This commentary first appeared on the South China Morning Post. Republished here with permission. You can access the other commentaries from the author on the same website as well.
When Chinese investors analyse e-commerce in Southeast Asia, one question they often ask founders in the region is whether the sector’s development in the region is “five or eight years behind China”?
The fundamental question that both parties should ask instead is whether Chinese-style e-commerce is the way forward. This style of e-commerce means building up massive selection, using the “invisible hand” of the market to select the best suppliers, and squeezing efficiency out of the whole marketplace.
Those in Southeast Asia may find the question arrogant and offensive. After all, Southeast Asia is diverse, and deeply fragmented. The bloc’s six biggest economies – Indonesia, Thailand, Philippines, Vietnam, Singapore and Malaysia – have huge variations in languages, customs, levels of economic development, legal frameworks and traditional retail landscapes.
But while these variations pose operational and organisational obstacles, they are not strategic challenges. There are fundamental similarities between customer and seller behaviours between the region and China.
First, customers are attracted to a vast selection of goods that offer value for money and can be delivered to them fast. This is universal.
Second, a significant percentage of the selection, whether sold by local or cross-border sellers, is manufactured in China, and exported through the country’s vast supply chain.
Third, sellers want more customers.
If a Southeast Asian company can deliver on the above, it will be able to acquire a large customer base, which in turn can attract more sellers, lower unit operations and marketing costs, negotiate better delivery time, and provide value for money.
It sounds simple – these principles were also how the region’s large retail empires became successful in the first place. E-commerce players know these principles, but some get lost in execution.
Indonesia is a case in point. Over the past few years, more than half of the e-commerce investment in Southeast Asia went to Indonesia, even though the other markets are attractive as well.
Indonesia’s combined e-commerce platform gross merchandise value (GMV) was an estimated US$40.1 billion in 2020, buoyed by both natural growth built up over the years and the Covid-19 pandemic’s movement restrictions, which forced more retailers and buyers to move online.
There has been fierce competition among players, with many business models and strategies being implemented. Leading platforms in Indonesia include regional players (Shopee and Lazada) and local players (Tokopedia and Bukalapak).
Research by Momentum Works shows that regional and local players have distinct strategic focuses and strengths in terms of the selection of goods and logistics.
For example, Shopee focuses on giving customers a mix of local and regional variety of mass-market fast-moving products, whereas Bukalapak focuses on offering goods from small and medium domestic retailers, with minimal overlap with other e-commerce platforms.
In terms of logistics, it’s another ball game altogether. Lazada has a large logistic infrastructure, with more than 70 per cent of its parcels going through its own facilities or first-mile fleet. Other players rely more on third-party logistics players. Tokopedia, which is now merging with Gojek, may leverage the latter’s assets to redefine its own logistics ecosystem.
It is clear that every player aims to give customers a large variety of goods to choose from but when it comes to logistics and improving the speed at which customers receive goods, each player is going down a different path.
The evolution of China’s e-commerce system – and its continued dominance in Southeast Asia’s e-commerce supply chain – indicates that Southeast Asia’s own e-commerce journey will bear resemblance to developments in China.
To understand the “China e-commerce path”, one should look at Taobao’s journey since its launch in 2003. Taobao, as part of Alibaba, which owns the South China Morning Post, aggressively grew its selection of goods at very low prices, and aggressively onboarded customers. Once it had the volume, it used the customer traffic to “naturally select” good sellers. Thereafter, it moved into building a closed-loop from payment to logistics – and the rest is history.
Gradually, brands and more premium sellers from the “natural selection” were moved to Tmall, an upper scale platform by Alibaba. However, the rapid ascent of Pinduoduo in the last few years bore an eerie resemblance to Taobao in its early days. It shows that the consumer demand which originally propelled Taobao’s rise has not gone away even as the economy in China grew significantly.
The only major difference here is, now the internet economy in China is much more advanced, while educating customers is no longer necessary, acquiring customers is much more expensive compared to early Taobao days. Hence Pinduoduo had to spend billions of dollars of subsidies to get there.
Today, investors pay close attention to Pinduoduo’s growth of “active users”. The logic is the same as the principles mentioned above.
The case study of Shopee, part of New York Stock Exchange-listed Sea Group, offers a look at how Chinese-style e-commerce can work with localisation. Shopee overtook Lazada in all the markets, and last year, according to Momentum Works estimates, finally overtook Tokopedia in GMV to become the top e-commerce platform in Indonesia.
Shopee’s strategy of offering almost unlimited “free shipping” is a natural adaptation of China’s e-commerce inspiration to relentlessly focus on growing consumer numbers.
This strategy started before Sea’s 2017 IPO and people did not believe that Shopee could sustain the campaign across Southeast Asia for as long as it did.
Shopee is still giving free shipping in 2021, as it is now the largest, strongest and most popular contender in the regional e-commerce sector.
All sellers now want to be on the Shopee platform, even some of the most premium conscious brands are starting to rethink their strategy of working exclusively with Lazada.
Shopee can channel traffic to their preferred cohort of sellers – the ones which play by its rules and offer the best discounts/service levels to customers. Such good sellers will further strengthen the platform’s value proposition to consumers, creating a positive cycle.
Sea’s stock value increased more than 800 per cent over the past two years.
This simple strategy resonates with that of Taobao or Pinduoduo, but takes on a Southeast Asia angle of identifying the crux of customers’ needs in a simple language everyone understands – free shipping. Everything else is secondary.
Free shipping in this way serves the same purpose as Pinduoduo’s 10 billion yuan (US$1.56 billion) subsidy.
Coupled with relentless, focused execution over the years, and gradual expansion into offering consumers products/services in adjacent verticals, the combination makes Shopee the poster child for Southeast Asia e-commerce today.
How did Lazada, which is now part of Alibaba and has full access to Taobao’s experience in China, miss out? The answer might be not about Lazada but about Alibaba Group as a whole – Tmall is a bigger focus now, and the ascent of Pinduoduo mentioned above has many parallels compared to that of Shopee.
Besides, compared to mobilising resources to fend off Pinduoduo at home, mounting a counter-attack in a foreign land is much harder for Alibaba, or any large conglomerate.
But how about the future? Will China still be a model for Southeast Asia’s e-commerce players?
The simple answer is yes. In China, new models keep emerging, built on top of the sophisticated e-commerce infrastructure, including payment, logistics and supply chain. Community group buying, on-demand e-commerce fulfilment, multichannel networks, live streaming, e-commerce focused new consumer brands – to name a few.
Southeast Asia’s e-commerce giants and even companies in adjacent sectors like Grab are taking inspiration from these. With Sea Group establishing Sea Capital, platforms are extending their tentacles beyond what they can do themselves.
After all, the fundamental dynamics between buyers, sellers and the platforms have not changed, and will not change.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]