Supply chains in Southeast Asia are famously broken. As small businesses are digitising, they are trying to find new sales channels to generate income by exporting beyond their home markets.
Both within Southeast Asia and outside, demand for locally produced products is rising. Buyers are moving away from China as a primary (manufacturing) source and starting to appreciate the quality, prices and diversity of SEA.
However, it’s not smooth sailing yet, and there’s a large opportunity for service providers and marketplaces to jump into the space and address the voids.
The problems with cross-border e-commerce
- Regulators are not catching up yet, and SEA is far from a ‘freedom of goods market’ (such as the US or Europe). Hence all sorts of compliance issues (taxes, import licenses, etc.) that restrict (the ease of) import and export have historically not been addressed.
- Import and export regulations are different for various product categories, adding to the complexity.
- SMEs are getting the demand but don’t have access to the distribution supply chain (DHL and FedEx won’t always entertain SMEs for various reasons) to reach their customers hassle-free yet.
- Existing distributor supply chains are closed and typically demand volume which is not suitable for most SMEs.
- Existing marketplaces (such as Lazada and Amazon) focus on sourcing from China or only satisfy supply and demand in their respective local markets.
- Global risks in the last few years are causing reversed globalisation trends.
The need for solutions
I don’t see regulators catching up fast enough, so we probably should not bank on them to provide a solution for e-commerce in the region.
Innovation is likely to come from startups that, in their core focus on:
- Taking on the compliance burden while offering SMEs a hassle-free import and export experience.
- Offer SMEs a product that offers a quick and easy way to ship products to the buyer’ market (regardless the importing jurisdiction).
- Generate and open up new demand, promote SEA products and build an infrastructure that supports lower (minimum volume) so that small buyers can be reached.
Challenges faced by startups and the massive opportunity
With HH VC Investments, we have looked at several promising players in the space within Southeast Asia.
These are the main challenges these players are trying to overcome:
- There are a lot of moving parts to make this work. Leading to the risk of loss of focus for (typically) financially strapped startups.
- They must ensure sufficient and diversified supply is available for the demand to be satisfied. This is the typical catch-22 for any marketplace, but now with the added layer of cross-border demand.
- They need to leverage existing or generate new demand across different markets with each its own culture, channels and habits.
- They need to build or use existing supply chain infrastructure in various jurisdictions.
- They need to navigate the (sometimes very) complex compliance frameworks of different countries
Just within SEA alone, there’s an ever-increasing middle class that is willing to spend on and try new products from their neighbouring countries.
Final thoughts
There’s a huge opportunity for startups to focus on cross-border e-commerce. This is simply given the sheer number of ever-increasing middle-class buyers that are willing to spend on and try new products from neighbouring countries in SEA.
But it’s still early days.
New entrants will be able to create a huge barrier to entry as these players wouldn’t just be building the infrastructure but also the compliance knowledge in-house.
Those that can overcome the challenges and offer a seamless product will be able to crack the space and have the potential to grow towards the size of the likes of Lazada and Alibaba.
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