status as Southeast Asia’s largest population and economy, has seen rapid growth in its digital economy. However, challenges remain in the adoption of Digital Transformation (DX) and Artificial Intelligence (AI) , including regional disparities and uneven development across industries. This article provides a detailed analysis of the current state of DX and AI implementation in key sectors such as finance, retail, logistics, manufacturing, and education, along with future prospects and business opportunities for Japanese companies.

This content offers valuable insights for those interested in the Indonesian market or considering DX initiatives.

 

Indonesia Government-Led National-Level DX and AI Initiatives

The Indonesian government has recently placed strong emphasis on advancing DX and AI at the national level. In 2020, it formulated the National AI Strategy (Stranas KA) 2020–2045 , outlining collaboration frameworks among government, industry, and academia, and identifying priority sectors for AI development.

Based on this strategy, the AI Innovation Center (PIKA) was established, and the KORIKA (National AI Innovation Consortium), an industry-government-academia partnership body, has been leading AI development efforts.

The government estimates that AI will generate economic benefits of up to $366 billion over the next decade , and promoting digital economic growth has become a national goal.

Building an Electronic Government and “INA Digital”

In addition to private sector initiatives, the government itself is undergoing digital transformation. In 2023, Presidential Regulation No. 82/2023 was issued, launching the “INA Digital” project—a unified digital government platform.

This initiative aims to integrate nine major administrative services—such as population registration, education, healthcare, police, social security, and immigration—into a single portal. Managed by the state printing agency Peruri , INA Digital seeks to enable citizens to complete procedures in one stop across ministries.

By May 2024, all government agencies were expected to be connected, marking a historic step toward more efficient and transparent governance.

As a result of these efforts, Indonesia has risen more than 30 places in the United Nations’ e-Government Ranking in recent years.

Fostering Digital Industries, Especially in Manufacturing

The government is also actively promoting the growth of digital industries, particularly in manufacturing.

The “Making Indonesia 4.0” roadmap, launched in 2018, focuses on five priority sectors—food, textiles, electronics, chemicals, and automotive—and sets a goal of doubling the annual productivity growth rate of the manufacturing sector by 2024.

To support this, the Indonesian Industrial Digital Innovation Center (PIDI 4.0) was established under the Ministry of Industry in 2021. PIDI 4.0 functions as a showcase factory, training facility, and technology hub, offering practical education programs in robotics and IoT.

Financial Sector Leads the Way in DX and AI

The financial sector is currently at the forefront of DX and AI adoption in Indonesia.

With a population of about 275 million people and a significant portion still unbanked, smartphones and fintech are rapidly expanding financial inclusion.

According to a 2021 survey, 78% of bank users in Indonesia actively use digital banking , up from 57% in 2017. Non-face-to-face transactions surged during the pandemic, making mobile banking and e-money commonplace in urban areas.

The widespread rollout of the QRIS (Quick Response Code Indonesian Standard) has enabled even small businesses like street vendors and warungs (small shops) to accept digital payments.

Explosion of Payment Data and AI Utilization

The rapid growth of fintech and digital payments is evident in transaction numbers. Real-time payment transactions reached 19 billion in 2023 , a 267% increase from the previous year—ranking Indonesia 8th globally and 3rd in the Asia-Pacific region.

Some projections estimate that transaction volume could reach 120 billion annually by 2028 , six times the 2023 level.

However, cashless payments still account for only around 13% of total transactions , indicating significant room for further growth.

Major banks and emerging fintech firms are now analyzing vast amounts of payment data using AI for credit assessment and marketing purposes.

For example, new fintech services are using AI-based credit scoring based on transaction history to offer loans to individuals and SMEs without traditional credit records.

Banks are also adopting AI-powered chatbots for customer service and fraud detection systems to enhance security and efficiency.

 

Retail and E-Commerce: Warung Digitization and AI-Powered Personalization

Indonesia’s unique retail landscape includes traditional formats like warungs (small shops) and street vendors. These are now being transformed through DX.

Startups like Bukalapak’s Mitra and Warung Pintar have introduced ordering apps and inventory management tools, helping small retailers move away from paper-based record keeping.

The Gojek Group has promoted QR code payments via GoPay, enabling cashless transactions even at roadside stalls. As a result, signs saying “QRIS accepted here” are now common in urban markets.

Despite these advances, only about 30% of UMKM (micro, small, and medium enterprises) nationwide have adopted digital solutions. Many older shop owners in rural areas still struggle with smartphone usage.

To bridge this gap, the government and private companies are rolling out digital training programs and simplified applications.

For instance, the AwanToko app, launched in 2024, connects warungs directly with wholesalers online, streamlining procurement and reducing middlemen costs, thus improving profit margins and operational efficiency.

AI Applications in Retail

AI is gradually being adopted in the retail sector. Major e-commerce platforms are using recommendation engines to personalize product suggestions based on browsing and purchase history.

Text mining of product reviews and social media sentiment helps predict demand and optimize inventory planning.

In physical stores, experiments are underway using camera footage analysis to measure foot traffic and dwell time, while shelf image recognition is being tested to detect stockouts.

One supermarket has begun piloting AI-based shelf inventory checks to automate restocking processes.

Chatbots are also becoming popular for customer service, both on e-commerce sites and via WhatsApp, allowing businesses to serve customers outside regular hours and reduce lost sales opportunities.

Logistics: High Costs and AI-Driven Efficiency Improvements

As an archipelagic nation, Indonesia faces long-standing logistical inefficiencies. According to the World Bank, logistics costs accounted for 23.5% of GDP in 2021 , significantly higher than neighboring countries like Singapore (around 8%).

Key issues include fragmented infrastructure between islands, excessive intermediaries, and inefficient manual operations.

To address this, both government and private-sector DX initiatives are underway.

Introduction of the National Logistics Ecosystem (NLE)

The government-led National Logistics Ecosystem (NLE) integrates logistics information across ministries and companies through a centralized digital platform, following a 2020 presidential directive.

It enables end-to-end integration of customs, port, transport, and quarantine procedures. By October 2024, NLE had been implemented in 46 ports and 6 airports, covering 97% of domestic trade .

Customs clearance times have been reduced, with some container delivery waiting times cut by 30%. The government plans to expand the system further to reduce logistics costs and improve efficiency.

Long-term goals include integrating with ASEAN supply chains to enhance regional logistics coordination.

Private-Sector AI Innovations

Private startups are also driving change. Waresix , Indonesia’s largest integrated logistics company, uses its AI-powered logistics OS called wOS to dynamically set freight rates and optimize loading efficiency.

McEasy, a vehicle management SaaS provider, analyzes real-time GPS and IoT sensor data to automatically optimize dispatch schedules and improve driver safety and fuel efficiency.

Japanese companies like Yamato Holdings and Sagawa Express have entered the market through joint ventures, introducing cold-chain logistics and enhancing service quality with advanced IT systems.

Manufacturing: Making Indonesia 4.0 a Reality

Manufacturing contributes about 20% of Indonesia’s GDP , but productivity lags behind other nations. To address this, the government launched the Making Indonesia 4.0 initiative.

Five key sectors—food, textiles, electronics, chemicals, and automotive—are targeted for digital transformation.

IoT, robotics, and AI are central to automating production processes and boosting efficiency.

The government evaluates companies’ digital maturity through the INDI 4.0 index , offering expert support and tax incentives to top performers.

Annual awards like the INDI 4.0 Award recognize leaders in digital transformation, with companies like LEN Industri receiving accolades for workforce development.

Japanese automakers such as Toyota and Mitsubishi are introducing welding robots and AI inspection systems in local factories to boost automation and quality control.

While labor unions express concerns over job displacement, the government is responding by introducing robotics and AI curricula in vocational schools and universities.

International cooperation is playing a key role. Japan’s JICA is collaborating with Indonesia’s Ministry of Industry to introduce Japanese IoT and automation technologies to local SMEs.

Chinese tech firms are also setting up smart factories, such as smartphone manufacturing plants near Jakarta equipped with AI-driven quality control systems.

 

Education: Bridging the Gap Through Digital Tools

Improving access and quality in education remains a structural challenge in Indonesia.

While digital technology holds promise for bridging educational gaps, progress in this sector lags behind others.

In remote and island regions, basic internet infrastructure and device availability remain critical issues.

Remote teaching by urban educators is helping, but many students are still left behind due to poor connectivity.

EdTech solutions are gaining traction, but their impact remains concentrated in urban areas where internet access is available.

Online universities like UICI , corporate training programs using VR and e-learning, and coding schools like Timedoor Academy are beginning to scale, though reaching broader audiences remains difficult.

AI is also being explored in education. Some universities have started experimenting with AI grading systems for essay exams, while high schools are testing AI tutors powered by ChatGPT-like models.

The government’s “Merdeka Belajar” (Freedom to Learn) reform promotes flexible curricula and creativity, supported by tablet distribution and improved internet access.

However, low ICT literacy among teachers, lack of parental understanding, and insufficient teaching methodologies hinder large-scale adoption.

AI and digital tools must be accompanied by human readiness and mindset shifts to realize their full potential.

Challenges and Structural Barriers to DX and AI

Despite clear progress, Indonesia still faces several structural barriers to widespread DX and AI adoption.

Infrastructure Gaps in Rural and Remote Areas

Many rural and island communities remain offline, limiting access to digital education, administration, and healthcare.

Schools and UMKM often lack devices and stable internet connections, slowing digital adoption.

Transportation and road infrastructure deficiencies also bottleneck logistics improvements.

Talent Shortages and Skill Gaps

There is a massive shortage of digital talent, with predictions of a shortfall of 6–9 million IT professionals by 2035 .

Many government workers, teachers, and frontline staff lack basic digital literacy, hindering effective use of new technologies.

Advanced AI expertise remains limited to select universities and urban corporations.

Low Labor Costs Delaying Automation

Due to cheap labor, many companies delay investments in automation, resulting in low productivity and weak global competitiveness.

Only large enterprises and foreign firms have widely adopted automation; most factories and warehouses still rely heavily on manual labor.

Experts warn that relying on low wages is unsustainable and advise gradual automation in preparation for rising labor costs.

Regulatory Uncertainty and Policy Fragmentation

Policy changes can be abrupt and unpredictable—as seen with the sudden ban on TikTok Shop—posing risks for startups and foreign investors.

Digital policies are spread across multiple ministries, creating inconsistency and implementation challenges.

The Personal Data Protection Law , enacted in 2022, is still being adapted to business and educational environments.

Incomplete Education Digitalization

While AI tutoring and online learning tools are being tested, they remain largely limited to urban elites.

Public education still relies heavily on paper-based instruction and assessments, with teacher digital literacy still developing.

Uneven AI Application Across Industries

AI is thriving in sectors like banking, e-commerce, and logistics, but adoption is minimal in agriculture, fisheries, and local government offices.

Large corporations with big data dominate AI innovation, while smaller businesses lack the foundational data needed for AI implementation.

 

Summary

Indonesia possesses tremendous potential with its young population and growing economy. However, its journey toward comprehensive digital transformation remains incomplete.

Although the government and private sector have made meaningful progress—especially in fintech, e-commerce, and logistics—challenges persist in infrastructure, education, regulatory clarity, and human resource development.

The path forward lies in inclusive DX strategies that ensure no one is left behind. Collaboration between government, businesses, and educational institutions will be crucial in building a truly sustainable digital economy.

For Japanese companies looking to enter Indonesia, strategic partnerships, localized approaches, and long-term investment in collaboration with local stakeholders will be key success factors.

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Glossary

• DX (Digital Transformation): Fundamental changes in business operations and models through digital technologies.
• AI (Artificial Intelligence): Computer systems capable of learning, decision-making, and reasoning similar to humans.
• Fintech: Innovative financial services combining finance and technology.
• QRIS (Quick Response Code Indonesian Standard): Indonesia’s standardized QR code payment format.
• UMKM (Usaha Mikro, Kecil, dan Menengah): Indonesian term for micro, small, and medium-sized enterprises.
• NLE (National Logistics Ecosystem): Government-led logistics data integration platform.
• INDI 4.0: Indonesia’s digital maturity index for manufacturing.
• EdTech: Educational technology combining education and digital tools.
• Demographic Dividend: Economic growth driven by a large working-age population.

FAQ (Frequently Asked Questions)

Q1. Can Indonesia be considered a DX-leading country?
A1. While certain sectors like finance, e-commerce, and logistics show progress, overall DX is still in early stages, with significant gaps between urban and rural areas.

Q2. Why is DX slow in Indonesia?
A2. Factors include reliance on cheap labor delaying automation, inadequate digital infrastructure, talent shortages, and policy uncertainty.

Q3. Is AI being used in education?
A3. Limited pilot projects exist in cities, such as AI tutors and automated grading, but adoption is still very limited in public schools.

Q4. What should Japanese companies watch out for when entering Indonesia?
A4. Flexibility in adapting to regulatory changes, localization strategies, and awareness of data protection and telecom regulations are essential.

Q5. Which sectors hold the most growth potential?
A5. Fintech, logistics, e-commerce, and education stand out as promising sectors.

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