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How the entry of Chinese tech giants is transforming Asean’s e-commerce scene

Great potential but held back by payments and logistics infrastructure

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WITH 158 million middle-class consumers, Asean is often seen as the next frontier for the e-commerce market. Despite experiencing rapid expansion over the past five years, e-commerce penetration is still less than 2 per cent of total retail sales in Asean. For context, this was where China was in 2010 and only a tenth of Chinese e-commerce penetration today.

However, we think the Asean e-commerce scene is about to change significantly, thanks largely to the recent entry of Chinese tech giants into the region. China tech-related investments through companies such as Alibaba, JD.com and Tencent have surged in 2017 - the number of deals quadrupled and value rose about three times. These tech giants bring with them capital and know-how, while also easing constraints on logistics and e-payment adoptions that has been holding back e-tailing. Competition in the Asean e-commerce sector will also intensify. Alibaba and Tencent are probably watching each other's moves in the region and propel each other to expand in Asean. Other large players have been flooding into the market. For instance, Amazon recently launched its first service, Amazon Prime in Singapore late last year.

The lack of efficient logistics and fulfilment has been one factor holding back e-commerce growth in the region. Although digital platforms can improve access to information such as pricing and product variety, getting products delivered to customers in a cost effective and timely manner is still challenging in Asean ex-Singapore. Homegrown startups such as Ninja-Van, Deliveree and aCommerce, together with larger logistics companies such as SingPost and GD Express, have already been entering the market and getting funding to tackle this last-mile logistics problem in South-east Asia. In addition, Chinese e-commerce companies can help ease the region's logistics constraints in two ways. First, they have a track record of using warehouse automation technology to drive efficiency, and can bring this knowhow to drive greater efficiency in Asean. Second, the entry of deep-pocketed Chinese players will likely raise pressure to scale up e-commerce markets.

Lack of familiarity with e-payment is another key constraint. 'Cash-on-delivery' methods, which are risky for merchants and costly for consumers, still account for 65 per cent to 80 per cent of e-commerce transactions in Indonesia and Thailand respectively.

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We see two potential catalysts that together could help boost e-payment adoption in Asean. Firstly, the entry of Chinese e-commerce giants into Asean could bring in the wealth of experience that they have in successfully transforming customer culture and adoption of e-payments. These digital players often use their services including online games, e-commerce market place, and ride hailing to 'cross-sell' consumers on their payment platforms.

Secondly, some Asean governments have recently made a big push to promote e-payment adoption. Singapore and Thailand have introduced services allowing inter-bank transfers between individuals using just mobile numbers or individual ID card numbers (PayNow in Singapore and PromptPay in Thailand).

Implications for the economy and impact on retailers

In Thailand's case, the scheme reduces bank transfer fees. Both PayNow and PromptPay will be expanded beyond individuals to businesses, with plans to also link both platforms together to facilitate cross-border transfers. Thailand and Singapore are each developing their own QR code standards, with plans to also implement a National Digital Identity system.

We see Asean e-commerce taking off, with e-tailing growth outpacing offline retailing six to 10 times over the next few years, compared to six times in the past two years. Indonesia has the best long-term market potential given its large and rapidly growing middle class and young consumer market. Although Thailand is a less obvious choice for e-commerce growth in the long run, we see a good chance that it could experience a surge in e-commerce activities over the next two years due to catalysts, such as the high-profile alliances between Chinese e-commerce giants and large Thai business groups with extensive offline distribution network, good infrastructure connectivity, government support for e-payment adoption and high smartphone penetration.

E-commerce will likely transform the Asean retail industry. The rise in e-commerce could potentially benefit the brand owners, but bring mixed effects for convenience stores and negative effects for department stores.

The negative impact on retail distributors could be larger than anticipated if e-commerce players use e-tailing as a hunting ground for customer data. Large e-commerce players could lower the prices of goods and associated services more aggressively to gain volume and grab valuable data that would allow them to monetise in the future by offering high margin financial services. This 'cross subsidisation' could drive significant downward pressure on margins in the retail sector with a greater negative impact on pure retail players.

The 'gold rush' for data; e-commerce as 'springboard' into finance

Drawing from the Chinese experience the e-commerce boom may disrupt not just the retail sector, but also its enablers including the financial and logistics sectors. We think many e-commerce giants would use e-tailing as a starting point to accumulate consumer data and move into financial services including savings and loans products, following the playbooks of Alibaba and Tencent in China.

For example in Thailand, the partnership between CP Group's Ascend Group and Ant Financial could potentially bring together an extensive 7-11 branch network, rich local customer data from True group, and Ant Financial's credit scoring technology. As another example, SEA Ltd could integrate Airpay into its rapidly growing e-commerce platform Shopee, feeding its e-money business with rich data from both e-tailing as well as its gaming business Garena.

The disruption to the financial sector emanating from the entry of e-commerce-powered fintech players could start to compete with some existing financial players, but the impact should vary significantly across services. Financial institutions focusing on micro loans are likely to be more exposed to competition from these tech players as the latter focuses on the underbanked population. Banks could be more impacted by the reduction of fee income partly because various governments are promoting e-payment adoption.

Over time, E-wallet players could also pose competition for funds with existing banks/asset management companies if they obtain a licence or partnership with asset management companies to allow people to invest their cash in the wallet a la Yu'e Bao in China. This could also lead to lower fee incomes that banks earn from cross-selling products to their depositors.

In conclusion, we believe that e-commerce has significant untapped potential in the Asean region. We think the recent surge in investment by Chinese e-commerce giants will be the game changer for the region's e-commerce industry.

  • The writers are from Credit Suisse. Santitarn Sathirathai is Head of Emerging Asia Economics Research, and Michael Wan is Economist

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