Uncovering Misconceptions About the True Potential of E-Commerce in Southeast Asia

With a population of 600 million people, a growing middle class and increasing internet penetration, Southeast Asia is often seen as a next gold mine for e-commerce. Lazada Acquisition Alibaba's $1 billion — Jack Ma's biggest overseas acquisition to date — occurred earlier this year. But behind the headlines and hyperbole, how big is the real potential of e-commerce in Southeast Asia?

$88 Billion Opportunity

There is little data available on the current size of Southeast Asia's e-commerce market or projections for the future. Part of the reason for this is because the industry is still very new and as a result, legacy institutions like government and research firms are still trying to stay up to date. Partly because C2C e-commerce, which is estimated to constitute one-third or one-half of the total GMV of e-commerce, is unregulated and taxed. The fact that C2C transactions in Southeast Asia take place on social platforms like Facebook and Instagram, is facilitated by conversations on apps like LINE and Facebook Messenger.

However, several reputable organizations have tried to assess the size of ecommerce in this region. One of the efforts made at the beginning came from AT Kearney in collaboration with CIMB. Released in early 2015 and titled 'Lifting the Barriers to E-Commerce in ASEAN', this report estimates the current market size of $7 billion (in 2013) and predicts a future potential of $86 billion.

Most recently, Google in collaboration with Temasek, released a report entitled 'e-conomy SEA: Unlocking the $200 billion digital opportunity in Southeast Asia' which measures the current value of the ecommerce market at $5.5 billion (in 2015) and predicts growth to reach $88 billion by 2025. However, keep in mind that Google and Temasek only give half the picture because they don't include C2C and P2P markets like OLX. , Carousell and Instagram due to the difficulty of getting data.

Growth of the Western Ecommerce Model vs. China: Why Estimates About Ecommerce Potential in Southeast Asia Are Not Correct

$88 billion seems big but if we put it in context, people would think this is the right interpretation. The US ecommerce market is currently $394 billion. However, it is clear that the US ecommerce market is more mature and both Amazon and eBay are older than some of the junior staff on our team. What about China? China has far surpassed the US in 2013 to become the world's largest ecommerce market in terms of GMV.

And today, the e-commerce market in China is worth $700 billion, making up 13% of total retail across the country. With a population of half the population of China, shouldn't the potential for ecommerce in Southeast Asia be greater than 'merely' $88 billion?

This then gets even more interesting if we look at the projected figures for 2025 and adjust them to the size of the population. This metric gives you an idea of ​​how much the average person spends on ecommerce in a year. We use the calculations below for some of the key markets in Southeast Asia as well as benchmark countries such as the US and China:

A few things stick out here. Of course, China is still the largest ecommerce market in the world with $3 trillion GMV and a penetration of 25%. By 2025, the average Chinese shopper is expected to spend $2,000 per year online, nearly triple the number of Singaporeans and will exceed Americans who, 10 years from now, will spend $3,000 on ecommerce per year.

Another interesting thing is that the Southeast Asian countries that are growing here are represented by Thailand and Indonesia. Reports from Google and Temasek project these two markets will reach $11.1 and $46 billion, respectively. This figure is already impressive but when adjusted for the size of the population, the per capita GMV of ecommerce is very low — $155 and $157, respectively for Thailand and Indonesia. There may be a reason for this.

The GDP per capita of the US and Singapore is certainly higher than developing countries like Thailand and Indonesia, the general public has more money to spend, and China is no longer a developing country with its GDP per capita predicted to reach $14,000 by 2025.

But 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 in 2025, which is larger than China's current GDP per capita and not far from the projected GDP of China in 2025. However based on current e-commerce projections, Thailand's per capita online spend is only $155 or 1% of household spending.

This does not make sense considering that Thai consumers have high purchasing power and retail is a large part of the Thai economy as evidenced by retail penetration and GDP per capita figures. Even if the missing parts of C2C and P2P were included — say 50%, bringing $155 to $300 — this would still be low compared to today's China.

From 2006 to 2016, China's per capita ecommerce GMV grew 127x. It's hard to believe that Thailand's per capita GMV will only grow 9x in the next ten years, especially if Thais have been shopping online more than the Chinese did at the start of their ecommerce trend in 2006. This only makes sense if we assume that the market is growing. e-commerce in Southeast Asia regions such as Thailand and Indonesia will grow more slowly like the West by 18% (US 2000-2015) and will not grow like the CAGR of the last 10 years in China of 68%.

As we will find out, the reason for this discrepancy is the misapplication of the Western-style e-commerce growth model, where the appropriate model for measuring e-commerce in Southeast Asia is China's hyper-growth model.

Mother's Other Siblings? Southeast Asia's thriving e-commerce has more in common with China than the rest

The fallacy of the existing projections is that they often base on the Western model, in which case the West is seen as a trusted pathway to e-commerce. However, for several reasons that will be explained below, Southeast Asian e-commerce is more like China than other more developed markets such as the US, Europe and Japan. As a result, we should expect high double-digit growth like that experienced by China over the last ten years rather than gradual year-on-year progress like other legacy e-commerce markets.

1. Lack of offline retail infrastructure

“Why is e-commerce growing so fast in China than in the US? Because the infrastructure of commerce in China is very bad. It's not like here where you have all the (physical) stores: Wal-Mart, K-Mart, whatever, wherever. But in China, we have nothing, nowhere. So ecommerce in the US is just a dessert; as a complement to the main business. But in China, e-commerce is the staple.” — Jack Ma, Founder and Chairman of Alibaba.

Bangkok and Jakarta are home to top malls and luxury department stores in Southeast Asia such as Central Word, Paragon and Grand Indonesia. However, once you're outside the big cities, there's not much to find. China is the same, with most offline retail located in tier 1 cities such as Beijing, Shanghai and Guangzhou.

Retail GFA (Gross Floor Asia) per capita stands at 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 who are outside the big cities. According to data aggregated by aCommerce, 70% of orders in Thailand come from outside Bangkok.

As in China, all of this is expected to accelerate e-commerce growth at a faster pace than the legacy market.

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

The lack of credit cards has not prevented e-commerce in China from growing 68% annually over the past decade. With a less than ideal financial system, logistics and delivery companies are finally filling this gap by offering cash-on-delivery (COD) solutions. During its time in 2008, COD accounted for 70% of the total B2C transactions in China. However, by 2014, Alibaba's Alipay had surpassed COD as the dominant payment method, with more than 85% of shoppers for 11/11 expressing their preference for using Alipay vs. only 21% for COD.

Southeast Asia today is very similar to China 10 years ago. With credit card penetration in the single digits, COD has become the dominant payment method, with 74% of transactions in developing Southeast Asia being paid in cash based on data from aCommerce. Like China, e-commerce in Southeast Asia will not always depend on COD. With this Lazada acquisition, Alibaba is now executing their master plan to bring Alipay and Ant Financial to the region.

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

China's cross-border e-commerce was never a big thing until recently, with the creation of government-approved bonded warehouse areas that allow for faster international shipping and lower costs. Global brands and retailers can now tap into the lucrative Chinese market by setting up shop on platforms like Tmall Global and JD Worldwide without the expensive physical store presence in the country.

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

Similar to China, emerging markets in Southeast Asia such as Thailand and Indonesia currently have high import duties and taxes. This lack of a global level playing field puts pressure on the development of the local e-commerce ecosystem so that what happens is e-commerce bloodshed in Indonesia as we can see today.

4. A “no-tail” ecosystem

Internet adoption in China and developing Southeast Asian countries did not reach a critical mass until the mid-2000s. This market 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 now call "No-Tail" ecosystem. As a result, digital advertising in these countries lags behind more mature markets such as the United States and Japan where companies like Facebook and Pinterest often view ad sales as the most obvious - and sometimes, only - way to make money.

Lack of mature advertising environment, internet companies in China have little choice but to look to commerce to monetize thus elevating the ecommerce industry in China to its current giant status.

"While US companies focus on advertising revenue, Chinese companies have become the pacesetter in e-commerce," reports The Washington Post.

"You visit Facebook and you can't even buy anything, but with WeChat and Weibo you can buy anything you see," William Bao Bean, partner at Shanghai-based SOS Ventures director of Chinaccelerator, said in the same Washington Post article. .

Uber's failure in China is not due to a lack of deep pockets; The ride-sharing giant is lost as it struggles against competitors focused on ecommerce monetization in the long term, not on short-term transportation revenue.

Similar to China a decade ago, Southeast Asia has an equally nascent advertising market. "There aren't enough local publishers, therefore there isn't enough buying from advertisers," said Lichi Wu, a Southeast Asia ad tech expert who previously worked at Google and AdMob.

With "walled gardens" like Facebook and Instagram dominating all content creation, no force is strong enough to break this chicken-and-egg cycle. Faced with the grim reality of low RPM (revenue per 1.000 impressions or page views) many online businesses have embraced ecommerce as a business model.

It's no surprise then that one of the most popular sources of "passive" income in Thailand and Indonesia is buying goods from Taobao and AliExpress and reselling them for a margin on Facebook and Instagram, whereas in the US, home entrepreneurs are often blogging, SEO and affiliate marketing. to generate advertising revenue.

Measuring Southeast Asia Ecommerce Based on China's E-commerce Model Growth

Looking at all the previous metrics, we can observe similarities between e-commerce in emerging Southeast Asia today and China in 2006. For example, e-commerce GMV per capita and Thailand e-commerce penetration in 2016 were already comparable to China in 2006. (To be more precise , based on these figures Thailand ecommerce in 2016 was already ahead of China in 2006.).

As a benchmark for where Southeast Asian e-commerce is 10 years from now, let's look at e-commerce GMV per capita as a percentage of national GDP per capita. This metric should give us an idea of ​​an individual's e-commerce purchasing power relative to their standard of living. We can't really use China's ecommerce GMV per capita in 2016 because Thailand's GDP per capita will be higher than China's in 2016, so as a result we can underestimate the potential.

China's ecommerce GMV per capita as a percentage of per capita national GDP was 6% in 2016. If we multiply this by Thailand's and Indonesia's projected GDP per capita for 2016, we'll get ecommerce GMV per capita of $711 and $533, respectively. Then applying this to calculate the projected population, we get an ecommerce market of $51 and $157 billion for Thailand and Indonesia, respectively. Contrast that with Google and Temasek's projections of $11 and $46 billion and we can see how much potential is actually left.

Taking Thailand and Indonesia figures from Google and Temasek reports and plugging in an estimate for C2C, say 30%, gives us a head start for our annual projections. Then averaging the annual growth to reach $51 and $157 billion, we will get the annual projections as below. In this scenario, the new CAGRs are 43% and 50% for Thailand and Indonesia, compared to the previous 29% and 39% respectively.

Without adjusting for Singapore, Malaysia, the Philippines, and Vietnam (where the last two names do not follow the Chinese model), we would get a total projected size of at least $238 billion. Indonesia's adjusted re-ecommerce projection alone stands at $157 billion, significantly more than the $88 billion estimated for all six Southeast Asian markets combined.

This revised projection provides an overview of the true potential of e-commerce in Southeast Asia and explains why everyone here is doubling, with Alibaba's acquisition of Lazada for $1 billion, Tokopedia gaining funding up to $248 million until now, and MatahariMall just earn $100 million. As in China ten years ago, people who invest in ecommerce first and take the prospect of a long-term strategy will end up owning the largest chunk of this $238 billion - not $88 billion - of the ecommerce gold mine in Southeast Asia.

- 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.