Market insights

E-commerce set to burgeon in SEA

08 March 2017 by Alywin Chew

The e-commerce market in Southeast Asia (SEA) is poised for a boom, and its internet economy is expected to burgeon to more than $200 billion within a decade, a new report has found.

The report, commissioned jointly by US tech giant Google and Singapore investment firm Temasek, focused mainly on six major markets in SEA - Indonesia, Singapore, Malaysia, Philippines, Thailand and Vietnam – as well as smaller ones such as Cambodia and Laos.

Titled e-conomy SEA: “Unlocking the $200B Digital Opportunity”, the research found that there are currently about 260 million users in the region, making SEA the 4th largest market in the world. This particular market is also the fastest growing one, expanding at a 5-year compound annual growth rate (CAGR) of 14 per cent. Singapore and Indonesia were found to be the countries where e-commerce activity is the highest.

At present, the Asia-Pacific region already leads the pack in global B2C e-commerce, according to a 2015 Research and Markets report. The study found that the region’s share of total retail sales had already surpassed that of Western Europe and North America. Other studies, such as one commissioned by the Ecommerce Foundation, valued the Asia-Pacific region’s B2C e-commerce market at US$770 billion.

Deep-diving into the opportunity, the Google-Temasek report identified three distinctive factors in the SEA region that will drive explosive growth in its e-commerce market: a fast-growing young population in which 70 per cent are currently aged under 40, the lack of major retail establishments as compared to the rest of the world and a rapidly expanding middle class that will contribute to significant GDP growth.

What these factors essentially mean is that a significant part of the population in SEA comprises Internet-savvy people who have considerable spending power that retailers will be eager to tap into by expanding their online offerings.

However, despite these projections of potential, there are aspects today where it remains unfulfilled. A 2016 Bain & Company market report titled “Can Southeast Asia Live Up to Its E-commerce Potential?”, challenges the potential with a surprising statistic: only a quarter of consumers aged 16 and above in SEA have ever bought a product online.

Challenges to e-commerce growth

From the lack of a solid regional logistics and payment infrastructure, to the obvious wide range of consumer preferences and cross border concerns, SEA faces a variety of challenges to entirely fulfil its e-commerce potential. However, these troubles of early-stage e-commerce markets are not anything atypical or daunting to experienced players who are looking to invest in the region for the long haul.

Innovative companies are finding their own solutions to overcome the slew of challenges. For examples, Singapore Post has established partnerships with local logistics and transportation providers to solve customs and tax collection problems. Also, other e-retailers are taking advantage of big data to monitor the variety of customer preferences across the region to serve them better.

How to win in SEA

To the companies who still remain wary of the promises the region holds, SEA does boast its fair share of successes whom they can learn from – amongst them Lazada, an online shopping app, and Grab, a ride-hailing app.

The commonality between the emerging winners seemingly indicating that the key to success, lies perhaps in having a keen understanding of what makes the region’s consumers tick.  

Lazada, for example, has set up logistics networks in each of its markets so as to boost delivery reliability – a top priority for its customers. According to a Reuters news report, the company said last December that it was looking to double its number of warehouses in the region to keep up with the surge in e-commerce purchases from customers in smaller cities.

Founded in 2012, Lazada now ranks among the top e-commerce sites in SEA. Earlier this year in April, Chinese e-commerce giant Alibaba bought a controlling stake in the company for about US$1 billion. Besides Singapore, Lazada also operates in Malaysia, Indonesia, the Philippines, Thailand and Vietnam.

Grab, too, has focused its efforts on localisation. Anthony Tan, the founder and CEO of Grab, was once quoted saying by technology site itviec.com that “great mobile apps solve problems and are localised. Localisation means the app is customised to fit local customs and preferences in each market”.

The company introduced GrabBike in 2014 – a strategic move as two-wheelers were a more convenient way to travel in Southeast Asian cities that are prone to traffic congestion.

The company has also made it a point to hire local app developers instead of foreigners as the former would have better local knowledge. Besides English, Grab is also available in five other local languages. Grab, which was established in 2011, is today valued at around US$1.5 billion.

These two companies, along with others such as Garena and Razer, form the four “unicorns” – tech start-ups that are valued at $1 billion and over – hailing from Singapore, an excellent base for e-commerce operations in the region boasting great connectivity within the region and a strong eco-system of e-commerce players.

SEA’s raw potential

With statistics showing that e-commerce potential in SEA is more a glass half full instead of half empty, companies eager for a stake in the region will no doubt be ready to rise to the occasion.

Amidst the complexity of the region, it is imperative that businesses must take a much more calculated approach in how to effectively tackle the challenges unique to not just the region, but also the specific countries they are operating in.

A strong localization strategy is one that has proven to work. What is next?

Edited by Liew Hanqing and Tan Yi Xuan