Southeast Asia (SEA) is the next frontier for e-commerce, says Marc Woo, Google’s head of e-commerce.

The Association of Southeast Asian Nations (ASEAN) has an estimated 32% e-commerce growth rate concentrated in six countries: Singapore, Malaysia, Indonesia, Thailand, Vietnam, and the Philippines. (Google & Temasek, E-conomy SEA: Unlocking the $200 billion digital opportunity in Southeast Asia, 2016)

Called the ASEAN 6, the region’s business to consumer retail e-commerce gross national product is estimated at $88 billion by 2025. This does not include consumer to consumer and business to business. (Google & Temasek)

But when ASEAN’s growth is patterned after China’s e-commerce growth, instead of Temasek’s  Western model, it is estimated to exceed $238 billion, wrote Sheiji Ho, CMO at ACommerce for in 2016.

That’s an outstanding valuation given that ASEAN has a total population of only 644.1 million (compared to China’s 1.38 billion) and only an average of 53% have internet connection. But this region has the world’s fastest internet growth at the rate of 31% since 2016 or over 80 million a year.

“On the face of it, Southeast Asia would seem like an e-commerce wonderland. No place on Earth matches this region in digital adoption. The people in the Philippines send more texts than any other country. Jakarta is the world’s No. 1 city for tweets. Indeed, Southeast Asia’s population…may be diverse, but its inhabitants have one important thing in common: an eagerness to use mobile technology.” (Bain & Co., Can Southeast Asia Live Up to Its E-commerce Potential?, 2016)

Half of the world’s internet users are in Asia and SEA has a 133% rate of mobile users (more than 768 million) that exceed the 100% world average. (ASEAN Up, 2017)

In a move to position itself for the region’s e-commerce boom, China’s e-commerce giant Alibaba recently invested about $1 billion (83% interest) in ASEAN’s e-commerce leader Lazada, which is also number one in the Philippines.

ASEAN’s e-commerce potential lies in many factors unique to the region: its burgeoning middle class with lots of cash; a young population with 70% under age 40; a GDP growth rate of 5.3% over the next 10 years; a rapidly growing internet and mobile penetration; tech savviness; heavy internet, mobile, and social media users; alternative payment methods; and a variety of online retailers and sellers.

“Opportunities also abound in each market; rising labour costs in Singapore may be a boon for the online retail segment, while the non-traditional work hours of the Philippines’ business process outsourcing workforce has created a ready market for non-traditional retail.” (DBS, 2015)

Geography also matters since the lack of physical stores, especially in archipelagos like Indonesia and the Philippines, make online shopping the only option. But even in main cities where malls and stores are centralized, offline retailers can no longer ignore the looming internet market.

“While the impact of this acceleration in Southeast Asia is advantageous for start-ups and online brands, it is having a different and adverse effect on the real-world economy. From mall shopping to cinemas and taxis to travel agencies, it is clear that digital has taken a toll on certain industries.” (Bain & Co., May 2017 Press Release)

In Metro Manila, the capital of the Philippines, vacancy is rising in retail spaces at the rate of about 11%; while in its southern city Cebu, retail space vacancy fell from 12% (2015) to 9%. (Philippine Retailers Association)

“Throughout the region, some categories already are starting to score big. Fully 24% of all clothing and footwear and 18% of all travel is now purchased online.” (Bain & Co., 2016)

Much needs to be done

“Of course, Southeast Asia faces a host of challenges in its journey to becoming a flourishing e-commerce marketplace. For one thing, the region encompasses a broad range of ethnicities, languages, consumer preferences and regulations.” (Bain & Co., 2016)

So we cannot generalize the ASEAN 6. For instance, Singapore is an outlier.  It has the smallest population (5.74 m) in the region and is one of the world’s most prosperous country; it has the highest internet penetration at 82%; the fastest download speed at 122.4 megabits per second (world average is 23.3 mbps); the most (98%) bank account holders; the most trust in online transactions (59% where the world average is 51%); and the highest payments online (50%). Despite all these markers for e-commerce vitality, only 62% bought online in the past month.

In contrast, Indonesia is ASEAN’s most populated (262 m and 3rd in the world) and the world’s largest archipelagic state; it has the world’s 2nd most forested area after the Amazon; its download speed is the second slowest (6.7 mbps); it has the lowest bank account holders (37%); has the 3rd highest distrust of online transactions (60%); with the consequent 3rd lowest online payments (4%). Only 41% bought online in the past month.

Singapore has the most mobile users in ASEAN but its mobile web traffic is a low 40% while Indonesia’s is one of the world’s highest at 70%. Yet ASEAN e-commerce growth rate is predicted to grow the most for Indonesia by 32% compound annual growth rate (CAGR) but the least for Singapore by 18% CAGR until 2025. (Google & Temasek)

Meanwhile, the Philippines is geographically similar to Indonesia as an archipelago of 103 m; its download speed is the slowest (3.4 mbps); it has the 2nd lowest bank account holders (36%); the highest distrust of online transactions (67%); and the lowest (.5%) online payments. Only 38% bought online in the past month. It’s e-commerce growth rate is set at 34% CAGR until 2025.

While Indonesia is the world’s largest Muslim majority (87%) with 700 languages, the Philippines is largely Catholic (83%) with English as one of its official languages and only seven dialects. The median age in Indonesia is 29.9 years with about 64% under age 35, but the Philippines is younger with a median age of 23.4 years and about 70% under age 35.

“An in-depth analysis of the trends in five ASEAN markets shows that e-commerce is at a different stage in each country, with different sets of opportunities and challenges. Logistics remains a key impediment to be overcome in Indonesia and the Philippines, while Singapore—which faces no such infrastructure limitations–-still has relatively low online retail adoption rates because of the convenience of accessing traditional retailers.” (DBS, 2015)

Apart from Singapore, ASEAN needs to build the infrastructure to widen and speed up affordable internet connectivity.  “[I]ncreased broadband access leads to accelerated economic growth as evidenced in the close link between information and communication technology (ICT) diffusion and firm-level productivity. Similarly, the World Economic Forum (2013) reported that digitization has created 6 million jobs globally and provided a $193 billion boost to world economic output in 2011….” (Asian Development Bank (ADB) Policy Brief No. 2016-2)

“Typically, most developing economies are plagued by inadequate ICT infrastructure and power supply, limited credit card usage as a payment option, underdeveloped financial systems, and a lack of purchasing power, which must first be addressed for an online economy to function well.” (ADB)

Only about 1% in ASEAN have credit cards.  In the Philippines, 99% of electronic transactions are paid with cash or check that even the online ride service Uber accepts cash. Digital retailers adapt to the paper-based payments and allow cash on delivery or bank deposits.

“Also, Southeast Asia lacks a solid regional payment and logistics infrastructure, ingredients that have served as the foundation for China’s astounding growth in digital retail. In addition, surveyed consumers in the region say they don’t yet fully trust e-commerce platforms, are concerned about the lack of touch-and-feel inherent in digital commerce and report having trouble finding the products they want. These types of complaints about early-stage e-commerce markets are typical.” (Bain & Co., 2016)

The top ten countries most beset by cyber attacks include Thailand, Philippines, Malaysia, and the worst is Indonesia (which overtook China). Thus, online shoppers are fearful when a website asks for personal information, especially credit card or payment data. ATKearney says 75% of Filipinos don’t want to share personal data online.

“Certain sociopolitical barriers must also be overcome, such as weak legal and regulatory frameworks relating to online transactions and cybercrime, cultural preferences for face-to-face interaction, and the society’s reliance on cash. Last, cognitive obstacles such as poor ICT literacy and lack of awareness and knowledge of e-commerce must also be addressed.” (ADB)

“Even as Asia’s developing countries further strengthen their capacity for e-commerce, most of them face institutional issues, such as complicated border clearance procedures and red tape, and disharmonized customs requirements between states hinder intra-regional trade. Market-related risks—such as fraud, costs of adaptation, and a risk of crowding out—also serve as barriers to entry.” (ADB)

With a mere 3% e-commerce penetration, ASEAN is still at its earliest stage.  To set the foundation for its e-commerce boom will require an investment of about $40-50 billion until 2025. This assumes SEA maintains a GDP growth of 5.3% and CAGR growth of VC investment from 0.04% to 0.25% from 2014 to 2025. (Google & Temasek)

“Like in China ten years ago, those that invest in ecommerce early and take a long-term, strategic outlook will end up owning the biggest chunks of this $238 billion—not $88 billion—ecommerce goldmine in SEA.” (Sheiji Ho)

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