Southeast Asia: The world’s e-commerce battleground — who will win the roaring 20s?

TL;DR

• Despite massive growth, e-commerce penetration in the region has only reached a meager 5% in 2021
• E-commerce GMV in SEA will triple in the next 5 years
• This growth will attract even more attention to SEA’s e-commerce ecosystem, making it likely that SEA will become the battleground for the climactic battle between e-commerce giants from different regions
• To date, SEA’s e-commerce ecosystem as a whole remains relatively heterogeneous and entirely distinctive to the “the west” — aka the United States and Europe — and “the east” aka China
• Whereas it is impossible to predict which companies will win in the future, predictions can be made about how the battle will unfold, four keywords: (1) Capital Burn (2) Consolidation (3) Vertical E-Commerce (4) Amazon
• Any company that wants to win at a regional scale will need to devise a highly customer-centric strategy that is nuanced to the distinctive local differences in every Southeast Asian market
• There will be one clear winner: Southeast Asian consumers will heavily benefit from the increasing investment into the space in various ways

Putting growth intro perspective: E-commerce GMV in SEA remains relatively low in absolute terms

The past 5 years have been a remarkable growth story for e-commerce in SEA, with GMV across the region growing from $5b to $62b.

However, despite…

• the ubiquity of shopping festivals (11.11., 12.12. etc.)
• the mountains of parcels that are piling up in condominium lobbies
• the emergence of several SEA-native e-commerce unicorns (Lazada, Tokopedia, SEA, Bukalapak)
• the significant advances in the supporting infrastructure of the ecosystem

… e-commerce penetration in the region has only reached a meager 5%. Crazy, right? Although the relative growth has been staggering, the absolute size of SEA’s e-commerce GMV is still tiny.

How tiny? Although the US has only about half the population size of all Southeast Asian nations combined, US e-commerce GMV in 2020 reached $861b — a whopping 13.8x times the GMV of SEA.

This is actually an exciting number, as it hints at the future potential of e-commerce in Southeast Asia.

After all, comparing the region’s current GMV with the US is an apples to oranges comparison:

• SEA is at a massive economic disadvantage: GDP per capita of ASEAN nations is $4,925 compared to $63,736 in the US
• SEA is at a massive structural disadvantage: many essential components of the e-commerce ecosystem had to be built from scratch (e.g logistics) or are a lot less mature than in the US (e.g. underbanked population, consumer trust)

SEA might have started out from a position of disadvantage with regards to e-commerce but the region is rapidly overcoming these hindrances to become an economic powerhouse.

The Asian Development Bank Institute expects GDP per capita in ASEAN to more than triple by 2030 and many of the structural disadvantages affecting e-commerce have significantly progressed in recent years:

• Digital Payment Gross Transaction Value (GTV) has reached $600b in 2020 and is expected to grow to $1,200b by 2025 — cards, Account-to-Account & e-wallet payments made up 41% of all transactions in 2020, slowly eating away the preference for cash (59%)
• Logistics have dramatically improved but consumers still cite “issues with delivery” as the single biggest barrier to e-commerce — indicating that there’s more work to be done

The roaring 20s: An exciting future lies ahead for e-commerce in the region

SEA will experience an even bigger e-commerce growth in the next 5 years, with GMV expected to almost triple from $62b in 2020 to $172b in 2025.

Whereas the 2010s have been about trailblazing — establishing a supporting ecosystem and earning consumer trust — the 2020s will be about scaling GMV by further advancing the ecosystem and following the needs & preferences of SEA’s young and emerging middle class.

According to Bain & Company, 50 million new consumers will join the ranks of the middle class in Indonesia, Malaysia, the Philippines, Thailand, and Vietnam by 2022, contributing to the region’s $300 billion middle-class disposable income.

The majority of these people will be young digital-natives, who will further fuel GMV growth through their instinctive familiarity with and preference for digital consumption.

Eyes on the Prize: SEA could become the battleground for the climactic battle between e-commerce giants from different regions

This imminent e-commerce growth wave will attract more capital and more new entrants to SEA’s e-commerce landscape.

In 2021, SEA’s e-commerce ecosystem as a whole remains relatively heterogeneous and entirely distinctive to the “the west” — aka the United States and Europe — and “the east” aka China.

This becomes evident when taking a closer look at the ecosystem in Indonesia, Thailand, and Vietnam.

iPrice’s The Map of E-Commerce ranks the region’s top 50 e-commerce players based on their average quarterly traffic, mobile application ranking, social media followers and number of staff. This ranking is based on Q4 2020.

The data proves my point:

• Apart from Shopee & Lazada, the two regional powerhouses, the landscape across countries is largely heterogeneous, i.e. the main players vary by country
• JD ID, the Indonesian subsidiary of Chinese e-commerce giant JD, is the only “eastern” or “western” behemoth that is a relevant player in the abovementioned markets, making SEA’s ecosystem comparatively unique

In all fairness, so far many “eastern” players have chosen to invest in or partner with local players, rather than opening their own operations:

• Thailand’s JD Central is a joint venture between Thai retail giant Central and Chinese e-commerce powerhouse JD
• China’s Alibaba Group is a major investor in Indonesia’s Tokopedia and its affiliate Ant Group is a major investor in Bukalapak
• China’s JD.com invested in Vietnam’s Tiki.com
• China’s Alibaba owns regional powerhouse Lazada since 2016

Major “western” players have so far not chosen to enter the Southeast Asian e-commerce arena, with the exception of Amazon’s small enclave in Singapore.

With ever-increasing growth, many of the aforementioned companies might re-evaluate their “indirect” or non-existent SEA strategies, as they will face increasing pressure to look for growth opportunities outside their backyard.

This could make Southeast Asia the arena where e-commerce titans from different regions fight for GMV:

• Southeast Asian Giants: Shopee, Lazada
• Local Giants: Tokopedia, Bukalapak, Tiki.com
• Chinese Giants: Alibaba, JD, Pinduoduo, etc.
• Western Giants: Amazon, Walmart

How will this battle unfold?

Whatever happens in the years to come, four things seem certain:

• Billions of Dollars of capital will be burnt in the bloody fight to gain market share
• Consolidation seems inevitable, as companies seek profitability and users might at some point get tired of perusing different marketplaces with the same business model & similar assortments. Even relatively unconventional consolidation might occur among digital-first powerhouses with complementary capabilities, as the Tokopedia-GoJek merger shows.
• Vertical e-commerce will be a growth driver: much attention is given to horizontal players, while strong & innovative vertical players, such as Indonesia’s parent-focused Orami or Thailand’s hybrid Pomelo Fashion are frequently overlooked. There are plenty of international role models and it seems only a matter of time until more regional vertical players emerge.
• Amazon will enter the party somehow at some point: Nothing intrigues me as much as thinking about how Amazon will choose to compete in Southeast Asia. Since its launch in Singapore in 2017 and coverage about a potential investment in GoJek back in 2019, news about the US company’s foray into SEA has become scarce. Expansion plans might have been shelved but I highly doubt they have been abandoned.

Who will win?

Any company that wants to become a massive player at a regional scale will need to devise a highly customer-centric strategy that is nuanced to the distinctive local differences in every Southeast Asian market.

Particularly foreign entrants will have to avoid two cardinal sins:

• Assuming Southeast Asian consumers are homogenous: consumer habits and preferences differ greatly among markets
• Imposing “what works at home”: companies need to make an effort to truly understand Southeast Asian consumers and then combine their capabilities to build a fully localized service offering

It is impossible to foresee which companies will win but one winner seems certain: the Southeast Asian consumer

With more and more capital being invested into the e-commerce space and supporting infrastructure, consumers should look forward to:

• More choice: consumers will be able to select their preferred platform from a variety of options to make their purchase
• Better deals: increasing competition will induce various platforms to fight for consumers money & loyalty, which will ultimately lead to better deals for end consumers
• Faster & cheaper delivery: there is still much to be done in the logistics space, particularly with regards to cost. On Shopee, for example, it is not uncommon to pay quite significant percentages of Order Value for shipping, particularly for small purchases. I would not be surprised if subscription models a-la Amazon Prime will be launched at some point to stimulate higher purchase frequency.
• More payment & financing options: many players are heavily investing in digital wallets, e.g. Shopee’s parent company SEA with Airpay. The company has already launched financing options in some markets and it can be expected that more and more e-commerce companies will venture into financial services to decrease costs, stimulate purchases, and boost margins. For consumers, this will open up an entirely new payment & financing ecosystem outside the traditional banking world.

Bring on the roaring 20s!