Cross border vs local ecommerce fulfillment strategies in Southeast Asia

The pros and cons of localized ecommerce versus cross-border ecommerce approaches to logistics in Southeast Asia. Source: aCommerce Data 2016

A major global sports brand recently decided to switch its ecommerce logistics strategy in Southeast Asia from a regional cross-border one to a localized one. The brand had been fulfilling its Indonesian orders via a cross-border hub in Singapore since the early 2010s.

How did that scenario work out? Well, the absence of a website in a local language, painful payment experience and sluggish delivery ended up undermining the company’s highly anticipated growth potential. They realized that in order to become succesful in Southeast Asia’s largest market, they would need to fully commit to a localized strategy. Bain & Company’s Southeast Asia Digital Consumer Survey supports the difficulty of a non-localized strategy – the figure below shows that global players consistently scored lower in customer satisfaction than regional and local players on the Net Promoter Score.

Local and regional players seem to have a customer experience advantage over global players. Source: Bain & Company 2016

It may seem the moral of this brand story is that a localized strategy trumps a cross-border one from a business perspective but you’re mistaken. It ultimately depends on a set of factors unique to each business and the eIQ team has taken a moment to depict some of the scenarios for when one ecommerce fulfillment strategy is more appropriate over the other.

“Sometimes it makes sense to adopt a regional ecommerce strategy but every company needs to decide whether and if it is time to go local.”
– Mitch Bittermann, Group Chief Logistics Officer at aCommerce

As global brands increasingly wake up to the Southeast Asian opportunity for ecommerce, what is too often overlooked is the market’s immature state and more specifically, the logistical challenges businesses must overcome such as lack of regional payment systems and a reliance on Cash on Delivery due to a highly unbanked population. 

There are two main approaches to entering Southeast Asia:

  1. Cross-border logistics: employing third parties and local partners to do the entire fulfillment process from abroad of one or two centralized hubs (often in Singapore for Southeast Asia) and/or
  2. Localized fulfillment: investing in the country’s local infrastructure, such as warehouses, staff and a delivery fleet and do the fulfillment nationally. Another option is outsourcing to a third-party service provider to do the localization for you, as Sales Stock, an ecommerce startup, did with aCommerce in Cawang

It’s important to consider all elements of both strategies because the cost of choosing the wrong strategy may negatively impact a brand’s reputation, decrease margins and ultimately put commerce operations to a halt. To leapfrog the learning curve, here is a snapshot of the main steps taken when choosing an ecommerce logistics strategy in Southeast Asia.

Step 1: Test the Local Markets Via Cross-Border Fulfillment

When a business is unsure of the demand for its product, a phased approach is an efficient way to test the waters without full commitment. It allows time for calculation of the business’s scalability. Starting with a cross-border approach means that the business wouldn’t need to invest heavily in inventory and a local team to run the operations. Because the product is shipped from overseas, the company will usually outsource the entire fulfillment process in the local country. Amazon’s current strategy in Southeast Asia is to adopt a cross-border model by connecting sellers overseas to buyers in local Southeast Asian countries, there is no need to engage in costly investment regarding fulfillment such as warehousing, handover and last mile logistics. 

Singapore is a good hub for cross-border due to its escape of typical regional challenges

Infrastructure in Singapore makes it very convenient for businesses to do cross-border ecommerce fulfillment resulting in many companies using the country as a jumping board to enter the ASEAN market. For example, Singapore’s ratio cross-border over total ecommerce is the highest in the region, reaching 55% according to a report by Payvision. It also depicts the island-city-state as particularly cross-border friendly – low customs tax close to 0%, mature infrastructure, with the busiest seaport by cargo tonnage behind Shanghai. It is important to note that Singapore is an exception and not representative of the development of the rest of the region. 

Cross-Border or Localized Ecommerce Fulfillment in Southeast Asia

Singapore has the lowest customs tax in ASEAN. Source: AT Kearney

In addition to Singapore, cross-border ecommerce is also big in Malaysia, which makes up 40% of the total ecommerce market in the country. This fact is why, according to Bain’s comparative analysis, global players scored best in these two countries.

quick guide to ecommerce logistics in Southeast Asia

Easy cross-border regulations in Singapore and Malaysia saw global players performing well in these countries compared to their neighbours.

Considerations & Limitations of Cross-Border

Doing cross-border requires at least four different parties:

  1. Linehaul carrier
  2. Airline
  3. Customs clearance agent
  4. Local delivery partner.

This means whenever a delivery is late, it will be difficult to attribute responsibility and fix the problem.

The same reasoning is applied to reverse logistics. Returning international orders is such a hassle that most people just forego it and absorb the cost of inconvenience. It is important to keep in mind that 92% of customers are very likely to shop again with an online or catalog retailer if the returns process is convenient. Conversely, 82% will not shop from a store that has a complex returns policy.

Before deciding on the best strategy for your business, here are some key facts to consider derived from the global sports brand case study:

  • Cash On Delivery (COD): is still the preferred payment method in Indonesia where credit card penetration is less than 15%. In some countries, COD can be anywhere from 50-70% total orders shipped. By not offering it, brands would lose out 50-70% of the total sales opportunity.
  • Complications for cross-border COD: Cross-border COD adds extra steps to cash flow from reconciliation to the bank and to the company HQ, which prolongs the entire process.
  • Transportation Lead Time: Being able to deliver within a short time frame improves customer satisfaction. Indonesia is made up of over 18,000 islands with poor road links in certain areas. For a large global brand, partnering up with a local logistics provider will help cut down transport and delivery times.
  • Duties and Taxes: Businesses should consider that an online shopper would pay an additional one-third of an item price in duties and taxes if ordering online to another ASEAN country  (see fig.18 above).

“Understanding and overcoming local country regulations are the keys to enabling ecommerce which can be difficult to manage from abroad.” – Mitch Bittermann

“ASEAN is one community, nonetheless, each country has its own flavors in terms of customer expectations, payment methods, transportation network, taxes, and regulations,” said Mitch Bittermann. “Understanding and overcoming local country regulations is the key to enabling ecommerce because it’s difficult to manage from abroad.”

Step 2: Tackle Logistics Challenges Locally to Get More Order Volume

Having a localized ecommerce fulfillment strategy in Southeast Asia means more control over the logistics process. Local investment in the fulfillment process includes better supervision of inventory management, handover, last mile delivery and reverse logistics.

For example, going local reduces the number of parties involved meaning easier identification of problem areas to enforce fast acting solutions. The less distance traveled to reach end customer will also lower costs.

Consider going local when you have major order volume or trying to get more order volume. Fulfilling major volume orders abroad might become more expensive in the long run.

Doing things locally could also increase your ability to attract more demand from the previous consumers who are not willing to pay for that extra mile delivery or wait more than a week to get their orders. In the case of the aforementioned global sports brand, they’re foreseeing the increase of orders to 1000 per month after a year of going local, 10 times from what they are currently doing right now regionally.

It saves time for the customer and improves payment experience

Saving time for customers means higher conversion rates and more sales. In the case of Indonesia, a brand can reduce shipping time from 5-8 business days to 1-2 days by going local. This has a significant impact knowing that 6% of cart abandonment rate is due to slow shipping. 

Cash on delivery remains the preferred payment option for online customers in Southeast Asia. Cash handling process is easier when the operation is located in a single country. For the sellers, it means faster cash reconciliation and greater transparency.

Considerations of a localized strategy

As the brand’s positioning becomes stronger in one country and the order volume rises, managing customer expectations from afar gets harder and could hinder businesses growth, as was the case with the anonymous global sport brand mentioned above. In the long run, the cost of operating with third parties might be more costly than to invest in local infrastructure.

But markets in Southeast Asia are very fragmented and can be complicated for outsiders to steer the way in. Each country has its own set of regulations of doing business for foreign brands and challenges that might be completely different from another country in the region. And this complication is what usually deters the businesses to take the initial jump and operate locally.

Choosing the right local partner is key in doing business in new unknown markets, especially Southeast Asia. Businesses can leverage their local expertise to find the best strategy to ease their way into the Southeast Asian market.

No “One Size Fits All” Approach

“Ultimately, the right approach would depend on the business model and scalability potential, there is no ‘one size fits all‘ approach to choosing the right logistics strategy.” –  Mitch Bittermann

BY ALEXANDRE HENRY & ANUTRA CHATIKAVANIJ 

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