When Singaporeans shop online, they tend to buy products sourced from outside the lion state.

Overall, it’s estimated that 55% of all ecommerce transactions in Singapore are cross-border – meaning the items were listed on etailers in the US or China, for example – and then shipped to their eventual destination.

The statistic is higher than corresponding figures for cross-border online trade in Japan, South Korea, and China.

This is undoubtedly strengthened by the fact that the overwhelming majority of ecommerce purchases in Singapore are prepaid with credit card and Singaporean consumers are exempt from GST and import duties as long as the total value of their order is below S$400.

Singapore is also a high-income country, meaning residents can afford to splurge, while also bereft of the same logistical challenges that stymie higher adoption of ecommerce in countries like Indonesia and the Philippines. Next-day delivery is the norm.

In 2016, the World Bank declared Singapore the fourth-best country for logistics infrastructure in the world noting it’s an important hub for regional and world trade, located conveniently in the heart of major shipping lanes.

There are other factors at play, too. Amazon and Singpost have a collaboration to facilitate the delivery of overseas purchases within three days – roughly the average time it takes to deliver a domestic order in Indonesia.

Despite the fantasized utopia of a truly open world economy – a scenario where goods and services can move unhindered to where demand is – the reality is that cross-border flows still involve a great deal of friction.

Cutting down cross-border fees for Singaporeans

The first problem is that there’s a high degree of financial inefficiency, with banks and payment processors trying to capitalize on arbitrage opportunities to bump up their own bottom line. Foreign exchange rates also work against consumer interest with banks routinely charging far more than official rates. And lastly, consumers are simply unaware of the available discounts and promotions that may be applicable to their purchase.

Jake Goh, CEO of RateX.

“Consumers are still paying unnecessary fees when they shop online, e.g. they pay 2%-5% in transaction fees on top of the price of the goods they purchase due to the frictions in existing payment networks,” explains Jake Goh, CEO and co-founder of RateX, a Singaporean payments startup that’s trying to iron out these inefficiencies and level the playing field.

RateX, which recently raised a US$2.3 million pre-series A funding round, has built a free browser extension – currently available on Chrome and Firefox – where users can get the lowest exchange rates for overseas purchases on Amazon and Taobao.

The extension also aggregates coupon codes, applying it directly to applicable sales. It leverages partnerships with Sephora, Zalora, ASOS, and more.

The extension is currently only available for consumers in Singapore, but the team expects to add Taiwan and Indonesia to its roster later this year. The long-term goal like most companies is to dominate the region.

“Southeast Asia is the world’s fastest-growing internet market. Gross merchandise value of ecommerce will rise to US$65.5 billion by 2021, up from US$14.3 billion in 2016,” outlines Jake referring to a study by Frost & Sullivan.

Jake claims RateX has helped shoppers save S$500,000 in both foreign exchange conversion fees and coupon codes since launch. He adds that they’re expanding at 30% month-on-month but doesn’t specify whether that’s in terms of users or transaction value.

A cursory examination of the website reveals the number to be actually S200,000 though.

Leveraging blockchain

The founder accepts that while the ultimate goal is to simplify cross-border commerce for all of Southeast Asia, a key hurdle the company faces is siloed infrastructure when it comes to payment and settlement mechanisms. There are significant overheads and fees involved when dealing with multiple currencies and paying merchants in different countries.

So what’s the solution to this problem? Jake believes blockchain can minimize the intermediaries involved in cross-border settlements. The team’s already working on the Rate3 token – a proprietary payment network built on top of the Stellar horizon platform that specifically looks to solve problems in fintech.

“This significantly reduces the risk and fees associated with different banks in various countries […] RateX eventually leverages on [it’s] own payment network to scale in a much more efficient way compared to existing methods,” explains Jake.

The eventual aim is for the Rate3 token to be used pervasively across the ecommerce ecosystem, bridging together shoppers, merchants, 3PLs, wholesalers, and manufacturers.

“We believe that blockchain technologies are key to creating this [enabling network],” affirms Jake.

The key challenge for the team will be convincing the disparate players in the ecosystem to come onboard by accepting this token as a payment mechanism. It’s unclear what the incentive structures will be for them to move away from existing structures towards Rate3.

At the moment, however, the primary mode of monetization is via affiliate sales, where merchants give RateX a commission of the sales it brings to them. The RateX browser extension will suggest products as users browse sites and the site has an updated list of trending deals.

“This business model allows us to give consumers zero markup on exchange rate conversion fees and transaction rate fees,” outlines Jake.

Singaporean shopping preferences

The startup’s been facilitating shoppers in Singapore for a couple of years now. What has it noticed about trends in the country?

Jake reiterates the view that Singaporeans are one of the top cross-border shoppers in the world. Despite a thriving mall culture, the sheer variety of international brands and fast-fashion trends means that all products cannot be found in local stores. Even when they are, it’s sometimes cheaper to purchase from overseas via online shopping even after factoring in shipping fees.

The two largest segments for its user base are consumer electronics and appliances – which are primarily sourced from either the US or China – as well as clothing and fashion brands that haven’t established a presence in Singapore yet.

The dynamic goes some way in explaining why Amazon set up shop in Singapore as well as the decision of Lazada to offer merchant goods from Alibaba’s Taobao marketplace. Consumer purchase intent is marked and vivid, why not double down to make the process even more seamless?

Jake also notes that most RateX shoppers display a tendency to purchase things late at night.

Online activity spikes between 10PM – 1AM in Singapore.

Mobile shopping is on the upswing, Jake says, but it’s still not the dominant channel particularly when it comes to big-ticket purchases. Desktop browsing and shopping are deeply ingrained in the Singaporean consumer psyche, a factor that Jake believes is due to the better product comparison features on a larger screen.

Singaporeans are also incredibly plugged in. The average resident has over three connected devices and the overall internet penetration rate is about 85%, one of the highest in Asia, but Singapore isn’t a mobile-first country like Indonesia or the Philippines. Consumers accessed the web on desktops and PCs before the smartphone revolution engulfed the region. It doesn’t seem like these preferences are going away anytime soon.

Indonesia is arguably the most important internet market in Southeast Asia as a result of its sheer size, emerging middle class, and digitally savvy population.

The annual global digital ecosystem report by We Are Social says Indonesia has 132.7 million internet users, which points to a penetration rate of 50% of the population. 130 million of these use some form of social media, showing how plugged in Indonesians are when it comes to documenting their lives online or using platforms like YouTube to consume content.

Source: We Are Social

With half of the Indonesian population still offline, there’s massive potential for ecommerce ventures, smartphone manufacturers, as well as brands building products to appeal to millennials in the country.

Other countries in Southeast Asia – Malaysia, Singapore, Thailand, and the Philippines for example – may have higher internet penetration rates but their smaller populations can’t compete with Indonesia in terms of volume.

It’s these numbers that have forced investors to take notice.

study by Google and AT Kearney indicated that venture capital activity in Indonesia has grown 68X in the past five years, driven mainly by growing interest in ecommerce and ridesharing.

Total VC activity in the first eight months of 2017 was recorded at US$3 billion – more than double the number for the entirety of 2016, which was US$1.4 billion.

The same study predicted the volume of investments in Indonesia will continue to grow in the foreseeable future because VC investment as a percentage of GDP in Indonesia is actually lower than its Southeast Asian counterparts.

Source: Google / AT Kearney

What are Indonesians doing on the web?

Indonesian residents love the internet. 79% of survey respondents in the We Are Social report said they logged on to the web at least once a day. The average daily time spent online was almost 9 hours with approximately 5 hours dedicated to social media and streaming music.

Source: We Are Social

The majority of web traffic in Indonesia comes from mobile phones, facilitated by the availability of cheap smartphones to the Indonesian population coming online for the first time; sidestepping desktops and PCs directly.

Access to mobile has also caused excitement around fintech as only 36% of Indonesians possess bank accounts and only 3% have credit cards. If e-wallet platforms get it right, there are 125 million mobile internet users waiting for easy banking.

[subscriber_signup]

Indonesians are also increasingly using the internet to embark on their product buying journeys. 45% of Indonesian netizens search online for a product or service to buy with a similar number landing on an online store and 40% make ecommerce transactions at least once a month.

Source: We Are Social

Fashion & beauty categories attract the highest amount of spend online, almost double that of electronics despite having a lower basket size than consumer appliances like mobile phones, cameras, and wearable gizmos.

It was estimated that Indonesians spent close to US$10.3 billion online in 2017.

Source: We Are Social

Dizzying statistics aside, the Indonesian market still has plenty of space to grow.

Expect heightened competition in the years to come as incumbents jostle for space and keep raising large war chests to outmuscle opponents. VCs, especially with an entrenched position in the market, can’t afford to back down now – there’s too much skin in the game for them to consider any hasty exits.

Recent developments already demonstrate how investors are taking a long-term view of the market. Alibaba injected over a billion dollars in local ecommerce marketplace Tokopedia last year. JD.com, Alibaba’s direct rival in China, has opened fulfillment ccenters across Indonesia with a view to keep expanding. And homegrown unicorn Go-Jek is rapidly transforming into a Wechat-esque ‘super app’ with users able to do everything from hail motorbikes to get their plumbing fixed, and pay for it via e-wallet.

In 2015, Thailand’s insurance sector was valued as the 8th largest in Asia, with an annual growth rate of 4.5%. Thai residents spent approximately $334 on insurance every year, accounting for an overall penetration rate of 5.5%.

Life insurance accounts for the largest segment within the insurance industry in Thailand. These are annualized premiums paid out in the event of death or permanent disability; or after reaching a certain age. If you subtract life insurance from the overall industry pie, premiums decline considerably to $100/capita.

Photo credit: Thaire.

And this is where the largest potential for growth lies.

Thailand is already considered to be an upper-middle income country by the World Bank, with a GDP per capita of $6,033. When you combine that with a rosy economic outlook, it’s straightforward to predict that the size of motor and travel insurance will rise, too. Higher disposable incomes will lead to a greater outlay on cars and vacations – and the insurance industry is bound to benefit.

But one of the problems currently plaguing Thailand’s insurance sector is that distribution channels are antiquated and riddled with inefficiencies. To purchase an insurance plan, you normally have to arrange for a broker to meet you, prepare an unwieldy amount of paperwork, and wait for the bureaucratic red tape to churn its wheels.

The entire process is frustrating from a consumer standpoint and expensive for insurance companies too; broker commissions can eat into premiums and the process is only scalable by hiring a greater number of agents.

In 2016, a total of $5.1 billion in non-life insurance premiums were solicited via brokers, agents, and bancassurance channels. Precise figures for online distribution aren’t available, but the channel did grow by 25% as compared to 2015.

One of the startups that’s trying to simplify the insurance acquisition process is Frank. It offers motorcycle, car, and travel insurance direct to consumers in Thailand via its website. Consumers apply for their insurance product of choice, receive an instant quote, and for certain products, can have the policy in a few seconds. It’s fairly hassle-free.

Frank’s co-founder Harprem Doowa admits they’re still a small player in a very “traditional industry” but he affirms their product is largely positioned towards millennials and future Thai generations who are far more comfortable transacting online and will continue to carry these preferences along with them.

“This will take time,” he adds, referring to overall adoption of Frank’s product.

Harprem ecommerceIQ

Harprem Doowa, Co-founder and MD of frank.co.th

Innovating the insurance value chain

Another key challenge for Frank is ensuring that all parties involved in the transaction are equally adept and comfortable with technology. At the end of the day, it’s another distribution channel and isn’t inherently marketing its own product.

Frank’s policies are underwritten by companies like Bangkok Insurance and AXA – large, unwieldy, and geriatric organizations resistant to systemic change and constant reinvention.

“Insurance companies themselves are still not ready with the backend to underwrite policies immediately. Most still require manual approvals,” explains Harprem.

Another problem is that many potential customers opt out of the process because they’re unfamiliar and uncomfortable with scanning and uploading documents. They require the support of an agent or customer support advisor to complete the transaction – driving up costs and somewhat negating Frank’s value proposition in the first place.

The third aspect hampering progress in insurtech are Thai regulations: Harprem explains that while they protect consumers, there’s a real bottleneck towards online conversions because of the multiple in-person verifications required.

Value-add Partnerships

The fledgling insurtech company has experimented with a number of ways to make it more visible and enticing to customers. One of these is partnerships with popular ecommerce players like Lazada, Grab, honestbee, and foodpanda.

ecommerceIQThis may seem like a contrasting list of partners – how does quick food delivery equate to online insurance? – but Harprem is upbeat about the benefits its brought to the table.

“Doing partnerships with many companies increases our exposure 30X and when [consumers] go and search online for insurance, they see Frank. It wouldn’t be the first time and therefore they are more likely to buy from us,” he explains.

That’s a critical takeaway – startups aren’t flush with the kind of cash that large organizations have, they have to stay lean. By leveraging relationships with online companies, even something unsexy like insurtech can be galvanized into a winning brand.

“The more customers see your brand, the more likely they are to buy insurance from you at a later stage,” exhorts Harprem.

Where do the opportunities and threats lie?

Of course, it’s possible that large insurance companies eventually sidestep players like Frank and start selling direct to consumers via web channels but this will involve channel conflict.

Specifically, it will alienate the vast number of brokers who currently provide the bulk of insurance revenues. Another complication is the sheer time insurance companies take to make decisions, hampered by bureaucracy and lengthy internal approvals processes.

Harprem says the team is completely aware of this but isn’t overly worried. Frank’s nimbleness means it can continue innovating and pivoting as and when the need arises.

“It took one of our partners two years to update their home page.”

There are two additional areas which, if done right, could provide considerable value in the coming years. One is ‘microinsurance’, or insurance for low-income households that provides protection for health risks, property damage, or other specific perils.

Harprem says there’s definitely a business case for it in Thailand but adds that it’s not a priority for Frank right now.

The other opportunity is changing fintech from just another distribution channel to overhauling the entire product in itself. That’s where technologies like blockchain have the greatest potential.

In Singapore, this is already becoming a reality. Electrify, which allows users to buy electricity on the blockchain, closed a $30 million ICO yesterday. Insurtech company PolicyPal, which is powered by blockchain technology, allows underbanked consumers to purchase products like agriculture, property, life, and personal insurance.

“This, in my humble opinion is true fintech,” says Harprem.

Coffee is the second-most traded commodity in the world after crude oil. The ubiquitous drink commands a sizable US$100 billion market globally, with exports accounting for US$20 billion.

But as traditional coffee drinking markets in the West exhibit signs of stagnation, Asia is stepping up to fill the void. Indonesia, India, and Vietnam are ranked within the top five fastest-growing markets in the world.

 

Part of the reason behind this spurt is product innovation in the value chain. The number of new coffee products in Asia rose by 95% between 2011 and 2016, offering consumers tantalizing choices and catering to local palettes.

Specifically, it was the growing role of coffee pods that spurred and accounted for 26% of global coffee retail innovation in 2016.

“As emerging market consumers develop their taste for coffee, innovation is stepping up a notch as drinkers trade up from instant to fresher-tasting coffee […] pod and capsule sales will [continue to] increase,” says Johnny Forsyth, global drinks analyst at Mintel.

This presents a rare opportunity for FMCG brands to cash in. Tea has generally been the caffeinated drink of choice across most of Asia but a combination of glitzy marketing, an increased footprint of global coffee brands like Starbucks, and “cafe socialization” is changing habits.

Nescafe Dolce Gusto doubles down on Asia

The Dolce Gusto machine was first introduced by Nescafe in 2006 as a cheaper alternative to its premium Nespresso offering. The mechanics are similar; consumers insert ‘pods’ of coffee to make instant drinks like cappuccinos, latte macchiato, espresso, and hot chocolate.

Sales of the machines have been rising steadily in Asia due to Nescafe’s social media campaigns to engender brand loyalty.

The company launched its first Southeast Asian customer relationship management program in Singapore. The email marketing campaign segmented users based on their individual profiles and alerted them about offers, new flavors, and seasonal products.

“From the highly-engaged Facebook following, we know that consumers enjoy that the brand is sophisticated but not too serious […] It has allowed us to develop a new, innovative programme which really engages members,” said Will Adeney, VP of marketing analytics for Ogilvy One.

More recently, in Malaysia, Nescafe deployed social listening strategies to further entrench Dolce Gusto as a fan-centric brand. The company learnt coffee drinking wasn’t an activity done in isolation; connoisseurs loved to document it on social media with a prodigious amount of hashtags. Engagement from followers was robust.

Key themes and hashtags linked to coffee in Malaysia.

This helped Nescafe develop marketing campaigns around user-generated content. Its fans were already posting brand images on social – why not give them an enhanced platform?

Nescafe leveraged user-generated content along with its own collateral.

Why does this matter? Because according to Nielsen, the most credible advertising comes from people we know and trust.

83% of people have faith in the recommendations of friends and family.

Another interesting caveat: 53% of millennials indicated that user-generated content has influenced their purchasing decisions.

To tackle developing markets like Thailand, Nescafe launched a subscription commerce campaign powered by ecommerce enabler aCommerce. The offer, first introduced in August 2016, enticed consumers to sign up for a yearly subscription of coffee pods with the perk of a free Dolce Gusto machine.

Consumers only needed to pay via credit card, which would be billed automatically every month for a total of 12 recurring payments. It was a novel concept in Thailand, which still mainly relies on cash-on-delivery as its primary payment mechanism.

But the success of the campaign prompted the global coffee behemoth to launch another similar subscription campaign, this time revolving around Nescafe Gold & CoffeeMate.

Blending online & offline

Coffee drinking in Asia may be accompanied by a blitz of social media activity, but there’s a large offline component, too. It’s a way for friends and family to bond, building meaningful experiences and connections along the way.

It’s because of this factor Nestle has relied on pop-up campaigns inside shops and department stores. Visitors to a Tokyo mall last month were greeted by Pepper, the famous humanoid robot, who proceeded to ask them if they wanted a coffee.

An embedded tablet helped determine the size, type, and strength of the beverage and payments were facilitated via Alipay.

The timing of the campaign deliberately coincided with Chinese New Year celebrations and was designed to grow the brand in mainland China, where Starbucks is aggressively promoting its stores.

Another campaign in Australia placed expertly-trained staff across large department stores in the country to educate potential customers about the benefits of Dolce Gusto machines.

This particular promotion targeted Mother’s Day, typically one of the busiest retail days in Australia.

In 2013, Credit Suisse analysts estimated that about 55 % of Nestle’s coffee sales came from developing markets.

Such continued product innovation and catchy campaigns probably mean the figure is much higher now.

To tackle new and competitive markets like Southeast Asia, the best retail strategy is a blend of online strategies like subscription commerce to capture Internet-savvy consumers and traditional offline customer touchpoints to win over the world’s next population of coffee drinkers.

Most parents will buy rattles and dolls for their children from a very young age up until the child hits his/her mid-teens – with just the types of toys purchased changing as the child grows older.

The potential of the global toys & games industry is heavily influenced by demographic trends such as the number of households and birth rate. There’s also a seasonal variation in the types of toys & games currently popular around the world; depending on blockbuster action flicks, emerging WWE stars, and fashion trends.

Thailand’s demographics in particular hint at a widening market for the toys & games industry. The natural birth rate in 2017 was about 240,000 – this refers to the number of births in a year subtracted from the number of deaths – representing a population growth rate of about 0.4%.

Population growth rates peaked in the 1970s at about 3% but aggressive public awareness campaigns by Thai authorities have brought this figure down substantially.

At the same time, annual household income more than doubled from $1,089 in 1999 to $3,276 in 2015. Thai families might not be growing as quickly as before but they definitely have more to spend.

Source: Ceicdata

Higher disposable income also means the sale of toys & games isn’t restricted to children only. Older consumers are forecasted to impact sales too, especially in categories like action figures and accessories.

According to Euromonitor, the value of Thailand’s toys & games industry was estimated to be worth US$376 million in terms of sales volume in 2015. The same report forecasts sales to increase to US$541 million by 2020, or by an average of 9% a year.

That’s a sizeable chunk that brands like Hasbro and Mattel should be eyeing carefully, especially as internet retail is predicted to grab a larger piece of the pie in the coming years, making it critical to double down on mobile/web acquisition channels.

Where do Thai consumers buy toys?

ecommerceIQ initiated a survey to understand online consumer purchase habits for toys & games in Thailand. There were over 300 participants spread across the country.

What was interesting to find was the availability of offline retail wasn’t a bottleneck to transacting online. Only 2.9% of respondents said they ignore online channels because of malls or shopping centers.

The largest inhibiting factor for online purchases is the prevalent lack of trust.

Thai people feel either the pictures online are either heavily photoshopped or they’re usually disappointed when receiving the product after purchasing.

Top reasons why customers don’t shop online for toys in Thailand. Source: ecommerceIQ

But not all is lost. Survey respondents in the 18-24 & 25-34 age category were, on average, 43% likely to indulge in online purchases for toys and games. Those were the two youngest tiers surveyed and it is likely as they grow older they’ll carry these preferences with them.

If online channels optimize the overall buying experience, it’s plausible that the proclivity towards web shopping will increase when it comes time for them to buy toys for their children.

Another encouraging trend that forecasts enhanced ecommerce market share in the future is the amount that users spend online. People with higher basket sizes are more likely to shop online. The largest segment actually spends north of $100/order.

And what toys are people in Thailand purchasing exactly? The survey shows Nerf guns are wildly popular for online purchases along with board games like Monopoly and Transformers action figures.

The overall survey results are consistent with Euromonitor’s analysis of the toys & games industry in Thailand that says the popularity of internet shopping is expected to continue its trajectory of rapid growth, fueled by younger shoppers.

40.1% of this category were secured by web channels in 2015, as compared to 13% in 2010 (although this does include video games, which our survey results excluded).

Euromonitor also makes another prediction: traditional toys and games distributors are expected to expand their internet retailing options over the coming years as more users flock towards this medium.

How can toy brands take advantage?

It’s not enough to list your products on a marketplace and engage in paid campaigns every now and then. Users don’t trust online advertisements; they’re eager to purchase but the one thing holding them back is the nagging uncertainty that the product won’t match expectations.

Often they’ll visit an offline store to see the product up close and personal before purchasing. Little wonder why influencer marketing is becoming so important in a brands’ marketing mix.

Influencer marketing platform MuseFind says 92% of consumers trust an influencer more than an advertisement. And with adblockers flooding browsers, it’s likely that your target consumer simply won’t even view your advertisement, no matter how much money you pour into the campaign.

In Southeast Asia, brands can take a cue from China’s bold forays into live streaming. Quartz predicts this is now a U$5 billion industry with once ordinary citizens catapulted into superstardom simply by broadcasting their lives for the world to see. Such online influencers routinely recommend products they use and their audiences follow suit. Evocative marketing is becoming the new normal.

Other than live streaming, product reviews by YouTube stars is another channel that potential shoppers gravitate towards. An unboxing video can help lower the trust barrier significantly as users know what to expect inside the package.

Some juvenile YouTube stars have racked up millions of subscribers on their page with their videos routinely garnering 10 million+ views.

Children need to feel they’re on the same wavelength as their peers, so if it’s ‘cool’ to buy a new toy then they’ll pester their parents until they get their hands on it.

And what’s cool is what’s trending on the internet.

What’s Pinduoduo?

Pinduoduo, or PDD, is a social commerce app founded by Colin Huang, an ex-Google engineer, in September 2015. Only a couple of years old, PDD has become the fastest growing ecommerce company in China. It raised $100 million in 2017, is backed by China’s Banyan Capital and Tencent, and valued at a whopping $1.5 billion.

Source: Crunchbase

As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD and Vipshop.

How does Pinduoduo work?

Users can download the PDD app or access it within WeChat. Like any ecommerce platform, PDD offers products across a wide range of categories from food to fashion. However, unlike Tmall and JD, PDD incentivizes users with discounts to invite friends to buy in groups.

 

For example, one container of Similac Advance Infant Formula Powder costs 59 yuan if you buy alone but only 35.5 yuan if you can get one other person to buy it too. In the screenshot below, a total of 1,822 pairs have “group-purchased” this item already.

 

 

In addition to group discounts, PDD also incentivizes customer acquisition. Getting users to follow the PDD WeChat Official Account, install the app, and sign up via WeChat login will earn them free products.

PDD also offers cash red envelopes worth 5-20 yuan to users for each friend they get to download the app and register. The entire system is then gamified through a public leaderboard.

Wait, is this new? Didn’t Groupon invent social commerce?

Groupon did arguably pioneer the group buying concept. In its early days, a certain number of users had to sign up for the same deal in order for everyone to receive the voucher. But unlike PDD, there wasn’t a direct incentive; users had to sit back and wait for anonymous users to tip the scale.

This mechanism was quickly abandoned to scale faster with minimum thresholds that acted more like gimmicks.

Groupon was labeled “social commerce” at first but in its later years, lost its social aspect.

Source: wiredtech on Flickr.com

Let’s take a step back and look at the definition of social commerce, according to ConversionXl:

“Social commerce is defined as the ability to make a product purchase from a third-party company within the native social media experience.”

Groupon emerged in the pre-mobile age of 2008 when most consumers still transacted via desktop, especially in the company’s US home market. Back then, less than 1% of ecommerce transactions were via mobile acquisition channels.

In addition, the company’s main distribution channel was email newsletters, a slow and high-friction medium and payments weren’t seamless either as users relied on a credit card or PayPal.

Now looking at 2016 in China – PDD’s first full year in operation – WeChat is the country’s dominant “super app” and leading medium to socialize online with 889 million Monthly Active Users (MAUs) by year end.

71% of ecommerce now takes place on mobile, creating a flattering backdrop for the rapid rise of PDD, which started out as an app on WeChat.

Paying for products on PDD is also remarkably easy because the app makes it automatic. After the first payment, users can opt for one-click payment via WeChat Pay that don’t require passwords.

Desktop usage, clunky email newsletters, and credit card payments limited Groupon’s true social commerce potential. Where Groupon failed, PDD is succeeding because of an ecosystem of mobile-first users and WeChat’s features that make it a super app.

Will PDD come to Southeast Asia?

Why not? Southeast Asia ecommerce is already being carved up by Alibaba and Tencent. Lazada and Tokopedia, two companies owned and invested in by Alibaba, dominate the B2C and C2C space on one end and Tencent-invested JD, Shopee, and Go-Jek are on the other end.

With Southeast Asia’s horizontal ecommerce market being consolidated into a few properties like Lazada, Tokopedia, JD and Shopee, there isn’t as much opportunity in the space as before.

New ecommerce players have to focus on dominating a specific, vertical category or provide a competitive advantage through means other than outspending peers in advertising and/or coupon subsidies.

This is where a model like PDD fits snuggly.

It also helps that one of PDD’s biggest investors is Tencent, which already has its eyes set on the rapidly growing Southeast Asian market.

Will the PDD business model work in Southeast Asia?

To determine if the PDD model would work in the region, we need to identify the criteria that were conducive to its success in China:

1. Lack of distribution channels / expensive distribution channels

If you strip away all the hype, PDD’s competitive advantage is in its customer acquisition strategy. Instead of relying on expensive channels like display advertising or paid search (e.g. Baidu ads), PDD is paying its users to get more users. For example, CPCs alone on Baidu can range from 5 to 25 yuan. Note these are clicks, not even users acquired.

Southeast Asia (excl. Singapore and Malaysia) is very similar to China in terms of lack of channels, due to a similar “no-tail” ecosystem. Whereas entrepreneurs in China had to pick their poison between Baidu, Sina and Sohu back in the day, startups in emerging Southeast Asia are limited to Facebook Ads, Google Search, and portals like Detik in Indonesia and Sanook in Thailand.

Early entrants like Lazada took advantage of low cost-per-clicks (CPCs) back in 2013 but given the raging ecommerce “bloodbath”, online ad CPCs have gone through the roof.

Having saturated online channels, Lazada started exploring offline advertising channels like TV and out-of-home media.

Others like Pomelo Fashion tapped into physical stores as a more cost-efficient way to acquire users and simplify last-mile logistics.

PDD social and viral customer acquisition strategies could work quite well.

2. High mobile commerce penetration

The majority of ecommerce transactions in China now take place on mobile. In 2016, 71% of ecommerce GMV was on mobile. In the US, this number was only 20% in 2016.

In Southeast Asia, companies like Lazada and Shopee today see over 65% of their orders coming from mobile (with 21.6% using both mobile and desktop to shop), according to a recent survey by ecommerceIQ.

Needless to say, high mobile penetration in Southeast Asia along with high mobile ecommerce usage will provide a fertile ground for a business model like PDD to gain traction here.

3. Frictionless mobile payments

One of the drivers of PDD’s success is its seamless payments through WeChat Pay.

This will be a challenge for PDD in Southeast Asia as only Singapore and Malaysia are credit card dominated whereas the rest of the region is mainly a cash-on-delivery market.

Source: ecommerceIQ

Despite efforts to come up with a universal mobile payment standard, no one has succeeded as of today. Efforts like Sea’s AirPay, Ascend’s True Pay, and LINE Pay have hit a wall due to lack of distribution, lack of use case, and a plethora of other issues.

Right now, most eyes are on Go-Jek’s Go-Pay, which has a massive distribution channel by leveraging Go-Jek’s 40 million install base and 10 million Weekly Active Users (WAUs). In addition, and more importantly, Go-Jek addresses emerging Southeast Asia’s unique lack of both credit card and bank account penetration — users are able to top up their Go-Pay accounts by handing cash to Go-Jek drivers that essentially act like mobile ATM deposit machines.

While still a poor-man’s WeChat Pay, Go-Pay offers hope for business models like that of PDD to thrive in Southeast Asia.

4. Attachment to popular social platform

Without the WeChat ecosystem, PDD wouldn’t have been the company it is today. Being embedded in WeChat, PDD was able to quickly get massive distribution by tapping into the potential 889 million MAUs of WeChat.

In Southeast Asia, Facebook, Instagram, WhatsApp, and LINE are highly popular, however, none are considered super apps that offer seamless integration.

The closest to WeChat in Southeast Asia would probably be Indonesia’s Go-Jek.

While Go-Jek hasn’t entered ecommerce yet (it’s positioned only as a services marketplace and offers delivery for partners through its GO-MART product), it wouldn’t be surprising if PDD decided to leverage the Go-Jek platform, given the similarities to WeChat in China. Like PDD, Go-Jek also counts Tencent as an investor.

With an estimated third of ecommerce in markets like Thailand happening on Facebook, Instagram and LINE, the user behavior of buying through social channels already exists.

5. Access to cheap product sourcing

If you browse through PDD, you’ll notice that most of the products sold bear similarities to many of those sold on Taobao. In other words, a lot of “mass” and non-branded products. PDD thrives in China because of easy access to a supply of these products manufactured locally.

However, in Southeast Asia, these kind of products (typically sold on social media and C2C platforms) are imported from China, which leaves less margin for PDD to play with in terms of discounts and customer acquisition.

To sum up, emerging Southeast Asia meets several of the criteria behind PDD’s success in China but poses some unique challenges:
ecommerceIQ

What will happen next?

In the analysis, we’ve identified some of the drivers of PDD’s rapid rise in China and also their presence in emerging Southeast Asian markets at an earlier stage.

Given this opportunity, we can expect the following scenarios to play out over the next few months and years:

1. Local and Chinese entrepreneurs will launch PDD clones across the region

Ever since opening up to the world in the 80s, we can describe China having gone through the following three stages, with the third one still progressing as we speak:

1. Made-in-China (1980-2000)

China perceived as manufacturing base for (often cheap, low-quality) export products

2. Copy-to-China (2000-2015)

Chinese entrepreneurs, some foreign educated, bring back models that worked in the US, e.g. Search (Google -> Baidu), Portals (Yahoo -> Sina, Sohu)

3. Copy-from-China (2015-2030)

Birth of unique Chinese Internet business models (e.g. bike-sharing, payments, live streaming, social commerce, O2O). Increasing media focus on Chinese tech innovation and locals outside of China looking for Chinese models to copy

We are witnessing stage 3 happening right here in Southeast Asia. Below is a Thai post on Facebook looking to recruit staff to work on what looks like a PDD clone:

It doesn’t have to be local talent copying PDD from China to Southeast Asia. With the influx of Alibaba, Tencent and JD into the region, there are plenty of Chinese employees who’ll be noticing the similarities between Southeast Asia today and China, and jump on new opportunities.

2. PDD will enter Indonesia through Go-Jek (helped by common investor Tencent)

If PDD were to follow Alibaba and Tencent’s steps and enter Southeast Asia, we expect them to join forces with Go-Jek. By embedding itself inside Go-Jek, PDD is executing the same game plan that led to its rapid initial growth within the WeChat ecosystem. Fostered by a shared investor — Tencent — Go-Jek would be the perfect launch partner for PDD in Southeast Asia.

3. Existing players will adopt the PDD business model to compete against horizontal ecommerce plays

Local ecommerce players like MatahariMall, Konvy, and Orami could pre-empt PDD by adopting its customer acquisition strategies to compete with regional giants like Lazada and Shopee.

For Konvy and Orami, two female-focused ecommerce platforms, this move could make a lot of sense since the majority of PDD’s users in China are female, over 40 year old, and living in smaller cities.

Play on players.