What investors should know about ASEAN’s e-commerce war

The e-commerce giants of Southeast Asia, which take leaves out of China’s book, have largely been mired in stiff competition and weak earnings. But we think their woes are just the growing pains of a young market preparing for long-term growth.

Shopee, the biggest online retail platform in Southeast Asia, looks Chinese in every detail: lots of red, mini games for earning points, and big promotions on the November 11 ‘Singles’ Day’, as well as the other Chinese shopping festivals that have been created in recent years.

Similarly, Lazada, the region’s second-biggest e-commerce website, bears all the marks of Tmall, China’s most popular online marketplace, as Chinese tech giant Alibaba controls them both.

Despite their Chinese similarities, these ASEAN firms have been struggling to replicate the profit margins of China’s e-commerce giants, which have become largely profitable.

Shopee has strategically switched between a top and bottom-line focus, swinging back to losses after a brief period of profitability, although losses narrowed in the fourth quarter of 2023.

Lazada, too, has been making losses, despite receiving sizeable capital injections from Alibaba in the last few years. Also bleeding cash are TikTok Shop and Jakarta-based Tokopedia, the region’s third and fourth-biggest players respectively.
 

Growing pains

The arduous quest for profits in ASEAN’s e-commerce sector has sapped investor confidence, but we think the current challenges are just growing pains for a young market, where demographic dividends, infrastructure upgrades, and further digitalisation will drive long-term growth.

In fact, we are seeing early signs of competition easing among the top players, which are echoing Shopee’s narrowed quarterly losses.

We’ve seen evidence of e-commerce firms cutting back on their subsidies for merchants and vouchers for consumers.

A close look at some of the differences between ASEAN and China throws light on exactly why monetisation requires more time and patience across this vast and fragmented region.
 

Economies of scale

First, Southeast Asia lacks the economies of scale which have been key to China’s success in developing the world’s biggest online shopping market.

Many of China’s 1.4 billion inhabitants live in densely populated areas. There are 21 Chinese cities where the population exceeds five million, compared to just six such cities in ASEAN.

Nevertheless, ASEAN has a young and growing population, which the World Bank estimates will rise from about 690 million this year to some 740 million by 2033. An enviable median age of 30 for the region compares with 39 in China, 49 in Japan, 38 in the US, and 42 in Europe. Cities are growing across Southeast Asia, where the overall urbanisation rate is forecast to rise from 52 to 56 per cent by 2030.

Second, China arguably has the world’s fastest express delivery services, thanks to an unrivalled high-speed rail system, with a total length of about 45,000 km, and a vast network of modern warehouses.

In Southeast Asia, it was not until last year that Indonesia launched the region’s first high-speed rail line at 142 km. Geographically, much of the region’s archipelagic features also limit the efficiency of land transport.

But Southeast Asian countries have realised the importance of efficient intra-regional transportation and are working together to improve infrastructure, partly through a scheme called ‘Master Plan on ASEAN Connectivity 2025’.

Meanwhile, some e-commerce firms are stepping up investment to expand their own logistics networks. For example, Shopee has opened five new sorting centres and more than 300 new delivery hubs across its Asian markets in the fourth quarter of 2023.
 

Third, China has a high digital payment penetration, which is key to the country’s e-commerce boom, with about 85 per cent of Chinese adults using cashless transactions to some extent. No country in Southeast Asia except Singapore can match that level of digitalisation yet.

In Indonesia and the Philippines, which together account for more than half of ASEAN’s population, the penetration of digital payments is well below 50 per cent and most people remain underbanked or even unbanked.

However, a rapid wave of digitalisation has swept Southeast Asia in the wake of the Covid-19 pandemic, prompting some researchers to predict that the region’s e-wallet users will quadruple from about 100 million in 2020 to over 400 million in 2025.

Competing for new users, several e-commerce operators have developed their own e-wallet brands. Shopee, for example, has attracted some 30 million people to use its ShopeePay since launching the service in 2018.
 

Tectonic shifts

None of the current challenges looks big enough to break the investment case for ASEAN’s e-commerce sector though. Its long-term growth potential also remains supported by the region’s macroeconomic trends.

Exactly how the sector will end up looking and who the big winners will be are still being played out. Tectonic shifts are still underway – with one particularly seismic move at the end of 2023.

TikTok, the world’s biggest short-video platform, announced in December its plan to invest S$1.5 billion in a joint venture with GoTo, which owns Tokopedia.

The move is a vote of confidence in ASEAN’s e-commerce market and will probably change its competitive landscape given the app’s massive popularity and its expertise in merging entertainment, social interaction, and shopping.

The bar has been raised and today’s top names may well change as the market matures. The region’s e-commerce giants still have a good fight ahead of them to sort out their ranks.
 

This article was first published in The Straits Times on 25 March 2024, and is reproduced with the writer’s permission.