China goes for broke in Indonesian e-commerce

[JAKARTA] China's deep-pocketed internet giants are fighting a turf war in Indonesia, where e-commerce sales could surpass India's as soon as 2020.

The only problem is that there's almost no path to profitability.

Alibaba Group Holding Ltd., Tencent Holdings Ltd. and JD.com Inc. already back four of the top five online-shopping startups in Southeast Asia's most populous country. In March, Alibaba invested another US$2 billion in Lazada Group SA, which runs business-to-consumer operator Lazada Indonesia, after pumping US$1.1 billion into Tokopedia PT, Indonesia's largest online retailer in terms of gross merchandise volume, last August. Tencent holds a 36 per cent stake in New York-listed Sea Ltd., which owns Shopee Indonesia, and JD.com has its own subsidiary in the country.

There's plenty luring Chinese tech giants to Indonesia as they look to expand geographically. The country not only has attractive demographics, but also better prospects for building up market share than in India - the other obvious frontier - because Indonesians were shopping online through social media before the launch of official e-commerce sites. About three quarters of Indonesians aged 14 and above, some 140 million people, use Facebook regularly, compared with only a quarter in India, at 241 million.

About half of online shopping transactions flowed through social media sites in 2014, but with better logistics support - such as shipping and payments - e-commerce operators can easily lure small merchants away. By 2020, social media will account for only 12 per cent of the total gross merchandise volume, CLSA estimates.

Even by dollar volume, sales in Indonesia, with the help of Chinese investment, could outpace India's in two years, CLSA estimates. Indonesia generated almost US$13 billion worth of e-commerce transactions in 2017, compared with US$17.8 billion in India.

That's where the good news ends.

To break even, e-commerce needs to be able to generate at least US$4.50 in revenue from every US$100 transaction conducted on their sites, according to CLSA analyst Paul McKenzie. Online retailers can charge for advertising or commission fees.

That's a tall order. Best-in-class Alibaba, which controls 58 per cent of China's online shopping market, can only get a 2.5 per cent take-rate from its advertising services. What kind of pricing power does the more-fragmented Indonesian e-commerce industry have?

As for other fees: There aren't any. In their battle for small merchants, platforms such as Lazada Indonesia only charge sellers a one-time fee for joining. With such steep competition, requiring even a nominal payment could send customers elsewhere.

Shopee is the only player that offers us some glimpse into the operators' financials, through the filings of its parent, Sea. Despite a 170 per cent jump in gross merchandise volume in the second quarter, the company's operating loss isn't narrowing fast enough. Sales and marketing expenses, which include subsidies to merchants and consumers, remain elevated.

The only viable way for the Chinese to make money in this market is perhaps through industry consolidation. After all, Indonesia has already seen some high-profile mergers, such as Grab's takeover of Uber Technologies Inc.'s entire Southeast Asian business this year. Could Jack Ma engineer a marriage between Tokopedia and Lazada Indonesia?

As Chinese money pours into Indonesia, the venture-capital culture there is also changing. To mainland tech tycoons, profitability is often beside the point. Just look at some of China's hottest tech IPOs this year: Cash burn is the path to success.

BLOOMBERG