By Patrick Cheung
The recent stepping down of Pinduoduo CEO, Colin Huang, has again drawn much attention to the proliferation of its business model in China and overseas. Indeed, as a seasoned Chinese investor having seen how it has budded amid the fierce ecommerce competitions in China, we cannot stop but think, can we replicate such success in overseas markets, particularly in Southeast Asia?
Digital infrastructures in Southeast Asian countries are still at an early stage with enormous growth potentials. As suggested in the report by Google and Temasek, by 2025, Southeast Asia's ecommerce market is estimated to reach $153 billion. Indonesia, the largest e-commerce market in Southeast Asia, will reach $82 billion, with the highest compounded annualized growth rate of 49% between 2015 and 2019.
Despite the huge GMV potential, the market penetration of ecommerce in Southeast Asia is still low, only 2%-3% of the total retail sales. By comparison, this figure is about 37% and 15% in China and the US. The overall growth rate is fast, and the penetration rate is relatively low, so there is massive room for improvement and innovation in the future.
Compared to the China market, Southeast Asia has seen more startups in social commerce as well, such as Indoshare and Ula in Indonesia, and Fingo in Malaysia. In terms of the infrastructure, apart from Singapore, there is no strong universal third-party payment provider in the rest of Southeast Asia. Looking back to China's infrastructure, Pingduoduo emerged from an ecosystem where 3rd party payment was rather developed, especially the payment function embedded in the most popular instant messenger, WeChat. As China's online transaction volume rose from 50.51 billion RMB in 2009 to 26.9 trillion RMB in 2020, 3rd party payment has also extended the coverage to lower-tier cities. The emergence of Pingduoduo has captured the consumers' desire to spend, particularly in lower-tier cities. Whereas in Southeast Asia, except for Singapore, the online payment penetration still lags far behind China. Indonesia, for example, is only at 11% for online payment.
What is the percentage of cash on delivery? The current payment tools are confined to specific scenarios. For logistics, the basic express delivery of Singapore, Thailand, Java Island in Indonesia, and Vietnam is now able to reach customers within seven working days. For customs clearance, it's stricter in Indonesia and has improved in other countries. For online traffic, the competition between Shopee and Lazada has raised the cost of customer acquisition online and will affect merchants accordingly, which creates an opportunity for new low-cost customer acquisition channels such as social commerce.
Social Commerce Development from China as a Reference
Referencing the development of social commerce in China, we see the changes in the flow of information/traffics and the flow of goods in 5 phases. Phase 1, Taobao has drawn traffic from offline to online, connecting, and matching merchants and shoppers. Phase 2, JD.com, comes in with supply-side integration, building warehouses, and inventory. Phase 3, Pinduoduo, Yunji optimizes traffics based on people's trust and recommendations. Phase 4, Aikucun optimizes the leftover inventory and improves inventory leftover. Phase 5, we expect to see change on the traffic side again where content-based social selling (e.g., Tik Tok), leads the way.
In terms of business models, we see three models:
1. Group Buy
Buys are incentivized by group discounts to invite friends to buy in bulk.
2. Distribution via micro-merchants (S2B2C)
Micro store owners are enabled with discounted goods and fulfillment capability to social sell to consumers. What's worth noting is that the emergence of Pingduoduo was coupled with the growth in the disposable income of the suburban population. Take those living in the Midwest of China as an example. In 2019, the average disposable income for the suburban population in 2019 was 16,021 RMB per capita. In Lanzhou, a 2nd tier city in the Midwest, the disposable per capita for those in rural villages is 13,605 RMB per capita.
3. Content-based social selling
Social-led live streaming ecommerce:
For example, Kuaishou connects upstream with brands, factories, and industrial clusters, midstream with live streamers and MCNs and downstream with end consumers.
Ecommerce-led live streaming selling:
The upstream is mainly brands, factories, or industrial clusters. The midstream is mainly anchors, MCN institutions. And the downstream is consumers. The variety of products that can be sold on live streams has been gradually expanded, covering beauty, apparel, food, home, digital and electrical appliances, automobiles, and many other categories, accelerating the increase in online penetration of various categories.
Finding Feasible Models in Southeast Asia
A few key characteristics we have noted:
• Social networking in Southeast Asia is extremely mature, and the social platforms with the highest penetration in each country are different. It is difficult for new social platforms to enter. But it'll be worth paying attention to bringing content on the platform, such as an MCN + supply chain model.
• The combined share of Southeast Asian e-commerce is not large enough to support the growth of a company that operates like Baozun, so it may not have much potential for a pure agency model.
• People in Southeast Asia are social by nature. Their time spent on social networks is up to 8-10 hours per day. However, the supply chain is still lacking. Therefore, based on this, it's possible to look for opportunities in social ecommerce/content ecommerce. As long as the product selection and supply chain are connected, the cost of acquiring MSME customers can be controlled, and the ramp-up will be quite fast.
With that said, there could be two models to be explored:
Group Buy. It's best suited for the population segment that is price sensitive in lower-tier cities. The more you group, the cheaper the price you get for quality goods. Leveraging on social platforms (like WeChat in China), once social referral becomes a chain reaction, it's easier to increase transaction rate.
S2B2C model. Upstream, connect with brands, and their inventory to form a supply chain. Downstream, connect with small businesses as distributors, and distributes goods to end consumers through social platforms. The platform is in charge of the supply of goods, logistics, and after-sales, building trust between brands and consumers, through the effective use of social media to accumulate positive influence, establishing a social ecommerce SCRM system to convert public domain traffic on social platforms into private domain traffic to achieve efficient conversion. Then, the platform provides content for products recommendation, increase transaction efficiency, and user stickiness.
Patrick Cheung is the Founding and Managing Partner for ZWC Partners, a Chinese VC investing into early stage tech starts up in Indonesia. He is also a serial entrepreneur and has invested into a number of tech unicorns across the border in both China and SEA.