Sunday 21 January 2024

E-commerce War in South East Asia: Explaining Lazada's Action and the Future.

By now, investors would be aware there is intense competition in South East Asia's e commerce scene. Bytedance's Tiktok has entered since early 2023 and been utilising its US$10+ billion annual profits from China to subsidise the large losses incurred in South East Asia, the aim is simple to be the one of the de facto 2 e-commerce players (given South East Asia population and lesser spending power, it seems this region can only support 2 profitable players)

Shopee (Sea Group's e commerce arm) demonstrated how profitable e commerce could be when it posted 2 quarters amounting to an annual US$1 billion of annual EBITDA gains (or about US$500 million in annual net profits). Lazada and Tokopedia being the no 2 in each of their country was starting to turn EBITDA positive and would have turned profitable in a few years time.

Bytedance seeing the potential returns came in to fight for the top spot. This has resulted in a 3 corner war where the top 3 (Shopee, Lazada, Tiktok shop) are now selling below cost in order to kill each other. It is a war of attrition. Consumers gain because lots of incentives are now dished out. Tokopedia gave up and sold itself to Tiktok.

Why E Commerce is lucrative

E commerce profits on (i) the traditional format of users looking for products and (ii) the peddling style where products look for users. While (i) contributes to some amount of profits, (ii) is where money is made; products looking for users tend to be inferior in the hierarchy of needs and of the highest margins. Additionally, a few products are OEM goods which is slapped on with a brand and superior marketing (peddling the product to users), the branded good commands a larger margin compared to its OEM peer. Singapore's PRISM is one such product line which relies on OEM products and then slapping its brand and asking for 40% more to a comparable products. Due to its superior marketting, naive consumers in this region would pay close to 40% more.

In recent times, both E commerce platforms and Short form social media like tik tok helps in the marketing aspect of such products, they earn a cut from (ii) where they peddle goods to its user base. Live-streaming is another example. The China e commerce space is rift with such advertising to the extent that Douyin, Bytedance's Tiktok in China and its army of influencers helps Bytedance command close to US$10+ billion in profits selling "unneccessary" products to the China base.

Both Lazada and Shopee used the same method albeit a less intrusive by offering the goods to be the first few searches when being searched by consumers or placed in the front of the app home page. This is akin to being on the first floor of the shopping mall or similar to how Google and Apple charges websites to be the first few search results when we search on browsers. 

The Current No 2: Tokopedia and Lazada

Tokopedia was no 2 in Indonesia and close to becoming cashflow positive. This proves to show how only the top 2 e commerce platforms can be profitable and lucrative in South East Asia. 

However Tiktok shop entered and Tokopedia started to make large losses again. This resulted in Toko shutting down, selling their marketting channels and infrastructure to Bytedance Tiktok shop. Bytedance is now using this and their cash hoard from China to burn to become the no 1 in South East Asia with the aim of securing US$1-$2 billion in annual profits.

Lazada is still loss making in South East Asia but the no 2 in other countries. However, the amount of losses they have raked up is about US$1 billion a year so far. As the penetration of e commerce improves and efficiencies, the original intent was to continue improving until positive EBITDA is achieved. However, that ended when Bytedance entered disrupting the natural evolution.

Differing Strategy

Bytedance's Tiktok is addictive, it attracts users to be hooked to its short form video. With the addiction and attraction of eyes, it moves to monetise by peddling products to its users. The purchase of Tokopedia helps it to build its infrastructure of shopping channels. Bytedance is doing quick time by overhiring staff in order to set up quickly. It has cash to do this because Bytedance has a warchest in the US billions to support loss making in the short term.

The mass hiring by Bytedance is only a temporary move; many of its workers will be made redundant once it moves to the maturity stage. However, now it requires all the manpower to fight with Sea Group to take the no 1 spot. The current no 2 spot will only make a very small amount.

Sea Group's Shopee has responded in kind by slashing prices to negative margins and hired influencers to market more goods on its shopee platform. In the process, the e commerce losses amount to a US$1.5 billion of negative equity. Shopee has a US$7.5 billion in cash warchest and a cash generating sister in Garena which earns US$400 million in cash. In all likelihood, Shopee has a runway of 4 years to fight while Byedance's tiktok loses billions in cash each year in South East Asia.

Explaining Lazada Strategy

Lazada do not want to paratake in the cash burning war. Instead it is opting for optimisation to minimse cash losses. Its e commerce strategy continues to focus on mainly the traditional format of allowing users to search for products with a little of (ii). It is currently selective choosing which South East Asia countries it wants to be the no 2 and focusing its resources there. For other countries, it is shutting down its operations.

Beyond what Singaporeans are complaining about the job cuts here by Lazada, Lazada has made redundant its entire operations and staff in Vietnam. This is because it is a distant second. The next in line for Lazada could be the laying off is its entire staff in Indonesia because of how weak its position is there, as the no 3. This shows the reality that Lazada had previously overhired staff in its early years to prepare for war with Shopee at each South East Asia country. When the dust settled, cost optimisation had to take place, optimisation is done to turn profitable.

Lazada is likely to only concentrate its battle in 3 South East Asia countries and let Shopee and Tiktok/Tokopedia fight it out in the whole region in a loss making battle. In short, Shopee and Tiktok are fighting a war of attrition to be no 1 while Lazada has decided for cost optimisation, take the No 2 spot in selected countries (for the time being). I caveat I am not sure if Lazada will mount a challenge again when only 1 is left.

Prepare for Mass Layoffs in Sea Group and Bytedance in the Future

The pay for IT staff, live streamers and influencers are lucrative now for these 2 companies. In times of war, the demand for talents and mercenaries are high. Both Bytedance and Sea Group need to expend large amount of IT manpower and marketting staff in order to take the No 1 market leader position. This means paying over the top for IT resources and influencers.

This is evident in Singapore. However, eventually one of them (Bytedance or Sea) will wave the white flag on the e commerce front. When it is raised, a large number of layoffs will occur becaue it will mean the ending of operations in countries. The National Trade Union of Singapore's FDAWU has to be aware of this and should not complain when the time comes because it is the eventuality, either Singapore introduces a legislative framework to backstop redundancy exercises or shut up when redundancy happens. Union leaders have to start reading more and be learned about realities.

Both Sea Group and Bytedance are now burning cash to duke it out, the loser will go bankrupt and layoff its staff. South East Asia will never be able to support 3 e-commerce giants due to its population size and spending power. Only 2 will remain and the unfortunate third will have to massively downsize including those working in Singapore. Lazada is showing its intent to settle for the no 2 spot and securing it. Bytedance and Sea Group will either be the No 1 or the bankruptee because of their high fixed cost in fighting the war. The e commerce war will likely last for 4 more years and if it exceeds that point, Sea Group would likely go bankrupt or just focus on being Garena only.

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