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China giants tackle tough Indonesian e-commerce

JD.com, Tencent and Alibaba's Lazada do battle with local firms such as Blibli to get slice of US$7 billion pie

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Indonesia's e-commerce market is forecast to grow from about US$7 billion last year to US$63 billion by 2027, reports Morgan Stanley. It also said that the country, which comprises 17,000 islands, has a young population which will benefit from improving transportation and communications.

Jakarta

IN A warehouse on the outskirts of Indonesia's capital, supervisors at e-commerce company Lazada use bikes or electric scooters to zip around a floor the size of four soccer fields, where up to 3,000 workers pack and despatch goods around the clock.

The warehouse is one of five that Lazada has opened across Indonesia to cut costs and expand its reach in an archipelago whose 17,000 islands are sprinkled across an area bigger than the European Union.

Chinese tech firms, including Lazada's top investor, Alibaba Group Holding, have poured at least US$6 billion into nearly every aspect of Indonesian e-commerce. Lazada uses Alibaba's inventory management systems and has tied up with ride-hailing companies, often using their motorbikes to deliver goods in a country with creaking infrastructure and traffic-clogged cities.

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The payoff could be huge. It is a market forecast to grow from about US$7 billion last year to US$63 billion by 2027, reports Morgan Stanley. Florian Holm, co-chief executive at Lazada Indonesia, said: "Indonesia, both in terms of the customers and behaviour, is a very unique challenge and we need to adapt."

Lazada and Tokopedia, in which Alibaba is also an investor, dominate Indonesia in customer traffic, with more than 117 million monthly website visits each, going by data from e-commerce aggregator iPrice.

Alibaba doubled its investment in loss-making Lazada to US$4 billion in April, underscoring its global ambition to secure a bigger share of the e-commerce market.

Between the investment and the rewards, however, lie enormous complexities. The World Bank has said logistical costs swallow up around a quarter of Indonesia's Gross Domestic Product (GDP), citing bottlenecks in supply chains, long times in ports and lengthy trade clearances.

Lazada has opened warehouses in places such as Balikpapan, on the coast of Borneo, to avoid hauling everything from Jakarta. Mr Holm said that had in some cases reduced shipping costs by 90 per cent.

Competitive pressure is growing. Another Chinese heavyweight, JD.com, arrived in Indonesia in 2016. And the US giant Amazon, which opened a warehouse in Singapore last year, may be prepared to dip a toe into the Indonesian market soon.

Indonesia's e-commerce sales are set to rise from 3 per cent of retail activity now to 19 per cent by 2027, Morgan Stanley estimates. The same report said there were 159 million smartphones in Indonesia at the end of 2016, a number that could rise to 275 million by 2021.

Indonesia's young population and room for improvement in transportation and communications add to the prospects for growth, the bank said.

This has attracted other Chinese companies. Tencent Holdings, which owns regional e-commerce player SEA, has entered the fray. Tencent and JD.com have stakes in Indonesia's ride-hailing firm Go-Jek, while JD.com has invested in online travel company Traveloka.

But Usman Akhtar, a partner at Bain & Co in Jakarta, said Indonesian companies such as Blibli, backed by a unit of the Djarum group, remain a force. "I would not characterise Indonesia as turning into a replica of China's e-commerce market, at least not yet." Kusumo Martanto, who heads Blibli, said the company has seven warehouses in Indonesia with seven more planned, and is aware that it is important for local e-commerce companies to compete against Chinese players.

Alibaba founder Jack Ma is on an Indonesian government steering committee for e-commerce, advising on areas such as tax, cybersecurity and human resources. Indonesia's communications minister, Rudiantara, said there was no conflict of interest in Mr Ma's role, describing him as a "guru".

But some policies seem to be turning towards Mr Ma's home turf. Indonesia, which is trying to tackle a shortage of talent in the digital sector, will send 10 students to India and 10 to China to study this year "because the future of the digital economy is in China and India", said the minister, who uses a single name.

Morgan Stanley said delivery times across Indonesia are down to about three days from 10; deliveries in big cities can take 24 hours or less.

Indonesia's e-commerce supply chain to the rural areas remains inefficient, said Willson Cuaca of East Ventures, a tech investment fund."To send goods from point A to B, the logistics company needs at least two modes of transport," he said, referring to the complications of operating across so many islands.

Amazon, by contrast, prefers to control its own supply chains from start to finish. But entering a market like Indonesia could require it to revisit that strategy. Amazon Singapore did not comment on whether it had plans for Indonesia. REUTERS