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Here’s how Lazada lost its lead to Shopee in Southeast Asia (Part 1 of 2)

Written by LatePost Published on     10 mins read

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Cultural frictions and mismatches between Alibaba and Lazada led to costly stumbles.

Southeast Asia’s homegrown e-commerce platform, Shopee, is a pioneer in more ways than one. Formed in 2015, it is an offshoot of gaming company Garena, helmed by founders who studied abroad and worked overseas for multinational companies. Its fourth quarter and full year 2020 financial reports indicate that Shopee’s turnover for the year was USD 35.4 billion, double that of 2019 and accounting for 57% of the entire Southeast Asian e-commerce market’s transaction volume.

Yet Shopee’s position is far from secure, as a seasoned online retailer from China wants a piece of the market too. Alibaba (NYSE: BABA; HKG: 9988), China’s largest e-commerce company, has been sparing no effort to extend its reach in the region. Southeast Asia was the largest and first overseas market where Alibaba landed. Alibaba CEO Daniel Zhang Yong and co-founder Peng Lei flew into the region for meetings on a monthly basis. In 2016, when Shopee was still a fledgling firm, Alibaba acquired Lazada, which was at the time the largest e-commerce company in the region.

Now, Shopee seems to have captured the lion’s share of the market. Its parent company, Sea Limited (NYSE: SE), is the largest tech company in the region, with a market value of nearly USD 130 billion.

“Alibaba is experiencing what Amazon experienced when the latter attempted to enter China by acquiring Joyo. Although its systems and personnel were a notch or two above Alibaba’s, Amazon eventually lost to Taobao. For Alibaba, the reverse is happening now in Southeast Asia,” said an unnamed investor to LatePost.

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In 2014, Alibaba listed on the New York Stock Exchange to great fanfare. At the time, the charismatic Jack Ma said the company aimed to reach the stage where half of its revenues are from overseas customers within a decade.

Skills and Abilities

A good number of former Alibaba employees believed that selecting a suitable region for expansion was a simple matter. “Amazon’s home turf is in the Americas and Europe, and there is almost no chance of succeeding there. Russia and the Middle East are close to China, but their slower speed of economic development is not ideal. India is a potential area for investment, but it is impossible to do it without the assistance of local partners. Africa and Southeast Asia are the only two regions left. Compared to Southeast Asia, Africa’s distance from China and limited human resources pool is a problem,” they said to LatePost.

Southeast Asia’s advantages are clear: it is densely populated with over 600 million people, part of the region is underdeveloped, yet it is growing at a phenomenal pace overall, spurred by relatively stable sociopolitical conditions and preferential tariffs within the ASEAN region. And Southeast Asia is home to a sizable population of the Chinese diaspora to boot. (More than 60 million people form the Chinese diaspora, and 70% of them reside in Asia. Most are specifically in Southeast Asia.)

Southeast Asia has a far more diverse population than China, with varying cultures and languages that shape consumer habits in distinct ways. Business strategies require heavy localization as expansions take place. Photo courtesy of Lazada Indonesia.

Alibaba entered the regional market through Lazada, which was established in Singapore in 2012. Lazada contains the DNA of German incubator Rocket Internet, which itself is notorious for being a “copycat factory” that duplicates business models lifted from Silicon Valley and transplants them in new locations abroad.

By 2015, Lazada’s GMV had exceeded USD 1.3 billion, surpassing Indonesian counterpart Tokopedia to become the region’s leading e-commerce platform. Not long after, in April 2016, Alibaba bought a 51% stake in Lazada, then followed up with an investment of USD 1 billion in June 2017 to raise its stake to 83%.

At first, Lazada focused heavily on the Indonesian market. The streets and alleyways of Jakarta were lined with its advertisements. This was because Indonesia was seen as the most promising market in Southeast Asia. The ads worked: they planted the idea that e-commerce was more accessible than many people in Indonesia thought.

“Rocket Internet made a significant contribution to the development of e-commerce in Southeast Asia,” said an e-commerce industry expert to LatePost. “For the first time in history, someone was pouring money into this area.”

Like Alibaba and JD.com, which launched their November 11 and June 18 shopping festivals in China, Lazada developed Harbolnas, its own sales event for December 12. Taking a page from the playbooks of the Chinese marketplaces, it started by focusing on the consumer electronics vertical, managing its own warehousing, delivery, and payment needs. Eventually, it launched Lazada Marketplace, which provided services to third-party sellers as well, just like JD.com.

As Lazada’s operations scaled, its management team began to flounder while demands in the e-commerce industry became increasingly taxing. According to a Lazada insider, when the company held promotional activities, unexpected stockouts and delayed deliveries became common because its warehouses were not integrated well. The entrance of Alibaba would be a propulsive force for Lazada’s development through a combination of financing and expertise.

The profile of Jack Ma, Alibaba’s founder and arguably the most well-known Chinese entrepreneur, Influenced Lazada to accept Alibaba’s investment wholeheartedly. With new business ties in place, Alibaba disbanded its local AliExpress cross-border operations team.

At the time, Shopee was hardly seen as a threat. It first launched in Taiwan in October 2015 and entered Southeast Asia through Indonesia, Philippines, and Vietnam the following year.

Conflict-ridden beginnings

Following the acquisition, Alibaba promised Lazada that it would be able to maintain independent operations, but disagreements and conflict quickly broke out.

“For example, in 2017, Cainiao [Alibaba’s delivery provider] wanted to build a 10,000 sqm warehouse, but Lazada wanted to try one that was 5,000 sqm first,” said a Lazada insider. “That year, Alibaba also wanted to bring some major international brands to Lazada, but Lazada’s employees felt that these brands were too expensive and would not be received well by locals.”

In order to ensure that its directives would be implemented, Alibaba decided to transform Lazada’s internal structure, announcing in March 2018 that Peng Lei, Ant Financial’s former CEO, would take over as CEO of Lazada, as part of the terms of a USD 2 billion investment.

After this mammoth financing, Lazada did not immediately move to counteract its competitors, but instead began the process of cleaning up its internal organization. A Lazada advertising supplier told LatePost that because Lazada was almost a wholly owned subsidiary, account management across multiple countries was now more complicated, and until this could be sorted out, budgeting and spending nearly ground to a halt.

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Simultaneously, local sellers in Southeast Asia found that their back-end operations interface had changed overnight. A seller who was familiar with Alibaba’s offerings in China said that Lazada’s new back-end was almost a replica of the Taobao platform, but with an interface that used local languages instead of Chinese.

Alibaba’s upgrade plans for Lazada were codenamed Voyage, representing its outward path to new locales. Alibaba Group’s chief technology officer, Zhang Jianfeng, had set two key requirements: first, the overall project had to be completed before March 31, the last day of Alibaba’s fiscal year; secondly, the plan had to be achieved in one fell swoop.

Local sellers had generally agreed that Lazada’s back-end interface needed an upgrade, because it was “difficult to navigate,” but the sudden change was not ideal. Almost all of Taobao’s back-end management and product functions—including coupons, customer service IM tools, and storefront design capabilities—were piled in front of sellers in Southeast Asia all at once, making it difficult for the merchants to learn how to utilize them. A Lazada employee told LatePost that moving Alibaba’s systems to Southeast Asia without modification was like “installing a Boeing 747 engine on a classic car.”

Aside from technical transformations, hundreds of Alibaba’s middle management employees were assigned to various positions within Lazada, which unnerved its original European managers. “On one hand, the European managers were relatively arrogant, and were not used to being subordinates to Chinese staff and reporting to Chinese managers,” said a Lazada insider to LatePost. “On the other hand, these European managers knew very clearly that their new colleagues were here to replace them. Who would still want to work in Lazada?”

European employees such as Lazada’s co-founder, Charles Debonneuil, and chief marketing officer Tristan de Belloy soon left the company. Many others, including staff in lower rungs, followed. The friction was exacerbated by the language barrier. There are dozens of languages used across Southeast Asia. Although English is the main language of communication in Singapore, Alibaba’s employees were generally not fluent in the language and preferred to use Chinese to communicate among themselves in small circles.

Another Lazada insider told LatePost that when Alibaba was selecting candidates who would be transferred to Lazada, the first trait they looked for was loyalty, while the second point of evaluation was their business performance in the Chinese market. Therefore, fluency in English was not a key requirement, although younger employees with greater familiarity with the language were sent over later on.

With the triple jab of product upgrades, personnel adjustments, accounting cleanups, Lazada’s actual operations ground to a halt. A number of Lazada’s partners told LatePost that they felt the company did “almost nothing” in the first six months after Peng Lei’s arrival, while a Malaysian seller told LatePost that Lazada even suspended some of its key promotions during this period.

While internal troubles mounted in Lazada, Shopee was waiting in the wings. Photo source: Tuchong.

Shopee launches a surprise attack

At the end of 2017, Shopee’s parent company, Garena, changed its name to Sea Limited and listed on the New York Stock Exchange at a value of USD 6.3 billion.

“After it went public, many Shopee people sold their stock,” said an investor of Shopee. “They didn’t believe that it was possible for it to grow bigger.”

In 2018, however, Shopee seized the opportunity to launch an offensive in light of Lazada’s stagnation in Southeast Asia, led by CEO Chris Feng. Today, Shopee’s market capitalization has exceeded USD 120 billion. It is said by Shopee’s employees that 80% of Sea Limited’s stock price is supported by Shopee’s growth potential, while 80% of Shopee is supported by Feng.

Chris Feng is a native of Huai’an, Jiangsu, and received a scholarship from the Singaporean government in 2000 when he was a sophomore in high school. Later, he attended the National University of Singapore to study computer science, and pursued further studies at Stanford University. He joined McKinsey and then moved to Rocket Internet, where he became responsible for Lazada’s cross-border business.

Insiders close to Feng say he led a team’s defection from Lazada to join Garena in 2014 due to dissatisfaction with the situation at Lazada. He founded the mobile games division of Garena and started Shopee a year later. According to people familiar with the matter, he is well respected by his subordinates and characterized as a “very, very smart and very, very confident” person who “reacts quickly and has excellent abilities of recall.” Reportedly, he holds large-scale meetings involving dozens of individuals every two weeks, and can casually invoke data and information mentioned during previous meetings with ease.

On weekdays, Feng is known to wear Shopee’s team shirts, only donning formal suits on formal occasions. He still lives in affordable public housing (HDB) flats set up by the Singaporean government. A longtime friend of his has commented that Feng does not value money, but is “really a person who wants to do big things.”

Feng’s experience and contacts in Lazada are said to have been crucial to Shopee’s growth. For example, he was keenly aware of Lazada’s chaotic situation in 2018 and seized the chance to launch an offensive.

Like Lazada, Shopee started by aggressively advertising throughout Southeast Asia, with billboards plastered at bus stops and along highways in the region. It commissioned high-profile spokespeople from various countries and regions, including Filipino boxer Manny Pacquiao and Malaysian singer Siti Nurhaliza. In March 2018, the difference between the number of visits to Shopee and Lazada’s sites began to narrow, according to a report from iPrice.

Feng focused his attention on the Indonesian market. “When talking about population and scale, Indonesia alone accounts for over 40% of Southeast Asia’s population,” said an investor to LatePost. “There is a saying that whoever wins Indonesia will win Southeast Asia.”

Around half of Indonesia’s population of 260 million people are under the age of 30. The country has a per capita monthly income of only RMB 1,500 (USD 230). Indonesia’s local industries are underdeveloped and are unable to provide enough high quality and inexpensive goods for the domestic market.

Through its Chinese connections, Shopee gained a large number of Indonesian users. Sales for some goods ran as low as IDR 99, or RMB 0.05 (USD 0.0077). A consumer recalled to LatePost that these included cosmetics, daily necessities, and small toys. She mentioned her preference for IDR 999 (USD 0.069) Korean face masks, although she knew that they were only packaged and marketed as a Korean brand—the product’s packaging indicated that it was made in Guangzhou, China.

“In China, e-commerce platforms allow factories to directly open stores and sell their cheap goods. Indonesia does not have many factories, but Chinese wholesalers from the mainland can purchase and stock huge amounts of goods in warehouses locally,” said an Indonesian e-commerce entrepreneur to LatePost.

Most of these traditional wholesalers had mature offline distribution channels, and it was no easy task bringing them into e-commerce. Before it was acquired by Alibaba, Lazada had tried to win them over, but because the firm did not circulate within local Chinese business circles, it was unsuccessful in these endeavors. After its takeover by Alibaba, Lazada still had no interest in forming partnerships with these wholesalers. Many people who worked at Lazada at the time said that the group’s focus was on branding and bringing in goods that could upgrade consumption trends in Southeast Asia. New Alibaba hires dedicated their resources and time to introducing more international brands and helping Alibaba land more overseas sales on Singles Day.

“Lazada’s European managers were already not in touch with what was on the ground themselves. I didn’t expect Alibaba’s people to be even less grounded,” said a former Lazada employee to LatePost.

Meanwhile, Shopee’s Feng spent about 80% of his time in Indonesia each year. He even picked up the local language. His team’s unrelenting efforts eventually enticed wholesalers to utilize Shopee’s platform and secure a supply of low-priced products.

This entry is adapted from an article published by LatePost. It was translated by Lin Lingyi. Part 2 continues the tale of Shopee’s late surge and internal disquiet in Lazada.

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