Opinion: Asia – the new e-commerce battlefield

November 01, 2018 | REPORT

The e-commerce competition intensifies in Asia Pacific

Retail news is flush with GAFA (Google, Apple, Facebook, Amazon) and BAT (Baidu, Alibaba, Tencent) stories, as if the US and Chinese internet giants are dominating our digital planet.

Indeed, at times it feels like they are…but are they really? What is going on in Asia Pacific? How big is each country’s e-commerce market? How fast are they growing? Who is dominating them: GAFA or BAT; or other players we don’t hear so often about? What are the implications for global brands active in these markets? And, along the way, what’s the situation in Hong Kong?

E-commerce market size and growth in 2017

It was no surprise that China and Korea lead the world by far in terms of e-commerce’s share of their total retail market, at  20 per cent and 19 per cent respectively. Japan and Korea are second and third behind China in terms of absolute e-commerce market RSV (Retail Sales Value), at US$79 billion and $51 billion respectively. India is fourth already, at $30 billion. But they are all dwarfed by China’s $449 billion e-commerce which is close to six times six times larger than Japan’s. (Notably, China’s total retail market is only 2.2 times larger than Japan’s.)

Surprisingly, the total of Southeast Asian e-commerce market’s RSV in 2017 (six countries including Singapore, Malaysia, Indonesia, Thailand, Vietnam and the Philippines), was $9.1 billion, barely comparable to Taiwan’s $9.3 billion.

Meanwhile, the fastest growing e-commerce markets in Asia Pacific over the last three years have been India – at an amazing 50 per cent CAGR from 2014-2017 – and Indonesia at 35 per cent CAGR, (just below China’s 38 per cent over the same period). Other Southeast Asian markets are not far behind:  Malaysia at 33 per cent, Vietnam at 34 per cent and Singapore at 26 per cent. If the trend continues, the Southeast Asian region will soon become one of the most attractive e-commerce arenas globally. No wonder, then, that global giants Amazon and Alibaba are establishing beachheads in these markets.

The laggard

Hong-Kong, however, is lagging, its e-commerce market worth just US$1.9 billion in RSV and its share of the total retail market just 4 per cent, comparable to Singapore’s 5 per cent but dwarfed by China, Korea, Taiwan and Australia. So, why is Hong Kong lagging other APAC markets so much? Here are some of the possible reasons:

  • Hong Kong has a very dense physical retail environment. Basically, shopping is easy and convenient in offline stores because there are plenty of them, close to everyone’s home. But the UK also has a very high retail density and its e-commerce penetration is as high as in China.
  • Hong Kong has a strong cash culture. Hongkongers use cash more often than in other markets (rather than credit card or electronic payment). The Octopus card has limited usage beyond MTR and convenience stores, whereas in Mainland China, for example, electronic payment is widely embraced, the country on its way to becoming a cashless society.
  • Less availability of local e-commerce sites. Perhaps the Hong Kong market is too small to justify a dedicated investment and entrepreneurs would rather build a website for China than for Hong Kong.
  • Global players have not invested in Hong Kong until recently (for example, Alibaba extending its 11/11 promotions and introducing Alipay in local restaurants and taxis) because they may have considered the market too small.
  • More importantly, unlike Singapore, Hong Kong may not be considered a gateway to a larger regional market like Singapore is for Southeast Asia. In fact, quite the opposite is true: global e-commerce companies may simply consider Hong Kong as a natural extension of the China market. If that is so, the good news is that Hong Kong may quickly catch up the rest of China, under the influence of BAT.

The biggest e-commerce players in APAC

There is no need for me to introduce Alibaba and Tencent/JD.com. China’s internet giants and their respective integrated ecosystems stretching from payment to logistics are battling for leadership in the world’s largest e-commerce market. Although protected from foreign intrusions, the rivalry between the two camps is brutal, each one matching the other’s advances, move after move, like the recent investments they made in the grocery sector.

Meanwhile, Amazon has become the number one e-retail and marketplace platform in Japan, with more than 20 per cent market share, ahead of historical marketplace pioneers Rakuten and Yahoo! Japan. The rest of the Japanese e-commerce ecosystem is very local, with a few notable pureplays like Zozotown in fashion, and many online extensions of local offline retail incumbents like convenience store chains 7 and FamilyMart, and big box electronics retailer Yodobashi Camera.

Amazon is also very active in Australia, where it is already number four behind pioneer eBay and Apple and Woolworths. But its recent decision to create an Australian website with a local distribution centre, enabling the introduction of its coveted Prime service, is likely to turn the Australian market upside down.

Amazon has chosen Singapore as its beachhead entry point into Southeast Asia, where it has recently launched its Prime Now service.

Ebay was the pioneer in South Korea where the company holds the number one position with more than 23 per cent market share through top player G-Market and the third largest player Auction. But venture capital-backed Coupang and 11Street are the fastest-growing challengers, with distinct value propositions. They might soon change the Korean ranking.

Ebay is also number one – for now – in Singapore, with a 33 per cent share of the island-state’s e-commerce market through its locally owned leader Qoo10, leveraging the experience that eBay acquired in Korea’s most advanced e-commerce environment.

Chinese giant Alibaba has put a stake in the ground in Southeast Asia through its acquisition of multi-market platform Lazada, which is present in six markets: Singapore, Malaysia, Indonesia, Thailand, Philippines and Vietnam. Benefiting from its parent’s huge capabilities and investment power, Lazada is growing at a fast speed and has already grabbed regional leadership with a 20 per cent market share in Southeast Asia.

China’s second giant JD.com is quietly building infrastructure in Indonesia and entering alliances in Thailand and Vietnam while its parent Tencent is investing in technology, e-payment and C2C platforms.

However, early entrant German capital-backed Zalora, which used to be present in every market in Southeast Asia, exited Thailand and Vietnam, selling its business to local players. In the Philippines, it sold a 49 per cent share of the business to mall operator Ayala, entering an omnichannel partnership which also includes Ayala’s BPI bank.

Likewise, Japan’s Rakuten, which was an early entrant in Singapore, Indonesia and Malaysia, retreated from these markets in 2016.

So the stage now seems set for an Asia Pacific face-off between Amazon, eBay and Alibaba.

What about Hong-Kong?

Hong-Kong’s e-commerce environment is still dominated by international platforms Amazon, Apple, Yahoo!, G-Market (eBay), Zalora, Asos, Rakuten and flash player Reebonz through their international websites, with very limited local adaptation or local infrastructure investment, which means a relatively basic service level.

Meanwhile, China’s Alibaba and JD/Tencent have gradually become more available to Hongkongers:

WeChat payment and AliPay have become increasingly accepted in Hong Kong restaurants and taxis, and Hongkongers can now enjoy Alibaba’s Singles’ Day and other promotions.

It looks like Hong Kong’s e-commerce destiny is to become part of the huge China market and therefore China’s digital ecosystem – just as Hong Kong will soon be connected to the mainland by powerful road and rail links.

What does this mean for Hong Kong e-commerce strategies?

Betting on technologies and capabilities that are compatible with large Chinese platforms will undoubtedly boost Hong Kong’s e-commerce energy. That means local retailers should embrace WeChat, Alipay and other Chinese standard capabilities as Hong Kong standards.

Likewise, Hong Kong entrepreneurs and investors may focus on building e-commerce websites and capabilities with the ambition to serve China, not just Hong Kong.

With such strategies in place, Hong-Kong’s e-commerce players may be able to capture an opportunity at the scale of China – 236 times bigger than the Hong Kong market!

Find out more about Pascal Martin, Partner

This article first appeared in Inside Retail Hong Kong, Spring edition 2018.