China Goes for Broke in Indonesian E-Commerce

China’s deep-pocketed internet giants are combating a grass war in Indonesia, where e-commerce sales could go beyond India’s as soon as 2020.

The only problem is that there’s almost no course to success.

Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Inc. currently back 4 of the top 5 online-shopping startups in Southeast Asia’s most populous nation. In March, Alibaba invested another $2 billion in Lazada Group SA, which runs business-to-consumer operator Lazada Indonesia, after pumping $1.1 billion into Tokopedia PT, Indonesia’s biggest online seller in terms of gross product volume, last August. Tencent holds a 36 percent stake in New York-listed Sea Ltd., which owns Shopee Indonesia, and has its own subsidiary in the country.

There’s plenty drawing Chinese tech giants to Indonesia as they planning to expand geographically. The nation not just has appealing demographics, however also better prospects for developing market share than in India– the other apparent frontier– because Indonesians were shopping online through social networks before the launch of official e-commerce websites. About 3 quarters of Indonesians aged 14 and above, some 140 million people, use Facebook regularly, compared with just a quarter in India, at 241 million.About half of online

shopping transactions flowed through social media websites in 2014, but with much better logistics support– such as shipping and payments– e-commerce operators can quickly lure little merchants away. By 2020, social networks will account for just 12 percent of the total gross product volume, CLSA price quotes. Even by dollar volume, sales in Indonesia, with the assistance of Chinese

investment, might surpass India’s in 2 years, CLSA price quotes. Indonesia created nearly$ 13 billion worth of e-commerce transactions in 2017, compared with $17.8 billion in India.That’s where the bright side ends.To break even, e-commerce has to have the ability to create at least$4.50 in revenue from every $100 deal performed on their websites, according to CLSA expert Paul McKenzie. Online sellers can charge for advertising or commission costs. That’s a tall order. Best-in-class Alibaba, which controls 58 percent of China’s online shopping market, can only get a 2.5 percent

take-rate from its advertising services. What sort of prices power does the more-fragmented Indonesian e-commerce industry have?As for other costs: There aren’t any. In their battle for small merchants, platforms such as Lazada Indonesia just charge sellers a one-time cost for joining. With

such high competitors, needing even a small payment could send out clients elsewhere.Shopee is the only player that offers us some peek into the operators’ financials, through the filings of its moms and dad, Sea. Despite a 170 percent jump in gross merchandise volume in the 2nd quarter, the business’s operating loss isn’t narrowing quick enough. Sales and marketing expenditures, that include subsidies to merchants and consumers, remain raised. The only feasible way for the Chinese to make money in this market is maybe through industry consolidation. Indonesia has actually currently seen some prominent mergers, such as Grab’s takeover of Uber Technologies Inc.’s entire Southeast Asian business

this year. Could Jack Ma engineer a marriage between Tokopedia and Lazada Indonesia? As Chinese cash pours into Indonesia, the venture-capital culture there is likewise altering. To mainland tech magnates, success is often beside the point. Just look at a few of China’s most popular tech IPOs this year: Cash burn is the course to success. To call the author of

this story: Shuli Ren at [email protected]!.?.!To contact the editor accountable for this story: Rachel Rosenthal at [email protected]!.?.!This column does not necessarily show the viewpoint of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion writer covering Asian markets.

She previously wrote on markets for Barron’s, following a career as a financial investment banker, and is a CFA charterholder.

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