#CMO Insights – Why SEA is the Next E-Commerce Gold Rush
Last week my colleague and I were in Shanghai to attend the Asia Cross Border ecommerce Congress 2015. A lot of focus was on cross-border for e-commerce in China. One of the most developed markets in e-commerce today, China is arguably more developed than Western markets such as the U.S. or Europe, given how advanced commerce on Tmall and WeChat is. We’ll share learnings picked up during this conference, and ultimately argue that Southeast Asia – and not China – is the more interesting market for e-commerce.
Cross-Border: The Last Blue Ocean for China ecommerce?
The domestic Chinese e-commerce market is one of the most competitive in the world, long considered to be a red ocean game. Which is why at the Asia Cross Border ecommerce Congress 2015 in Shanghai last week, a Yihaodian speaker voiced her opinion that the last blue ocean for Chinese e-commerce would be in cross-border operations. But is she right? With Alibaba’s Tmall and JD WorldWide dominating the B2C space (50 percent and 23 percent of total B2C sales in China, respectively) and Taobao owning over 95 percent of the C2C space, the game has long been over in China. As one of the leading B2C websites in China, majority owned by Walmart, Yihaodian needs to know where the next big streams of revenue are going to come from – and cross-border is currently the hottest topic of e-commerce in China.
The China e-Business Research Center shows that today’s inbound cross-border market in China is estimated to be 155 billion RMB ($25 billion) and is expected to grow to a whopping 1tn RMB ($164 billion) by the end of 2018. This the type of cross-border e-commerce driven by an increasing domestic Chinese demand for foreign products, be it fashion and apparel or more likely food, beauty and health products. Plagued by food and health scandals, Chinese consumers are increasingly turning abroad in order to avoid risk of buying fake beauty products, contaminated milk powder, or fake pharmaceuticals. As for outbound, Alibaba has been riding the manufacturing-driven cross-border wave that leapfrogged China into modernity, saddled the mighty United States with a huge trade deficit, and allowed Jack Ma to become the richest person in China.
Cross-Border Hypemen Need to Shift Their Focus
Despite all the hype about cross-border e-commerce in China, it’s still a very small business compared to the domestic e-commerce market. We asked Yihaodian how big their new cross-border business was in terms of percentage of total company sales which turned out to be only 2 percent and projected to go up to 10 percent over the next five years. 10 percent is still a very small number. Getting there will be an uphill battle as domestic product quality and safety will no doubt increase over the next few years due to increased government pressure and regulation – which in turn will lessen the need for Chinese consumers to look abroad for shopping. In many ways, cross-border e-commerce in China can be seen as a desperate move to cope with the fact that the domestic market is reaching saturation. With Tmall and JD owning close to three quarters of the Chinese B2C e-commerce market, there just isn’t much room for “smaller” players like Yihaodian, Suning, Amazon and VIPShop to compete. B2C e-commerce is a winner-takes-all market.
Southeast Asia – The Next ecommerce Gold Rush?
The gold rush of the 19th century led many Chinese people to immigrate to the United States in search for fortune. Chinese (and global) Internet companies should look at Southeast Asian e-commerce as their next potential gold rush. It’s too late to dig for e-commerce gold in China as all the gold mines are controlled by the big players such as Tmall and JD. Same thing applies to India, where Flipkart, Snapdeal and Amazon have allocated huge sums of money to win the market. What’s left is a region that is home to 20 percent of global population but currently only generates less than 1 percent of global retail e-commerce (A.T. Kearney, 2014). Compare that to the U.S. with 12 percent of global population and 32 percent of global retail e-commerce. Southeast Asia is the next untapped frontier of e-commerce.
Reading Tea Leaves – Why SEA is only 4 to 5 years behind China
Before moving to Bangkok, I spent four years working in Beijing for an e-commerce retailer. That was back in 2008; fast forward to the present and I’m with one of Southeast Asia’s leading e-commerce enablers. Having worked in both markets, I’m fortunate to be able to draw comparisons.
Today’s Southeast Asia looks eerily similar to the early days of the e-commerce Wild West in China – cash-on-delivery as the dominant payment method and a very fragmented B2C e-commerce market. Back in 2008, e-commerce sites like DangDang and Amazon still had 16 percent and 15 percent of the Chinese B2C market, respectively. Today, they’re 2 percent and 2.1 percent respectively in a market dominated by Tmall (51 percent) and JD.com (23 percent). Today’s SEA B2C market is like China in 2008. The market is still fragmented despite companies like Lazada having a head start with an estimated market share of 20 percent. It’s still early to tell who’s going to win though. Local players like MatahariMall just recently committed $500 million to build the biggest e-commerce site in Indonesia and global players like Amazon, Alibaba, and JD have been rumored to be eyeing an entry into this lucrative market as well.
Based on my observations, e-commerce in Southeast Asia is on the same trajectory as China e-commerce, except for a 4 to 5 year delay for desktop e-commerce – SEA mobile e-commerce only lags 3 to 4 years (more on this later). The main reason that I believe this is that both China and SEA have similar ecosystems – they never really went through Web 1.0/1.5. Both markets lack a quality, open long-tail publisher inventory. The emphasis is on ‘open’ because China did in fact go through a blogging boom that happened on Sina’s popular but closed blogging ecosystem which didn’t allow third-party advertising.
Due to this lack of quality long-tail inventory, China’s online advertising ecosystem never developed beyond the major portals such as Sina and Sohu and hence forced Internet companies to explore non-advertising based monetization such as Value-Added Services (VAS) and e-commerce as ways to make money. For example, close to 90 percent of Tencent’s revenue today comes from VAS and e-commerce. Compare this to the U.S. where companies like Google, Facebook, and Instagram have always been advertising-first businesses. All this accelerated the growth of e-commerce in China from a supplier side. Southeast Asia has a similar advertising ecosystem as China and our hypothesis is that it will follow China’s path of e-commerce.
Secrets to Striking It Rich In SEA – Understanding the Differences
Now that we have agreed that SEA is the next e-commerce gold rush, how does China go about entering this lucrative market? There are generally two schools of thought regarding market entry which I’d like to call ‘Silk Road 2.0’ and ‘Barbarians at the Gate’.
The ‘Barbarians at the Gate’ approach has often been covered in countless business school case studies. We’re talking about the eBays, the Googles and the Groupons forcing their way into China and then losing to domestic competitors. It’s the culturally least-sensitive approach and the one most likely to fail. Ironically, not only does this apply to Western firms entering China but also Chinese companies trying to go abroad. The Chinese search giant Baidu being a recent case in point. The other approach is the more culturally sensitive one which I’d like to call ‘Silk Road 2.0’. Just like ancient trade back in the days, ‘Silk Road 2.0’ focuses on trade and partnerships to enter a new market as well as a solid understanding of the nuances of the market one is entering.
Why Southeast Asia Is Different
C2C will not be dominated by one key player like Taobao in China
Unlike China, the C2C e-commerce space will not be dominated by one key player like Taobao in China. Alibaba rode China’s manufacturing and export boom which benefited Taobao, allowing the latter to grow into the C2C juggernaut it is today. SEA isn’t a manufacturing powerhouse compared to China. As a result, the C2C space here will remain fragmented for the foreseeable future. Instead, there will be different C2C platforms addressing unique consumer needs.
At the higher end of the C2C spectrum, players like Lazada and Tokopedia are trying to mimic the Tmall model, going after higher-end brands. At the lower end, incumbents such as Rakuten, Kaskus, and OLX are more like a long-tail version of Taobao or digital flea markets. There are also new entrants like Line, the popular messaging app, which is trying to establish a foothold in the mobile marketplace domain.
Instagram, Facebook, and Line are major ‘shadow’ marketplaces in SEA
While banned in China, Instagram, Facebook, and Line are the most popular social media platforms in SEA. Their popularity combined with local entrepreneurship and ingenuity has resulted in these platforms informally being used for e-commerce. Because of their dominance and reach, these platforms should be considered as serious competitors to anyone looking to disrupt the e-commerce marketplace game in SEA.
Mobile e-commerce adoption will be faster in SEA than in China
In Shanghai I caught up with one of China’s leading “Taobao Partners”. These TPs help brands operate stores on Tmall, taking care of everything from marketing, merchandising, store design, as well as fulfilment and logistics. This TP talked about how his company was shifting strategy away from Tmall and towards WeChat stores. This is because within less than one year WeChat and its mobile commerce platform has completely disrupted the e-commerce space in ways that make mobile commerce in “mature” markets like U.S. and Japan look like child’s play. Consumers in China can order food, book taxis, pay bills, transfer money, get their laundry done and sell products all within one single app.
This is where mobile commerce in SEA is headed. The biggest reason for this accelerated development is the fact that SEA is truly a mobile-first market. Back in 2008, most, if not all, of China e-commerce was done via desktop or laptop computing. In SEA today, for many consumers, the smartphone is the first and only foray into Internet and e-commerce. According to a Google study, in China 8 percent of users only access the Internet via a smartphone whereas this number is 31 percent and 21 percent in Malaysia and Vietnam.
We’ve already seen glimpses of the potential of mobile commerce in SEA. As mentioned before, there’s a huge shadow e-commerce market, with transactions happening on Instagram, Facebook and Line. Also, Line has experimented and achieved success with mobile commerce initiatives such as Line Flash Sale and Line Groceries.
Open vs. “closed” system – “Open” SEA will lead to hyper-competition
China is a closed system. In the past, the Great Wall of China kept barbarians out of the middle kingdom. Today, the “Great Firewall of China” keeps out foreign Internet and e-commerce companies. SEA is an open system with porous borders. As a result, competition in the SEA e-commerce market will be more intense as local companies such as MatahariMall and iTruemart and global firms like Rocket Internet, Alibaba, JD and Amazon duke it out for dominance.
COD will remain necessary to win in SEA
Last week in Shanghai, I was surprised to see how easy it was to pay for things using Alipay and WeChat. My friends paid for their orders as well as transferred money among themselves by a click of a button inside WeChat. Forget about carrying and swiping your Square dongle. And this isn’t just a novelty feature used by early adopters – Alibaba’s financial arm Yu’e Bao has over $92 billion under management, making it the biggest money-market fund in China and the fourth-largest in the world, according to Quartz. Thanks to Alibaba and WeChat, COD decreased from over 70 percent of total payments in 2008 to less than 21 percent recently.
SEA, however, doesn’t have an Alibaba or WeChat yet. Due to their size and reach, Alibaba and Tencent were able to turn their online payment methods into the defacto standard for e-commerce in China. SEA is still fragmented and until local financial institutions and/or e-commerce players get their act together in terms of payment platforms, COD will remain the dominant payment methods covering over 80 percent of total payments.
Cross-border e-commerce is as overrated as the real gold is in Southeast Asia. SEA e-commerce is like China 4 to 5 years ago. If you regret having missed out on China and India, now is the time to act. Getting in early will allow companies to reap the benefits of a market that’s slated to grow from $7 to $8 billion over the next few years (A.T. Kearney, 2014). Understanding the nuances of SEA versus China will allow you to avoid common pitfalls and position yourself for e-commerce fortunes.
More about the writer, aCommerce CMO Sheji Ho