Keynote Q&A:

Development of digital economies in Southeast Asia

Perspective on the future of digital economies and how sectors such as ecommerce, logistics, fintech and Web3 will shape in the future” to “ Keynote Q&A with China International Capital Corporation (CICC) in June 2022 on how ecommerce, logistics, fintech and Web3 will shape the future

Event Sneak Peak

Momentum Works and CICC hosted a joint panel discussion titled “Post-pandemic Economic Restart and Restructuring” on 15 June 2022. Jianggan Li, CEO of Momentum Works, spoke with Shengyong Goh, Executive Director of Equity Research, CICC about about the key players, in different industries such as ecommerce, logistics , fintech and Web3 across countries and the economic history of Southeast Asia. The session delivered insights into important happenings, and contextualisation of the Southeast Asian economic ecosystem, and we have split it into two blogs to convey the many interesting takes on key issues.


1. We see different business models within the ecommerce industry and the ecosystem – 1P, 3P, B2C, C2C. Lazada started out as a 3P-B2C, Shopee as a C2C. So, what do you think are the most appropriate business models within Southeast Asia, and what do you think the future holds for these business models?

Over the past 9 years, we’ve seen things evolve quite drastically. Lazada chose the path of B2C, especially after the acquisition by Alibaba, so they understand that the brands will eventually have larger contributions to the ecommerce market revenue, so there was a lot of effort to develop with the brands. Shopee took a different approach to basically copy Taobao in its early days. The question is which model suits the region at the moment, especially the region’s level of economic development, consumer education, infrastructure, as well as competitive landscape. 

For most countries in Southeast Asia, people have cared a lot about selection and savings. Eventually, as the economy develops, I believe the market will move towards quality and speed. So, when would that happen? How would that happen? And, when that happens, will there be a good online retailer like JD which would emerge in the region? We don’t know yet.

2. You talked about promising markets in Southeast Asia. With recent macroeconomic headwinds – inflation, high oil prices, which are driving freight costs up, which one do you find to be the most promising?

If I were to analyse the 6 major markets, I would think the markets with high levels of economic development tend to have better penetration, basket size, and infrastructure in terms of payments and logistics. These are countries like Singapore, Malaysia, and Thailand. Of course there are people who say that these markets are relatively small compared to ones with larger populations such as Indonesia, Philippines and Vietnam. Is the market too small? That’s up to people to judge, but I do think these markets are sizable. 

The interesting question is Indonesia. Many look at the GDP per capita of about $4000, and the large population of 270 million. So a lot of investment and talent went to Indonesia to push the infrastructure, seller and consumer education. So does the economics make sense for Indonesia now? I would say it’s much better than a few years ago, but if you were to win in Indonesia, you would probably need to operate much more efficiently than if you were to win in more advanced economies. 

3. We talked about local champions. We talked about regional players. How should we think about this in the long run, in terms of competitive dynamics? Will it be the regional players who will stand out or would local players be able to defend their ground altogether?

There are many dimensions you can analyse for these different players. Essentially, the regional players would have a few advantages. 

  • Better access to capital and talent. 
  • Working for a regional company is more attractive than a local company in terms of scale and career progression. 
  • Economies of scale – in product and infrastructure. 

That said we have the case of Alibaba who beat both Ebay and Amazon in China. Some people say China is a big market, but 20 years ago it was a small market, and local players did not have as many resources as international players. How did they manage to do that? A number of things – the leadership had an entire focus on the region. They are not executives from elsewhere who can just back off if things don’t go well. They had the focus in terms of people, organisation and product. Do we see this in Southeast Asia at the moment? I would say not so much yet. I do see some of the regional players have good localisation in terms of leadership, people, and organisation. Will it remain this way? If things continue this way, regional players will have some advantages over local players. However, if the market develops, who knows?

4. The e-commerce take rate of merchants – in terms of commission rate, payment fees, value-added services – is quite high in Southeast Asia compared to China. How should we understand this entire situation?

We got asked this question a lot when we released our Southeast Asia food delivery report in January this year. People were saying that in most countries in Southeast Asia, the GDP per capita is lower than that in China, so how can the food delivery players charge a higher commission than China. If you talk to any veteran on Chinese internet, the biggest companies are all advertising companies; they make their revenue from consumer traffic. Essentially, they don’t need a high take rate to be viable and profitable.

When you look at Southeast Asia, advertising is still a small part of their business. However, competition might eventually drive that to an equilibrium, so if you have competition, among the different ecommerce players and platforms, eventually, the takerate will not be very high, but if you have the consolidation of ecommerce platforms, you might see a higher take rate. We might also see better monetisation of advertising. One more caveat – I think a higher commission rate might not go down politically well in some countries where you have a large SME base. This is something which players need to be very careful about. 

5. We’ve noticed that competition has slowed, and everyone is lowering incentives and increasing take rates. What is your view on the path to profitability? Will regional players achieve that, or will local players achieve that as well, given that they might have a slightly smaller market share in their local markets?

I think it goes back to our initial point about 1P or 3P. If you are a retailer, your margins are higher, but your scale might be limited because you have all the assets and inventory yourself, but if you are a marketplace, if you have more consumers on the platform, you have more sellers. When we talk about path to profitability, the question is not about if they can reach that, as I think it is possible once you have significant efficiency in fulfillment. If you have enough buyers buying frequently from the sellers, you can achieve that. 

The question is how can you deal with all the friction in the market. Think about the operations, payments, fulfillment. The path to profitability will be impacted if the market is not as efficient as you hoped it would be. The question is how do you deal with it. How do you increase the density and efficiency, sort out all the operational and people management problems, the local fraud and safety issues. I would even argue that for companies to reach profitability, they would probably need to operate more efficiently compared to companies in China because of lack of infrastructure and friction. It is not that they can’t do it, but it would require lots of effort from the leadership, people and organisation.

6. Social commerce, live commerce, TikTok – almost any other investor is interested in this. What do you think of the path to penetration and adoption for live and social commerce in Southeast Asia? Where do you think the total addressable market (TAM) in terms of social commerce market is? Has it impacted or will it impact ecommerce in Southeast Asia as it has in China?

The key difference between Southeast Asia and China is the availability of product selection and assortment. If we see many of the things that are sold on TikTok, it’s really thanks to the manufacturing power of China which in Southeast Asia often has to come from cross-border. I think TikTok is trying to breach the gap very quickly with companies like Shopee. They have signed an agreement with a number of logistics companies. At the end of the day, when we look at what TikTok is doing, it’s a number of flash sales of goods which people already know. Will they break through that to become something more interesting and attractive like in China? This remains to be seen. But I do think that Shopee is taking Tiktok very seriously. You can see from the Shopee app in Indonesia that they have been trying with different video capabilities. I would say that it would be an interesting battle to watch. 

At the moment, TikTok has achieved some growth, but whether it is sustainable and meaningful remains to be seen. That said, there is another player which many people overlook – Facebook. Facebook doesn’t close the loop. It allows people to stream, but it doesn’t handle payments and logistics. It’s interesting that in Southeast Asia we start to have a class of enablers. There are the likes of Upmesh, Shopline who fill in the gaps. One thing interesting is that Facebook is popular in more mature/high-spending countries. And, the social graph that FB is able to get attention from users in livestreaming. They just don’t close the loop which leaves room for enablers. I think it pretty much depends on what enablers can do to facilitate the ecosystem. You can read our Live Commerce in Southeast Asia report for in-depth insights.


7. Logistics is essential to e-commerce in Southeast Asia. As you mentioned it has enabled ecommerce to do better delivery, but the landscape is really fragmented. There are upcomers like Ninja Van, J&T and the old guys like DHL. These are your 3PL guys. Then you have your 1PL ecommerce guys like Lazada and Shopee. How should we think about the differences in 1PL and 3PL in Southeast Asia, be it cost management, fulfillment centers? And what do you think are the trends and developments in the logistics industry in Southeast Asia?

You’ve mentioned the likes of Ninja Van, J&T Express and Flash Express from Thailand too. These players have become sizable by working with ecommerce platforms. Companies like Shopee are starting to build their own logistics and are channeling some volume to that, so what will happen next? I would think they would keep their logistics concentrated in big cities, in areas with high density of demand and spending power. At the same time, they would work with different partners for areas they are not willing to operate more efficiently. So there would be some dynamics going on. It would also depend on how much ecommerce players want to take the risk of holding the assets. I would foresee ideally they would keep all the high density areas and guarantee the fulfillment and customer service level.

As for the 3P players, would they eventually become price-takers or have some negotiation power? I think it would also depend on where the demand originators are (platforms, etc.). If it is concentrated, what would the demand originators do with their inhouse logistics?

8. Logistics is the enabler of ecommerce, but ecommerce is also the driver of logistics. How do you think the e-commerce and logistics landscape will evolve in Southeast Asia? 

Eventually they would evolve to become something very similar. If you look at the logistics landscape in China, all the large ecommerce 3PLs (except for SF express) are quite similar. They serve the same bunch of customers, and with the exception of J&T, all of them have some kind of stake from Alibaba. They also have the same agent network. I would think that things will become similar. It also comes down to how these companies will manage their large operations, because essentially, logistics is heavy. You have people, assets, operations efficiencies you want to build, so while you say that in theory everyone should reach the same level of efficiency, in reality it depends on how the systems are built, and how the systems processes are enforced. 

In Indonesia, some players are able to achieve more volume, better service compared to the rest, and theoretically, it should be simple for the rest to catch up, but in reality, I think it is leadership and organisation.

9. We’ve seen the popularity of collection points and technology-driven lockers in China. It’s a little bit different in Southeast Asia, so what are your thoughts on this?

When it comes to Southeast Asia, we did see a few earlier attempts to develop lockers and collection agents. However, when it comes to earlier attempts, the problem was that there wasn’t enough collection volume and density. Now, as the volume increases, you see a number of delivery players starting to develop lockers and agent networks again. I do think this is more efficient than having to deliver door to door. The question is how do you make sense operationally in each city?

If you look at cities in China, they are highly similar to each other. People live in high density residential estates with a maximum of 3 entry points. It’s relatively easy to place these lockers and collection points strategically. In Southeast Asia, each country is different. Singapore has a system similar to China where people live in high density residential blocks known as HDB, but HDB is more open, so it does not have the same entry and exit points. Which means from an operational point of view, where you place these collection points would need to be calculated differently. In Indonesia, most people in Jakarta still live in houses and travel by motorbikes. So there’s a difference in how to get the business to make sense operationally. But I think it makes more sense to have the bulk of orders delivered to one place than to individual households.

If you are interested to find out more about the aforementioned sectors, reach out to us at [email protected].

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