Issue #2. SEA E-Commerce Aggregation & India's Cloud Surge
In the SEA region, aggregators are leading in the e-commerce market, two-wheelers are electrifying at a quicker pace than EVs, and India's cloud computing market is experiencing a surge
Hello dear reader,
Last week, I mentioned that I hoped to make this a weekly newsletter. It's been a week and here is the second issue, so we are off to a good start.
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1. Aggregators Lead the Charge in Southeast Asian E-commerce
Ben Thompson’s aggregation theory is probably the best explanation of how the internet works. It posits that companies in the digital era can achieve dominant market positions by aggregating supply and demand, leveraging network effects and data to enhance user experience and create a virtuous cycle of growth.
And you would be hard-pressed to find a better manifestation of this theory than the e-commerce industry in Southeast Asia. Outside of Indonesia, over 80% of the gross merchandise value (GMV) is generated by two platforms: Shopee and Lazada. In the case of Indonesia, Tokopedia is the major player, overtaking Lazada. In the US, the top 10 players control around 60% of e-commerce sales, while in Germany, it’s under 33%. Although sales are not synonymous with GMV, the difference is still staggering.
But why have these aggregators been so dominant in Asia, whereas the same hasn't occurred in the US or Europe, where no companies have essentially captured the entire market?
Firstly, while in the US and other regions the rise of e-commerce has been driven by traditional e-commerce stores (remember, Amazon wasn't a marketplace at first), Southeast Asia's market was dominated by marketplaces from the outset. This made the aggregation effect more pronounced since there was no need to shift sellers from their own online stores to marketplaces.
Secondly, logistics and distribution systems have not developed to the same degree as in the West. This had three major consequences:
There were no national retailers, as most of the population resided in smaller urban and rural areas;
Since there were no major retailers, there wasn't anyone who could transition from traditional retail to e-commerce in the same way Walmart did;
Manufacturers of goods faced difficulties reaching remote regions and had limited capacity to sell their products.
Thirdly, the fact that Asian societies are mobile-first played a significant role. An average person uses 30 apps per month (which I suspect is even lower in Asia). I would guess that the same average person visits more websites per day than apps per month. Again, there are consequences:
Unlike on the PC, competition isn't just one click away. Downloading an app requires more effort than conducting a Google search;
Better personalization, as users have one entry point, unlike PCs where you can delete cookies, use various browsers, etc.;
Enhanced personalization fosters more targeted advertising and finely-tuned in-app recommendation engines.
Fourthly, almost every marketplace has launched a payment solution. While Amazon introduced its first payment solution, Amazon Pay, in 2007, 13 years after its inception, Shopee Pay launched its e-wallet just three years after the platform began operations. And although we may purchase something on our favorite e-commerce platforms a couple of times a month, we use payment solutions daily. E-wallets not only drive additional revenue but also enhance customer retention.
Finally, antitrust laws are less likely to be invoked, allowing companies to be more aggressive in launching new products, diversifying their offerings, and investing in marketing.
2. Electrification Extends Beyond the Automotive Industry
Gojek, the leading ride-hailing company in Indonesia, is planning to replace all their standard two-wheelers with electric two-wheelers (E2W) by 2030. Today, the company has over 2 million registered bikes and cars combined. Overall, in Indonesia, the government plans to put 9 million E2Ws on the road by 2030. The push towards two-wheeler electrification is evident all over Asia. While the developed world is electrifying cars, the developing world is switching to electric motorbikes.
Globally, 49.9 million were sold in 2022, with Asia dominating the market with over an 80% share. According to some sources, in Thailand, Vietnam, Indonesia, and Malaysia, over 80% of households own at least one motorbike.
In the E2W sector, Asia's dominance is even more pronounced. Globally, 9.2 million E2Ws were sold in 2022, with China alone accounting for 85% with its 7.7 million bikes sold. (Although 2022 witnessed a decline from 10.2 million the year before, a downturn attributed to pandemic-related supply chain issues). China, India, and other developing Asian nations accounted for 95% of all E2Ws sold globally.
Source: IEA
But that's not the main point. The main point is that the motorcycle industry is experiencing a much faster rate of electrification: 18.4% of motorcycles sold globally are electric, compared to 10.2% of cars. The limiting factors affecting electric car adoption are not as pronounced with two-wheelers for several reasons:
They are light and, with limited trip distances, battery capacity is not an issue. For instance, in India, an average two-wheeler trip is 6 km. Even a budget electric scooter priced under $2,000 can provide up to 12 round trips on one charge.
Speaking of prices, E2Ws are priced extremely competitively, especially in China, where you can buy one for under $500. In contrast, an average EV costs $35,000. So yes, there’s a gap.
Captain obvious here, but cars are heavier than two-wheelers. An average car battery weighs 1,000 pounds (453 kg), several times more than an E2W weighs as a whole. This discrepancy provides a critical infrastructural advantage for E2Ws: not only can they be charged, but their batteries can also be swapped. The battery swap market biggest player is Taiwanese company Gogoro, which operates in 9 countries and, as of January 2023, has performed 370 million swaps at 12,200 battery-swapping stations.
Additionally, Asian governments are strongly promoting the adoption of E2Ws. India increased its incentives by 50% in 2021. The Indonesian government has allocated $455.88 million in subsidies for the purchase of 800,000 electric motorbikes and the conversion of another 200,000 from combustion engines to electric.
Finally, a notable point in Indonesia is that you can convert a regular motorcycle to an electric one, a modification not easily done with cars.
Despite significant progress and the inherent advantages that the electric motorcycle industry has compared to EVs, many Asian countries have a long journey ahead in this transition.
3. Cloud Providers Zero in on India
Global cloud providers have seen an incredible run-up in the demand for their services. Just in the last 5 years, the market has grown 2.4 times to $414 billion. The United States dominates the market with a 62.3% share, while China adds another 13%. Not much left for the rest of the world.
But some parts of the world have been eking out their share, including India. In 2016, India's cloud market was basically non-existent with overall revenue not even reaching a billion dollars, while the global market was at $95 billion. By 2027, it is projected that India will grow to $12.5 billion in public cloud revenue, thanks in large part to the global cloud giants expanding their capacity into India.
There are a three main factor that make India so attractive to cloud providers.
Sustained demand. The main thing is the demand for cloud services. There's been a lot said about India's prowess in the IT sector, so I'll offer you just one number: 606,331 — that's the number of employees Tata Consultancy Services has, the second-largest IT consulting company in the world. Even before entering the country in 2016, AWS already had tens of thousands of customers in the country. Bringing their services to India helped customers both technically (reducing latency, i.e., how fast everything works) and in terms of support. Add to that an exploding Internet population that has increased from 93 million in 2010 to 1060 million in 2022, a 66% income growth in the last ten years, and you get a steady rise in demand for cloud services for decades to come.
Creating additional demand outside of India. This is somewhat genius. India is known for its giant IT outsourcing industry, with 5.4 million people working in the tech sector overall. AWS trained 4 million people with cloud skills since 2017. Meaning, AWS came to the country, which boasts one of the strongest IT sectors in the world and a talented, English-speaking workforce, taught them how to use AWS, and then "introduced" that workforce to the global market, implying that "Hey, here are 4 million skilled and fairly inexpensive experts in the field who know how to use our service. So use our service." Now, every company considering launching their own data center considers the capital expenditure needed to open said data center and then considers the 4 million Indians skilled in working with AWS, making the decision to choose AWS even easier. Teaching the Indian IT sector how to use AWS expands not the local market for AWS, but the global market.
Data sovereignty. Since the adoption of GDPR in 2016, cloud providers have been cognizant of the fact that countries around the world may adopt stricter rules around data protection. Moreover, businesses have also recognized, at least through public statements, that protecting data is… well, important. India is no exception. The country likes its bureaucracy, so it took them six years to develop and then pass the data protection law, called the Personal Data Protection Bill. Although India does not require data to be localized, the law still helps in driving more cloud business.
By 2027, India will capture just 1.5% of the global cloud market. But it feels like that share will steadily grow for decades to come.
Thank you for reading, and see you next week,
Martin.