Losses loom as Shopee, Lazada brace for bruising 2024 in South-east Asia

SOUTH-EAST Asia’s e-commerce giants face a bruising battle in 2024, with growth slowing just as new players TikTok and Temu are shaking up the status quo.

The notion that profitability would come with scale has come under challenge, as Chinese platforms brought the fight to market leaders Shopee and Lazada and ate up market share.

Already, there are casualties in the fight. Lazada is set to axe 30 per cent of its staff across South-east Asia, according to a Thursday (Jan 4) report by Tech In Asia. About 100 have been laid off in Singapore so far, according to a CNA report. The latest exercise was preceded by a round of layoffs in October 2023.

Shopee too slashed headcount, with three rounds of layoffs between September 2022 and March 2023 cutting over 7,000 jobs worldwide. The cost cuts helped parent Sea swing into the black, before its dive back into the e-commerce fray sent it sinking to a loss in the third quarter.

Businesses in South-east Asia’s biggest market Indonesia rallied hard in 2023 to keep social media juggernaut TikTok from rolling onto their turf with its livestream retail model in TikTok Shop.

TikTok has shaken the belief that there will be two winners in a large market such as Indonesia, said Simon Wintels, leader of retail and consumer packaged goods practice at consultancy McKinsey.

“As long as you get to scale, you’ll have a nice position, then you can start making a profit – that thinking has gone out the window,” he said.

A government ban on payments on social media platforms stymied TikTok Shop’s plans in October 2023.

TikTok could have skirted the ban by transacting on a standalone app. But building a separate app would have slowed momentum – sister company Douyin’s attempt at a China app saw low conversion rates compared to keeping it within TikTok, said Li Jianggan, founder of consultancy Momentum Works.

As it turns out, the ban did not stop TikTok Shop for long. A deal with Indonesian titan GoTo was orchestrated, with TikTok investing US$1.5 billion to take over the majority stake of GoTo’s e-commerce arm Tokopedia. This has breathed new life into TikTok’s efforts in the vast Indonesian market, widely seen as the crown jewel of the region.

Now, the actual work begins for TikTok and Tokopedia.

“From the operations point of view, how do you ensure conversions?” said Li.

E-commerce rivals may have heaved a sigh of relief over the ban, but are now gearing up to tackle the TikTok threat again. Investors will be watching closely with economic uncertainty in the background. Sea’s share price has fallen to about US$38, down from a May 2023 peak of US$88 and a fraction of its all-time high of US$357.78 in November 2021.

Numbers posted by Sea have been on the up and up, with e-commerce revenue growing year on year. But peeling back the data tells a different story. E-commerce revenue grew just 5 per cent from US$2.1 billion in the first quarter of 2023 to US$2.2 billion in the third quarter. Core marketplace revenue remained stagnant at US$1.9 billion from Q2 to Q3.

Operating income for e-commerce fell from US$115.8 million in the first quarter of 2023 to US$65.5 million in Q2, before sinking into a loss of US$428.2 million in Q3.

This leads to questions whether signs of a slowdown are showing, said Huy Nguyen-Tuong, partner at consultancy Boston Consulting Group (BCG).

“We need to be careful to see if revenue growth is driven by consumer demand, or whether the platforms have started to scrutinise the prices and therefore raised commissions, and to what extent this will be sustainable,” said Huy.

Where incumbents have settled into their market positions, raising commissions would be a natural step up for market leaders, as merchants would have little choice for alternatives. But with macroeconomic headwinds still blowing through the region, consumer spending is unlikely to continue growing. Higher commissions would be harder to stomach, especially with new entrants offering a fast-growing alternative.

Despite the bruiser of a battle that lies ahead, there is still potential for e-commerce players to tap in South-east Asia. TikTok Shop merchants in Indonesia are hoping to capitalise on unrealised demand – customers who do not have a Shopee or Lazada account, said Momentum Works’ Li.

Indonesia, in particular, holds much potential for business. Digital penetration in rural areas has grown 3.7 times from 2015 to 2022, and 74 per cent of rural Indonesian households now have Internet access, compared to 20 per cent in 2022, according to the e-Conomy Sea 2023 report by Bain, Google and Temasek.

“There are people who have never used e-commerce before,” Li said.

The challenge is for e-commerce to grow in a sustainable way, said Florian Hoppe, partner and head of vector at management consultancy Bain & Company. With TikTok Shop having an average order value (AOV) of US$5 across South-east Asia, it is hard to imagine how it is making money.

Even with commissions from merchants, shipping costs and other overheads rack up. TikTok Shop may have pioneered “discovery-based” e-commerce, where consumers discover products that pop up in their social media feeds rather than search for products on purpose. But this would require repeat purchasing for it to be sustainable.

Other platforms like Shopee are not sitting idle, and have now built live-streaming elements into their operations.

But e-commerce platforms are not designed with live-streaming in mind. BCG’s Huy noted that merchants cannot start a live-stream on their own, and need to inform platform owners when they want to begin. And the average e-commerce customer is not attuned to a social experience – people are not looking for entertainment on their e-commerce platforms.

Indonesia will remain a key battleground for e-commerce.

“It’s the biggest market, but the AOV is low. However, it is important to investors that Indonesia is covered, and it does drive volume,” said Hoppe.

The new year could also see smarter investments rather than players dishing out blanket discounts and promotions, said McKinsey’s Wintels. He sees more utilisation of analytics to raise cost efficiency and improve personalisation for customers.

The burden of regulation is also likely to get heavier, with the ban on e-commerce payments in Indonesia not a one-off occurrence, said Huy.

“I’m seeing indications and signs of it happening in Vietnam and the Philippines as well,” he said.

How punishing the South-east Asian campaigns turn out will depend on the priorities of the new entrants. TikTok and Pinduoduo, the parent company of Temu, may well turn to focus their efforts on other markets like the US, where both have made inroads in the last year.

TikTok has already signalled its intention to concentrate some firepower on the US market, aiming to grow its e-commerce business to US$17.5 billion in gross merchandise value.

“All these things complicate the resource allocation calculations and how much their South-east Asian subsidiaries will get,” said Li.

The incumbents, on the other hand, have flagged that they will aggressively defend their ground. Lazada’s parent company Alibaba in November 2022 injected US$845 million into the e-commerce unit, as it prepares Lazada for a possible public listing.

Sea chief executive Forrest Li set TikTok firmly in his sights when he said in a Q2 earnings call that the company would focus on growth in the e-commerce segment. In his Q3 call in November, Li said: “We believe that live-streaming e-commerce will become a sizeable and profitable part of our platform, and extend our long-term growth potential.”

He had earlier rallied staff to “fight until we prevail”, in a September memo to employees recalling its past competition with Lazada. “I encourage the newer joiners to ask our veterans for their war stories – exciting and energising times when teams came together and did whatever it took to meet huge, seemingly impossible challenges,” said Li.