Discretionary spending, the act of buying things you don’t need by McKinsey’s definition, has been on the rise in China (unsurprisingly) as monthly disposable income of urban households double.

 

Spending expected to grow from $0.64 trillion (2000) to $4.38 trillion (2020). Source: McKinsey 2017

What does this mean? More Chinese shoppers, as well as Southeast Asians, are spending on items that are categorized as ‘semi-necessities’ (ex. high-end skin care lotions, designer hand bags, etc.).  

As one professor and author studying Chinese consumerism puts it,

“I think the Chinese dream is the American dream plus 10%.”

What’s important to note is that a growing portion of this spending is happening outside of the country.

58 million users in China are expected to engage in cross-border transactions in 2017 and cross-border ecommerce alone is expected to reach 7.5 trillion RMB ($1.1 trillion USD) this year.

Korea, Japan and the US are currently the most popular destinations for the Chinese to find products that they believe are better quality, worth the price and guarantee authenticity – some of the reasons why they shop overseas.

Recently stepping into the limelight is neighbour and resource-rich Southeast Asia, that has recently landed on China’s radar.  

Where do China-Southeast Asia trade relations stand?

China’s no. 1 and no. 2 ecommerce behemoths, Alibaba and JD.com respectively, are already directing the world’s attention to the region through recent activities. The former increased its stake in the region’s largest e-marketplace Lazada to 83% and the latter continues to fortify its local presence in Indonesia and Thailand and rumoured to be investing in existing ecommerce player Tokopedia.

The One Belt, One Road initiative that plans to build extensive roads, power plants, bridges, etc. to connect over 60 countries received financing from Chinese President Xi JinPing earlier this year.

How One Belt, One Road will connect over 60 countries. Source: Quartz

The super power’s leader pledged $109 billion SGD ($80 billion USD) to the “project of the century”.

It’s also easier to do business in China without a license as the country’s highest government authority previously approved 10 cities with a large number of warehouses for expedited handling of cross-border ecommerce purchases by customers.

Foreign retailers/brands can store merchandise they bring into China duty-free, and then send items as they are ordered through customs under the relaxed cross-border ecommerce rules.

Calculations from May 2016 counted total two-way investments between China and ASEAN countries to be over $160 billion despite political turmoil over the South China Sea.

As the gates open for easier trade between China and Southeast Asia – both literally and figuratively – businesses should have an eye open for opportunities in the other market.

It makes sense for brands operating in China to be marketing in Southeast Asia, especially when Alibaba holds around 60-70% China’s ecommerce market share and no player has more than 25% of the total cross-border ecommerce market share.

The Chinese giant long launched its very own Taobao shop-in-shop (SIS) on Lazada to target price-sensitive Singaporean shoppers with over 400,000 Chinese products.

“Southeast Asia is an attractive FDI destination for China because of its fast-growing and large domestic market,” said Lee Ju Ye Maybank economist in Singapore.

Jack Ma has also long-expressed introducing businesses to China.

These were snippets of an interview Ma participated in June this year,

“We’re interested in bringing local products to the world, to China. This has always been our focus.”

“For Thailand’s small and medium-sized ecommerce companies, don’t worry. If they want to compete with us in bringing Thai products to China and the world, maybe it’s tough, but if they do serve the customers locally, it would be great.”

In order to do this, companies in Southeast Asia need to capture Chinese consumers by bypassing marketplaces and selling direct to consumers through localized content marketing and offering products that the Chinese are already hungrily looking for.

Popular overseas goods include red wine, fresh produce such as avocados, milk and fruits.  

A BCG study also found that before Chinese customers decide to make a purchase, consumers make contact with a product through seven different touch points on average, such as store displays, product promotions, or social-media comments.  
The opportunities seem endless (keeping in mind tax revisions) or as Louis Li, the Deputy General Manager of JD Worldwide wants to remind the rest of the world, “don’t forget about China.”

In his seminal presentation at DLD15, NYU professor and serial entrepreneur Scott Galloway coined the term “The Four Horsemen” to describe the four most dominant companies in digital that have a combined market cap of $1.3 trillion (2014). These companies are Amazon, Apple, Facebook and Google.

 

Galloway’s Four Horsemen theory assumes a Western-centric view; the moment we move east, we start to see different pockets of power, most notably in China, and increasingly in Southeast Asia – the following are these differences.

Romance of the Three Kingdoms

China’s version of the Four Horsemen is called BAT, representing the three kingdoms in China – Baidu, Alibaba and Tencent.

Baidu: The Search Giant

Often considered the “Google of China”, the bulk of Baidu’s revenues come from search advertising. Unlike Google, Baidu has struggled to stay relevant in an environment that has rapidly shifted towards mobile and ecommerce. Discovery on mobile is increasingly favoring apps over search – ask yourself, do you find yourself searching less on mobile than on desktop?

And then there’s ecommerce. With the dominance of Alibaba, product searches are moving away from Baidu and straight onto Alibaba properties like Taobao and Tmall. The very same is happening to Google with over 55% of product searches now starting on Amazon and this is not even accounting for the damage Alexa aka Amazon’s next trojan horse may inflict on Google.

Alibaba: Ecommerce & More

Alibaba is the king of ecommerce, responsible for over 80% of online sales in China (B2C and C2C combined). Over the last 20 years, Jack Ma’s empire has grown into one that puts even Jeff Bezos to shame.

With expansion and investments in areas like advertising, health, entertainment and transportation, Alibaba is more than ecommerce nowadays. Its digital advertising business last year surpassed Baidu to become the number one in China in terms of net digital ad revenue share (28.9% vs. 21.3%), and is estimated to reach 33.7% by 2018 (vs. Baidu’s 17.6%).

Tencent: Gaming & WeChat

Tencent, the biggest among the BATs in terms of market cap – $300 billion vs. Alibaba’s $288 and Baidu’s $60 billion, 2017 – is best known for its popular messaging app WeChat. Its main revenue sources are gaming and value added services like virtual goods, etc.

The company has dabbled in ecommerce since the early 2000’s until it gave up on organic growth and took an investment in Alibaba’s competitor JD. Today, Tencent is JD’s biggest shareholder with 21.25% ownership, surpassing the 16.2% stake of JD Founder and CEO Richard Liu Qiangdong.

Three Kingdoms become Four Horsemen

With the global rise of on-demand and ride-sharing, China’s Didi Chuxing has cemented itself as the fourth horseman in China. The company is the result of a civil war between Didi Dache (backed by Tencent) and Kuaidi Dache (backed by Alibaba) and the newly merged entity subsequently assimilated Uber China to become the third most valuable private company globally, only trailing Uber ($68 billion) and Ant Financial ($60 billion).

Didi’s recent funding round of $5.5 billion values the company at $50 billion and gives it the ammunition needed to expand internationally and invest in self-driving technology.

With Baidu at risk of becoming the next Yahoo, many have looked at news reading app Toutiao to become one of the Four Horsemen in China. Launched in 2011, the company has benefited from the mobile and vertical media wave in China to become one of the most prominent digital media properties in the country.

Valued at $11 billion based on its recent $1 billion funding round, Toutiao is said to have 78 million daily active users and 175 million monthly active users with users spending an average 76 minutes on the app per day.

Southeast Asia: A Proxy War for Chinese Horsemen

The Southeast Asian tech space, despite being very nascent, has provided plenty of promising local successes to root for. There’s Tokopedia and Go-Jek in Indonesia and of course Grab, Garena (which owns Shopee) and Lazada regionally.

However, if we look beneath the surface, we’re seeing signs of a looming proxy war between Chinese tech giants, with expected local casualties through collateral damage.

Alibaba made its big entry into Southeast Asia through its Lazada purchase, Jack Ma’s biggest international acquisition to date. Its ongoing tour-de-force has led many local ecommerce players to join forces (e.g. Orami) or throw in the towel (e.g. Ascend Group).

JD entered Indonesia organically in 2015 to test the waters and it is now said to be in talks to invest millions into Tokopedia. All this follows the news of Tencent, JD’s biggest shareholder, leading the recent $1.2 billion investment into Indonesia’s Go-Jek, valuing the on-demand motorbike startup at a massive $3 billion.

Then there’s Didi Chuxing, who, through its acquisition of Uber China, “participation” in the anti-Uber alliance, and a crisp $350 million investment in Grab should know quite a lot by now about operating in international markets and Southeast Asia in particular.

Fresh off a massive $5.5 billion round, Didi may be going after its “allies” in Southeast Asia. What’s that phrase again? Keep your friends close and your enemies closer…

With an Alibaba camp (Lazada), a Tencent fraction (potentially Tokopedia, Go-Jek, and Shopee), and Didi Chuxing, there’s room for one more Horseman in Southeast Asia.

But it won’t be a Chinese company, the fourth Horseman in Southeast Asia is either going to be Facebook or Google, with my bets on the social media giant.

The whole Facebook vs. Google story in Southeast Asia deserves an entire article by itself but it basically boils down to:

  1. Google’s assets are narrowed down to search-only due to the lack of long-tail publisher inventory in Southeast Asia, which is required for a thriving display ad ecosystem to compete with Facebook;
  2. Southeast Asia is already mobile-first or, in some cases like Myanmar, mobile-only and less people are searching on mobile (same issue Baidu faced in China); and,
  3. The rise of ecommerce in Southeast Asia is eating into Google’s lucrative product searches. Post-Alibaba acquisition, Lazada is set to replicate Tmall’s ad monetization strategy. It has already started recruiting for its Marketing Solutions team as seen from job postings on its site. Survey data from ecommerceIQ for Indonesia shows 57% of users start their online shopping journeys with product searches on marketplaces like Lazada and Tokopedia, bypassing the Google tollgates.

Why Southeast Asia? Not for the obvious reasons.

Why all this sudden interest in Southeast Asia from our Chinese neighbors? The obvious, often reported, reasons:

  • Geographically close to China;
  • Huge, untapped market with 600 million people and a growing middle class;
  • China’s economy is slowing down and the BATs are sitting on piles of cash to spend on (overseas) growth;
  • Cultural affinity: Southeast Asia is home to the largest community of overseas Chinese (over 25 million across the region)

However, the main reason is that Southeast Asia–and with Southeast Asia I mean emerging Southeast Asia (i.e. Thailand, Indonesia, and Vietnam)–is very similar to China about 10 years ago. This is especially true when we look at aspects like prevalent business models, digital advertising landscape, and mobile adoption.

Primary Business Model: Ad-Driven vs. Commerce-Driven

Whereas US companies’ de facto way of monetization is advertising, Chinese firms have historically looked at ecommerce and transactions as a way to generate revenues. The poster child for this is of course Tencent. In 2016, only 18% of Tencent’s revenues came from advertising, up from 9.5% a decade earlier.

71% of Tencent revenues came from value added services (VAS), driven by online gaming, virtual goods sales and digital music downloads. Compare this to Facebook, who generated 98% of its revenues from advertising in 2016.

Another more recent example is Quora, the unicorn Q&A app now worth $1.8 billion after its latest $80 million funding round. After 8 years, the best Quora could come up with are intrusive, text-based contextual ads that were pioneered by Google in 2003.

On the other side of the world, Fenda, a Chinese Quora/Reddit hybrid, has gone beyond advertising and built a $100 million business by monetizing transactions. Technode explains how this model works:

“Users who are knowledgeable about a particular topic can set a price, usually between 1-500 RMB for their answers and get paid for answering questions from others. If they don’t reply within 48 hours, the money will be reimbursed to those who raised the questions.

In addition to connecting questioners and respondents in the Q&A chat interface, Fenda has an eavesdropping feature to engage more listeners. Anyone who is curious about the dialogue can listen to the reply for 1 RMB, which is split between the user who asked the question and the user who answered. After the completion of dialogue, Fenda will take 10% from the overall income from both parties.”

Non-Existent Long-Tail Publisher Ecosystem

At the very root of the ad-driven vs. commerce-driven dichotomy between US and China (and increasingly Southeast Asia) is an immature online advertising environment, perpetuated by a “chicken-and-egg” problem of supply and demand issues:

Supply-Side Issues

Internet adoption in China and emerging Southeast Asian countries didn’t reach critical mass until the mid-2000’s. These markets skipped most of the Web 1.0 and “Web 1.5” booms and jumped straight into Web 2.0, resulting in digital content creation happening mainly on closed social media platforms like Facebook or on vertically-integrated portals like Sina and Sanook.

Unlike in the US, there aren’t millions of long-tail websites and blogs that form the basis for the many ad networks and programmatic advertising. To make things worse, closed platforms like Facebook and portals like Sina sell most (if not all) of their ad inventory direct to consumer, bypassing exchanges for higher margins. We call this phenomenon a “No-Tail” ecosystem.

Demand-Side Issues

Aforementioned lack of quality ad inventory has led advertisers to buy directly on big portals and closed systems like Facebook. As a result, the lack of demand for ad networks like Google Display Network in Southeast Asia has suppressed RPM rates (revenue per 1,000 impressions) for local ad networks, providing little incentive for content creators.

In turn, content creators have found other ways to monetize. In Southeast Asia, peddling merchandise to your Facebook and Instagram audience has been one of the most popular and lucrative ways to make money. In Thailand, this has led to estimates of 33% of ecommerce GMV coming from social commerce.

In China, content creators are leveraging WeChat and increasingly live video apps to sell merchandise and generate revenue off virtual goods transactions. Meanwhile in the US, the de facto ways for bloggers to make money is still to create content and monetize through AdSense and affiliate marketing.

Mobile-First, Mobile-Only

The other striking similarity between China and emerging Southeast Asia is that both are mobile-first and in some areas mobile-only. Granted, some coastal areas in China developed pre-mobile era but given the size of China, many people are still coming online and these are mobile-first or mobile-only.

Unlike in the US, new startups in China are frequently building for the mobile user first then later expanding to desktop users. Fenda started out on WeChat followed by its own apps and website while Toutiao started out as an app.

In Southeast Asia, ecommerce players like Lazada already see over half of their orders coming from mobile. Indonesia’s BaBe, the country’s leading news aggregator app backed by China’s Toutiao, followed a similar path to its majority investor by taking a mobile-first approach.

Learning From Past Mistakes

All of these ecosystem similarities mean that Chinese companies entering Southeast Asia will have a higher chance to succeed.

It’s not the first time that Chinese BATs have ventured abroad, winding up with mixed results. Baidu announced its international expansion plans as early as 2006, launched in Japan with Baidu.jp in 2007 then later shut it down in 2015 after lack of traction.

This time around, Alibaba, Tencent and perhaps Didi Chuxing are hopefully smarter and are more confident playing on familiar grounds – Southeast Asia.

Not many companies can say they are growing faster than the country’s expansion but Jing Dong Mall or JD.com, one of China’s most well known online retailers, is growing at almost 40% year on year. The B2C company can also add the following achievements under its belt: Fortune Global 500 member, biggest competitor to Alibaba’s Tmall and last year, acquired Wal-Mart’s Chinese division, Yihaodian.

Louis Li, the Deputy General Manager of JD Worldwide, wants to let the world know that China’s market is still maturing and open for business.

It’s hard for industry businesses to forget about China when the superpower has overtaken the US in total online spend at $752 billion in 2016, see fig below, and expected to grow 20% annually by 2020.

What are some important factors brands and retailers need to consider before selling to consumers in China’s red ocean? eIQ speaks to Louis about his views at Last Mile Fulfillment Asia.

Be the little guy

“Even if you’re big overseas, don’t assume the Chinese will know who you are and what you offer,” comments Louis.

“Be prepared to do what the smaller brands have to do to become familiar.”

This means dedicating resources to consumer education about what your business can offer and rigorous content marketing on the right platforms. This also means legwork to build a trustable name from scratch no matter how big you are elsewhere.

The channels are different

“Unlike the West, the Chinese don’t use Google, Youtube or Facebook,” comments Louis. “Companies will need to find the right tools to do marketing.”

Some of China’s most popular platforms are Mobile QQ and Tencent’s WeChat, the country’s largest chatting app that also facilitates payments, taxi-hailing, news services, food delivery and much more.

The platform boasts over 800 million users and has welcomed notable brands such as Coach, Chanel, Burberry and Apple onboard who share promotions, support followers and run sales campaigns.

JD and Tencent formed a strategic partnership in May 2016 to share big data with brands to reach more niche customers versus general sweeping TV or newspaper ads.

Source: eMarketer

Through a WeChat campaign during Chinese New Year last year, JD was able to increase Japanese skincare SK-II brand followers by 20,000.

Knowledgeable customer service reps

It’s understood that strong customer support is vital to any successful business. Louis suggests automating as much of the general inquiries as possible, for example a chatbot answering common questions such as “where can I track my package? How can I get a refund?“

A few other pointers to keep in mind when serving the Chinese consumer:

  • 73% of consumers would expand their purchases with a merchant by 10% if the merchant delivered superior customer experience
  • If they already provided their telephone number and credit card information online, they do not expect to have to provide the same information again
  • Chinese consumers like to share online and expect to be heard, the reply of the company can determine their repurchase rate
  • 86% of consumers are willing to pay more for a better customer experience

*Source: Deloitte’s “Delivering Superior Customer Experience in China”

Invest heavily or drown in the red ocean

Ecommerce in China is extremely competitive, much more than other markets, so companies should be ready to allocate resources to a team and to logistics to ensure products are delivered quickly to the end customer – especially the Chinese consumer who already has expectations.

“If you promise people to deliver same day, people will more likely buy,” says Louis. “Our people will literally cross rivers and climb mountains to get the package to the end customer.”

In 2016, JD fulfilled a total of 1.6 billion orders through its own extensive logistics network: 256 warehouses covering 5.6 million m2 and 6,906 delivery and pickup stations in China.

China’s cross-border future

By 2020, a quarter of the country’s population will be shopping either directly on foreign-based sites or through third parties. Online consumption already accounted for 13.5% of all retail spending in the country in 2016 and consumers in low-tier cities are outspending those in high-tier cities online.

The demand for goods exists. The demand for goods in Southeast Asia also exists and is strong. Not only do Chinese consumers want Thai consumer goods such as fresh fruits, the amount of trade between China and Cambodia has taken off since 2012.

Source: Bloomberg

The more online retailers, the better growth for China’s economy and its citizens is how Louis sees it.

“Ecommerce helps consumers,” says Louis. “The farmer in China’s outer provinces would never have been able to get their hands on an iPhone 7 until now.”

Forget about China? I doubt anyone will any time soon.

By: Cynthia Luo

Compared to Alibaba chairman and founder Jack Ma’s marketing skills and media savviness, SF Express’ founder Wang Wei is very much like the logistics service his company offers–low-profile, boring but indispensable. So indispensable to the growth of China’s economy and ecommerce market that after its February 23, 2017 IPO in Shenzhen, SF Express now has a market cap of $38 billion. FedEx, the quintessential delivery company founded in 1971, has a valuation of $51 billion for comparison.

Owning a whopping 68 percent of shares, Wang Wei’s net worth beat out Jack Ma’s earlier this month to become the 2nd richest person in China with 198.5 billion RMB (about $28.7 billion USD). He has already surpassed Tencent’s Pony Ma, whose company is behind the popular WeChat platform.

The Birth of A Logistics Empire

Despite being less known than Jack Ma in mass media and tech circles, Wang Wei’s story and slow grind to become the king of logistics in China is nonetheless as interesting and inspiring.

The son of a Russian language interpreter in the People’s Liberation Army and a university teacher, Wang Wei was born in Shanghai in 1971 and followed his parents to Hong Kong soon after. Growing up there, Wang Wei only finished high school and then started working for a local Hong Kong ‘uncle’ eventually ending up in a small printing shop in the city of Shunde in Guangdong province.

While sending printing samples to Hong Kong for clients to review, he noticed the increasing volumes and lack of available delivery options – the glimpse of an upcoming opportunity in logistics.

During his time in Shunde, China itself was going through a transformational process of opening up to the world under the leadership of Deng Xiaoping. Deng helped initiate the concept of “Special Economic Zones (SEZs)”– pockets of China that would be experimentally exposed to free-market forces. The Pearl River Delta (PRD), an area encompassing cities such as Shenzhen and Guangzhou, became part of the first SEZs and stimulated increased trade between it and Hong Kong.

Many Hong Kong businesses then decided to set up factories in Guangdong province leading to an increased demand for delivery services between Hong Kong and the mainland.

In 1993, at the height of China’s economic reform, Wang Wei at age 22, decided to partner with five friends to start Shunfeng (SF) Express. His dad provided a 100,000 RMB loan, about $13,000 USD, to get Wang Wei’s business off the ground.

Like the Ubers and Airbnbs first starting out, Wang Wei’s business model straddled the grey area as private courier businesses were ruled illegal in China until 2009. The only legal option was China’s inefficient national post office system but this didn’t stop SF express.

The early days consisted of Wang Wei personally hauling suitcases and backpacks across the Hong Kong border, working 15-16 hour days but he was determined to build his fledgling startup into China’s largest logistics company.

Shunfeng Express and Wang Wei’s Business Philosophy

For 20 years since the company’s founding, Wang Wei personally controlled 99.99% of SF Express and avoided any raising external funding. The lack of public exposure and venture capitalists has led to legendary stories of VCs offering around $70,000 USD to “bounty hunters” who could successfully broker a dinner meeting with the elusive SF founder.

Asked about his reasons for shying from media, Wang Wei once answered: “I believe in a higher power, I think, a person’s success has nothing to do with talent. Success is related to doing good deeds. Having a lot of money isn’t something to brag about, nor is having talent.

Being successful and making money is just a matter of fate. That’s why I don’t think people should brag about achievements in their career. Being low-key also brings benefits from a management perspective — if employees don’t recognize you, you are able to dig deeper and get to understand the real situation.”

In a move signaling an inevitable IPO, Wang Wei sold a 25% stake to a consortium of investors led by CITIC Capital Holdings Limited in 2013.

“I believe a company’s objective shouldn’t be making money. I want to create a platform through which I can express my values and thoughts. The sole purpose of going public is to get funding, which can then be used to fuel a company’s growth. SF needs funding too but SF cannot go public just because of the need for money. After an IPO, a company will be turned into a money-making machine with the daily ups and downs of the share price affecting the company’s morale, this makes it very hard to manage the company.”

“For me to run a business, I’d like to develop a business for the long-term, to provide people a means to a better and respectable life. But after going IPO, things will be different. You have to account for shareholders, you have to make sure your share value keeps increasing. Earning a profit becomes the company’s sole mission. This way, a company becomes very fickle just like today’s society.”

In a very Bezos-esque and Spiegel-esque move, retaining full control of his company allowed Wang Wei to execute his long-term strategies – mind you, SF was founded 24 years ago, before eBay and Amazon even existed.

“In order to run a successful business, you’ll need to relentlessly focus on the long-term. Once you go public, every penny, every small decision will be scrutinized by your shareholders. This is not something I can accept. I cannot promise short-term returns if I’m optimizing for the long-term. In addition, once you go IPO, you’ll need to start disclosing information. In order to compete with global giants, we need to keep our secrets. As a business owner, you need to really understand why you want to go public. Having said that, in the short-term, SF won’t go public. Even in the long-term, if we decide to go public, it won’t be for the sake of going public or for making money.”

IPO and International Growth

Despite Wang Wei’s well-intended efforts to keep his firm private as long as possible, the brutal reality is that his company operates in the commodity last-mile delivery space with quickly eroding margins – down to 5% from 30% 10 years ago according to analysts.

Alibaba’s push into aggregating all delivery services in China through its Cainiao platform has only exacerbated this. As a result, delivery companies in China have recently started their frantic race towards raising as much capital as possible, as fast as possible in order to get to scale in a winner-takes-all-market.

“SF Express, YTO, and the other China express delivery majors have all been racing to go public. Faced with shrinking profits and mounting competitive threats, the dream of being the “Fedex of China” has morphed into an arms race in capital and capabilities,” commented Jeffrey Towson, Professor at Peking University’s Guanghua School of management.

SF competitors such as ZTO Express and Alibaba-backed YTO Express all have recently gone public, with ZTO raising $1.4 billion at $12 billion valuation through its listing on Nasdaq and YTO achieving a valuation of almost $10 billion through its backdoor listing on the Shanghai Stock Exchange.

With competitors raising more firepower, SF had little choice but to follow suit and go public in Shenzhen via a reverse merger with a local mining company. This move turned Wang Wei into the third wealthiest individual in China and was richer than Jack Ma for a couple of days until SF shares dropped but this doesn’t signal the end to China’s logistics arms race.

According to Investment Professor Towson of Peking University, in order to keep scaling, China’s logistics leaders should look at international expansion – the rest of Asia being the most obvious initial step.

STO already has its biggest overseas delivery center in Hong Kong to enable pan-Asia deliveries within 24 hours and SF Express has been strategically located since the early days with its headquarters in Shenzhen, close to Thailand, China’s gateway to Southeast Asia.

With Alibaba’s acquisition of Lazada in Southeast Asia last year and JD’s entrance into Indonesia in 2015, it’s a no-brainer for the likes of SF to follow its largest Chinese customers into the next largest emerging market.

If SF led by Wang Wei enters Southeast Asia, expect a logistics war to be fought between Chinese entrants, local incumbents such as Ninja Van and Kerry Logistics, as well as global players like DHL and Singpost.

By: Sheji Ho, aCommerce Group CMO

alibaba-southeast-asiaIt’s been several months since Alibaba’s blockbuster acquisition of Lazada, the leading ecommerce platform in Southeast Asia.

When the news broke, pundits and critics debated whether or not each side got a good deal, how it would impact rivals like MatahariMall, Tokopedia and Orami, and how the region would be flooded with cheap Chinese products.

Elsewhere, startup founders and VCs high-fived each other as the move put the region on the global map and they hoped it would lead to more funding and exits in the future.

However, everyone has failed to go beyond superficial observations. Alibaba’s acquisition of Lazada is much more than simply growing retail GMV, proving exactly why Jack Ma is Jack Ma and why he’s always been several steps ahead of the game.

Those celebrating the news, especially those in the retail space, may end up biting their tongues.

Peter Thiel, PayPal and Why Distribution Matters

In his book ‘Zero to One’, Peter Thiel talks about how PayPal almost didn’t survive were it not for their lucky break stumbling onto what would become their biggest distribution channel, growth engine, and eventual acquirer: eBay.

PayPal focused on targeting eBay’s Power Sellers — those responsible for the bulk of volume going through eBay — and then amplified it by paying for user sign ups and invites to friends, effectively turning PayPal into a mainstream payments platform.

No wonder Peter Thiel has been such a fervent proponent of distribution, beyond just building a great product.

“Poor distribution — not product — is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished,” Thiel writes.

eBay accelerated PayPal’s growth thanks to its reach and velocity of transactions — high usage kept the payments company thriving. Distribution is exactly what Alibaba needs Lazada for. But for what? Most definitely not cheap Chinese products.

Inside The Belly of The Beast

Around the same time that Peter Thiel’s PayPal was acquired by eBay, the latter company was attempting to grab market share in China through an investment into — and eventual acquisition of — EachNet in 2002, at that time the leading Chinese C2C marketplace.

In response to this, Alibaba launched Taobao in May 2003 and eventually beat EachNet to become China’s largest consumer-to-consumer e-commerce marketplace. In a timespan of 3-4 years, eBay’s C2C market share plummeted from 72% to 8% and caused them to throw in the towel while Taobao’s share continued to climb, reaching over 80% by 2007.

Shortly after Taobao’s launch, Alibaba introduced Alipay, a third-party online payment platform, in 2004 to help facilitate transactions on Taobao. Today, Alipay is China’s largest third-party payment platform with 70% market share, boasting over 400 million users and generating over 80 million transactions per day (compared to PayPal’s 9 million).

Whereas PayPal was primarily a peer-to-peer (P2P) online payments platform based on email and linked to credit cards, Alipay was connected to bank accounts and incorporated features tailored to the Chinese market, such as escrow services.

alibaba-sioutheast asia

According to Jack Ma, Chinese culture, despite being one that traditionally values trust and integrity, lacked a system that enforced it. As a result, Alipay’s escrow feature was a perfect solution to the trust gap and shifted China’s e-commerce behavior away from cash-on-delivery (COD) towards one that is seeing 68% of transactions today.

With Taobao’s massive reach and distribution — 423 million annual active buyers and over 90% of total C2C ecommerce GMV in China — Alipay was able to cement its position as the leading third-party payment method.

Leveraging its 400 million users and reach through Alibaba e-commerce platforms, Alipay has grown beyond being an Internet-based payment platform into a finance and banking behemoth to the extent of threatening the old financial guard.

In 2011, Alipay spun off Alibaba to become Ant Financial Services Group, covering everything from online payments to microlending to banking and credit scores. Based on its recent funding round of $4.5 billion earlier this year, the group is now valued at $60 billion, making it the second most valuable non-public tech company behind Uber.

With this new war chest, Ant Financial looked to expand into new markets and for a while had been trying to get a foot into Southeast Asia. The company set up a Singapore entity as early as 2010 but lacked a proper distribution channel. Ant Financial’s lucky break seems to have arrived earlier this year.

Eyeing The Payments Opportunity in Southeast Asia

In many ways, Southeast Asia e-commerce is like China e-commerce but 8 years younger. Back in 2008, cash-on-delivery (COD) was still the dominant payment method in China making up over 70% of payments. Today, Southeast Asians rely heavily on COD when shopping online, attributing to roughly 70% of transactions.

To wean customers off a high dependency on COD, many well-funded startups and established conglomerates have been trying to solve the payments bottleneck, including Omise (Thailand), Doku(Indonesia), LINE Pay (Thailand), and True Money (Thailand).

Despite the PR and media hype, these homegrown solutions have yet to shift consumers away from COD because a lot of these heroic efforts have been “technology for technology’s sake” — building a faster car when what is really lacking are more roads

The Product Challenge

  • Platforms like Omise and 2C2P are basically payment gateways and don’t offer a viable solution for the massive C2C and P2P space that Google and Temasek peg at ‘several billion dollars’. These payment gateways still primarily process credit cards and, with credit card penetration across emerging SEA standing at single digits only, doesn’t really address the core of the issue. In addition, these solutions do not offer a fix for the trust issue often hindering C2C and P2P transactions — namely escrow.
  • 2C2P and Omise also face getting ‘pushed out’ as they don’t own any ties to the end consumer. Meaning if a cheaper and better alternative was to present itself, there is nothing stopping a merchant from swapping them out. Taobao got users to sign up to Alipay, making it much easier to convince non-Taobao e-commerce platforms to adopt Alipay as well.
  • Rabbit LINE Pay, previously LINE Pay, never captured much market share despite its association with LINE, the popular messaging platform reaching 33 million users in Thailand. LINE Pay’s limitation is that it only supports credit cards, stumbling yet again into one of the fundamental payment obstacles in Southeast Asia – lack of credit card penetration.

The Distribution Challenge

  • Although good attempts at providing shoppers with a second payment method, fintech startups like Digio and Deep Pocket are building mobile wallets before solving their chicken-and-egg problem.
  • It is difficult for mobile wallets to become widespread when awareness is low and users don’t have a strong (often financial) incentive to adopt it. User acquisition then becomes an expensive play without an inherent distribution channel.

The (Lack of a) Use Case Challenge

  • One of Thailand’s leading mobile wallets, Ascend’s True Money, connects with major banks in Thailand and has distribution access to companies in the CP conglomerate portfolio, including over 19 million mobile subscribers.
  • Yet, True Money is reported to have as little as 100,000 active monthly users out of 6 million registered users as of 2014. True Money’s current use cases are limited to mobile phone top up, online game top-up, and bill and over-the-counter payment, typically at CP-owned 7-11 stores.

Ecommerce is a more obvious and natural use case and therefore True Money is also used as a payment gateway on Ascend’s ecommerce properties WeMall and WeLoveShopping. However, with only 26% of Lazada’s traffic, Ascend still has a long way to go before taking a page out of Peter Thiel’s playbook and turning its ecommerce properties into a fertile breeding ground for its payment solutions.

The Lazada Acquisition: A Trojan Horse Strategy?

Alibaba’s foray into Southeast Asia has never really been about growing retail GMV. In the long run, it’s not so much about beating Lazada’s direct rivals or tapping into new growth markets outside of China; it’s about securing access to a massive end user base in a market whose lack of commerce infrastructure is eerily similar to early days China. Jack Ma’s endgame is to introduce and monetize his other products and services, starting with Alipay.

alibaba-southeast asia

Adopting Alipay would be pivotal for the region’s e-commerce growth and that of Lazada in particular. Widespread adoption of a convenient payment platform that bridges the trust gap between buyers and sellers will lead to more transactions overall as witnessed in China, now the world’s biggest e-commerce market in terms of GMV and penetration.

Alibaba’s (ironic) 20% stake in Ascend Money, the parent group of True Money, coming just a few months after the Lazada deal, shows Jack Ma’s master plan for Southeast Asia gradually coming to fruition.

But it’s much more than just Alipay and facilitating marketplace payments. As highlighted earlier, Ant Financial, Alipay’s parent company, operates an entire digital finance ecosystem in China consisting of but not limited to: Yu’e Bao, the biggest mutual fund in China in terms of investors with $108 billion in assets; Zhaocai Bao, a P2P lending platform with $32 billion in transactions in its first year; and Sesame Credit, a credit-scoring system based on — you’ve guessed it — ecommerce data.

And finance is only scratching the surface. Jack Ma, in his 2015 letter to shareholders, hints at much more to come:

“Alibaba group’s strategy is to build the infrastructure of commerce for the future. Ecommerce is only the first step. […] Around half of Alibaba Group’s workforce and our affiliated companies, including Ant Financial and Cainiao, are working on important areas of our ecosystem, including logistics, Internet finance, big data, cloud computing, mobile Internet, advertising and the so-called double H industries — Health and Happiness (the big data-based healthcare and digital entertainment businesses which will take 10 years to become data-driven).”

Hence it shouldn’t be retailers like MatahariMall or Central that should be worried about increased competition; instead, banks, insurers, hospitals and everyone else should start preparing for some ass whoopin’

For a preview of what could be coming up in Southeast Asia one only needs to look at what happened to Uber recently in China.

Learnings From China or How Alibaba’s Trojan Horse Strategy Killed Uber China

“Uber didn’t lose in China in 2016. They lost in 2014 when they got in, and found out 2 years later.” — Wang Di, Quora User

Alibaba, partnering up with long-time frenemy Tencent, adopted a similar strategy in China to take out Uber.

Outsiders often point to the classic textbook “why-foreign-Internet-companies-fail-in-China” excuses like lack of localization (culture/language barrier), lack of connections/guanxi, government protection, and lack of IP law enforcement. Although these do apply to a certain degree, none of them get to the core of why Uber failed in China.

Uber failed because it thought it was competing against Didi in the smart transportation space. Little did they know that Didi’s majority shareholders, Alibaba and Tencent, were playing according to an entirely different set of rules.

For Alibaba (and Tencent), Didi wasn’t just a ride-hailing app; Didi’s strategic and hidden purpose was to serve as a scalable user acquisition channel for Alipay Wallet, Alipay’s mobile version, as well as Tencent’s WeChat Wallet, according to this brilliant Quora answer:

Around 2012, WeChat’s super success helped many Chinese IT companies shift their focus to the mobile app market. Meanwhile, though with occasional suspensions, the government started encouraging mobile payment development. All was set for Tencent and Alibaba to launch their mobile payment app to be a booming big thing. All except for the Chinese user habits.

The Chinese were not familiar with mobile payment at that time. In fact, no large group of people in the world were significantly better than the Chinese either. Moreover, the Chinese were mostly quite cautious when paying online, and a lot of them are not exactly fans of novelty gadgets.

But how they love discounts or kickbacks! A dollar saved is a dollar earned.

The cab-calling apps Didi and Kuaidi became perfect for user traffic introductions.

Users could tap Didi to call a cab and pay 30 yuan in cash, but if they paid the cabbie by Tencent Wallet (redirected from Didi), they would only have to pay 10. Were users willing to save 20 yuan—3 or 4 US dollars—by using an already built-in feature in another app? Just a few taps here and there? Hell yeah.

And then they were hooked-up with WeChat Wallet. Which was what Tencent really wanted.

With Didi as a key distribution channel for Alipay Wallet, Alibaba was able to acquire more users into its ecosystem of services including Taobao, Tmall, Ant Finance and much more, leading to monetization across different products. Uber only had transportation.

Tencent and Alibaba have been throwing unthinkable amounts of money to pay for all the unbelievable kickbacks. Unthinkable for a cab-calling app, but totally reasonable if you want to mark your territory in the biggest market in the world that is most advanced in mobile payment.

What The Future Holds for Southeast Asia

alibaba-southeast-asia

With Southeast Asia being hailed as the next big and untapped ecommerce market in the world, we are seeing many players subsidizing their way into growth through discounts and coupons. Not surprisingly, critics often look at this as a race to the bottom for everyone.

Not entirely true. As the Uber China example has shown us, this will only be the case for companies that fail to look at the bigger picture and are unable to monetize through a diversified set of products or services, whether now or in the future.

With all this in mind, one could argue that Alibaba got a pretty good deal with Lazada, especially given the long-term opportunities in SEA beyond retail ecommerce. A quick look at Alibaba’s stock confirms this—Alibaba’s share price jumped after the April 12 acquisition announcement and has increased by 35% ever since (as of October 3, 2016).

Alibaba’s acquisition is widely considered a victory for the growth of ecommerce in SEA but how many of us here are ready to face the fact that whatever trophy we hauled in may not be a shiny unicorn but perhaps something else?

THIS ARTICLE ORIGINALLY APPEARED IN TECH CRUNCH ON NOVEMBER 7. WRITTEN BY SHEJI HO, CMO AT aCommerce

Hong Kong tackles online counterfeit products with the launch of the ‘Hong Kong Trust Mark’ electronic logo, reports Enterprise Innovation.

Small and medium enterprises are expected to benefit from the initiative, launched by the Hong Kong Federation of ecommerce. Hong Kong’s retail industry offers a wide variety of goods and services. However, due to the rampant selling of fake goods online, a lot of consumers feel reluctant of buying goods on the internet.

The Hong Kong Trust Mark is recognized by the ‘Belt And Road Ecommerce Strategic Alliance’, including the Thailand ecommerce association.

A trust mark will improve confidence of new customers in purchasing from unfamiliar websites, including a guarantee against the risk of fraud and non-payment.

Pawoot Pongvitayapanu, founder of tarad.com and President of the Thai Ecommerce Association comments, “For a healthy growth of ecommerce in Thailand and surrounding countries, a well developed trust system is necessary. Our association will give full support to this Trust Mark in the ASEAN market.”

The scheme could build a trust worthy image for Hong Kong’s online trading platforms. The Trust Mark will also provide a channel for complaints and legal consultations. Meanwhile, HKFEC will actively communicate with local government and organizations to make Hong Kong a better place for ecommerce.

HKFEC will aggressively promote the “Hong Kong Trust Mark” and encourage more online retailers to participate. It will also raise awareness regarding IP rights.

Those who obtained the Trust Mark would be authorized to post the electronic logo of the “Hong Kong Trust Mark” issued by HKFEC on their website and linked to a given webpage. Online consumers can click the “Hong Kong Trust Mark” logo on the approved website to review the details and status of that particular site.

Following Alibaba’s various initiatives at battling counterfeit, more ecommerce organizations are stepping up to battle fake goods to better the ecommerce landscape for consumers.

A version of this appeared in Enterprise Innovation on August 18. Read the full version here.