Retailing giant Amazon will arrive in southeast Asia in 2017 as it opens a Singapore operation. However, existing e-commerce firms are in the process of pulling out of the region in the face of huge losses, poor infrastructure and pervasive logistics challenges.
Amazon is planning to take the first step into the southeast Asian e-commerce market with an upcoming launch in Singapore. Meanwhile, Alibaba’s Lazada is also looking to diversify with the acquisition of the online grocer, RedMart. But these new moves come at a difficult time for the industry. The top players in the region’s e-commerce market are losing money, even though customer and transaction numbers are rapidly growing.
Looking at the current state of play, Lazada is the most established player in the market. Rocket Internet originally started the goods retailer and its sister fashion website, Zalora, in 2012 and they have grown rapidly ever since. According to Rocket’s 2014 and 2015 financial reports, Zalora’s revenue growth rate was over 70% – driven by an expanding customer base and a strong increase in the number of transactions. However, despite Zalora’s 6.7 million customers at the end of 2015, it still showed a net loss of US$98.175 million.
Existing e-commerce retailers are leaving the southeast Asian market
Meanwhile, Lazada made US$275 million in net revenue last year and raised some US$700 million from investors. However, issues arising from its high operating costs and nascent online markets means it is burning through capital. Luckily, Chinese giant Alibaba came on board as a controlling shareholder and invested US$ 1 billion before the company ran out of cash. As part of the deal, Rocket offloaded a 9.1% stake for US$137 million.
And Lazada is not alone in its struggles. The well-known Japanese online platform, Rakuten, is also leaving the southeast Asian market and plans to focus on its domestic operation and Taiwan. As a result, it closed down its e-commerce sites in Singapore, Malaysia and Indonesia. Rakuten also sold Tarad.com, the e-commerce company in Thailand it acquired in 2010, to Porar Web Application Co.Ltd.
Poor infrastructure is a huge challenge for operational growth
To add to the mix, the US retail giant Amazon is due to land in the region via Singapore in the first quarter of 2017, and is reportedly quietly acquiring assets, including refrigerated trucks and new staff. In theory, southeast Asia has many unexplored corners for e-commerce companies like Amazon, but there are significant barriers to expanding the market and improving profitability.
According to a report by Google and Temasek released in May, the total first-hand e-commerce market in the region is expected to reach approximately US$ 88 billion by 2025. To hit these numbers, the percentage of e-commerce in the wider retail industry will need to expand eight times, from 0.8% in 2015 to 6.4% in 2025. Although the ground seems fertile – 70% of the region’s population is under 40 and internet penetration is growing – no world-class online retailer has yet emerged.
The report explains the problem lies in a limited developer capacity and leadership in the region, the lack of a healthy mergers and acquisitions system and a large number of people without access to banking services. There are also no scalable e-payment alternatives, weak last-mile delivery options and high levels of fraud and cyber-attacks. Despite this, TechCrunch says, “For all its problems – higher-than-expected competition, inconsistent logistics, staff churn and slower market growth than expected – Lazada represents a great opportunity for Alibaba.”
Delivery systems will need to be modernised
However, inadequate infrastructure and a woefully inefficient logistics network in the delivery industry will be a significant issue for any serious operator to expand. Lai Chang Wen, one of the co-founders of e-commerce logistics provider Ninja Van, points out that Singapore’s “logistics was not built for e-commerce.” As a result, Amazon may struggle. Unlike the slick operation it runs in the West, handwritten delivery documents are still common and tracking parcels is difficult.
To be successful the retail giant may need to learn lessons from Alibaba’s delivery brand Cainiao. It can now handle more than 33 million packages every day and at its peak during China’s biggest shopping festival, it delivered over 650 million packages within 24 hours. Of course, Amazon does have considerable experience in managing stock movements; in its developed markets the $99-a-year Prime membership attracts custom by covering the cost of all deliveries for a year. To make this possible the company removes the middlemen for long distance deliveries, even leasing 40 Boeing 767-300s to transport goods on time.
Customers will benefit from e-commerce competition
In the bigger picture, the growth of e-commerce platforms in southeast Asia, and the associated flexible payment methods, should be welcomed as it will open up the world of online shopping to unbanked people. As an example, Alibaba’s Chinese payment arm Alipay has a mature ecosystem which includes a third-party payment method and a proven system for dealing with fraud. Amazon also offers various payment options, such as cash and gift cards.
Meanwhile, for the companies and investors involved, the penetration rate of e-commerce in the region is 6.4% – much lower than the 14% currently seen in China and the US. However, the potential for growth in the region, as markets such as China, the US and India are reaching maturity, should continue to attract investment and expansion. As a result, business insiders expect to see innovative strategies and consumers will probably benefit from the resulting price war for some time.