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With the boom of technology in the region, Southeast Asia has become home to young startups, and investors hoping to help fuel its rapid growth.

Some examples of investment news surrounding the region only this year include Chinese ecommerce giant JD.com confirming a $500 million joint venture with Thai retailer Central to build up the ecommerce and fintech sector in Thailand; Malaysia Debt Ventures set aside a $238 million fund to target technology-based companies like AR, VR, etc; and 500 Startups has made its debut investment in Myanmar backing a social media monitoring and news discovery app.

A recent report commissioned by Google and AT Kearney also highlights just how much money has been funneled into the region, which market is the most attractive and where are the most deep-pocketed investors coming from.

Southeast Asia’s golden child

Although the investment for startup companies in Southeast Asia only contributed to 8% to the total $90 billion of investment into Asia, this value has grown 23 times from 2012 to 2016 from $0.3 billion to $6.8 billion.

Most of the money has been pumped into Singapore and Indonesia that captured 60% of the entire investment.

Indonesia startups investment

Singapore gained most of the startup investment in Southeast Asia

However, nothing shone brighter this year than the myriad of Indonesian startups that have been stealing the attention of global industry giants like Tencent, Expedia, and Tim Draper from Draper Associates who invested in the early days of Tesla, Baidu, and Skype.

The country has produced three startups that classify as a ‘unicorn’, a company valued at more than $1 billion. They are Traveloka, Tokopedia and Go-Jek.

The first is valued at $2 billion after a $350 million investment from Expedia in July, and both Tokopedia and Go-Jek also are worth around $1 billion and $3 billion respectively.

Where’s all the money coming from?

Attracting the Chinese investors

In a short span of four years time from 2012 to 2016, Indonesia has seen 31 times growth of investment value from $44 million to $1.4 billion. During 8 months in this year alone, this value has grown more than two times to $3 billion driven by later-stage investments.

Indonesia startups investment

The staggering growth has AT Kearney predicting the ecosystem could attract more investment than the oil and gas industry — which contributed $23.7 billion or 3.3% of the country’s GDP last year.

“Due to the massive growth, the value of startup investments in Indonesia may surpass the nation’s oil and gas investment which was $5 billion in 2016,” said AT Kearney partner, Alessandro Gazzini.

From all of the investment raised by Indonesian startups since 2012, ecommerce received the biggest chunk of gold taking 58% of the total investment value.

Transport and fintech quickly follow behind with 38% and 2% respectively.

Indonesia startups investment

Indonesia has also become a hotbed for the expansion of Chinese companies as the country sees a growing interest from Chinese investors this year.

94% of the startups investment in the country during 2017 have involved Chinese investors, up from only 2% last year. Two of the infamous Chinese BAT, Alibaba and Tencent, are raising stake in Indonesia by investing in Tokopedia and Go-Jek respectively.

Meanwhile, JD.com diversified its portfolios with investment in Traveloka making Indonesia the official battleground for Chinese companies to fight their proxy war.

Indonesia startups investment

The involvement of Chinese investors in Indonesia is something that the government has encouraged across all sectors. Indonesia’s Investment Coordinating has even set up a special China desk to attract more investors.

With the country still at a nascent digital stage, there is no precise measurement to find out the country’s true potential until company’s try but as the famed venture capitalist Tim Draper said about Indonesia, “it is a great place to be”.

With 600 million people, a growing middle class and rising internet penetration, Southeast Asia is often considered as the next gold rush for ecommerce. Alibaba’s $1 billion landmark acquisition of Lazada — Jack Ma’s largest overseas acquisition to date — happened here earlier this year. But headlines and hyperboles aside, how big is the opportunity for ecommerce in Southeast Asia exactly?

The $88 Billion Opportunity?

Little data exists on the current and projected size of the ecommerce market in Southeast Asia. Part of this is because it’s still a nascent industry and, as a result, legacy institutions like government and research firms are still playing catch up. Part of it is also due to the fact that C2C ecommerce, estimated to be anywhere from one-third to half of total ecommerce GMV, is mainly unregulated and untaxed. It doesn’t help that the majority of C2C in Southeast Asia actually happens on social platforms like Facebook and Instagram, facilitated by conversations on messaging apps like LINE and Facebook Messenger.

Having said that, several reputable organizations have taken a stab at assessing the size of ecommerce in this region. One of the earliest attempts at market sizing comes from AT Kearney in collaboration with CIMB. Published in early 2015 and titled ‘Lifting the Barriers to E-Commerce in ASEAN’, the report estimates the current market size at $7 billion (as of 2013), and projecting a future potential of $89 billion.

More recently, Google partnering with Temasek, released a report titled ‘e-conomy SEA: Unlocking the $200 billion digital opportunity in Southeast Asia’ that sizes the current ecommerce market at $5.5 billion (as of 2015) and foresees it to grow into an $88 billion market as early as 2025. However, it’s important to note that Google and Temasek paint only a partial picture as they are leaving out C2C and P2P marketplaces such as OLX, Carousell and Instagram because of difficulties in obtaining data.

Western vs. Chinese Ecommerce Growth Models: Why Existing Estimates on Southeast Asia’s Ecommerce Potential Are Wrong

$88 billion seems like a big deal but as soon as you put it in context, one may start to wonder if this is the right number. The US ecommerce market today is a $394 billion market. But then again, and quite obviously, the US is a much more mature ecommerce market and both Amazon and eBay are older than some of the junior staff on my team. What about China? China surpassed the US in 2013 to become the world’s largest ecommerce market in terms of GMV.

And today, Chinese ecommerce is a $700 billion market, making up about 13% of total retail in the country. With a population half the size of China, shouldn’t the future potential of ecommerce in SEA be a little bit brighter than a mere $88 billion?

southeast asia ecommerce

Things become even more interesting when we look at the projected 2025 numbers and normalize them based on population size. This metric gives us an idea how much an average person spends on ecommerce in a given year. We’ve done this calculation below for key SEA markets as well as benchmark countries like the US and China:

ecommerceIQ

A couple of things stand out here. Obviously, China is still the world’s largest ecommerce market reaching $3 trillion GMV and 25% penetration. By 2025, the average Chinese shopper is expected to spend north of $2,000 per year online, almost triple the amount Singaporeans will spend online and catching up quickly to Americans who, 10 years from now, will be spending almost $3,000 on ecommerce annually.

The other interesting bit is emerging SEA countries represented here by Thailand and Indonesia. Google and Temasek’s report projects ecommerce in these two markets to reach $11.1 and $46 billion, respectively. This number in and by itself is impressive but when normalized with respect to population size, the ecommerce GMV per capita numbers are disappointingly low $155 and $157 for Thailand and Indonesia, respectively. Perhaps there’s an explanation for this.

US and Singapore’s GDP per capita are obviously much higher than that of emerging markets like Thailand and Indonesia, people have more money to spend in general, and China’s not exactly a developing country anymore with its GDP per capita projected to reach $14,000 by 2025.

Yet if we compare China and Thailand in the table below, we can see that Thailand’s GDP per capita is estimated to reach $11,000 by 2025, which is higher than China’s GDP per capita today and not far from China’s projected 2025 number. However, based on current ecommerce projections, Thailand’s per capita online spend will only be $155 or 1% of household purchasing power.

This doesn’t make sense given that Thai consumers do have spending power and retail makes up a large part of Thailand’s economy as evidenced by below retail penetration and GDP per capita numbers. Even if accounting for the missing C2C and P2P part—let’s say the other 50%, bringing the $155 to roughly $300—this number is still low compared to China today.

southeast-asia-ecommerce-potential

From 2006 to 2016, China’s ecommerce GMV per capita grew 127x. It’s hard then to believe that Thailand’s GMV per capita will only grow 9x over the next decade, especially given that Thai people are already spending more online on a per person basis today than Chinese did at the beginning of the Chinese ecommerce boom around 2006. This only makes sense if we assume SEA’s growth markets like Thailand and Indonesia will grow at a modest, Western-style pace of 18% (US 2000-2015) and won’t be growing at China ecommerce’s last 10-year CAGR of 68%.

As we’ll soon find out, the reason for this discrepancy is the faulty application of a Western-centric ecommerce growth model whereas the right model to size up ecommerce in emerging SEA is actually the Chinese model of hyper-growth.

Brothers From Different Mothers? Emerging Southeast Asia Ecommerce Has More Similarities With China Than Anything Else

The fallacy of existing projections is that they’re often based on a Western-centric model, in which the West is seen as the tried-and-true path towards ecommerce. However, for various reasons explained below, SEA ecommerce resembles China more than markets that developed earlier such as the US, Europe and Japan. As a result, we should be expecting high double-digit hyper-growth similar to the one China experienced over the last decade instead of the more gradual year-on-year progress of more legacy ecommerce markets.

1. Lack of offline retail infrastructure

“Why did internet ecommerce grow so much faster in China than in the USA? Because the infrastructure of commerce in China was bad. Unlike here, where you have all the (physical) shops: Wal-Mart, K-Mart, everything, everywhere. But in China, we have nothing, nowhere. So ecommerce in the US is just a dessert; it’s complementary to the main business. But in China, it’s the main course.” Jack Ma, Alibaba Founder and Chairman

Bangkok and Jakarta are home to some of the most high-end malls and department stores across the region such as Central World, Paragon and Grand Indonesia. However, once outside of the capital cities, there’s much left to be desired. China is very similar, with most offline retail concentrated in tier 1 cities such as Beijing, Shanghai, and Guangzhou.

Retail GFA (Gross Floor Area) per capita is 2,200 sqm in the US versus 500, 500 and 100 sqm in China, Thailand and Indonesia, respectively, according to data from CLSA. As a result, the majority of consumers in Thailand and Indonesia have no choice but to shop online, especially those outside the bigger cities. Based on aCommerce aggregate numbers, 70% of orders are from outside Bangkok.

Like in China, all this is expected to accelerate ecommerce growth at a much higher pace than in legacy markets.

2. Cash-on-delivery as the dominant payment method

The lack of credit cards didn’t deter ecommerce in China from growing at 68% annually over the last decade. With a less than ideal financial system, logistics and delivery companies ended up filling the gap by offering cash-on-delivery (COD) solutions. In its heydays in 2008, COD was 70% of total B2C transactions in China. However, by 2014, Alibaba’s Alipay had surpassed COD as the dominant payment method, with over 85% of 11/11 shoppers expressing a preference towards using Alipay vs. only 21% for COD.

Today’s SEA is eerily similar to China 10 years ago. With credit card penetration in the low single digits, COD has become the dominant payment method, with 74% of transactions in emerging SEA paid through cash based on data from aCommerce. Like China, SEA ecommerce won’t rely on COD forever. With Lazada’s acquisition, Alibaba now is executing its master plan to bring Alipay and Ant Financial services into the region.

3. Lack of cross-border ecommerce due to high import duties and taxes

Cross-border ecommerce in China was never a big thing until recently, with the establishment of government-approved bonded warehouse zones which allow for faster international shipping times and lower fees. Global brands and retailers can now tap into the lucrative Chinese market by setting up stores on platforms like Tmall Global and JD Worldwide without having a costly physical presence in the Middle Kingdom.

Prior to this, ordering abroad was limited for many Chinese consumers due to high import duties (30%). (These import duties still apply to merchants who are not licensed to sell in China’s cross-border ecommerce network, e.g. ordering directly from Amazon.com).

Similar to China, SEA’s growth markets like Thailand and Indonesia today have prohibitive import duties and taxes. This lack of a level global playing field puts the pressure on developing a strong local ecommerce ecosystem which is what we’re seeing right now with the ecommerce bloodbath in Indonesia.

southeast-asia-ecommerce-potential-3

4. “No-Tail” ecosystem

Internet adoption in China and emerging SEA 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, leading to the formation of what we call a “No-Tail” ecosystem. As a result, digital advertising in these countries has lagged behind that of more mature markets like the US and Japan where companies like Facebook and Pinterest often see selling ads as the most obvious—and sometimes only—way to make money.

Lacking a mature advertising environment, Chinese internet companies have had no choice but to look at commerce to monetize which has lifted the Chinese ecommerce industry to its present day juggernaut status.

“While US firms focus on ad revenue, Chinese companies have become pacesetters in ecommerce,” reports The Washington Post.

“You go on Facebook and you can’t even buy anything, but on WeChat and Weibo you can buy anything you see,” said William Bao Bean, a Shanghai-based partner at SOS Ventures and the managing director of Chinaccelerator, in the very same Washington Post article.

Uber didn’t lose in China because of lack of deep pockets; the ride-sharing giant lost because it was battling a competitor that was focused on long-term ecommerce monetization, not on short-term transportation revenues.

Similar to China a decade ago, emerging SEA has an equally nascent advertising market. “There are not enough local publishers therefore not enough spend from advertisers,” said Lichi Wu, an SEA ad tech expert previously with Google and AdMob.

With “walled gardens” like Facebook and Instagram dominating all content creation, there’s not a strong enough force to break the vicious chicken-and-egg cycle. Faced with the grim reality of low RPMs (revenue per 1,000 impressions or pageviews) many online businesses have embraced ecommerce as a business model.

It’s not surprising then that one of the most popular sources of “passive” income in Thailand and Indonesia is buying merchandise from Taobao and AliExpress and reselling it for a margin on Facebook and Instagram, whereas in the US stay-at-home entrepreneurs often resort to blogging, SEO and affiliate marketing to generate advertising income.

Sizing Up Southeast Asia Ecommerce Based On The China Ecommerce Growth Model

Looking at all the previous metrics, we can observe similarities between emerging SEA ecommerce today and China in 2006. For example, Thailand’s 2016 ecommerce GMV per capita and ecommerce penetration numbers are comparable to China in 2006. (Granted, and to be precise, based on these numbers Thailand ecommerce in 2016 is already ahead of China in 2006.)

To benchmark where emerging SEA ecommerce could be roughly 10 years from now, let’s look at ecommerce GMV per capita as percentage of national GDP per capita. This metric should give us an idea of an individual’s ecommerce spending power relative to living standards. We can’t really use China’s 2016 ecommerce GMV per capita because Thailand’s GDP per capita by 2025 will be higher than China in 2016, resulting in us underestimating the potential.

China’s ecommerce GMV per capita as percentage of national GDP per capita is 6% in 2016. Multiplying this with Thailand and Indonesia’s projected GDP per capita for 2016 we’ll get $711 and $533 ecommerce GMV per capita. Then applying this to the projected population count, we’ll get a $51 and $157 billion ecommerce market size for Thailand and Indonesia, respectively. Contrast this to Google and Temasek’s projections of $11 and $46 billion and we can see how much money is left on the table.

Taking Google and Temasek’s 2015 Thailand and Indonesia numbers and including an estimate for C2C, let’s say 30%, gives us the starting point for our annual projection. Then averaging out annual growth to reach the $51 and $157 billion numbers, we’ll get the below annual projections. In this scenario, new CAGRs are 43% and 50% for Thailand and Indonesia, versus the previous ones of 29% and 39%.

southeast asia ecommerce

Without adjusting for Singapore, Malaysia, Philippines and Vietnam (former two don’t follow the China model), we’ll get a total projected size of at least $238 billion. Indonesia’s re-adjusted ecommerce projection of $157 billion alone is bigger than the original $88 billion estimated for all six SEA markets combined.

This revised projection does justice to the true potential of ecommerce in Southeast Asia and explains why everyone here is doubling down, with Alibaba acquiring Lazada for $1 billion, Tokopedia having raised $248 million to date, and MatahariMall just fresh off a $100 million round. Like in China ten years ago, those that invest in ecommerce early and take a long-term, strategic outlook will end up owning the biggest chunks of this $238 billion — not $88 billion — ecommerce goldmine in SEA.

BY SHEJI HO, CMO AT aCommerce

 

Vietnam retail market ranked by AT Kearney

source: Vietnam Online

Vietnam is at 11th spot in the Global Retail Development Index (GRDI) ranking by AT Kearney and has been among the top 30 fastest emerging global retail markets since 2008. According to the study, Vietnam has low market saturation and its GDP growth is highest among Southeast Asian countries in the GRDI.

Its GDP has grown 5.2% annually since 2013, the highest among its Southeast Asian peers also ranked in the GRDI.
Export growth and a 17% increase in foreign direct investment has spurred economic growth, underpinned by Vietnam’s geographic advantage and low labour costs. This foundation led to impressive growth in 2015 in the retail sales area (22%) and in retail sales (9.5%).

Ecommerce in Vietnam is expected to grow as the use of mobile phones spreads and online shopping becomes more common. Ecommerce campaigns are ramping up, including Online Friday, held by onlinefriday.vn, which attracted 1.1 million visitors and close to 2,000 participating retailers.

From 2011 to 2015, Vietnam saw a continuous growth in retail turnover, worth $111 trillion (VND 2.47 trillion), accounting for 76.2% of the total retail and consumption value, according to a workshop discussing challenges facing the domestic retail sector in international integration held in HCM City on June 28.

Many market research companies and experts forecast that the retail market of Vietnam has great prospects for high growth in the future, driven by a population of 91.7 million with high consumption demands.

President of the Vietnam Retailers Association, Dinh Thi My Loan, underlined the challenges facing domestic retailers in international integration. Echoing Loan’s opinion on the increasing competition in the market, Nguyen Thi Thu Trang, director of the Centre for WTO and Integration of the Vietnam Chamber of Commerce and Industry (VCCI), called for incentives to ensure the sector’s sustainable development.

For the first five months this year, Vietnam’s total retail sales and services revenue reached $63.4 billion (VND1,430 trillion), a year-on-year increase of 9.1%. Meanwhile, the purchasing power of goods retailers witnessed high growth of 9.5% in the period, amounting to $86 billion (VND 1,920 trillion), accounting for two-thirds of the total retail sales and services revenue.

A version of this appeared in Nation Multimedia on June 30. Read the full article here.

ASEAN Today and its Digital Potential

The number of internet users has grown rapidly over the past decade and today two-fifths of the world’s population is online. Increasingly equipped with smartphones, consumers depend on the Internet for a growing range of everyday activities, from connecting with friends and family to shopping and banking. Businesses also harness the Internet extensively across their operations. A complex dynamic value chain comprising both global and local players has developed to deliver digital services to consumers and businesses. The digital economy’s value chain broadly consists of three elements: devices, networks, and applications.

By 2025, a digital revolution could transform daily life in ASEAN, making physical cash obsolete and cities smarter safer places to live.

Download the full report: ASEAN Digital Revolution AT Kearney