Will Amazon Create an E-commerce Apocalypse for Indonesia’s Local Players?

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American e-commerce giant Amazon will enter Indonesia with US$600 million. Local e-commerce competitors prepare for winter as Alibaba ramps up too.  

Just three months after Chinese e-commerce giant Alibaba acquired Rocket Internet’s Lazada for US$1 billion, America’s largest online retailer Amazon is now preparing to expand its business to Indonesia. The country is Lazada’s largest market, and home to more than 250 million people. Experts say Amazon is packing a hefty war chest of US$600 million.

Competition is sure to be fierce between the two firms, but also between the overseas juggernauts and their local incumbent counterparts. While anxiety spreads among the nation’s tech stakeholders, from a consumer perspective, Amazon’s arrival will undoubtedly be well received.

This news first came from Daniel Tumiwa, chairman of the E-commerce Association of Indonesia. “Amazon has announced it will open up e-commerce in Indonesia. They are ready to invest US$600 million for the first year here in Indonesia,” said Tumiwa, as quoted by Kompas. But even though Tumiwa has spilled the beans, Amazon remains tight-lipped about its plans for Southeast Asia’s largest consumer market.

Will Indonesia grow up like China or India?

If anyone’s word in Indonesia can be taken to the bank about what’s to come for local e-commerce, it’s Tumiwa’s. That said, he admits he merely heard the news through the grapevine. Tumiwa believes Amazon will follow the same pattern as its previous expansions in other emerging markets, such as India. Its took only two and a half years for Amazon to become the most visited e-commerce site in India, snapping up a more than 50 percent market share in a country with 1.25 billion consumers. The firm left two major local e-commerce players Flipkart and Snapdeal in the dust.

But Indonesia has different demographics to India. Many tech experts believe Indonesia’s e-commerce space may morph into something resembling China’s within a decade. Currently, e-commerce accounts for less than one percent of all retail transactions in Indonesia. In China, that figure sits at around 13 percent. With this in mind, there are a couple of different outcomes for the current online retail players in Indonesia: get outspent – like what we see happening to India’s incumbents – and sell your operation before it’s too late, or try find a way to outmanoeuvre Amazon and Alibaba in Jakarta.

One percent of the total retail sector sounds small, but the number is actually quite big. SingPost projects Indonesians will spend US$543.07 billion on retail and US$4.49 billion on e-commerce in 2016. Other key factors include Internet penetration, the number of domestic mobile users, and Indonesia’s growing middle-class.

According to a recent survey from the Indonesia Internet Service Provider Association, in 2014 there were around 80 million people connected to the Internet. That number has grown rapidly in less than two years. Local Internet service providers like Telkom Indonesia, Biznet, Ooredoo, and others are getting more aggressive in promoting fibre optic broadband service to home users. This means a combination of faster Internet at more affordable prices, and more people in the country connected to the web overall.

The archipelago’s number of mobile users is also growing rapidly due to the market being flooded with affordable Android smartphones. Currently, Indonesians can buy a new smartphone for as little as US$80. Feature phones (a term used to describe mobile phones that don’t connect to the Internet) are still the most used in Indonesia, but this is set to change in coming years.

According to Standard Chartered, there were around 149 million middle-class Indonesians in early 2015. That number is predicted to soar to 171 million by 2020. With this in mind, Indonesian consumers are becoming increasingly savvy when it comes to awareness about online shopping. All of these conditions bundled together act as the main driver for Amazon and Alibaba to be taking Indonesia’s nascent e-commerce market deadly seriously.

A dominant player in five years?

Indonesia’s e-commerce industry has developed quickly in recent years. For those who are less familiar with tech terminology, there are two main ways to run an e-commerce operation. One can set up a marketplace or choose to run a classifieds site. Indonesia’s marketplace sites include Bukalapak, Tokopedia, Lazada, MatahariMall, and Bhinneka, all of which can be considered the big fish in the pond. These sites process payments and are accountable for making sure you get your goods. For classifieds, there are sites like Jualo and OLX Indonesia (formerly TokoBagus), which are essentially just people selling to each other without the site getting involved on a transactional level.

Each one of these local e-commerce sites serves hundreds of thousands of active users with millions of orders each month. Bukalapak, for example, says it has 17 million registered users. On the other hand, the firm’s biggest competitor Tokopedia claimed to be facilitating 6 million transactions per month with only 300,000 active users as of 2015.

But firms like Amazon and Alibaba won’t be easily taken down. Both giants already became the winners in their home countries, while also expanding to new markets and rolling out new services. In terms of market maturity, now is the perfect time for them to get into Indonesia, as the local players have already forged a path and educated the market.

To glean more perspective on the issue, Indonesia Expat interviewed Madeleine Ong de Guzman, chief marketing officer of Elevenia, a joint venture between XL Axiata and SK Telecom. Elevenia is yet another one of Indonesia’s e-commerce heavyweights.

“If Amazon really does come to Indonesia, this will be good for the industry and a good opportunity also for everybody.

We all know their expertise and what they have done in the past. If it can be done in Indonesia this will raise everything that is being done in the country,” says de Guzman.

But with immense expertise in warehousing, logistics, and technology, the real question local stakeholders are surely asking each other is: Will Amazon end up dominating the market within a year or two, like what happened in India? De Guzman gives a confident answer:

“Indonesia is a very unique market and there is no dominant player at the moment. In the next two to three years, I am expecting mergers and acquisitions, business model changes, adjustments of strategy […] and a dominant player will probably be more evident in five years.”

Since its 2013 inception, Elevenia has arguably been one of the fastest growing e-commerce sites in Indonesia, with total funding of around US$110 million. As a business-to-consumer e-store, Elevenia currently claims around 300,000 sellers serving 3 million buyers, clocking around 30,000 transactions per day.

Madeleine adds, “Existing local and international players will definitely survive against Amazon […] E-commerce is not just a platform or a brand game. It’s more of an experience and it comes down to customer satisfaction. For whoever can execute consistently and has more patience, these things will be key. Another thing, if Amazon really does come, this will actually increase every [local e-commerce] company’s level of competitiveness, and the sellers and the buyers will ultimately be the winners.”

It’s now or never for payments, logistics, and infrastructure

Amazon will face the same problems that local e-commerce players are already grappling with in Indonesia. Logistics and payments remain the two biggest. The country has complicated geographic layout, with around 17,000 different islands spread across Southeast Asia. Shipping packages to different islands is expensive and takes time; sometimes packages don’t arrive at all. For example, if someone in Bali wants to buy something from Jakarta, it takes almost a week for the buyer to get his goods via the low-cost shipping option.

Indonesia has embraced a few concepts to help remedy logistics headaches. Some e-stores have launched their own delivery operations, while others place distribution centres in strategic locations around the archipelago to allow for online-to-offline pickup of goods purchased.

Amazon will also have to deal with the fact that credit cards may never be the preferred way of online payment. According to the Indonesian Credit Card Association, there are only around 8 million credit card holders in the nation, which is 3.2 percent of the entire population. This means – unlike developed markets in the West – Amazon will have to hit the ground running with payment methods like cash on delivery, and traditional bank transfers.

 

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Ketut Krisna Wijaya is a Bali-based freelance journalist and former writer at Tech in Asia. He specializes in technology and business stories in Southeast Asia. For more information, visit www.ContentCollision.co