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Constraints within Vietnam’s underdeveloped infrastructure are not well documented, but that hasn’t stopped the country from continued economic developments and growth in ecommerce.

Raphael Wilhelm and his co-founder Vanessa Santamaria launched SoNice, a new entry to Vietnam’s newest e-marketplace, took time to share with eIQ the challenges with starting a business in the up and coming ecommerce market.

What is SoNice?

The company launched in October 2016 in Ho Chi Minh City enabling Vietnamese designers and makers to scale their businesses as SoNice is capitalizing on the emerging and fast growing sector of local independent brands.

As many merchants on SoNice have little ecommerce experience, the company began to offer services such as content production, brand management and logistics in addition to hosting them on the platform.

Businesses were selling items such as concrete lamps, sketch notebooks and handmade leather wallets on the platform but they didn’t just want another online channel, they wanted someone who could help them scale.

SoNice features over 800 curated products and with a 80% month over month GMV growth since its launch four months ago, activating Vietnam’s smaller brands is working.

Home decor is one of SoNice’s core categories, which taps into Vietnam’s growing property market, where more young people are buying their first apartments and choosing western inspired, modern interiors.

Vietnam emerging from the shadows

Before 2015, Vietnam’s market was often overlooked by foreign investors and only two main companies were offering opportunities for brave investors, Dragon Capital and Vietnam Asset Management Limited.

During that time, countries such as Indonesia and India were showing investors that Asia was more than China, these two countries in 2014 accounted for 21% of the world’s population and 3.8% of global GDP together, and shadowing Vietnam’s potential.

But the tide slowly turned and Vietnam’s investment potential continues to grow. In 2016, the country overtook Indonesia and Thailand as ASEAN’s most attractive market for US firms – 40% of them cited Vietnam as their priority market in the region.

In that same year, ecommerce revenue also increased to $5 billion, accounting for about 3% of total retail trade and services revenue. The number could surge within the next few years as the government plans to invest $111.6 million from the State budget into the ICT sector by 2020.

With a young population, increasing urbanization and 44% Internet users in 2015, the country is steadily becoming an attractive market for businesses.

However, the ASEAN market comes with its own obstacles SoNice co-founder Raphael experienced firsthand. He details what new companies should look out for:

Overcrowded B2C space

Marketplaces such as Tiki, Sendo and Lotte are some of the most well-known marketplaces among the Vietnamese in addition to the region’s most popular marketplace, Lazada. This means that new businesses trying to capture market share would be entering an already crowded battleground.

Raphael advises,

“Understand the playing field first. It would make more sense as a smaller, new player to offer a more select and strategic product offering on your platform to increase the chance of survival.”

He notes that Vietnam’s vertical ecommerce market is still relatively young. Notable startups such as WeFit and Foody are good examples of successful companies that saw opportunities in their untapped fields by offering something unique to consumers.

“For entrepreneurs poised to enter Vietnam, think about what is lacking, and go from there.”

Challenges specific to foreigners

As a European business owner in Vietnam, the process of opening a bank account took 2X longer than it would for a local.

“The quality of financial services is also quite low in Vietnam. Not only did it take me a few hours to open a bank account, I was also required by the bank to pay a deposit to apply for a credit card,” comments Wilhelm.

For 100% foreign owned businesses, it will be a challenge to overcome the country’s bureaucracy. Wilhelm recommends hiring at least two different lawyers in Vietnam to help navigate the 5-6 month long process of launching your own company, whereas for locals, the process simply takes five days.

Vietnam’s unbanked population

Although it’s becoming less common, some people still pay for their houses using gold and the reason why Raphael says 90% of ecommerce transactions in Vietnam are paid with cash-on-delivery (COD).

According to the World Bank, 70% of Vietnamese are still unbanked. However, with 38% of the population owning a smartphone, payment companies and banks have the potential to access more clients and increase financial sophistication amongst the Vietnamese.

Low trust in logistics 

“The postal services in Vietnam are not yet up to an international standard, which can sometimes cause delays in delivery, making it hard to persuade people to shop online,” comments Raphael. “We use motorbike riders in Ho Chi Minh City and 3PLs to deliver to other cities like Hanoi and Danang.”

SoNice’s best-selling products range from Home décor items such as canvas art prints and Edison Desk Lamps to hand-crafted notebooks – the right size for motorbikes making delivery cost is also favorable.

“While logistics are a challenge, the price ranges between $1-2 to take your customer’s parcel from one district to another.”

Winning over VCs

According to Raphael, there’s a lack of funds and VCs that solely focus on Vietnam. Instead, startups often have to pitch elsewhere to raise funding, commonly to outsiders who aren’t quite convinced of the market potential.

However, it seems that overseas VCs are taking notice. In 2016, Vietnam saw two dozen startups receive funding from seed to Series C stages with the help of Hanoi based ed-tech startup Topica’s Founder Institute incubator.

For Raphael, interested investors are advised to spend time with local entrepreneurs and get to know their way around the city before committing to an investment opportunity.

“The culture here is so distinctive that it requires an understanding of the locals, of how things are done and these two require time and effort,” says Raphael. “The market can’t be pitched in 5 or 6 slides, it’s important to come with an open mind.”

Although the fundraising process takes time, the average deal size in Vietnam is relatively small, meaning that investors don’t need to commit to a major investment to make an impact. They could easily inject $500,000 and it would be considered a significant contribution, unlike funding rounds in Singapore or Indonesia where numbers are in the millions.

The Vietnamese mindset

In general, Vietnamese people have more to spend compared to even two-three years ago. When Raphael arrived in Ho Chi Minh City in 2012, the landscape was completely different.

“After Starbucks opened shop in Vietnam, a wave of boutique coffee houses popped up and young people also started to invest more in their first apartments. Vietnam is slowly opening up room for more experiences, shopping and consumer-centric verticals,” remarks Raphael.

The Vietnamese government has recently announced Resolution 35, an initiative to help launch one million enterprises by 2020, double the current number. The State is ensuring equal access to funding sources, land and natural resources among enterprises, regardless of their types and economic sectors and adopt policies to back SMEs, startups and creative businesses.

Vietnam: Is it worth it?

“Despite the hurdles in Vietnam’s growing ecommerce landscape, the challenges in payment, logistics and the law exist because the ecommerce landscape is so new, not because Vietnam is not suitable for ecommerce,” says Raphael.

SoNice’s growth in less than six months speaks for itself and Raphael is a passionate advocate for Vietnam’s potential.

“By coming in now, startups have a higher chance of succeeding but they must differentiate themselves from what’s out there. Deep rooted challenges in Vietnam present companies with lots of opportunities,” said Raphael.

Raphael (center) with the SoNice team in Ho Chi Minh city

Out of 189 countries, Indonesia ranks in the bottom 30% of worst countries to do business in according to the World Bank in 2014. Nonetheless, with its quarter billion population and largely untapped ecommerce potential, the archipelago is still pegged as the next big thing after India and China. Some even call Indonesia China’s little sister.

Since President Jokowi came into office in 2014, one of his main goals was to attract more foreign direct investment to Indonesia and on May 12, the President signed Presidential Regulation number 44 of 2016 that changed the rules of the Negative Investment List, a list that stipulates which sector is open to foreign investment in Indonesia as well as the percentage of foreign ownership permitted. Specifically, it changed foreign ownership laws in ecommerce business.

Now, 100% foreign ownership is allowed for business and companies approved under the Investment Coordinating Board (BKPM). The caveat is that the ecommerce business in Indonesia needs to have a value  of at least 100 billion IDR ($7.3 million US). If a foreigner has a great idea for an ecommerce venture but without the minimum investment, they can own a minority stake in a company, up to 49% with an Indonesia counterpart.

The Investment Coordinating Board’s (BKPM) director for business development, Pratito Soeharyo, said that since October last year, any company, including ecommerce businesses worth 100 billion Rp or more could be established in just three hours under the so-called three-hour licensing facility. Since the three hours licensing facility has been introduced, any company not in the list of Negative Investment List category could be established in three hours compared to the previous 23 days it required. Ecommerce business is now one of them.

Who Benefits the Most

1. Enterprise level ecommerce corporations 

Regulation 44’s valuation threshold will encourage large and established foreign investors to set up operations in Indonesia, such as Amazon, which just announced its expansion into Indonesia on June 16 2016. 

2. Local Indonesian ecommerce startups 

The other major winners and perhaps most important of all are smaller ecommerce startups from Indonesia. The regulation will ensure that foreigners who don’t meet the threshold of $7.3 million USD will have a joint venture with a local partner. The maximum foreigners can own is a 49% stake. 

 This will help level the playing field for both foreigners and local players as they will be able to easily attract more foreign investors.

Definition of “ecommerce business”

“Ecommerce business” is defined as online marketplaces, daily deals websites, price-grabber sites, and online listing platforms. Ecommerce enabler services such as logistics companies and on-demand transportation services are also included in the category, which falls under the jurisdiction of the Ministry of Communications and Informatics.

The change in regulation is part of a larger ecommerce roadmap that is being drafted by the government. The few key topics proposed are about consumer protection, including payment gateway and estimated delivery time, and also fiscal and business entity surrounding the industry. The roadmap plan will be finalized this year.

How Ecommerce Regulation 44 in Indonesia affects current e-business

Foreign ecommerce players operating in the country were using loopholes by splitting business units in the company and registering multiple entities.

For example, one local company is established to handle fulfillment where it owns the inventory and handles everything related to delivering the product to the consumer. Another separate entity holds the IP and is registered as a web portal. The fulfillment company can have an exclusive contract with the web portal legally by Indonesian regulations. But this process of setting up multiple entities takes a lot of money, time and requires a lot of trust.

Overall, the new regulation will enable an easier process in setting up an ecommerce business or injecting new capital to the existing players. And in future cases where foreign ownership exceed the allowed percentage, they will have two years time to comply with the rules with three options:

  1. Sell their shares to the local investors,
  2. Sell their shares through the domestic capital market, or
  3. Buy the exceed ownership portion from the investors and treat it as treasury stock.  

Indonesia Ecommerce Market Potential

The changes in this regulations are expected to serve as a strong foundation to level out the playing field, giving local companies more foreign know-how and foreigners a chance to have a localized best practices as well as stimulate job growth. 2015 saw the total ecommerce sector reach $19.7 million US and employ 3404 people. With the new regulation, 24 projects were listed in Q1 2016 and the government expects to see ecommerce sales in the country rise to $25 billion US by the end of the year and reach $130 billion US by 2020.

The government expects to see ecommerce sales in the country rise to $25 billion US by the end of the year and reach $130 billion US by 2020 with Regulation 44.

Sales estimated with the expectation that the number of internet users in Indonesia will reach 280 million by 2030. It is already up to 100 million users this year according to data from the Association of Internet Providers (APJII).

Ecommerce Regulation in Indonesia - Ecommerce Foreign Investment Value in Indonesia

Source: Jakarta Post, May 2016

Indonesia versus the world of ASEAN

According to A.T. Kearney, Malaysia and Singapore have the best-established ecommerce laws in Southeast Asia. Philippines has allowed 100 percent foreign ownership for ecommerce. In Thailand and Vietnam, despite the law restricting foreign investment in various sectors, ecommerce in both of these countries is one the sectors that get the most support or promotion by the local government to attract foreign investors. Ecommerce Regulation 44 in Indonesia was taken to entice more foreign investors.

Ecommerce Regulation 44 in Indonesia - Foreign Ownership Regulations for Ecommerce in Southeast Asia

Singapore is considered the easiest country in the world to do business, whereas Indonesia has traditionally been among the hardest

With the door opened for the foreign players to play solo in the open field, it certainly attracts The Giants with a lot of money to burn. But even Goliath can be beaten by David and local players have the advantage of their market knowledge. It will take more than big capital to conquer Indonesia but no one can say that the reward won’t be worth it. 

By Rara Kinasih

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