Japanese e-commerce hangover forming in SEA?

  • Rakuten shifting from B2C to C2C model, Sumitomo gets out of Malaysia
  • Possibility of competing against investee could serve as a cautionary tale
Japanese e-commerce hangover forming in SEA?

ARE Japanese investors in the South-East Asian e-commerce space beginning to suffer from a hangover? And could the startups they have invested in suffer an even larger one?
Let’s start with the Japanese investors first. While it is too soon to make conclusions, two recent moves by large Japanese companies to divest their interests in the South-East Asian e-commerce space suggests that corporate culture could be at fault.
Rakuten’s announcement last week that it was shutting down its e-commerce operations in Malaysia, Singapore and Indonesia, while putting up its stake in Thai e-commerce site Tarad for sale, to refocus on mobile C2C (consumer-to-consumer) commerce in the region, has grabbed all the attention.
But it was not the only exit by a Japanese company. On Jan 6, Sumisho Ecommerce Malaysia Sdn Bhd, a Sumitomo Corp subsidiary, sent a letter to some of its partners in Malaysia announcing that it sold its e-commerce site soukai.my, which it had been running since early 2014, to Malaysian company Hermo (M) Sdn Bhd.
Hermo has since renamed Soukai.my to Hermiso.com. Hermo’s chief executive officer is Tan Swee Yeong, a well-regarded entrepreneur in Malaysia who also happens to be ‘entrepreneur in residence’ at Singapore-based Crystal Horse Investments Pte Ltd. Both Tan and Crystal Horse are investors in Hermo.

The letter was signed by Daisuke Maeda, president of Sumisho Ecommerce, the holding company that operated Soukai.my. [The preceding three paragraphs have been amended slightly upon further clarification]

Apparently the growth Sumitomo expected in Malaysia did not materialise, therefore putting pressure on its operations.
No reflection of SEA e-commerce growth
Japanese e-commerce hangover forming in SEA?While one Singapore-based venture capitalist (VC) suggests, “We’re not yet anywhere close to the inflection point that would make this region a must-have for a global B2C (business-to-consumer) player,” a number of other VCs that Digital News Asia (DNA) reached out to were quick to quash the possibility that the moves reflected a slowing down in South-East Asia’s bullish e-commerce picture.
“In no way does it reflect on the e-commerce picture in South-East Asia. The pie is growing and it naturally means more players are attracted to the space and competition is increasing,” says a SEA-based VC, declining to be named for fear of offending Rakuten.
The VC’s own e-commerce portfolio has done well last year. “The pickup from our portfolio companies has been better than we thought, both from an adoption and revenue aspect,” he claims.
Catcha Group chairman Patrick Grove agrees that the future of e-commerce in the region is very bright. To him, Rakuten’s withdrawal has more to do with the fact that “corporate players can never beat an entrepreneur-driven business in the Internet space.”
Catcha Group is a substantial shareholder in the Australian Securities Exchange (ASX) listed Ensogo Ltd (formerly known as iBuy), which is a mainly South-East Asian-based e-commerce player.
The Japanese way at fault?
Yet some VCs wonder if the traditional Japanese way of doing business is at fault here. “Rakuten’s cutting back probably has to do with its execution,” suggests the regional VC.
“It may not be fair but the stereotype of the Japanese is that they tend to take proven models from Japan and do not do any customisation in adapting to local market needs. But Rakuten’s moves also show that they are being smart and nimble enough to cut their losses and focus on other markets.
“Traditionally, Japanese companies will beat a dead horse and keep losing money, but this shows they are turning over a new leaf,” he ventures.
Responding to questions from DNA via email, Arshad Ahmed, cofounder and managing director of Silicon Valley-based Elixir Capital, points out that Japan’s market tends to be both idiosyncratic and exclusive in many ways.
“Singapore is practically the opposite – open to outsiders and accessible. And each of the nearby South-East Asian e-commerce markets of Malaysia and Indonesia differ from one another as well.
“If Rakuten’s vision was to impose a Japanese way of doing e-commerce onto a South-East Asian audience, inevitably there would be shortcomings and discrete failures in this approach.
“Perhaps those failures added up to more than Rakuten was willing to bear,” suggests Arshad.
For Rakuten at least, those failures could yet pave the way for its future success in e-commerce, with a Rakuten spokesperson telling DNA via email, “We believe in the long-term growth of e-commerce in South-East Asia.

“As the market itself changes and adapts, we are looking toward C2C and mobile business models for e-commerce and other businesses globally and in South-East Asia.”

Cautionary tale

Japanese e-commerce hangover forming in SEA?

Yet this is where the picture gets interesting as Rakuten, through its South-East Asian venture arm, invested in Singapore-based C2C mobile commerce startup Carousell in November, 2013.
There is a real possibility that Rakuten could indeed launch a competing product against Carousell. VCs tell DNA it also depends on whether the contract Rakuten Ventures signed with Carousell has a “no compete” clause.
In response to DNA’s question on this, the Rakuten spokesperson said, “We are unable to comment on contract terms.”
An existing VC investor in Carousell also declined to comment when asked about this possibility.
However, Elixir Capital’s Arshad had the following comments: “Any time an entrepreneur shares proprietary information, whether it’s with a new investor or potential investor, it’s critical to consider how the business will protect its confidential information from being exploited.
“Contractual protections are helpful, but a small company may not have the resources to litigate against exploitation. Better to be prudent in how and when information is disclosed in the first place – compartmentalise the sharing,” he advises.
A Singapore-based VC feels that if there is no such protection, some fault would lay on the feet of the founders.
“If no provisions have been negotiated that specifically prevent Rakuten from launching a competitive product in Carousell markets, then the consequences of taking money from an affiliate of a possibly competitive strategic player are in my opinion clearly on the founders,” he says.
“Our advice to founders is always to work with an experienced and neutral VC firm with an independent investment committee that can provide suitable advice on how to handle relationships with such strategic players.”
Some VCs also point out that the fact Carousell could possibly face competition from a subsidiary of its investor, would serve as a cautionary tale to all startups seduced by the lure of a corporate VC coming into the picture with not just funding but its customer base, vendor relationships, and rich data that can be mined by startups.
“The doomsayers predicting the eroding role of VCs in the face of increasing corporate VCs entering the market are off the mark,” says the South-East Asian-based VC who requested anonymity.
“While startups have to always weigh the risk-reward scenario with a corporate investor, with pure VCs, they know that we will never compete against them,” he argues.
While it’s far from certain that Rakuten’s eventual C2C mobile commerce product will be a direct competitor to Carousell, one thing is for certain: Startups will now be a lot more careful when considering corporate investors, especially those which could possibly launch similar products.
And those pure-play VCs suddenly do look a lot more attractive.
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