From ecommerce to cloud services, the fight is on to dominate a market of 200m online
20 Oct, 2017FT.COM
When Sea Limited launched its prospectus to list on the New York Stock Exchange last month, the South East Asian ecommerce and gaming group sparked a war of words — or rather numbers — with Lazada, which disputed its rival’s claims to be the region’s top dog.
The spat, between companies respectively backed by China’s tech giants Tencent and Alibaba, was part of a proxy war and shone a light on what Bain & Co dubs a “clash of the titans”: a broader battle for share in this market of 200m digital consumers, who last year spent $50bn online, according to the consultancy.
It involves not just Chinese and local players but also multinationals such as Google, Facebook and Amazon, the latter rolling up in Singapore earlier this year. This showdown in Southeast Asia comes after Chinese and Western players have neatly carved up the major markets: the multinationals controlling the US and Europe and Alibaba and Tencent ruling the roost in China, where Facebook, Google’s search engine and Twitter are all blocked.
“The importance of Asia is coming to the forefront,” says Karim Temsamani, president of Google’s Asia-Pacific operations.
“Half the world’s population is here and household wealth is set to grow faster than anywhere else over the next 15 years. This is the centre of the world again, and companies that understand the people here and the way they use technology are going to win in this region.”
As well as customers, both sides are fighting over investments. In the past few months, Alibaba has lifted its stake in Lazada to 83 per cent and bought into Indonesian ecommerce group Tokopedia; Tencent has reportedly invested in Indonesia’s ride-hailing start-up Go-Jek, while Expedia put money into regional online travel group Traveloka.
“There’s a lot of deal activity now,” says Florian Hoppe, partner at Bain & Co in Singapore. “It’s clearly an escalating battle and the impacted sectors are getting broader and broader.”
That wide frontline sees the groups stretching their tentacles into the ecosystems around ecommerce, such as payments and logistics, while offering other services to keep consumers hooked within a single app — such as gaming, food delivery and messaging — to capture more of their time and money.
These models mirror those pioneered by Tencent and Alibaba in China. The Western multinationals, while increasingly flirting with similar models, are counting on customising their international offerings to capitalise on the region.
The US groups, says Mr Hoppe, are enjoying record quarters in the region on the back of growth there. “Facebook is playing a massive role on mobile, and YouTube is a real asset [for Google] out here. They are making good money on ads, and benefit from the fragmentation of the ecosystem, as recommendations and search matter a lot more in Southeast Asia than in mature online markets with dominant digital players.”
Mobile ad spending in the six countries that make up Southeast Asia — Indonesia, Malaysia, Singapore, the Philippines, Thailand and Singapore — is expected to reach $1.4bn next year and surpass $2bn in 2020, according to eMarketer. Sea, formerly known as Garena, controversially includes Taiwan in its greater Southeast Asia definition.
The region, notes Max Bittner, Lazada chief executive, is far from homogenous — it has different languages, religions and cultures — but what the countries have in common is “an exploding middle class, comparable to China a decade ago”.
“In Southeast Asia, this middle class explosion is happening simultaneously with the ongoing smartphone revolution, and all the growth in retail is driven solely by ecommerce,” he adds, noting that the catalyst was the $100 smartphones that began going on sale in late 2012.
Making money on ecommerce is a tougher proposition, notes one player: “We’ve seen competitors come and go quite frequently over the past five years.”
Sea’s initial public offering prospectus makes the same point, warning “we may fail to monetise our business effectively” and “we have a history of net losses and we may not achieve profitability in the future”. Its operating loss grew to $205m in its latest fiscal year and $150.5m in the first six months of this year.
This partly reflects bloated operating and marketing costs. Logistics are tough — unlike the US or Europe, some of these markets lack a large efficient postal network or big regional players like UPS or DHL — and the land-grab means companies are using big subsidies to woo customers.
Analysts and investors note that connections and local knowledge hands an advantage to domestic players. Tiang Lim Foo of Seed-Plus, an early-stage investor, says it was local knowledge that helped Indonesia’s Go-Jek, as it filled its fleet with motorbikes in traffic-jammed Indonesian cities, reducing Uber to the sidelines.
Amazon, meanwhile, whose entry into Singapore earlier this year was marred by being forced to halt orders when demand exceeded its ability to ship goods, has been reduced to co-opting Uber cars to deliver, according to local players.
With a big and growing market at stake, there is little to suggest any reining in of spending any time soon, as competition for online business in the region intensifies.
As Sea warns would-be investors in its prospectus, this means the odds of success are weighted in favour of the biggest players: “As ecommerce in [Greater South East Asia] is relatively new, competition for market share is particularly intense . . . Global ecommerce companies . . . in particular may have greater access to financial, technological and marketing resources than we do.”