A wave of consolidation is hitting Indonesia’s crowded wireless telecom sector, a market that once featured seven operators jostling for position, as the strain of 5G investment winnows out the field toward possibly having just three big players.

The stakes are high. Indonesia is the most populous Southeast Asian country and is expected to have one of the world’s biggest digital economies at USD 124 billion in 2025, data from Google and others show, triple the size last year.

The parent companies of Indosat Ooredoo and Hutchison 3 Indonesia agreed last month to merge the two businesses, creating a network operator with over 100 million subscribers. The merger is expected to reap USD 300 million to USD 400 million in savings a year, the companies say, most of which will be invested in expanding 5G services.

The deal is a blow to XL Axiata, the number 3 player with 56 million customers. The mostly Malaysian-owned carrier received approval in August to launch 5G services, but catching up by itself will be an uphill battle.

Indosat Ooredoo, along with top carrier Telkomsel, started rolling out 5G services this year. But coverage is only available in the capital Jakarta and a few other cities.

Expenditures on 5G equipment have lagged behind because of the punishing competition in a saturated market. The standard prepaid voice and data plan from leading providers falls between IDR 100,000 and IDR 300,000 (USD 7 to USD 21), which is cheap even when accounting for average wages in Indonesia.

The rates of return earned by wireless carriers in 2019 have shrunk 5% compared with a decade earlier, according to the Association of Indonesia’s Telematics Industry. The return on invested capital retreated to 1% from 7% over the same period.

These pressures caused lower ranked Bakrie Telecom to exit the mobile business altogether.

Indonesia is not alone when it comes to costly 5G upgrades. For the entire Association of Southeast Asian Nations, a low-cost 5G rollout that upgrades existing 4G infrastructure would still need USD 13.5 billion in investments through 2025, according to an analysis by A.T. Kearney, a US-based consultancy. A rollout using stand-alone 5G base stations, which offers higher-quality service, would more than quintuple the required spending.

The Indonesian government has little money in its coffers to build a telecommunications infrastructure, so that pursuit is left to businesses. Telkomsel, which has 169 million subscribers, will raise funds by listing a telecom equipment subsidiary as early as this year.

Indonesian wireless carriers have actively sought out foreign investment. Indosat, once a state-owned enterprise, sold shares to a Singaporean telecom, and that stake was taken over in 2008 by Ooredoo, a Qatari communications company.

Many observers think that the shakeout will continue until there will be only three carriers left. Johnny Plate, the minister of communication and information, expressed his anticipation that more mergers will result from Indosat’s deal.

In November last year, the government passed a wide-sweeping bill geared toward expanding foreign investment. The legislation contains language making it easier for telecoms to combine wireless spectrums, which will encourage more merger activity.

This article first appeared on Nikkei Asia. It’s republished here as part of 36Kr’s ongoing partnership with Nikkei.