The world has seen exceptional growth in e-commerce transactions in recent years. Asia, with its growing middle class and increasing internet penetration, is at the forefront of global e-commerce dynamism. The region accounted for 57.4% of global e-commerce sales (business-to-consumer) in 2019. According to Statista¹, Asia’s e-commerce revenues are predicted to grow by 22.4% to USD1.36 trillion in 2020 and reach USD 1.92 trillion by 2024. By then, Asian economies will account for 61.4% of the global e-commerce market. See Fig. 1.

Fig 1: Asia is the world’s largest e-commerce (B2C) market

While China is a market leader in terms of size, the e-commerce markets in India and Indonesia the world’s second and fourth most populous countries, respectively – are expected to enjoy double-digit growth rates in the coming years (see Fig. 2).

Fig. 2: Rapid growth in Asia’s ecommerce (B2C) markets

The economic benefits of e-commerce are stark. IMF Senior Economist, Tidiane Kinda, noted in his research paper that historically, Asian countries with higher e-commerce penetration (as measured by % of e-commerce sales to GDP) are more likely to experience higher GDP growth (see Fig. 3).

Fig. 3: Correlation between e-sales and GDP growth (2012-2017)

This is because businesses that engage in e-commerce tend to require a more knowledgeable and innovative workforce. This in turn lifts productivity and profitability. Fig. 4. puts this in perspective by showing that participation in e-commerce lifts global total factor productivity by 14%. The impact is even greater in Asia.

Fig. 4: Estimated impact of e-commerce participation on total factor productivity⁷

Efficient logistics services are vital in order to fulfil deliveries of online purchases to end-consumers – be it domestically or internationally. While there is still room for improvement, Asia’s logistics performance has advanced considerably in the past decade. According to the World Bank’s logistics performance index², Asia accounts for 17 of the world’s top 50 performers. Within Asia, Japan and Singapore are the two top-performing countries, followed by United Arab Emirates, Hong Kong, Australia, South Korea and China. China’s logistics performance is advancing rapidly. Logistics operators in China can now fulfil urgent deliveries within 12 hours in select city clusters and within 24 hours nationwide³, making online shopping ubiquitous in urban areas.

Over in Indonesia, as Ari Pitoyo, Chief Investment Officer of Eastspring Indonesia, noted in his paper Indonesia’s infrastructure reforms have helped reduced its logistics costs⁴ from 27% of GDP in 2015 to 22% in 2020. In fact, the government has an ambitious target of lowering logistics costs to 19% of GDP by 2024 and to eventually match the standards of Japan and Singapore, where logistics costs represent just a single-digit percentage of total GDP.

It is this robust logistics performance, especially when compared against non-Asian emerging markets, that provides the stage for Asian e-commerce companies to capitalise on the region’s growing middle class.

Since 2015, Asia’s middle class has overtaken those of Europe and North America. According to the Brookings Institute⁵, as urbanisation continues, Asia’s middle-class population will increase from 2.02 billion in 2020 to 3.49 billion in 2030. By that time, the region will account for 57% of global middle-class consumption. The growth of the middle class is particularly noticeable in China and India, followed by Southeast Asia. According to Bain & Company⁶, 50 million new consumers are expected to join the middle class in Southeast Asia by 2022, contributing to the region’s USD300 billion middle-class disposable income. With Asia accounting for 50.3% of global internet users⁸, this new generation of middleclass consumers is comfortable with digital marketplaces and purchasing products from social media sites. This change in consumer behaviour will in turn push traditional retailers to integrate more technology into their businesses.

Fintech is a key enabler of e-commerce. In this aspect, China leads the way. In 2019, Chinese consumers were comfortable with digital payments, with 86% of consumers using mobile (digital) payments for purchases. This is significantly higher than other Asian economies. See Fig. 5. Today, Alipay is the world’s largest mobile payment platform, with 900 million users in China (and 300 million users outside China)⁹. Its more than 200 financial partners offer users a multitude of financial services, such as bank account management, peer-to-peer money transfers, digital payments, and more.

Fig. 5: Percentage of consumers using mobile payments in stores 2019

Across the region, Covid-19 has also expedited the use of digital payments. In India, more shops and e-commerce platforms are reportedly urging consumers to pay via digital wallets to avoid the spread of the infectious disease. A survey conducted in April 2020¹⁰ shows that with the growth of India’s United Payments Interface (UPI) scheme, digital wallets were preferred by 53% of consumers. Over in South East Asia, the same research shows that during the pandemic lockdown, Indonesia, Singapore and Malaysia saw varying degrees of increase in the use of digital wallets and online payments. That said, while individual countries have their own regulations to protect customer’s personal data and financial information, regional payment regulations will go a long way to boost Asia’s e-commerce eco-system.

Despite Asia’s rapid e-commerce growth, its retail market is still dominated by small physical retailers with insufficient digitalisation and online retail expertise. According to Bank of America Global Research¹¹, brick-and-mortar still accounts for 75% of retail sales in China, 90% in India and 61% in Indonesia. This gives innovative e-commerce players an opportunity to tap the potential in these ‘fragmented’ markets.

China’s rural live-streaming is a prime example. In the early weeks of the Covid-19 outbreak, many farmers had to scrap tonnes of rotting produce – even as household demand for fruits and vegetables surged. Coming to the rescue of these farmers, e-commerce giants JD.com and Alibaba-owned Taobao quickly launched rural live-streaming initiatives to help them set up online stores and transport their produce directly from farm to home.

As of March 2020, more than 60,000 farmers have leveraged Taobao Live to sell their products across the country. According to Xinhua News Agency, the total revenue of agricultural products sold online reached RMB 283 million from January to April 2020, 28% more than last year¹². In the course of bringing ‘fragmented’ brick-and-mortar farmers onto the e-commerce platform, Kieron Poon, Eastspring Singapore’s China equity portfolio manager, believes that live-streaming, together with the last mile on-demand local services (“Daojia” in Mandarin Chinese), will be a new e-commerce format that will experience rapid growth. With a larger base of online buyers and sellers from rural areas, he expects China’s online sales penetration (now 24.1% of total consumption¹³) to continue to grow in the coming years.

Of course, such innovations are not limited to China. In India, Reliance Jio’s mobile phone app, ‘JioMart’ helps kiranas (neighbourhood retail stores) with online grocery orders and ensures timely delivery to customers. Its growth potential is widely recognised, and the company has attracted significant private equity investments from global investors. More recently in April 2020, US-based Facebook agreed to buy a 9.99% equity stake in Reliance Jio – a further testament of the growth potential in India’s e-commerce market. As visibility and acceptance of e-commerce rise in India, Krishna Kumar, Eastspring Singapore’s India equity portfolio manager, expects to see more small enterprises adopting technology in their business models, thereby attracting greater investment and capital flows. At the same time, opening up the sector to foreign players will accelerate the development of India’s e-commerce market.

Robust logistics networks, a rising middle class, improving financial infrastructure and rapid innovation will fuel Asia’s e-commerce revenues, which will in turn drive GDP growth and productivity. At the same time, this asset-light business model can help small entrepreneurs and start-ups access larger markets, which increases competition but also makes Asian economies more inclusive. Meanwhile, consumers benefit from greater choice and better price transparency.

Companies that can harness the massive amount of data generated by e-commerce transactions to interact with customers and improve the consumer experience are likely to be at an advantage. Understanding how all these dynamics play out is key for investors when assessing how current business models or economies will fare in an increasingly digital world. The dynamism of the e-commerce market also means that investors’ analytical framework needs to evolve along with the changing competitive landscape.

This is the fourth of six articles in our Asian Expert Series which explores the future of Asia post-covid.