22. May 2013–
With news just in of Rocket Internet's Southeast Asian Zalora retail platform bagging $100m investment, we look at how this area is bursting onto the internet scene. Julian Leitner, former head Rocket Internet Thailand and founder of Zalora Thailand gives an insight into why this country in particular shouldn't be overlooked...
Of all the emerging internet markets, Asia is making entrepreneurs and investors most exited. China is set to outgrow the US online retail market – the market size is estimated at $650bn, India with its population of 1.25bn already has an online population bigger than Germany, France and Italy’s combined and for the first time, businesses have the chance to reach Indonesia’s 17,500 islands and 250 million people via a single outlet.
Southeast Asia is of particular interest with an overall population of around 600 million people, and the current unexpected economic growth is offering up huge opportunities, primarily due to expanding economic liberalisation. This is not without justification – in 2015 the ten ASEAN member countries will merge their markets to a single, unified Asian Economic Community (AEC), largely built on the model of the single European market.
Out of the ten ASEAN countries, Indonesia, Malaysia and Singapore will be under the spotlight: Indonesia due to its huge size and therefore potential (250 million people), Malaysia due to its overall advanced level of development and combined widespread use of English and Singapore with its superb business and regulatory environment. However, largely overlooked is Thailand – currently ASEAN’s second-biggest economy and fourth most populous country, not to mention it has a thriving startup scene.
The number of Thais online is set to reach 40-50 million by 2015
Thailand has a population of roughly 70 million people and a GDP of $646bn, which make it the world’s 24th-largest economy. There are approximately 25 million Thais online with this figure expected to reach 40-50 million by 2015.
Unseen by Europe, is the degree to which Thailand’s internet users are “social” – more than three quarters of the online population is on Facebook, making Bangkok the world’s Facebook capital with a Facebook population of more than 8.5 million. Such is the degree of social media engagement that Zalora Thailand, Rocket Internet’s Thailand fashion venture, established in late 2011, has more than 528,000 fans, of whom 115,000 talk about it.
Meanwhile, Zalando, Rocket Internet’s European fashion venture, established in 2008, has 539,000 fans but only 12,000 actively talk about it. Thus highlighting the serious importance and the implications of the online marketing strategies that startups adopt.
Despite these more than healthy stats, the Thai internet market is still in its infancy. Back in early 2012, a survey among Zalora Thailand customers showed an impressive result: for more than three quarters of them, Zalora was their first online shopping experience for physical goods. Previously, if they shopped online it was for the standard plane ticket or hotel reservation.
Doing business in Thailand? Good luck...
To put it simply, doing business in Thailand isn't easy for foreigners. So far, it's mainly the internet giants that have entered Thailand’s market: Rakuten with the acquisition of Tarad in 2009, Living Social with the acquisition of Ensogo in 2011, Tencent with the acquisition of Sanook in 2010 and lately Rocket Internet with Zalora in 2011. But strong regulatory procedures are making doing business in Thailand somewhat of a challenge.
Among the market challenges there is a general lack of trust and an extreme lack of suitable payment systems. In total, there are just 17 million credit cards in Thailand, with unique credit-card holders numbering less than eight million. Many card-holders are reluctant to use their cards online, mainly due to a large scandal in the early 2000's that still plays on the minds of consumers.
Most payments have traditionally been executed by either ATM bank transfers or more recently by the introduction of a revolutionary over-the-counter payment system. Many bills, including the ones from internet companies can be settled at virtually all convenience stores, petrol stations and post offices by simply showing a unique QR code which is redeemed during the check-out process.
Back in 2012, Zalora paved the way with a somewhat revolutionary (or perhaps novel) payment idea. Zalora was the first B2C company to introduce cash on delivery as a payment method. The introduction of this payment method proved to be a real game-changer – these days more than two thirds of all orders at Thailand’s biggest online fashion stores are settled by cash on delivery.
Generating orders is challenging, but fulfilling them often proves even more challenging in Thailand. Even though the infrastructure in general is good, there are very few logistic providers equipped for B2C operations, partly due to the fact that up until two years ago there was simply no demand for these services. The Thai state postal authority is affordable, but unreliable. Most other operators only cover selective areas of the country and are in general very pricey.
Basically, there are no mid-tier providers: either companies go with the affordable, but unreliable, state provider or they go with the pricey but fast and reliable premium providers. Considering that the average checkout baskets are lower by nature in less developed countries, high order execution costs make the individual unit economics of shipments challenging.
With regards to the regulatory challenges, potential entrepreneurs and investors must know that Thailand in general does not allow majority foreign ownership in any company. Plus, as an aftermath of the 2009 Asian crisis, the flow of capital in and out of the country is now heavily regulated, as is the employment of non-Thai nationals. In addition, corruption and perceived discrimination of non-Thai companies and a general lack of English language skills among state organisations contributes to an overall challenging regulatory environment.
Government support for eCommerce and software development is set to end
However, it has to be mentioned that certain industries are being specifically promoted by the Thai government. The Board of Investment (BOI), Thailand’s official investment promotion organisation actively encourages activities in specific sectors. Luckily for the internet world, two of these industries are software development (chapter 5.8) and eCommerce (chapter 5.9).
These two chapters cover virtually all entrepreneurial activities in the internet: app development, digital models, online retail, lead generation etc. The investment promotions for both categories include the right to full foreign ownership, import duty exemptions on various tools and machinery, relaxed restrictions with regards to the flow of capital, easier employment of non-Thai nationals as well as a guarantee from the government against being nationalised.
However, following pressure from larger, well established offline competitors, it has been decided to bring an end to the promotion of eCommerce (chapter 5.9) and to downgrade the promotion incentives for software development (chapter 5.8) by mid 2013.
The Thai internet market offers opportunities like few others: it is largely untapped, rapidly developing, exploding in terms of size and is the perfect base for those with ASEAN-wide ambitions. However, startups need to overcome severe challenges, the like of which are mostly unknown in most of the Western world: regulatory challenges, operational challenges and of course the huge language barrier.
For related articles, check out:
Rocket Internet’s “Asian Zalando” Zalora nets €20m from Tengelmann Group
10 things to consider when investing in Asian markets
"The app economy is finished" - The view from Taiwan from a European Silicon Valley Investor