Strategy

How will Alibaba shake up the Southeast Asian e-commerce landscape?

25 January 2017 by Radhika Dhawan Puri

Southeast Asia’s quick-to-text-and-post consumers are attracting the attention of e-commerce companies who are eager to cash in on the growing appetite for online shopping.

With a smartphone penetration that is estimated to grow from 175 million units in 2015 to 230 million by 2017, and 688 million mobile subscriptions, eMarketer estimates that e-commerce revenues in Southeast Asia will reach US$14.04 billion in 2016, up from US$10.5 billion in 2015.

Alibaba on the prowl

It is against such a backdrop that Chinese e-commerce conglomerate Alibaba made its biggest play yet for regional dominance. In April, Alibaba announced it was buying a US$1 billion controlling stake in Singapore-based e-commerce company Lazada, which has been described as an “Amazon clone for Asia”.

Alibaba’s move is not surprising given that the acquisition would give it access to newer markets outside of China, such as Lazada’s operations in six Southeast Asian countries and 10 warehouses in the region.

One of Alibaba’s biggest overseas transaction to date comes on the back of a decision in 2015 to strengthen its relationship with Singapore Post (SingPost).

Alibaba signed agreements to increase the equity stake in the postal company to around 14.5 per cent from 10.2 per cent, and take up a 34 per cent stake valued at S$92 million in Quantium Solutions International, a SingPost subsidiary that offers end-to-end e-commerce logistics and fulfillment services across Asia-Pacific.

The result is an Alibaba that is muscling up not just on e-commerce, but also on the logistics front.

Alibaba is not alone. E-commerce giants such as Amazon and eBay have been investing in logistics networks to improve customer experiences and manage delivery costs. 

A spokesperson from SingPost says: “The lines between e-commerce and logistics are blurred. Often they are mentioned in the same breath because they are becoming inextricable from each other.”

Ali Potia, partner, McKinsey & Company, adds: “Efficiently run e-commerce logistics operations might have a simpler path to profitability than both asset light and asset heavy e-commerce models. Marketplace models have found it particularly challenging to be sustainably profitable in Southeast Asia.”

What’s next for Alibaba?

Alibaba’s expansion in the region is going full throttle.

Recently, it has also moved into the online grocery delivery business by snapping up a stake in Singapore-based RedMart through Lazada. The acquisition gives Lazada access to a ready fleet of trucks for delivery in Singapore, while RedMart has gained access to Lazada’s technological expertise and third-party seller base.

Potential partnerships are also on the horizon if Alibaba brings Cainiao into Asia. Alibaba spearheaded the establishment of Cainiao Network, a logistics data platform company comprising China’s top logistics firms such as S.F. Express and Shentong Express in 2013. As of now, Cainiao owns a network of more than 3 000 logistics partners in China and overseas.

According to Lai Chang Wen, CEO of Singapore-based logistics company Ninja Van, Cainiao doesn’t directly handle logistical operations. “Hence, Cainiao’s value-add will very much be dependent on the capabilities of local players,” he said.

Alibaba’s entry could open doors of opportunity for Singapore-based logistics companies that are already serving the complex needs of this region’s consumers.

The e-commerce landscape in Asia is facing unique challenges, such as lack of connectivity and infrastructure. Also customer tastes and preferences vary across countries and cultures in this region, making customer satisfaction an onerous task.

“Addresses are not codified and many cities face severe traffic congestion issues. Also, many e-commerce companies do not typically plan for cash management complexity, and this becomes important as cash-on-delivery is a preferred payment option in many Southeast Asian markets,” Potia observes.

For Alibaba, partnerships with local logistics players with strong proprietary technology will be crucial in traversing the tricky Asian e-commerce and logistics landscape.

Lai feels that Ninja Van is in a good position to partner with global companies looking for strong local expertise. “There is always a possibility of partnerships with existing players, which will provide easy manoeuvrability for a new player’s entrance. The key will be matching up to their required service levels. This can only be done with innovation, communication and flexibility,” he says.

Ninja Van lays claim to a number of technology innovations: Its proprietary technology automates tedious manual processes, and it is also the first to offer improved traceability in real time. Customers can choose various delivery options such as Ninja Collect as well as better visibility of their orders through real-time notifications via email, SMS and website.

The rise of niche e-commerce

While Alibaba’s entry will make Southeast Asia’s e-commerce landscape even more competitive, it may also further silo the industry landscape. Herein, many opportunities exist for players who are quick to innovate and flexible enough to adapt their business models, or even product.

For smaller players, for instance, the way around the winner-take-all game could be to become more niche, offering either a unique experience or product.

Take the example of HipVan, a furniture and home decor e-commerce website, which has reduced its focus on a marketplace model and switched to sourcing its own furniture. Wenda Lewis, head of marketing at HipVan, points out that the profit margins of products designed in-house are often twice that of products sold through the marketplace model.

“There are other e-commerce players such as Lazada that are getting into home decor products. We feel that sourcing our products and designing in-house allows us to differentiate ourselves from other players,” says Lewis.

Potia of McKinsey shares: “There is an opportunity for own brand, bespoke or niche e-commerce models – smaller, more focused offerings tailored to buyers who are looking for a specific product or category.”

Singapore is no stranger to new e-commerce players and this will signal a new wave of online retailers. Lazada might find itself up against many niche players.

While local e-commerce and logistics players are waiting to see what Alibaba’s growing footprint in the region will entails, it’s clear that there is no lack of opportunities in this region. Companies can reap benefits by delivering the emerging shopping and delivery experiences that consumers in Southeast Asia are already seeking.

Edited by Gracia Chiang, Sophie Chen, Kritika Srinivasan and Goh Wei Ting