Why Alibaba’s $1 billion Lazada deal is good for business in Southeast Asia

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Ecommerce in Southeast Asia has been given a huge boost after Alibaba announced a US$1 billion investment for a controlling stake in Lazada this week, one of the region’s biggest online players.

Lazada was founded in Singapore by Rocket Internet in 2012 and is considered the Amazon of Southeast Asia. It operates in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

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*http://www.lazada.sg

Under the deal, the Alibaba Group will invest US$1 billion to take a controlling stake in Lazada.

Bessie Lee, founder and chief executive officer, withinlink, says it is a clever move for both Alibaba and Lazada and will encourage ecommerce participation across the region.

“Alibaba and Lazada’s market place model will encourage high participation from people in Asia [where] anyone can open stores and sell merchandise and anyone can sign up and buy,” she says.

Brands in China, or in markets in Asia covered by Lazada, and global brands, will all benefit from the partnership, says Lee.

Global expansion

The deal is an important move for Alibaba’s global expansion in the business-to-consumer (B2C) area, says Xiaofeng Wang, senior analyst, Forrester (Beijing).

It helps Alibaba enter the large Southeast Asian market where it can benefit from Lazada’s existing logistics and payment processes. In exchange, Lazada gains financial and technological support from Alibaba to grow and compete in a highly fragmented and competitive market, Wang says.

She adds the deal will help Alibaba expand a number of its business models across the region. These include:

  • Tmall Global model: collaborating with international brands to give Chinese consumers access to more foreign products.
  • AliExpress: helps Chinese vendors sell products beyond China.
  • Market presence: Alibaba is opening international offices to better operate in global markets. This deal gives it a stronger presence in the Southeast Asian market.

Alibaba also capitalizes from Lazada’s well-established brand name in the region, rather than brand-building the Alibaba name from scratch.

“This investment is consistent with our strategy of connecting brands, distributors and consumers wherever they are and support our ecosystem expansion in Southeast Asia to better serve our customers,” says Michael Evans, president of Alibaba.

Infrastructure, logistics and payment systems

While the six countries Lazada operates in have a combined Internet user base of 200 million, currently just 3% of the region’s total retail sales are conducted online, according to an Alibaba release.

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Despite the promising potential, the region’s ecommerce sector is being challenged by a fractured market, infrastructure, logistics, connectivity and payment gateways.

The big benefit to the region is the export of Alibaba’s expertise of building an ecommerce market place, says withinlink’s Lee.

However the big challenges remain in the logistics and payment sectors.

A country like Indonesia for example is made up of thousands of islands making logistics and delivery a complicated and costly process. Alibaba has logistics partnerships both within the Chinese domestic market and with SingPost in SouthEast Asia but doesn’t run its own logistics businesses, so it will be interesting to see how an Alibaba-Lazada partnership may enhance efficiency in logistics in this region.

Payment will be a challenge too. Much of the region has low credit and debit card penetration. As a result, the region has developed innovative payment options and cash on delivery remains a mainstay. Here for example, are payment options for Lazada in the Philippines.

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Lee says Lazada’s existing payment solutions will give Alibaba a strong base to integrate its own payment gateway, Alipay.

Paul Srivorakul, group CEO, aCommerce and co-founder and chairman of Ardent Capital, says the deal is a wake up call for global and local ecommerce players. He believes it will accelerate the urgency and investment into the region, in turn generating more jobs, companies, investment and mergers and acquisitions.

The consumer

The big winner of course is the consumer. Consumers in Southeast Asia can expect more exposure to domestic and international brands. In addition, the more competitive environment as a result of the Alibaba-Lazada partnership will help expedite improvements to logistics, infrastructure and payment gateways.

Brands in China, and international brands with existing relationships with Alibaba, now have another channel to reach consumers in Southeast Asia.

Conclusion

“Southeast Asia is an attractive mobile-driven consumer market that is highly fragmented and diverse with significant barriers to entry and a nascent modern retail sector that has large headroom for growth,” says Max Bittner, CEO, Lazada Group.

“Leveraging Alibaba’s unique knowhow and technology will allow us to rapidly improve our services and provide an even more effortless shopping and selling experience,” he adds.

Sheji Ho, chief marketing officer, aCommerce, told ClickZ in November 2015 he expects Southeast Asia to reach ecommerce levels of between 10% and 12% by 2020. This will place it behind China and India in the top spots, surpassing even the United States. This latest announcement between two of Asia’s biggest ecommerce players is certain to bolster that prediction.

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