Emerging markets are a hotbed for e-commerce, with unique opportunities and challenges across regions. E-Commerce is has been growing exponentially in emerging markets, at a rate that may soon surpass developed countries in 2018. According to a report by Credit Suisse, “total annual sales across… Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey could reach up to USD$3.5 trillion and impact companies across multiple sectors, including retail, finance, security, and technology.” (1)
“ Emerging markets are catching up quickly in terms of their share of e-commerce sales to developed countries. Asia in particular has surpassed Western Europe and North America in sales. ”
Investors see two types of e-commerce models in existence. One is the model most found in developing countries, built on pre-existing infrastructure, a selling environment where buyers and sellers trust one another, and courts to offer legal protection. (2) The other is more common in emerging markets, like Nigeria and China, where “brick-and-mortar” retail sectors are often underdeveloped it took much longer to build the technical and legal infrastructure for e-commerce. (1,2) But after an information and communication technology revolution in many countries as well as the growth of mobile services, e-commerce has taken off. (2) While expanding incomes and growing middle classes partly explain the growth of e-commerce in emerging markets, the biggest factor has been the rise of internet usage.
Online shopping and mobile service have seen soaring demand in emerging markets. Around 50 percent of the online population in emerging markets will shop online by 2018, catching up quickly to the average of 63 percent in developed countries. (3) Internet penetration has been rising due to increasing mobile phone usage and innovation as well as the expansion of mobile networks in Asia, Latin America, and Africa. Global smartphone usage is expected to hit 50 percent by early 2018, and e-commerce will likely follow suit. (3) Assuming that Internet usage across the developing world matures to the levels found in the developed countries, this would imply an additional 1 billion Internet users, with India and China likely to be the largest contributors to this growth. (1) In India, for example, two-thirds of the Internet access is through smartphones and, in China, nearly three-fifths.
While China and India continue to dominate the e-commerce market outside of the US, companies in Africa, Southeast Asia, and Latin America have helped spur growth in their respective regions and should be watched as potential global competitors in this space.
“ Chinese companies JD.com and Alibaba generate massive annual revenues and compete with other e-commerce companies fiercely all over Asia. Indian companies Flipkart and Snapdeal are fighting to dominate this space. ”
China is the largest and most innovative retail e-commerce market in the world, and can serve as a model for growth in this sector for other countries looking to achieve the same. Online retailing in China is expected to grow from 17 percent of total retail sales in 2017 to 25 percent in 2020. (4)
Alibaba dominates the e-commerce sphere in China and in many parts of Asia, accounting for one-tenth of China’s total retail sales (including 75 percent of online sales). (5) Alipay and Wechat pay are the most popular online payments in China, and they are already an integral part of e-commerce platforms such as Alibaba and JD.com. (4) Alibaba’s Tmall platform dominates B2C e-commerce in China with a 53 percent market share and 97 percent of online shoppers using this platform. (4) What makes Alibaba different from Amazon and other Western e-commerce giants is that it fully integrates its payment platforms with its online shopping services, allowing users to retain a mobile money account with them. It is the primary choice for Chinese consumers to purchase products (61 percent of Chinese consumers start product search on Tmall, while only 39 percent of global online consumers use Amazon for the same). (4)
Chinese e-commerce seeks to expand into every corner of consumer life: banking, shopping, ride-sharing. As a result, Alibaba and other companies are implementing a “New Retail” model to pursue this integration. Alibaba makes significant investments in both domestic and regional companies to help achieve this. It invested in Southeast Asia’s Lazada and continues to make investments and acquisitions throughout South and Southeast Asia to broaden its consumer base. (5)
E-Commerce has transformed the way business is done in India, due in part to an ongoing increase in smartphone usage that is supported by government policy and business innovation. The Indian e-commerce market is expected to grow to USD$200 billion by 2026 from USD$38.5 billion as of 2017. (6) The value of e-commerce market is expected to cross US$50 billion by 2018. (6) Flipkart and Snapdeal are the two dominating online stores in India.
Growth has been spurred by both private investment and government initiatives. Indian e-commerce has attracted investments from Amazon totaling USD$1 billion in 2017. Additional, the government has announced initiatives such as Digital India, Make in India, and Innovation Fund to encourage more online penetration and entrepreneurship. (6) The Reserve Bank of India has allowed inter-operability for prepaid payment instruments, such as digital wallets, creating room for technological innovation in this area. (6)
In 2019, 151.1 million people in Latin America are expected to buy goods and services online, a dramatic increase from 121.1 million in 2016. (7) Recent figures show that the Latin America e-commerce market is still rather small, in comparison with Asia or North America, but retail e-commerce sales in Latin America are projected to grow from USD$57.02 billion in 2016 to USD$84.75 billion by 2019. (7) Brazil leads the market in Latin America followed by Mexico and Argentina. MercadoLibre is the most popular online retailer in Latin America, with a presence in 13 countries. B2W is the largest online retail company in Latin America competing directly with Amazon and enjoying 50 percent market share in Brazil. (7) Latin American e-commerce growth has been led by smartphone usage: in August 2016, 43 percent of mobile buyers in Latin America said that they bought products using a mobile phone on a monthly basis.
Worldpay found that the Latin American e-commerce market is “set to grow at a CAGR of 19 percent over the next five years,” rising from US$59 billion today to US$118 billion in 2021, the biggest rise of any region. (8)
Kenya, South Africa, and Nigeria are among the many countries in Africa experiencing information and communication technology revolutions that are increasing the access to mobile banking for middle income and lower income populations and connecting rural and urban areas. Kenya’s m-Pesa has helped increase internet access and the number of digital wallets. Over 60 percent of Africa now has mobile phone coverage and there are over ten times as many mobile phones as landline phones in use. (9) Alongside a growing middle class in Africa, this creates the foundations for e-commerce growth in the region.
For example, Nigerian e-commerce company Jumia has expanded to 23 African countries and boasts a network for over half a million users. (9)
Southeast Asia is the next major hotbed for e-commerce in Asia. The growth of e-commerce in Southeast Asia has mainly been driven by high rates of mobile phone usage and increased internet access. 30 million people in the region now have smartphones and 200 million people in Southeast Asia have some form of internet access, and that will triple to 600 million by 2025. (10) This promise of fast growth has lured China’s two e-commerce giants, Alibaba and JD.com, to explore opportunities in Southeast Asian countries. (10)
New government initiatives in Indonesia and Thailand aim to increase mobile phone usage and internet access, especially for rural users, and encourage foreign investment in the e-commerce sector. (11)
In order for e-commerce to grow faster, countries must create fully operate financial services systems that are well regulated, offer adequate consumer protection, and promote financial inclusion. Given that mobile phone usage has been so critical to the growth of e-commerce, encouraging mobile banking and reaching out to the underbanked populations will help overcome infrastructure-related barriers and allow for rural consumer to be integrated with e-commerce markets. Additionally, enacting regulations to prevent phishing scams and creating legal frameworks to ensure the security of online transaction is essential for the governments in Latin America, Africa, and Southeast Asia to boost e-commerce growth in their regions.
Companies like Alibaba, FlipKart, and Lazada face fierce competition with eBay and Amazon who are also trying to target consumers in emerging markets with growing disposable incomes. Investors should continue to watch for growth as well as business and technological innovations in this sector throughout emerging markets.