China investments boosting Asean e-commerce
By Sharmila Ganapathy February 8, 2018
- Asean e-commerce is taking off, but logistics and payments issues remain
- The rise of e-commerce in the region should bring down inflation
THE entry of Chinese tech giants is likely to bring capital and know-how into the Asean e-commerce sector, while also easing constraints on logistics and e-payment adoptions holding back e-tailing, global research firm Credit Suisse said in a recent research report.
The research firm highlighted that despite rapid expansion at the rate of 23% compounded annual growth annually over the past five years, business-to-consumer e-tailing penetration is less than 2% of total retail sales in Asean.
“To provide context, this was where China was in 2010 and only a tenth of Chinese e-commerce penetration today,” Credit Suisse said in its report titled Asean e-commerce- hidden tigers meet tech dragons.
However, the research firm believes the Asean e-commerce scene will change significantly due to the entry of Chinese tech giants into the region. “China tech-related investments into Asean have surged in 2017- the number of deals quadrupled and the value rose more than three times,” it pointed out.
For example, dominant tech players such as Alibaba, Tencent, and JD.com have stepped up their game in Asean through direct investment, partnerships/joint ventures and the acquisitions of different e-commerce players in the region.
Why Chinese tech giants are important to Asean
According to Credit Suisse, Chinese tech giants inject capital into local e-commerce startups while bringing cutting edge know-how to complement existing offline retail partners in the region.
“For example, JD.com and Central Group are opening a joint-venture e-commerce platform in Thailand, with JD.com providing technology and logistics support, and Central Group contributing merchant relationships and brand recognition.
Tencent has also been investing in SEA Ltd, helping to fund SEA’s expansion beyond games into the ecommerce and payments space. Alibaba’s recent investment into Indonesia’s Tokopedia will also help enhance the scale and quality of Tokopedia’s offerings,” the research firm pointed out.
The other thing that these tech giants bring to the e-commerce scene in Asean is competition, intensifying the already competitive landscape.
“Alibaba and Tencent are probably watching each other’s moves in the region and propel each other to expand in Asean. Other large players have been flooding into the market. For instance, Japanese tech investments into Asean has been rising in recent years, including by Softbank and Rakuten Ventures.”
Credit Suisse also noted that Amazon recently launched its first service, Amazon Prime in Singapore late last year. “In addition, Indonesia’s Salim Group and South Korea’s Lotte Group joined forces in October to launch an ecommerce platform in Indonesia selling leading retail brands.”
Finally, the entry of tech giants could serve as catalysts to drive faster policy implementation by Asean governments, Credit Suisse said, citing the example of Malaysia’s digital free trade zone joint project with Alibaba.
Helping solve logistics and payments problems
“These three factors together should help tackle the two key binding constraints that in our view have held back growth of e-commerce in Asean, namely logistics and payments,” the research firm added.
It said that the lack of efficient logistics and fulfilment has been a factor that has held back e-commerce growth in this region.
“Although digital platforms can improve access to information such as pricing and product variety, getting products delivered to customers in a cost effective and timely manner is still challenging in Asean ex-Singapore. For instance, according to the Google/Temasek 2015 report, delivering goods outside Java can take more than 10 days and sea freight costs could exceed US$1,000 for a 20-foot container in Indonesia.”
The research firm noted also that home-grown startups such as Ninja-Van, Deliveree and aCommerce (pic, above), together with larger logistics companies such as Singpost and GD Express have already been entering the market and receiving funding to tackle the last-mile logistics problem in Southeast Asia.
According to Credit Suisse, Chinese e-commerce companies have a track record of using warehouse automation technology to drive efficiency, citing JD.com which opened its fully automated sorting centre just outside of Shanghai, which handles about 9,000 parcels per hour, work that was normally done by 180 human sorters.
“Chinese companies can bring this know-how and technology to drive greater efficiency in Asean ecommerce,” the research firm added.
Secondly, the entry of deep-pocketed Chinese players will likely raise pressure to scale up e-commerce markets.
“This has resulted in many players offering free shipping and discounts to gain market share. In the long run, it could also lead to higher ecommerce trade volume that makes it more economical to further invest in technology.”
The research firm opined that countries with less severe physical infrastructure constraints such as Malaysia and Thailand are better position to benefit from this import of foreign logistics know-how.
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Lack of familiarity with e-payment remains
Another area highlighted by Credit Suisse in its report was the lack of familiarity with e-payment, which is another key constraint preventing Asean e-commerce from flourishing.
“For example, ‘Cash-on-Delivery’ methods that are risky for merchants and costly for consumers still account for 65%-80% of ecommerce transaction in Indonesia and Thailand respectively. The constraint on payments is particularly challenging in the Philippines, Vietnam, and Indonesia where 60%-70% of citizens are still unbanked.”
However, there are two potential catalysts Credit Suisse sees that could help boost e-payment adoption in the Asean region. One is that the entry of Chinese e-commerce giants into Asean could bring in the wealth of experience that they have in successfully transforming customer culture and adoption of e-payments.
“These digital players often use their services including online games, ecommerce market place, and ride hailing to ‘cross-sell’ consumers on their payment platforms. In addition, Chinese tech companies also provide financial ammunition to already rapidly growing local players, enabling them to expand at a faster pace. For example, Tencent, JD.com and Meituan-Dianping’s investments into Go-Jek – already a key e-money player in Indonesia – give it the ability to scale up further.”
The second catalyst is the fact that some Asean governments have recently made a big push to promote e-payment adoption. For example. Singapore and Thailand have introduced services allowing inter-bank transfers between individuals using just mobile numbers or individual ID card numbers (PayNow in Singapore and PromptPay in Thailand). In Thailand’s case, the scheme reduces bank transfer fees.
“Both PayNow and Promptpay will be expanded beyond individuals to businesses, with plans to also link both platforms together to facilitate cross-border transfers. TH and SG are each developing their own QR code standards, with plans to also implement a National Digital Identity system.”
Asean e-commerce is taking off
According to Credit Suisse, the entry of Chinese tech giants as well as other foreign players should stimulate rapidly growing e-tailing markets in the Asean region.
“We think e-tailing growth could outpace offline retailing six to 10 times over the next few years vs six times in the past two years,” the research firm said, noting also that even economies with low single-digit private consumption growth trends such as Singapore and Thailand could see double-digit expansion in the e-tailing segment.
Credit Suisse also thinks that Indonesia has the greatest market potential over the next five to 10 years given its large and rapidly growing middle class and young consumer market.
“However, over the next one to two years Indonesia’s growth in ecommerce will be partly capped by logistics constraints, especially related to hard infrastructure connectivity. This is a bottleneck that cannot be resolved easily even with advanced technology and know-how from foreign players,” it added.
“On the contrary, Thailand is a less obvious choice for ecommerce growth in the long run, but we see a good chance that it could experience a surge in ecommerce activities over the next two years. Although Thailand does not possess a strong structural consumption story partly due to its aging population, many ingredients are coming together to enable its ecommerce to take off in the near term,” the research firm opined.
Transforming retail, disrupting the financial sector
Credit Suisse expects the rise in e-commerce to potentially benefit the brand owners, mixed effects for convenience stores and negative for department stores.
“International experience suggests ecommerce helps disintermediate retail distributors, while connecting brand owners to customers. The negative impact on retail distributors could be larger than most observers anticipate if e-commerce players use e-tailing as a hunting ground for customer data to enter financial services,” it added.
According to Credit Suisse, lessons from China suggest the disruption will likely extend to the financial sector as tech players also venture into the fintech space using data accumulated from e-commerce.
“We think many ecommerce giants would use e-tailing as starting point to accumulate consumer data and move into financial services including saving and loan products, following the playbooks of Alibaba and Tencent in China.
“For example, in Thailand, the partnership between CP Group’s Ascend Group and Ant Financial could potentially bring together an extensive 7-11 branch network, rich local customer data from True group, and Ant Financial’s credit scoring technology.
“As another example, SEA Ltd could integrate Airpay into its rapidly growing e-commerce platform Shopee, feeding its e-money business with rich data from both e-tailing as well as its gaming business Garena,” the research firm said.
It added that financial institutions focusing on micro loans are likely to be more exposed to competition from these fintech players as the latter focuses on the underbanked population.
“Banks could be more impacted by the reduction of fee income partly because various governments are promoting e-payment adoption.”
Downward pressure on inflation
According to Credit Suisse, the globalisation and greater competition could result in lower inflation. “While difficult to quantify, we think the rise of ecommerce should bring down inflation through cost savings due to more efficient sales channels and increased competition.
“Academic literature suggests that drags on inflation exist even when ecommerce penetration is low due to greater price transparency,” the research firm said.
“We think these dampening effects on inflation could be even larger in the emerging market context. First, the potential costs savings and efficiency gains from using more online sales and distribution channels is likely to be larger in markets with many small and less efficient firms.
“Second, improvement in price transparency could help reduce the need to rely on middlemen who tend to earn fat margins and allow consumers to shop around for the cheapest deals more easily,” the research firm concluded.
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