Alibaba's Trojan Horse for Southeast Asia

It's been six months since Alibaba acquire Lazada, the most popular ecommerce platform in Southeast Asia. Since the publication of this news, observers and critics have debated whether this cooperation is good or not for both parties, how it will affect rivals such as MatahariMall, Tokopedia and Orami, and how the region will be flooded with cheap products from China.

Meanwhile, startup founders and VCs are patting each other on the shoulder because this has put the Southeast Asia region on the global competitive map and is expected to stimulate more funding and investment. exit company in the future.

However, everyone seems to have forgotten to think beyond mere superficial observations. Alibaba's acquisition of Lazada did more than just grow their retail GMV (gross merchandise value), proving that Jack Ma is Jack Ma and why he is always a few steps ahead in the game. Those celebrating this news, particularly those in the retail sector, may end up biting their own tongue.

Peter Thiel, PayPal and The Importance of Distribution

Peter Thiel founded PayPal in 1998 and built it into one of the largest payment platforms in the world with 145 million monthly active users processing up to 9 million transactions per day. PayPal went public in 2002 and was later acquired by eBay for $1.4 billion. After growing bigger than eBay, PayPal split from eBay in 2015 and had a second IPO, bringing the company to $46.6 billion and making it surpass eBay's 'only' $34 billion market value.

However, without eBay, PayPal probably wouldn't exist today. In his book 'Zero to One', Peter Thiel tells how PayPal nearly failed were it not for their luck that they met what would later become their biggest distribution channel, growth engine, and then acquirer: eBay.

PayPal focused on targeting eBay's Power Sellers — who were responsible for the large number of orders through eBay — and then augmenting them by paying them for each user registration and invitation to friends, effectively making PayPal a mainstream payment platform.

No wonder Peter Thiel is an advocate who puts distribution, in addition to building great products.

“Poor distribution – not product – is the number one cause of failure. If you can make just one distribution channel work well, you can have a great business. If you try a few but don't master any, you will fail." Thiel wrote.

eBay is accelerating PayPal's growth because of its reach and transaction speed — high usage keeps the payments company growing. Distribution is what Alibaba needs from Lazada. But for what? Of course not for cheap products from China.

Inside the Giant's Stomach

At roughly the same time as the PayPal acquisition, eBay is also trying to gain more market share in China through investation which develops into acquisition from the company EachNet in 2002, which at the time was the largest C2C marketplace in China.

In response to this, Alibaba launched Taobao in May 2003 which went on to beat EachNet to become the largest C2C ecommerce marketplace in China. Within 3-4 years, eBay's market share in the C2C market fell from 72% to 8% and caused them later withdraw from this competition while Taobao's dominance continued to climb to over 80% in 2007.

Following the launch of Taobao, Alibaba introduced Alipay in 2004, a third-party payment platform to help facilitate transactions that take place on Taobao. Currently, Alipay is the largest third-party payment platform in China with a market dominance of 70%, owning more than 400 million users and processes more than 80 million transactions per day (compared to PayPal's 9 million).

While PayPal focuses on a peer-to-peer (P2P) online payment platform that is based on email and linked to a credit card, Alipay is linked to bank accounts and has services tailored to the Chinese market, such as escrow services.

Menurut Jack Ma, Chinese culture, while valuing the values ​​of trust and integrity, does not have a system that upholds these values. As a result, Alipay's escrow feature is the right solution to bridge the lack of trust and shift Chinese ecommerce consumer behavior from cash-on-delivery (COD) to mobile payment dominating 68% of transactions now.

Leveraging its 400 million users and reaching out to Alibaba's e-commerce platforms, Alipay has grown beyond an internet-based payment platform into a financial and banking giant that also threaten old financial players.

In 2011, Alipay split from Alibaba to become Ant Financial Services Group, which caters for everything from online payments, microlending, to banking and credit scores. Judging from his last funding round which was valued at $4,5 billion earlier this year, the company is now valued at $60 billion, making it the most valuable non-public technology company after Uber.

With this armor, Ant Financial is looking for opportunities to expand into new markets and has been trying for some time set foot in Southeast Asia. The company had actually set up an entity in Singapore quite early in 2010 but lacked proper distribution channels. Ant Financial's fortunes seemed to emerge earlier this year.

Eyeing Payment Opportunities in Southeast Asia

In many ways, e-commerce in Southeast Asia is the same as e-commerce in China 8 years ago. In 2008, cash-on-delivery (COD) was still the dominant payment method in China, accounting for more than 70% total payment.

Currently, Southeast Asia very dependent to COD when shopping online, donate up to 70% of the total transaction.

To eliminate consumers' high dependence on COD, many startups with large capital or originating from conglomerates have tried to solve this payment problem, including Omise (Thailand), Doku (Indonesia), LINE Pay (Thailand), and True Money (Thailand). ).

However, despite the huge PR and media hype, this domestically based solution has not been able to shift consumers away from COD because much of this effort is simply “technology for the sake of technology” — building a faster car when what is needed is a better road. more.

Product Challenge

• Platforms like Omise and 2C2P are just payment gateways and offer no better solution for the huge C2C and P2P space that Google and Temasek predict is 'several billion dollars'. These payment gateways still primarily process credit cards and, with credit card penetration in emerging markets in Southeast Asia still only in single digits, do not really address the main problem at hand. Moreover, this solution also offers no cure for the trust issues that often get in the way of C2C and P2P transactions — especially escrow.
• 2C2P and Omise are also at risk of being abandoned by users because there is no end-user bond whatsoever, which means that if a cheaper and better alternative emerges there is nothing to stop merchants from switching to the product. Taobao requires users to register with Alipay, making it easier to convince non-Taobao ecommerce platforms to adopt Alipay as well.
• Rabbit LINE Pay, previously LINE Pay, has never captured a dominant market share despite its association with LINE, a popular messaging platform that has 33 million users in Thailand. This service is also limited because it only serves credit cards, again it doesn't solve the fundamental problem lack of credit card penetration in this region.

Distribution Challenge

• Despite their good efforts to provide consumers with a second choice of payment methods, fintech startups like Digio and Deep Pocket are only building mobile wallets before solving the main problem.
• It is very difficult for a mobile wallet to be widely used when awareness is still very low and users do not have a strong (usually financial) incentive to adopt it. User acquisition then becomes expensive without any associated distribution channels.

Challenges (Lack of) Usage Practices

• One of Thailand's leading mobile wallets owned by Ascend, True Money, is linked to major Thai banks and has distribution access to companies in the conglomerate CP portfolio, including more than 19 million mobile subscribers.
• Nevertheless, True Money reported only has 100,000 monthly active users out of 6 million registered users since 2014. Current practice of using True Money is limited to cell phone top-ups, online game top-ups, and bill payments and over the counter payments, usually at 7-11 stores. owned by CP.

Ecommerce is a more obvious and natural use for mobile wallets and as such True Money is also used as a payment method at Ascend's ecommerce companies such as WeMall and WeLoveShopping. However, with their combined traffic making up only 26% of Lazada's total traffic, Ascend still has a long way to go to follow Peter Thiel's footsteps and turn their ecommerce property into a growth platform for their payment solutions.

Lazada Acquisition: Trojan Horse Strategy?

Alibaba's move into Southeast Asia has never been just about growing their retail GMV. In the long run, it's not a matter of beating rival Lazada or finding new markets outside of China; it's all about gaining access to a huge customer base in a market that lacks an ecommerce infrastructure very much like China in its early days. Jack Ma's end game is to introduce and monetize his other products and services, starting with Alipay.

Adopting Alipay will play a big role in the growth of e-commerce on a regional scale and Lazada in particular. Widespread adoption of a convenient payment platform that bridges the crisis of trust between buyers and sellers will lead to an increase in overall transactions as has been seen in China, the world's largest e-commerce market in terms of penetration and its GMV.

News about purchases 20% share of Ascend Money, the parent company of True Money, by Alibaba which came just months after purchasing Lazada, is showing Jack Ma's master plan for Southeast Asia is starting to pay off.

All of this goes beyond just Alipay and facilitates payments in the marketplace. As noted above, Ant Financial, Alipay's parent company, operates the entire digital financial ecosystem in China which includes, but is not limited to: Yu'e Bao, China's largest mutual fund for 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 off — you guessed it — ecommerce data.

And the financial sector is just the beginning. Jack Ma, in a letter to his shareholders in 2015, hinted at a lot more to come:

“The Alibaba group's strategy is to build the e-commerce infrastructure for the future. Ecommerce is just the first step. [...] About half of the workforce of Alibaba Group and its affiliated companies, including Ant Financial and Cainiao, work in areas critical to our ecosystem, including logistics, internet finance, big data, cloud computing, mobile internet, advertising and also called Industry double H - Health and Happiness (a big data-based digital health and entertainment business that will take 10 years to become data-driven)”

Therefore, retailers like MatahariMall or Central shouldn't be worried about increasing competition; but it is the banks, insurance providers, hospitals and others who have to be prepared to accept the harsh whipping.

For a glimpse of what might happen in Southeast Asia, we just have to look at what happened to Uber recently in China.

Learn from China or How Alibaba's Trojan Horse Strategy Killed Uber China

“Uber didn’t lose to China in 2016. They lost in 2014 when they came in, and realized it 2 years later.” — Wang Di, Quora User

Alibaba, in collaboration with longtime rival Tencent, adopted a similar strategy in China to get rid of Uber. Outsiders have often heard the classic textbook strategy “how-foreign-internet-companies-fail-in-China” reasons such as lack of localization (language/cultural barrier), lack of connections/guanxi, government protection and lack of enforcement of IP laws.

While all of these have played their part, none of them explain the main reason why Uber failed in China.

Uber failed because they thought that their competition was only in the transportation space with Didi. What they don't know is that Didi's majority shareholders, Alibaba and Tencent, are playing by completely different rules. For Alibaba (and Tencent), Didi is not just a transportation service provider app; Didi's strategy and hidden goal is to act as an acquisition channel scalable Alipay Wallet, the mobile version of Alipay, as well as Tencent's WeChat Wallet, according to brilliant answer on Quora situs this:

Around 2012, WeChat's huge success helped many IT companies in China to shift their focus to the mobile app market. Meanwhile, despite some suspensions, the government is starting to support the development of mobile payments. Everything is ready for Tencent and Alibaba to launch their mobile payments app to be a big thing. All, except user habits in China.

People in China were not very familiar with mobile payments at that time. In fact, there hasn't been a significantly better group of people in the world at that time. Moreover, Chinese people are very careful when processing payments, and many of them are not fans of the latest gadgets.

Yet they all love discounts or paybacks! One dollar saved is one dollar earned.

Didi and Kuaidi taxi calling apps are perfect user traffic recognition.

You can use Didi to call a taxi and pay 30 yuan in cash, but if you pay for a taxi using Tencent Wallet (directed from Didi), you only have to pay 10 yuan. Are you willing to save 20 yuan—$3 or 4—by using the features already available in the app? Just by squeezing here and there? Of course.

And now you are connected to WeChat Wallet. As desired by Tencent.

With Didi as an important distribution channel for Alipay Wallet, Alibaba has succeeded in acquiring more users into its service ecosystem including Taobao, Tmall, Ant Finance and more, leading the monetization of all other products. Uber only has transportation.

Tencent and Alibaba have put in huge sums of money to pay for these repayment subsidies. Too much for a taxi calling app, but it makes sense if you want to mark your territory in the largest market with the world's most advanced mobile payment system.

The Future For Southeast Asia

With the sovereignty of Southeast Asia as the the next huge and untapped e-commerce market around the world, we will see many players subsidizing their path to growth through discounts and coupons. Not surprisingly, critics often see this approach as a race to the bottom for all parties.

Not always true. As the example Uber China has shown us, this will only fail for those companies that don't see the bigger picture and are unable to monetize through a different set of products or services, either now or in the future.

Taking this into account, one could argue that Alibaba is getting a good deal with Lazada, especially given the long-term opportunity that exists in Southeast Asia beyond retail ecommerce. Alibaba shares confirm this too—Alibaba stock price soared after news of its acquisition was announced on April 12 and is up 35% since then (as of October 3, 2016).

Alibaba's broad acquisition considered victory for the growth of ecommerce in Southeast Asia but how many of us are ready to face the fact that whatever trophy we get is not a unicorn horse but maybe another horse?

- Disclosure: This article was written by Sheji Ho and translated by Rara Kinasih. The original article can be accessed HERE.

This article is a collaboration between DailySocial and eCommerceIQ.