E-commerce: Southeast Asia: the new e-battleground

This article first appeared in Enterprise, The Edge Malaysia Weekly, on August 13, 2018 - August 19, 2018.
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Southeast Asia is slowly becoming the new battlefield for e-commerce platforms as more of them establish a presence in the region.

Right now, the two largest platforms are Lazada, which is controlled by Alibaba Group Holding Ltd, and 11street, which is operated by Celcom Planet Sdn Bhd — a joint venture between the subsidiaries of Axiata Group Bhd and South Korea-based SK Telecom.

Shopee, which focuses on the mobile rather than online platform, entered the fray a few years ago. It is operated by Sea Group (previously known as Garena Interactive Holding Ltd), which was founded in Singapore in 2009 and listed on the New York Stock Exchange last year.

“Southeast Asia has become the new battlefield for e-commerce platforms and the competition will only heighten,” says Yong Kai Ping, chief executive of the Selangor Information Technology & E-commerce Council (Sitec).

Taiwan’s largest business-to-consumer (B2C) online retailer — PChome Online Group — is also making its way to this part of the world, says Goh Boon Peng, CEO of Mystartr, a rewards-based crowdfunding platform. This was announced by PChome chairman Jan Hung-Tze last month.

Now, there is talk that JD.com — one of China’s largest online retailers (and a key competitor of the T-mall run by Alibaba) — is heading to this region as well, says Yong.

It remains to be seen if global e-commerce juggernaut Amazon will follow suit. There have been some signs that it is already extending its feelers to this part of the world. Last December, the company launched the Amazon Prime Now mobile app in Singapore.

“We believe that Amazon is looking very carefully at the situation in various markets. We would be surprised if it passed up the opportunity in Southeast Asia — it is just too attractive,” says Julian Atrope, senior vice-president of business development at iPrice Group.

He says the opportunity lies in the region’s growing internet economy, which is expected to exceed US$200 billion by 2025, according to the Google-Temasek e-Conomy SEA report published in 2016.

With all these companies pouring cash and other resources into Southeast Asia, e-commerce growth is expected to pick up, says Yong.

 

The Greater Southeast Asia market

To understand why this is happening, it is essential to understand what the Greater Southeast Asia (GSEA) region is all about and how Taiwan’s subsidy war factors into it. The GSEA includes Taiwan and the southern part of China, such as Guangzhou, while the subsidy war is between PChome and Shopee.

The subsidy war started in 2016, when Garena, which had gaming as its core business, launched Shopee and identified Taiwan as its first market. PChome was the market leader in Taiwan, in the B2B and B2C markets, and Shopee was effectively encroaching on its turf.

Shopee chose to launch its first offensive in Taiwan because it was a mature market and ripe for the picking. With the right strategy, it would be able to gain market share and generate revenue fairly quickly.

According to Export.gov, a website run by the US Department of Commerce and other government agencies, Taiwan has one of the highest e-commerce penetration rates globally, with a market size of US$37.6 billion in 2016. The market also experienced an average growth rate of 10% to 20% from 2012 to 2016.

Second, Taiwan is a small country with a concentrated population. This ensures that the money the Singapore-based company spends there will have a more significant impact than if it spent it in, say, Malaysia or Indonesia. Also, there was a clear target — market leader PChome.

Goh says when Shopee researched the e-commerce market in Taiwan, it found a weakness it could exploit to open up the market and grab market share from the incumbent. The weakness was this: Taiwanese consumers were willing to buy products from an online platform if they did not have to pay the cost of transport. “And when you get more consumers buying products on the platform, more merchants are willing to sell their products on it,” he adds.

The strategy proved successful. But PChome, which was alive to the threat to its dominance, went on the counteroffensive by providing subsidies to merchants and shoppers. The results were clear — its revenue increased 14.27% last year. But this was at the cost of virtually wiping out its profit, which fell a whopping 95%. Online reports say the behemoth spent no less than NT$10 billion (RM132 million) defending its position in 2016.

Sea Group did not do too well either. It saw losses in the past three years. According to its annual report, it lost US$107.3 million, US$225 million and US$561.2 million in 2015, 2016 and 2017 respectively.

If people only looked at the numbers, they would conclude that the whole thing was a lose-lose situation, says Goh.

So, how does this tie in with the GSEA concept? Basically, it was the recognition of this market that allowed Sea Group to raise billions in funding to “attack” the Taiwan market. And PChome is retaliating by expanding into Southeast Asia, says Yong.

“Jan intended to list PChome’s subsidiary, Ruten (which is jointly owned with eBay), on the Hong Kong Stock Exchange, but he cancelled the listing plans in June. His new plan is to raise funds for Ruten in the private market and use it to fight Shopee,” says Goh.

“Then, Jan will aim for the GSEA market, just like Shopee. If he remains in Taiwan, he will only be defending his turf and risk missing out on the big opportunity in Southeast Asia. But if he expands, he could attack Shopee in other markets and put it on the defensive. After all, PChome already has an operation in Thailand, but it is not that big.”

As for the Chinese players, Southeast Asia has always been their next expansion target, says Yong. “There is the Chinese diaspora in the region that they can leverage. It is harder for them to expand into India or the Middle East. And if they go west, they come up against powerful companies such as Amazon.”

 

A ‘subsidy war’ in Malaysia?

A subsidy war has already broken out in Southeast Asia, but in a different form and less visible, says Goh. He adds that Lazada had raised about US$700 million since 2011, but had become cash-strapped. Last year, Alibaba injected another US$1 billion into the company and increased its stake from 51% to 83%.

While it is hard to tell how much of the US$700 million was spent in Malaysia, it would not have been a small amount, says Goh.

Recently, 11street Malaysia welcomed a new investor — locally listed media and advertising firm PUC Bhd — which had agreed to invest up to RM90 million in the e-commerce platform. Before this, 11street burnt about US$30 million a year in Malaysia, says Yong.

Goh says, “While there are no exact figures to show how much these companies spent in Malaysia, it is a huge amount. It would not be less than what we saw in Taiwan recently.”

He adds that there is no doubt the money is being spent on subsidising the logistics and listing fees of the online merchants. A large chunk of the money is also being used to subsidise consumers through promotions and discounts.

However, the “subsidy war” in Southeast Asia, including Malaysia, is not as apparent because the competition between e-commerce platforms is not as intense as in Taiwan, says Goh.

E-commerce is still at a nascent stage in Malaysia, he adds. “Industry players in Taiwan are discussing what percentage of daily household items are bought online. But in Malaysia, the discussion is still very basic such as how many people shop online.”

Nevertheless, Malaysia’s e-commerce industry is set to grow by leaps and bounds in the coming years. “That is why investors keep throwing money at the industry. They see the potential and the trend is irreversible,” says Goh.

The National eCommerce Strategic Roadmap — produced by the Ministry of International Trade and Industry, Malaysia Digital Economy Corporation and US consulting firm A.T. Kearney — points out that the Malaysian e-commerce market grew from RM49 billion to RM68 billion from 2012 to 2015 at a compound annual growth rate of about 12%. It predicts that the market will grow at a CAGR of 11% from 2015 to 2020, effectively doubling to

RM114 billion.

 

 

Will SMEs gain or lose?

For Selangor Information Technology & E-commerce Council (Sitec) chief executive Yong Kai Ping and Mystartr CEO Goh Boon Peng, the next few years could be a “golden era” for small and medium enterprises (SMEs) that seize the opportunity to learn how to sell their products online.

As the internet is borderless, the online platforms will be able to open up more opportunities for these businesses to go regional or global. Meanwhile, with more e-commerce platforms moving into Malaysia, the SMEs that are also online merchants could benefit by getting all sorts of subsidies and support when the competition between these platforms heats up.

For now, these platforms are already providing merchants with support such as free online marketing classes and photographers to take photos of their products. There could be more to come, says Goh.

Yong says some SMEs can find their niche in the online space, primarily those whose products are already popular in the massive China market. “Business opportunities such as these are obvious. That is why brands such as OldTown White Coffee could be taken over by the likes of Jacobs Douwe Egberts in the future. You also see CVC Capital Partners eyeing snack food maker Munchy Group. Their products are selling well in China.”

Besides food manufacturers, some furniture makers are also doing well in China, he adds. For instance, many SMEs in Johor, particularly in Muar, have made a name for themselves there. Other niche products include halal products and services.

 

Fear of losing out, especially to China

However, the SMEs’ fear of losing out to regional competitors is also very real, says Yong. They are particularly afraid of competition from China as the country can produce cheaper products with its economies of scale and technological advantage. “The fear has always been there and these are valid concerns,” he adds.

On the home front, Yong says the SMEs are afraid of outside competition as they do not have enough support from the government to compete on the regional and global stage. An example is the recent announcement of the launch of the Digital Free Trade Zone — a strategic collaboration between Malaysia Digital Economy Corporation and Alibaba Group Holding Ltd. The government has not specified how it will help local business to benefit from the initiative.

“It seems that the initiative is good for the country’s economy, but the government has not provided details of how it will help local SMEs seize the opportunity to export their products overseas. There has been no announcement on what kind of support it will provide to SMEs to help them compete in the online world on a global stage. It is no wonder that the SMEs are afraid of losing out,” says Yong.

The government has come out with the SME Masterplan, but the impact is not widely felt, he adds. There are also incentives to help SMEs purchase equipment to upgrade their businesses. But more often than not, they do not have the money to make those purchases in the first place. “The government has to put in more effort to come out with solid measures that support our SMEs so they can compete in the online world,” says Yong.

Some SMEs are also worried that two of the three major e-commerce platforms in Malaysia are primarily controlled by Chinese companies. For instance, Alibaba has an 83% stake in Lazada, the largest e-commerce platform locally and one of the biggest players in Southeast Asia. Shopee, a mobile-based e-commerce marketplace, is run by Singapore-based Sea Group, which is 40%-owned by Tencent Holdings Ltd, one of the largest tech companies in China.

China’s influence is pervasive throughout the region. For instance, Alibaba has invested US$1.1 billion in Indonesia-based e-commerce firm Tokopedia while JD.com, Tencent and Thai retailer Central Group announced in December last year that they would form a US$500 million e-commerce and financial technology (fintech) joint venture.

However, this should be less of a concern as the platforms should remain unbiased to businesses in these countries, says Yong. “They earn their money from transactions. The more, the merrier, regardless of where the merchants are from. Sentiment aside, this should not be a major concern.”

Michael Kang, national president of the SME Association of Malaysia, says the fear of Chinese businesses invading the local market has been overstated. “Many people do not know that many Chinese companies that expanded overseas have failed.”

One of the reasons is that the Malaysian market is tiny compared with China. Businesses from China cannot just throw money in Malaysia and expect to get a return the way they can back home. “This strategy may work in China, but not in other countries,” says Kang.

There are other barriers as well. “Let’s say Chinese companies like to do business using cash and transactions are done very quickly via digital wallets. But in Malaysia, you cannot do cash transactions. You need to give credit terms. And the transactions are done more slowly. It is not easy for them to penetrate our market,” he says.

 

What more can be done?

Yong says there are a few things that can be done to buy local SMEs some time to upgrade their products. For starters, the government could impose a tariff on specific imported products to protect local businesses in the shorter term. Short-term protectionism would allow them to innovate and upgrade their products before the market is fully opened up.

The government could set up more agencies such as Sitec to educate SMEs on how to market and sell their products online by utilising the various e-commerce platforms. “The government should have more focus on the grassroots economy, which is to help SMEs,” says Yong.

By seeing the potential of e-commerce, more players can join the industry to provide SMEs with different services at reasonable prices. The role that Sitec is playing could also be done by private entities so that e-commerce awareness and knowledge can be disseminated even faster.

For now, there are still very few private players, says Yong. And most of do not have the proper knowledge. He shares a story about a friend who conducted a social media marketing class for SMEs to help them sell products online. “The person’s Facebook account, together with the accounts of other SME businesses that attended his class, was blocked by Facebook the following day as it violated some of the platform’s rules.”

In other cases, the knowledge shared in such classes are proper and useful, but the fee at RM3,000 to RM4,000 is deemed too high, says Yong.