Southeast Asia’s USD 34.5 Billion E- commerce Future: Does it Check Out?
Arose by any other name, according to Shakespeare, would smell as sweet. And whether the ten member cluster of nations surrounded by economic powerhouses Australia, China and India goes by the Association of Southeast Asian Nations ( ASEAN), or simply as Southeast Asia ( SEA), the region’s star is set to shine.
Comprising ten member nations ( Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), ASEAN looks to become an economic powerhouse in its own right. It is home to around 625 million people, 744 million mobile devices, nearly 200 million Internet users and a GDP over USD 2.6 trillion.
It will boast a 400 million- strong middle class by 2020 according to Nielsen. Amid the backdrop of political rhetoric transforming into economic reality, Mckinsey attributes ASEAN’S rise to three powerful socio- economic trends – rapid economic growth, urbanization and technology adoption ( notably Internet penetration and mobile technologies). Moreover, with the wheels in motion for a unified ASEAN Economic Community set to come into force as early as end- 2015, the region has embarked on perhaps its most exciting phase of integration and cross border trade in the association’s 48 year history.
Together these factors are transforming the region, its people and its economies, with e- commerce and mobile commerce leading the way.
BUILDING MOMENTUM IN A FRAGMENTED REGION
With rising online connectivity, with improvements in financial, logistical and security infrastructures, with more and more e- commerce M& As and with the AEC kicking in, ASEAN is ripe with potential. Frost & Sullivan estimates that the B2C e- commerce compound annual growth rate ( CAGR) of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam at 37.6 percent from 2013 to 2018, growing from USD 7 billion to USD 34.5 billion – a number that would be even higher if we were to include the remaining five member states.
Here’s why ASEAN holds such promise for governments, businesses and investors:
Southeast Asia comprises 744 million internet connections, with 119 mobile subscriptions per 100 people according to Wearesocial. It already accounts for 7% of global internet users, catching up to Western Europe ( 12%) and the U. S. ( 11%). Internet penetration has risen 414% in Cambodia, 346% in Myanmar, 47% in Thailand – year- on- year – in FY2014. The average person in the Philippines spends 6.3 hours a day online, in Thailand 5.5 hours, in Vietnam 5.2 hours, in Indonesia 5.1 hours and in Singapore 4.7 hours. These are ahead of China’s 3.9 hours, South Korea’s 3.4 hours and Japan’s 3.1 hours. The proliferation of tablets, phablets, smartphones and 3G – even 4G – services will play a role in further driving internet penetration rates, as technological advances continue to make devices affordable even to the lessaffluent, key to enabling the region’s ecommerce future.
What’s remarkable about the 2014 USD 7 billion estimate of ASEAN’S B2C e- commerce is that it has achieved this despite a financial infrastructure, which has a lot more potential – and need – to grow. An estimated 70 percent of SEA residents lack access to traditional banking services, says Mckinsey. Moreover, with credit card penetration in some markets below 5 percent, e- commerce in ASEAN is understandably underdeveloped. Consequentially, SEA online retail accounts for around 1 percent to 2 percent of total retail sales, compared to China, at 11 percent, as quoted by FT Confidential Research. However this figure for China was, as recently as 2010, 2.5 percent – a growth trajectory many anticipate SEA will follow in the coming years, against this backdrop of rapidly evolving financial infrastructure.
Logistics and e- commerce have so far proven to sometimes be a mismatch for Southeast Asian shoppers, as only a small portion receive free delivery. This means shoppers are incurring logistical costs that retailers would usually, in a competitive market, help to absorb. Southeast Asia’s landscape poses a unique set of challenges that is slowing the momentum e- commerce should be seeing. These include late delivery, damaged or lost packages, the prevailing practice of cash on delivery, lengthy return procedures, and a lack of special services such as trial or installation – particularly when given the geographical barrier between buyer and seller.
In response, firms can either build their logistics systems or partner with logistics companies. China’s Alibaba has, for example, acquired a 14.5% stake in Singapore Post, which itself will spend USD 145 million on building a regional e- commerce hub. Alibaba’s e- commerce site Aliexpress is seeing tremendous growth
across the region. Meanwhile, Uber has partnered with LBC Express in the Philippines to deliver Christmas presents ondemand. And that’s the role private and public sector actors with deeper pockets play – the ‘ uberfication’ of the region’s under- developed logistical sector, in turn building intra and cross- border commerce.
Rapid progress has been made in the domain of payment infrastructure and online security. Consumers are, however, put off from buying online – the Financial Times recently estimated that 90 per cent of visits to e- commerce sites do not result in sales. Part of the reason is because e- retailers are bound by Caveat Venditor, where governments impose strict regulations to hamper illegal money laundering operations across borders, indirectly turning off shoppers, who are required to provide credit card information to transact.
While this can be overcome as governments promote non- cash transactions and coordinate e- payment regulations, security laws needs to catch up with what is commonplace in other developed markets. ASEAN countries are responding, developing and enforcing security laws and regulations for e- commerce data protection and electronic transactions. Singapore’s Monetary Authority of Singapore ( MAS) has, for example, made the 2- factor authentication ( 2FA) process mandatory for any transaction, local or overseas. The movement towards intra- regional coordination of shared cybersecurity, best practices, and legislative framework will allay these fears, boosting e- commerce.
E- commerce requires a healthy and robust payments infrastructure, together with integrated innovations, to overcome deficiencies in a region underserved by traditional banking. In SEA, where well over 400 million people are unbanked, compounded by existing security concerns among digital buyers, alternative payment solutions are rising in importance, building the robustness of the payments infrastructure. They are a necessary option for businesses to reach out to unbanked customers, through new ways to complete transactions via ATMS, online banking and over the counter payments. Alternative payment solutions will also play a facilitating role in converting unbanked to banked users.
Rise in M& As
Southeast Asia is already drawing global e- commerce players, including Germany’s Rocket Internet, with investments in online marketplace Lazada along with online fashion retailer Zalora, Japan’s Rakuten, Softbank, and China’s Alibaba and JD. com, Tencent, to name a few. The pace of e- commerce and payment innovation in Southeast Asia is certain to accelerate. Rising investments are expected over the next few months, developing the region’s e- commerce through investment, acquisition and subsequent consolidation.
Advent of AEC
The word “fragmented” is used consistently by economists, politicians and business visionaries alike to characterize ASEAN – and not without reason. With ten countries, ten different languages, ten different currencies and economies with varying ( often too high) levels of economic nationalism, ASEAN is indeed made up of ten very unique parts.
Some are highly developed – Singapore, for example, has a 2014 per capita GDP of USD 60,410, while Myanmar’s was USD 1,405 according to the IMF. Singapore presents one of the most business friendly business environments in the world, whereas Myanmar was, as recently as 2013, twinned with Sudan in an article by The Economist.
For AEC to hold any meaning, even in less erudite circles, it would need to address the notion of piecing some of these fragments together, by opening up crossborder trade. And then, there’s the bigger context – where ASEAN fits in the broader Asia- Pacific narrative.
LOVE THY NEIGHBOR
ASEAN’S awakening lies not only in more efficient and transparent intra- regional trade, but also in doing business with its neighbors, particularly China.
That’s the biggest challenge, and even greater opportunity, one which is particularly attributable to e- commerce. China’s trade with ASEAN is estimated at USD 224.38 billion in H1 2015, up 1.6% year- on- year. More crucially, since 2010, over sixty percent of its outbound investment has been in ASEAN, with internet and e- commerce cited as key areas of interest.
With better infrastructure, and with trade efficiencies, e- commerce has the potential to drive the 21st century’s rendition of the Maritime Silk Road. ASEAN’S future is bright!
Aung Kyaw Moe is Founder and Group CEO of 2C2P, a Singapore- headquartered pan- ASEAN payment services company. He can be contacted at: Aung@ 2C2P. com