Since joining a private equity firm a long, long time ago (but not, alas, in a galaxy far, far away), I have developed a fairly poor opinion of the efficacy of consultants, particularly in the area of _predictions._1 I am also skeptical of their strategy and policy recommendations. Yet, I do admit that they can do good work in collecting and summarizing data, which can be very useful when trying to understand what is going on in a particular region.
Recently, I‘ve been researching and thinking about e-commerce in Southeast Asia and the challenges it faces. One of the better reports on this topic that I’ve read has been a February 2015 report by ATKearney.
For the most part Southeast Asia has not received the same level of interest and attention as its neighbors India and China. Yet, by rights it should receive more attention. With 630 million people, it is the third largest market in the world behind China and India. It had a total GDP of $2.38 trillion in 2014.2
Southeast Asia is not a unified economy or political entity; it consists of ten countries that are at different levels of economic development, have different legal systems, and different languages and cultures. While there is some overlap—Indonesia and Malaysia sharing a common language (with some differences), Malaysia and Singapore sharing a common history as part of the British Empire and similar common law legal systems—these countries remain very different and harmonization initiatives are still in their infancy.
While there have been some moves towards creating a common market for goods, in the form of the ASEAN Economic Community, it is still a work in progress. This policy of creating a common market for goods has already reduced tariffs among the ASEAN countries, but a lot of work remains to be done to dismantle non-tariff barriers.
Mobile penetration in the five founding ASEAN countries—Indonesia, Malaysia, the Philippines, Singapore and Thailand—is high (greater than 75%), although fixed line broadband penetration in most ASEAN countries is low (less than 10% except in Singapore).3
E-commerce in Southeast Asia is new and starting from a very low base, with e-commerce penetration of 3% in 2015 and around $6 billion in sales, compared with 14% penetration and more than $250 billion in sales in each of the U.S. and Chinese markets.4
One can say a lot about Southeast Asian e-commerce. In the interest of brevity, I’ll limit myself to three observations.
I have already mentioned that Southeast Asia is a fragmented market consisting of ten countries with very different levels of economic development, legal systems, cultures, and languages.
The differences among the Southeast Asian countries and between Southeast Asia and the rest of the world requires local management teams that are deeply aware of the conditions in their local markets. Southeast Asia is, in my view, too different; expatriate investment professionals are too far removed from the day-to-day experience of living in Southeast Asia. Most of Southeast Asia, beyond the confines of the large urban centers such as Kuala Lumpur, Bangkok, Singapore and Jakarta, is a world of small towns and villages, poor electrical and communications infrastructure, and limited transportation infrastructure and logistics facilities.
Indeed, when hiring to fill positions in its private equity and infrastructure investment teams in Southeast Asia, a key criterion Partners Group used was investing and/or operating experience in Southeast Asia. The same applies, with even greater urgency, to startups and established multinational corporations: their management teams must be local, and must understand at an almost bone-deep level the conditions on the ground.
Moreover, this fragmentation poses a strategic question for startups and established multinational corporations alike: Should it attempt to enter all the major Southeast Asian countries simultaneously, or focus its attention on gaining market share in one country in Southeast Asia before expanding to other countries. Indeed, when I was at the Wharton Global Forum in Kuala Lumpur in March 2016, I had the great pleasure to hear some Southeast Asian entrepreneurs and venture capitalists discuss this precise issue, in the context of startups deciding whether to go regional from the start, or to start in one country and expand.
Southeast Asia has largely leapfrogged to mobile, with most online access being made through smartphones and tablets rather than desktops and laptops. The high level of mobile penetration reflects the poor fixed broadband connectivity in many parts of Southeast Asia outside of Singapore.
For e-commerce companies (or indeed any company operating primarily in the online space), mobile-first design is a necessity. For many Southeast Asian residents, mobile is their only means of accessing the internet. For example, Lazada, one of Southeast Asia’s largest e-commerce companies, has seen the traffic share of mobile (smartphone and tablet) go from 11% in 2013 to almost 50% by the end of the first quarter of 2014.
Designing a “desktop” site and then subtracting features to generate a “mobile” site is particularly unwise. A wiser approach is to design the mobile site first, taking into account the way users actually use the site, and then design the “desktop” site, so that the user’s interaction with the site is as painless as possible.
Mobile first also means developing sites and user experiences that are lightweight to minimize loading times and data downloads on bandwidth constrained connections. It may involve building mobile apps for Android and iOS to offer a native experience on customers’ devices. It may also involve e-commerce via social media networks like Facebook and Instagram.
Social media is vitally important in Southeast Asian e-commerce: according to Bain & Company, more than 80% of e-commerce customers use social media such as Instagram and Facebook or messaging apps such as Line, WhatsApp, BBM, and Zalo to research products or connect with sellers. Indeed, informal C2 e-commerce in Southeast Asia often happens via social media, for example Instagram, where a customer might browse products on an Instagram “shop”, make product inquiries via Line, make payment via bank transfer or other method (often not credit cards), send confirmation of payment to the shop by Line, and receive shipment and tracking data by Line.6 This informal e-commerce on social media accounts for approximately 30% (by volume) of all e-commerce transactions in Southeast Asia.
While mobile penetration is high, one must note that e-commerce penetration remains low, with Bain & Company noting that only one in four consumers above the age of 16 had ever made an online purchase.
Payment and Logistics
It is trite to say this, but if a customer can’t take delivery of the goods he or she orders within a reasonably short period of time, there won’t be a sale. As such, getting the logistics part of the equation right is crucial not just in Southeast Asia but in every region of the world.
Logistics in Southeast Asia is a work in progress. Geography and the natural environment pose challenges. The region includes Indonesia and the Philippines, both of which are archipelagoes, and nations with dense tropical rainforests such as Malaysia, Myanmar, Thailand, Vietnam, Cambodia and Laos. Rail, road and maritime transportation are works in progress. The last-mile delivery of goods purchased online is also challenging, particularly outside of the urban centers, given the poor quality of the roads and the fact that some small villages may not even have addresses for postal deliveries.
If that weren’t enough, there is no common market with free flow of goods among the ASEAN countries yet. As such, goods crossing from one ASEAN member state to another are likely to require customs clearances and possibly the payment of import duties or other equivalent taxes prior to entry.
Finally, traditional warehouses and logistics firms in Southeast Asia are not set up for e-commerce transactions, which involve small (often individual) packages that must be sent to individual customers rather than large pallets and containers full of standardized items from one warehouse to another (or to retail stores).
On the payments side, a lot of ink has already been spilled on this topic, so I’ll confine myself to one observation. While almost 100% of Singapore’s population has a bank account, and Malaysia is not that far off with around 85% of its population having a bank account, the proportion of unbanked citizens in the other ASEAN countries is significantly higher (greater than 50% in most cases).
As such, e-commerce in Southeast Asia depends a lot more on cash-on-delivery terms and local pickups from pre-agreed locations, rather than online payment (via credit card) and door-to-door delivery.
E-commerce in Southeast Asia is fascinating—it has in many ways leapfrogged a great many developments in the United States, Western Europe, and China. It is not an easy region to understand without actually living in the region.