Industry Trend Analysis - BMI e-Commerce Index: Asia Holds Greatest Potential - NOV 2017


BMI View: Asia offers some of the largest and most attractive growth markets for e-commerce globally, with the region's online retail mar ket set to be worth over USD1.2 trn by 202 1 . Developed Asia markets such as Hong Kong, Singapore and Japan lead the pack, offering the level of logistics, consumer affluence and technological innovation required for the continued rapid development of e-commerce across all retail segments, while providing ideal bases for international e-Commerce majors to expand into the wider region. Operational risks are greater in Emerging Asia, but markets such as Malaysia and Indonesia nevertheless offer excellent long-term growth opportunities for the e-Commerce sector on the back of rising incomes , among their large and youthful consumer bases.

Note: For more information on the data points that make up this i ndex, see the Methodology table further below . For the indicators with s cores out of 100 ; higher score = lower risk . Source: BMI

Important Note: Our e-Commerce Index uses BMI ' s proprietary data points to quantify the development rate of the e- c ommerce sector in a given market, helping to better understand areas key to e-commerce growth such as infrastructure for logistics, technological penetration and consumer spending power.

Six key themes emerge from our analysis of the BMI e-Commerce Index for the Asia region, and we discuss each in detail below:

  • Small, But Mighty: Singapore & Hong Kong Most Attractive e-Commerce Markets In Asia

  • Japan: Ageing Yet Tech-Savvy Population Seeking Convenience

  • Malaysia: Our EM Asia Outperformer

  • India: A Giant Awakening

  • China: Sheer Size Grabs Headlines, But Growth Not Without Risks

  • South East Asia Attracting Attention

Small, But Mighty: Singapore & Hong Kong Most Attractive e-Commerce Markets In Asia

There is little to distinguish between Singapore and Hong Kong's e-commerce growth potential. Both benefit from fully urbanised populations, wealthy consumer bases (the proportion of households in Hong Kong and Singapore with disposable incomes of USD10,000+ account for 90.5% and 99.5% respectively) and highly developed logistics networks (both rank in the top 20 globally, according to BMI's Logistics Risk Index).

The long-term growth prospects for the e-commerce sector in these countries are limited by their small population sizes, as e-commerce has already penetrated all areas of mass market retail from food to fashion. The area where we see the greatest potential for growth in e-commerce is in premium goods and value-added services, with companies seeking to outdo rivals via the level of service offered to the consumer. Amazon has been quick to recognise this, launching its Prime Now same-day delivery service in July 2017. Once again it is these states' high levels of urbanisation and developed logistics resources that make such an offering possible.

Singapore And Hong Kong Offer Logistical Springboards
BMI Operational Risk Scores
Note: Scores out of 100, higher score = lower risk. Source: BMI

Hong Kong and Singapore also offer ideal bases for expansion by e-commerce providers in the wider Asia region. Alibaba, for example, has a 14.4% stake in Singapore's national postal company Singpost, which offers dedicated logistics and delivery services across South East Asia (a key area for expansion for Alibaba). The collaboration provides the Chinese e-commerce giant with end-to-end delivery support, helping to overcome significant logistical hurdles in markets such as Indonesia, Philippines, Thailand and Vietnam. Similarly, Amazon chose Singapore as its first entry point in Asia Pacific, providing a springboard for further expansion in the region over the coming years, with Australia lined up next.

Japan: Ageing Yet Tech-Savvy Population Seeking Convenience

Japan is the second largest e-commerce market in the Asia region, behind only China, with total sales forecast to register over USD147bn in 2017. Like other markets in Developed Asia (eg: Australia, South Korea, Hong Kong and Singapore), Japan has a wealthy, urbanised and technologically-proficient consumer base. Despite a sluggish economic outlook, ageing population and high levels of retail saturation, we believe strong demand for convenience will sustain e-commerce growth.

Unlike other developed states, where older generations have typically been slower to adapt to the e-commerce trend, Japan's high levels of internet penetration, with broadband subscribers set to reach 88.6 out of every 100 inhabitants by 2021, suggests that all age groups are online. Catering for Japan's ageing population will be a key strategy for e-commerce providers in the country, given that Japan's median age of the population will only increase further, reaching a projected 48.6 years in 2021 and 53.2 years by 2050.

e-commerce providers would be wise to invest in next-day/same-day home delivery services as well as click-and-collect points as these types of convenient hassle-free shopping experiences will hold appeal among pensionable populations. Japan's efficient logistics, which ranks in the top 20 globally within BMI's Logistics Risk Index, will facilitate further development of these more premium delivery options.

Japan's Silver Surfers
Japan - Median Age Of Population & Broadband Internet Subscribers
e/f = BMI estimate/forecast. Source: National sources, BMI

Malaysia: Our EM Asia Outperformer

Malaysia is the most attractive e-commerce market in Emerging Asia, according to our index. The country has the highest proportion of young adults out of all the markets in the region, with 35.9% of the country's population projected to be aged between 20-39 years old in 2021, and has the strongest projected growth in e-commerce sales. We forecast Malaysia's e-commerce market to reach over USD10.5bn in sales by 2021, recording a 23% annual average increase over our medium term forecast period.

Malaysia's e-commerce sector is still nascent, with consumers generally preferring to shop using cash in local stores due to a lack of trust with regard to online payments. However, we believe this will change as consumer purchasing habits evolve, supported by the government's National e-Commerce Strategic Roadmap which seeks to promote growth in online retailing and attract investment in the sector from global players. The government's focus is starting to pay off: in March 2017, Alibaba announced plans to open a distribution hub in Kuala Lumpur to serve its growing business in Malaysia and South East Asia. The government is working closely with Alibaba to create a Digital Free Trade Zone between China and Malaysia - enabling online retailers in one country to sell to consumers in another, with low or no import duties, speedy customs clearance and efficient access to logistics.

Malaysia Benefits From Youthful Consumer Base
Young Adults (20-39 yrs), % of total population
e/f = BMI estimate/forecast. Source: National sources, BMI

India: A Giant Awakening

India offers a fast-growing yet highly challenging e-commerce market. The country's huge population and long-term growth potential is encouraging significant investment by online players. Market leader Flipkart, for example, is pursuing a USD950mn merger with rival Snapdeal, with the aim of creating a locally-based e-commerce provider that can compete with Amazon. The latter committed USD3bn worth of investment in its Indian operations in 2016 as part of an aggressive expansion push.

India ranks 11th out of the 13 markets in our Asia e-Commerce Index, however, and can be characterised as a high-risk, high-reward market. Low disposable incomes, underdeveloped logistic networks, complex federal tax laws, and a lack of internet penetration beyond major urban areas will continue to prevent India's e-commerce market from reaching its full potential over the medium term. Profitability remains a serious issue for e-commerce players in India on the back of this. Credit uptake by Indian consumers is also relatively low, with cash the preferred method of payment, which is a more risky business model as companies have to relinquish control of payments to third parties responsible for deliveries.

Disposable Incomes Lagging In India
Disposable Income Per Capita, USD (2017f)
f = BMI forecast. Source: BMI

To help circumvent these risks companies will need to adapt their payment strategies. Amazon, for example, is enlisting local 'mom-and-pop' stores as official delivery handlers. In remote areas, where few people have internet access, consumers can visit their local store and use the shop's internet connection to browse and order goods. Store owners alert customers when their products are delivered to the store, collect the cash payment, and transfer the money, minus a handling fee, to Amazon.

We believe affordable locally produced goods, including white-label copies of premium brands, are key to driving e-commerce growth in India, as demand for discretionary or high-end products remains small at a mass market level. Amazon's strategy on introductory offers and lower-priced items, such as groceries and fashion, will therefore help it gain a foothold in the Indian market and is a tactic other international e-commerce players should heed when entering India.

China: Sheer Size Grabs Headlines, But Growth Not Without Risks

China is the single largest e-commerce market globally, with total sales forecast at over USD528bn in 2017. While the country lags behind more developed markets in the Asia region in terms of consumer spending power and urbanisation, the technology and logistics sectors have enjoyed significant state support, facilitating the rapid emergence of e-commerce.

We would caution, however, that this development is concentrated along the highly populated east-coast cities, and that like China's bricks-and-mortar retail sector more broadly, expanding nationwide to underdeveloped inland areas remains a major challenge. Moreover, the high level of state interference in the country means the operating environment for e-commerce players in terms of trade procedures and governance is complex. It is for this reason that China ranks only seventh out of the 13 markets in our Asia e-Commerce Index, dragged down by relatively weak scores for logistics (65.4 out of 100 in BMI's Logistics Risk Index) and level of internet penetration (just 21.3 of every 100 inhabitants is estimated to have broadband access in 2017).

Huge e-Commerce Market In China
e-Commerce Sales, USDmn
f = forecast. Source: BMI

The e-commerce firms best placed to push e-commerce innovation in China are domestic market leaders, Alibaba and JD.com. JD.com has been gaining market share from Alibaba in recent years, having differentiated itself from its rival by managing its own product inventory and delivering directly to customers. Its business model is fundamentally different to that of Alibaba, which operates more like eBay by offering several online market platforms, such as Taobao (C2C) and Tmall (B2C), which third-party consumers and businesses use to buy and sell products.

While these companies will continue to expand their services nationwide, we believe that in the more saturated e-commerce markets within east-coast cities, investing in new online platforms and targeting specific retail segments will be key in order to maintain differentiation and win over consumers. Alibaba's recent expansion into the luxury e-commerce sphere with the launch of Luxury Pavilion and JD.com's investment in luxury online retailer Farfetch are examples of e-commerce providers expanding into new spheres to meet increasingly sophisticated consumer demand. Vital to this strategy is the ability of e-commerce players to tailor their services to new sectors and audiences, rather than simply attempting to cater for everyone via a standard mass market offering.

Both JD.com and Alibaba have recognised that to entice high-earning luxury consumers, they need to replicate, or even improve upon the level of service offered in bricks-and-mortar retailers. For example, Luxury Pavilion consumers will be invite-only, with customers greeted with personalised homepages, product recommendations and VIP rewards, while on JD.com luxury brands maintain their prestigious customer relations through JD Luxury Express, a premium 'white-glove' delivery service that delivers in one hour.

South East Asia Attracting Attention

We forecast the e-commerce sector in emerging South East Asia (Indonesia, Philippines, Malaysia, Thailand and Vietnam) to be worth USD59bn by 2021, up from an estimated USD26.2bn in 2016. A market of this worth and growth potential is obviously attractive, not just for Chinese e-commerce majors, but other international players such as Amazon.

Key drivers of e-commerce growth in South East Asia will be the large numbers of young adult consumers (20-39yrs old), which forms approximately a third of the total South East Asia population. This demographic cohort is not only technologically-minded but also typically has the greatest level of disposable income. A rapidly emerging middle class will fuel the demand for e-commerce services, although incomes will remain relatively low for the majority of the population meaning competitively priced mass market offerings, such as food and fashion, will be the primary drivers of e-commerce development.

Indonesia Offers Largest Market In South East Asia
South East Asia e-Commerce Sales (USDmn)
e/f = estimate/forecast. Source: BMI

Chinese e-commerce players are starting to capitalise on the growth potential of South East Asia and will benefit from first mover advantages. Both Alibaba and JD.com are vying for market dominance in emerging markets in the region, where e-commerce offerings remain highly fragmented and underpenetrated. Alibaba is well placed on the back of its stake in Lazada, a leading player in Indonesia, Philippines, Thailand and Vietnam. In June 2017, Alibaba paid USD1bn to raise its stake in Lazada to 83%, having invested the same amount for majority control of the company in 2016. This was quickly followed by a USD1.1bn investment in Jakarta-based e-commerce platform Tokopedia, with Alibaba successfully fending off competition from JD.com. The latter, meanwhile, plans to enter Thailand by the end of 2017.

Related Research

  • SE Asia E-Commerce Battle: Alibaba Invests In Tokopedia , August 30 2017

  • Singapore: The Start Of Amazon's South E ast Asia Expansion , A ugust 10 2017

  • Flipkart-eBay India Deal Just Th e Start of e-Commerce Expansion , A pril 18 2 017

  • Amazon To Tap India's Huge Potential For Online Groceries , June 8 2017

  • Alibaba Moves Into Luxury , A ugust 17 2017

  • Logistical Challenges For HappyFresh In Thailand E-Commerce Expansion , August 18 2017

BMI e-Commerce Index Methodology
Source: BMI