This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays. You can access the previous editions of the Vantage Point weekly posts here.
Executive Summary
- Grab episode shows the risk of mixing business and politics
- JD.id’s retreat
- Shopee’s consolidation will be a boon
- Race hots up for electric two-wheelers
- Survival of the diversified in warung tech
Grab episode proves corporate life and public life don’t mix well
In a world where environmental, social, and governance (ESG) practices have become so front of mind, mixing business and politics is fraught with numerous risks.
In certain industries such as investment banking, for instance, having any business relationships within the political sphere is a huge no-no that is flagged in every compliance manual as a serious breach and, if undeclared, can be a sackable offence.
In this context, it should come as no surprise that there was a backlash against the appointment of Tin Pei Ling, a member of parliament (MP) in Singapore, to the role of director of public affairs and policy at Grab.
The appointment, made by the super app developer in early February, led to severe social media backlash over possible conflicts of interest. Even Pei Ling’s party, the People’s Action Party (PAP), suggested that “it is essential that MPs rigorously separate their public role from their professional and commercial interests in their private careers”.
The backlash compelled Grab to move Pei Ling to a corporate development role last week, where she will realise synergies across the company’s investments and acquisitions, as well as support strategy development.
Singapore is a business-oriented city-state but that does not mean politicians can freely mix their political and business lives. In the case of Pei Ling, in her role with Grab, there was an obvious perception that she could use her political position to curry interest for the company.
Given its dominance in ride railing in Singapore, the company is an integral part of the population’s daily lives. There have also been discussions on regulating the treatment of gig workers in Singapore, underlining its public profile. This position means the company will naturally be exposed to public scrutiny and public policy.
It, therefore, seems a wise move for Pei Ling to step away from a public affairs role and into a less politically-exposed role, although corporate development could also involve some sensitivities.
More typical for politicians, though, is to leave politics altogether before joining the business world in a full-time role. Once out of the political sphere, they can then use their political experience freely to promote and develop the company with the knowledge and experience developed during their political careers but every country is different in this respect. The treatment of ministers and MPs will also be different in most cases.
In Indonesia, for example, one of the founders of Gojek, Nadiem Makarim, left the ride-hailing giant to follow his political career as a minister of education & culture in the Jokowi government in 2010.
GoTo’s latest reshuffle involves former finance minister and central bank governor Agus Martowardojo being moved to a commissioner role. However, he had already served as the president commissioner of Tokopedia and is no longer in politics.
Historically, of course, the connections between businesses and the government in Indonesia were deeply engrained, especially during the Suharto era when cronyism was rife but the environment now is far more open to scrutiny through the Corruption Eradication Commission (KPK), greater democratic focus, and the advent of social media.
Politicians will often have outside interests and should be allowed to do so but the level of engagement, financial remuneration, and political sensitivities need to be closely monitored by both sides for it to be sustainable from a governance perspective.
JD.id’s retreat
E-commerce platform JD.com will close down its operations in Indonesia and Thailand in March, following a decision by its Chinese parent JD Global to cut costs globally.
Both JD Global and JD.id had reportedly been looking for investors to take over the shares of their e-commerce joint ventures in Indonesia and Thailand since last November.
JD.id was slow to take off in Indonesia as its strategy involved adopting the asset-heavy first-party logistics provider model (also known as 1P). The model entailed buying land to build warehouses, building internal logistics systems, taking on inventory risk and assuming higher levels of working capital. The model was heavily reliant on the scale of operations to pay off.
In contrast, other leading e-commerce players including Shopee and Tokopedia adopted a predominantly 3P model, whereby the company outsources its supply chain including distribution, warehousing, and order delivery to end customers. Global leader Amazon is now around 60% 3P but still maintains a large portion of 1P.
Meanwhile, Lazada set up its own internal logistics and warehouses but it too fell behind in the rankings in Indonesia. More recently Tokopedia has moved to internal fulfilment to capture more of the value chain but this is still relatively asset-light and accounts for only around 5% of sales.
It is increasingly taking on warehousing for sellers who choose fulfilment by Tokopedia, which has the advantage of tapping the captive fleet of Gojek that can be utilised for last-mile delivery along with Anteraja. This move enables the firm to earn higher commissions from those merchants.
In Latin America, MercadoLibre is following a similar strategy and has increased fulfilment through Mercado Enviods to 92% of orders in Q3 2022, up 5% over the last 12 months.
Apart from logistics, JD.id also struggled with its product mix strategy, which was more focused on larger brands. As the products lacked mass market appeal in price-sensitive Indonesia, the firm ended up holding inventory, which put pressure on its working capital.
JD.id probably also faces more competition from the resurgence of offline activity with retailers such as Mitra Adiperkasa seeing a significant rebound in sales coupled with a successful omnichannel strategy with 10% of sales coming through online channels.
Matahari Department Store too has seen a significant turnaround in its offline business even as it has become more active on marketplaces including Shopee, Lazada, and Tokopedia.
Amid this backdrop, it is possible that parts of the JD.id ecosystem may be sold off but it may be difficult to sell it as a going concern given the difficult trading environment and its asset-heavy model.
Even though JD.id was only ranked no.10 in across Indonesian marketplaces last year, it will further reduce competition in the market, especially in verticals such as electronics and furniture. JD.id’s exit may help to extend a more rational environment but not necessarily a profitable one.
Shopee’s consolidation will be a boon
Shopee, the e-commerce arm of Sea Ltd, continues to consolidate its business globally, closing its Polish operations earlier this month having already exited other early-stage markets including France, Spain, India, and four Latin American markets.
The company had always maintained that these markets were at a testing or pilot stage. To its credit, Shopee made the decision to exit relatively quickly in all cases. Its focus has intensified on Southeast Asia, Taiwan, and Brazil, which has become a core market for Shopee.
The India exit was forced given the ban on its game FreeFire due to its perceived China connections. Fortunately, Sea Ltd had not committed a lot of capital to the country and its exit can be seen as a blessing in disguise, given the highly competitive south Asian market.
Brazil ticks all the boxes for Shopee in terms of the macro numbers. The country has the largest population in Latin America at 214 million, a GDP of $1,894 billion and an income per capita of $8,857 in 2022, per IMF estimates. This means that consumers have sufficient disposable income to fuel e-commerce spending.
The country also has a high internet penetration of 70% compared to 74% in Indonesia.
The market is attractive given its high take rates for e-commerce in the mid-teens against high single-digits for its core Asian markets. This means Shopee has the potential to be highly profitable over the long term.
Shopee has also made strong progress unseating the competition to become the number two e-commerce platform in the country. It is the third most downloaded shopping app in the county after local e-commerce leader MercadoLibre and classifieds player OLX. In fact, it overtook MercadoLibre to emerge as the top shopping app by monthly active users last year, according to Data.ai.
The company does not break out a lot of financial detail in Brazil but the EBITDA loss per order before headquarter costs on Shopee in Brazil has halved from Q4 2021 to Q3 2022. In Q2 2022, the EBITDA loss per order was at $1.03 per order versus $1.42 in Q2 2022 and around $2 a year earlier.
Another upside for Shopee in Brazil is that it has received permission from the country’s central bank to operate as a payment institution, allowing it to manage prepaid payment accounts. It has also raised the possibility of operating Buy-Now-Pay-Later in the country. It already collaborates with Nubank, Brazil’s leading neobank, which allows for cashback for customers making purchases through the bank.
The ongoing improvement in profitability in Brazil should be a key focus for investors now that core ASEAN and Taiwan have hit breakeven in contribution margins. The fact that the take rates are that much higher in the region should make its rise towards contribution margin breakeven more rapid.
Sea Ltd has been one of the fastest to make adjustments to the new normal post-pandemic. The fact that it is now contribution margin positive in ASEAN and adjusted EBITDA positive in Malaysia and Taiwan shows that its efforts at controlling costs are paying off.
The company could see a leg-up in its share prices if it continues its focus on increasing the profitability of the core e-commerce business in Q4 2022 and achieves a stabilisation in its gaming business, which was expected to decline post-pandemic. Gaming, however, continues to still be a valuable source of revenue for Sea Ltd.
Sea Ltd now trades on 2.7x FY2023E EV/Sales and 2.2x FY2024E EV/Sales, which looks reasonable given sales growth expectations of 15.2% and 18.2% for FY2023E and FY2024E respectively.
More importantly, Sea Ltd is expected to grow EBITDA by 76%, 336%, and 161% for FY2023E, FY 2024E, and FY2025E respectively and be EBITDA breakeven by 2024E and to produce a positive net profit by 2025E.
On both these profit measures, Sea Ltd is ahead of its peers. FY 2022 results will provide further evidence of whether the company is able to continue to execute in this direction.
Race hots up for electric two-wheelers
While the rest of the world is focused on electric cars and surrounding infrastructure, Indonesia is moving forward rapidly in developing the electric two-wheeler (2W EV) market with a number of players staking their claim.
It is not the traditional two-wheeler brands that are leading the way but startups, mostly from Taiwan and China, who are looking to gain early access to the Indonesian market.
Sample the market statistics: More than 6 million combustion engine motorcycles are sold every year in the country. Indonesia is the third largest motorcycle market in the world after India and China. The Indonesian government has assigned a target of 400,000 electric four-wheelers and 1.76 million electric two-wheelers on the road by 2025 as it seeks to reduce emissions.
The key to large-scale EV adoption in the country, however, lies in the development of attendant battery charging infrastructure to support the fleet.
The country has seen electric two-wheeler manufacturers including Volta, GESITS Indonesia, Viar Motor, Smoot and Niu emerge over the past five years. New entrants Alva and Electrum have joined the fray with the latter teaming up with GoTo to plug into its ecosystem of motorcycles. Electrum counts Indika Energy, Alpha JWC, and Horizon Ventures among its investors.
Similarly, other players too are tapping ecosystems to boost institutional demand for the vehicles.
Volta Indonesia Semestra – a joint venture between NFC Indonesia, M Cash Integrasi and SiCepat – has already signed a collaboration agreement with a unit of Indonesia’s post office Pos Indonesia to provide EV motorcycles under a rental plan.
GESITS is one of the brands that supply to Grab, which introduced around 14,000 EVs in Indonesia by the end of 2022. Last year, Grab also placed an order for 6,000 electric bikes from Viar Motor Indonesia and has also invested in Smoot.
GESITS vehicles are manufactured by Wijaya Karya Industry and Construction (WIKON) and Wika Industri Manufaktur (WIMA), both subsidiaries of Wijaya Karya.
The Indonesia Battery Corporation, which owns a stake in WIKON and WIMA, is the holding company for the electric vehicle battery industry founded by MIND ID, Pertamina Power Indonesia, state electricity company PLN, and Aneka Tambang Persero.
The entry of prominent mainstream automobile firms and global brands will be the real test of how the Indonesian EV market will play out.
Indomobil Sukses Internasional has joined the bandwagon of firms looking to produce electric motorbikes in Indonesia. It will start producing Yadea electric motorcycles in 2023 through Indomobil E-Motor Internasional, which has a well-established distribution network.
Yadea electric motorcycles are sold in over 100 countries including China, Nepal, India, Germany, and the US. The company said it expects total sales of its electric motorcycle variants to reach 60 million units by 2022.
With a sales network of more than 10,000 dealers in various countries, Yadea claims to have secured a 20% share of the $23-billion global electric scooter and motorcycle market, so it represents a significant player in the space.
Indomobil is one of the largest automotive groups in Indonesia, controlled by the Salim Group. It is a distributor for a number of major auto brands including Nissan, Audi, Volkswagen, Suzuki, and KIA.
The firm will face competition from the new Honda and Yamaha products that will be marketed in Indonesia in 2023.
Honda will introduce more than 10 new electric motorcycle models globally by 2025, with the aim of achieving sales of electric motorcycles of 1 million units in the next 5 years. It has already introduced an electric PCX in Indonesia but will gradually introduce more models. Yamaha is testing its E01 electric motorcycle, which is modelled on the NMax.
The initial launches of two-wheeler EVs are aimed at B2B, with ride-hailing companies Gojek and Grab as major customers. So, the players connected to those ecosystems will perform better in the short run.
There is still some way to go before Indonesia can support 2W EVs for the mass market, given the need for infrastructure. But, the race is on to gain acceptance and, with sustainability a key focus for Indonesia, this is a train that will keep moving forward.
Survival of the diversified in warung tech
Warung tech, or the business of digitalising mom-and-pop stores, is a tight-margin business and companies that succeed in this space will be those that diversify beyond their core offering.
Companies such as Bukalapak and Gudangada, which source FMCG and other goods for warungs, for instance, are finding new ways to increase their take rates. This involves switching sourcing to local FMCG providers to reduce costs. This can also improve take rates as local players tend to be less aggressive on pricing than national players. There are also virtual goods like phone vouchers or gaming tokens that are more profitable, where Bukalapak has been expanding.
There is also an ongoing move to digitalise warungs, which is in line with government policy to see 30 million SMEs go digital by 2024. Bukalapak is a huge contributor to this push through Mitra Bukalapak, which sources goods for its Mitra Partners through the app, cutting out the middleman and giving them access to a greater number of physical and virtual products. There were already more than 15 million Mitra Bukaplak partners in place by the end of the third quarter of 2022.
Grab, meanwhile, recently started a collaboration with Sampoerna Strategic Group to digitalise warungs within the Indonesia Sembilan app to allow them to offer delivery services through Grab Express, and offer cashless transactions using OVO QR code.
The Sembilan app had a total of 225,000 warungs in Indonesia connected to its network, which can then offer their goods for sale on GrabMart, as well as potentially have access to other services such as Buy Now Pay Later.
Grab already works with Bukalapak, and its Mitra Bukalapak partners, to enable them to sell their goods on GrabMart, expanding its reach and creating more trade while providing opportunities for MSMEs to expand their reach and customer bases.
Another player in this space is Gudangada, which is a B2B marketplace connecting warungs with wholesalers and brands.
In order to increase its share of the value chain, Gudangada is starting to offer services such as point-of-sale services and lending to warungs, becoming more of a one-stop shop for its customers and taking on more of the supply chain. This should also help to boost revenues beyond pure transaction fees, which tend to provide slim pickings.
Gudangada already fulfilled a crucial function for its MSMEs in that it enabled them to get access to a much wider range of products to sell but it also provided valuable data for suppliers on demand to enable them to better manage inventories.
The next logical move for a player such as Gundangada is to move to offer fintech services such as BNPL or other services, given that it has a certain amount of data on its warungs.
It does intend to build more partnerships with fintech companies and banks to give them more visibility on the financial health of MSMEs.
It has established Gudangada Modal which provides services for its B2B partners in areas such as invoice financing but this has yet to be extended to warungs in a big way but when it does, these are likely to be productive loans to finance inventory for example.
It is interesting that there has been some pulling back from the warung-tech space over the past few months, with even players such as Tokopedia becoming less aggressive given the focus on profitability. This means that those that remain have an opportunity, especially those focused on tier II and tier III cities.
Those players that remain, such as Bukalapak and to a lesser extent Gudangada, also have an opportunity to expand their product offerings. We have seen the same thing with bookkeeping players such as Bukuwarung and Lummo, although some of those diversification efforts have been less well-measured, diversity of revenue is a positive attribute in this space.
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.