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

Written by LatePost Published on     8 mins read

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Lazada has ironed out its operations, but can it catch up to Shopee?

Part 1 covers the seeds of conflict that were planted when Alibaba acquired Lazada.

Aside from the uneven availability of goods in Southeast Asia, logistics is a huge problem that cannot be easily resolved. In 2017, express delivery services in Southeast Asia were not only expensive, but also slow. It usually took seven days for users to receive goods that they had purchased on e-commerce platforms. International parcels could take up to a year to be delivered.

Shopee’s solution to this was simple and crude: subsidies and free shipping. Some Southeast Asian sellers told LatePost that many users would be incentivized to order via Shopee even if these sellers had advertised on other e-commerce platforms, simply because Shopee offered free shipping services. Merchants also benefited from shipping subsidies. For example, when an Indonesian cross-border seller received orders for more than IDR 90,000 (RMB 40; USD 6.26) of goods, they would receive about IDR 50,000 (RMB 23; USD 3.48) worth of shipping subsidies.

Shopee poured money into subsidies in exchange for traffic and sales volume, which directly accelerated the development of the local express delivery industry. Indonesia’s two largest express delivery companies, JNW and J&T, were the main beneficiaries. A J&T employee in Indonesia told LatePost that the density of J&T’s outlets in Greater Jakarta increased from a handful in 2018 to “one per 5 km.” In order to move more goods to Indonesia, a country that consists of more than 1,000 islands, J&T also purchased a number of cargo ships. Reportedly, by mid-2018, most products purchased on Shopee could be delivered within three days, with some even arriving the next day.

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These subsidies caused Shopee’s 2018 net losses to double year-on-year (YoY) to USD 961 million. Its GMV increased to USD 10.3 billion, at 2.5 times YoY growth.

Delivery subsidies were an old tactic of Lazada, but in 2018, after Alibaba’s team parachuted in, Lazada suspended these subsidies in many countries. Similarly, pouring money into sales and marketing campaigns, recruiting wholesalers, and localizing in the Indonesian market were all tried and true tactics utilized by Lazada before Shopee came along. A large number of Shopee’s management team also defected from Lazada. A Lazada insider told LatePost that by 2018, Shopee’s progress in investments and logistics could be attributed to former Lazada personnel now working for its competitor.

In the first quarter of 2019, Shopee’s annual app downloads, monthly active users, and user retention rates had surpassed Lazada’s, according to reports by iPrice.

“How did we do so well?” mused a Shopee middle management executive to LatePost. “Actually, it was just that our competitor was a good foil.”

Chinese exporters visit Shopee’s office in Thailand. Photo courtesy of Shopee.

Cultural conflicts persist

In September 2018, Peng Lei stepped down as CEO of Lazada after just six months and became chairperson instead. Lazada’s co-founder, Frenchman Pierre Poignant, took over as CEO. But behind the scenes, it was Zhang Yong, then-CEO of Alibaba Group, who held the highest decision-making authority within Lazada. After Peng Lei stepped down, Zhang was said to take a five-hour flight every month from Hangzhou to Singapore for two days of meetings.

“The market was still in its infancy, and what Lazada needed was a boss who can be a street fighter,” said an e-commerce industry insider to LatePost.

During those monthly meetings, teams across seven countries would report to Zhang. For each country’s team, 30 to 50 people would fill a conference room, with Zhang making decisions for each item on the agenda, one by one. However, Zhang’s hands-on management style backfired at times.

For example, Lisa of Blackpink, a popular Korean girl group, is Thai. On December 12, 2018, Shopee invited Blackpink to perform in Jakarta, drawing huge crowds. The following year, Tokopedia, an Indonesian e-commerce company, did the same.

Lazada wanted to recruit Blackpink for a partnership too, but the team at its Hangzhou-based headquarters could not understand why Lazada wanted to invite a group that was relatively unknown in China to perform in Southeast Asia, while devoting a sizable budget to them at that. A Lazada investor told LatePost that the team had a meeting with Zhang in Singapore, but could not present their idea clearly, and eventually resorted to its old playbook of paid ads on Facebook and Google.

The same investor told LatePost that because ad-driven traffic in Southeast Asia is cheaper than in China, the return on investment for this action is high, which translates to better performance reviews in Alibaba’s internal evaluation system. This is because paid advertisements with lower cost could still generate the same number of clicks in absolute numbers, even if these were not the most effective marketing tools. “They might have spent ten times the amount of money on old advertising tactics to find less success than Shopee,” he speculated.

Zhang was present in Southeast Asia at least two days each month, but Shopee’s CEO was in Southeast Asia every single day. And Alibaba’s employees who were stationed in Southeast Asia across mid and senior management positions were unable to handle cultural conflict well.

“There are several cultures within Lazada: the more direct Alibaba culture, the European and Singaporean culture that emphasizes professionalism, and the more reserved and restrained Southeast Asian culture, especially in Indonesia,” said the same investor. “Alibaba’s culture is so strong. It wanted to assimilate locally, but it didn’t know anyone, and soon made itself a common enemy of all other cultural groups.”

Daniel Zhang, Alibaba CEO
Daniel Zhang Yong, CEO of Alibaba Group and Jack Ma’s pragmatic successor. Photo courtesy of Alibaba Group.

A key example of this is in Lazada Vietnam’s CEO, Zhang Yixing, who served as assistant to Daniel Zhang Yong before taking the mantle. Zhang Yixing was said to have implemented a top-down management system in Vietnam, which conflicted with the local Vietnamese culture of “collective leadership.” If Vietnamese staff questioned his decision, he would respond by telling them that his practice was what was done in China for Tmall.

According to people familiar with the matter, Zhang Yixing once issued the directive to purchase hundreds of thousands of dollars worth of toilet paper to serve as promotional stock. But toilet paper is not a necessity in Vietnam, as in many Southeast Asian countries, where people are used to washing up with bidet sprayers. Ultimately, only a small portion of this stock was sold.

Things finally came to a head in the first half of 2019. During a meeting between the local Vietnamese team and headquarters in Singapore, Zhang Yixing’s Vietnamese subordinates voiced their complaints about him. Afterwards, Zhang was transferred back to Hangzhou.

These cultural conflicts became pressing issues for top management. In June 2018, Peng Lei said in an internal speech that she wanted to remind all Alibaba employees that they had to remain humble as they had much to learn. “Every country has its own philosophy,” she said. After she became chairman of the board, she repeatedly emphasized that Alibaba’s employees had to “maintain a spirit of humility and onward struggle.”

Management incentives fall flat

Alibaba’s internal evaluation system did little to solve the problem. Alibaba gave new managers at Lazada fixed key performance indicators (KPIs), requiring them to hit these KPIs within 18 months. Reportedly, Alibaba’s local managers in Southeast Asia were preoccupied with achieving results within a four-month period, leaving them with little time to process and interpret the local environment properly.

“The time that Alibaba gives these managers is too short,” said a former employee at Huawei to LatePost. This person also said that Huawei usually gave him at least two years to adapt to a new international environment.

Alibaba employees with special skills or experiences might be able to hit these KPIs, but they did not remain for long. “I am really optimistic about the Southeast Asian e-commerce market, because those who are willing to stay here in the long run will start their own businesses, or climb the internal ranks of Alibaba and use Lazada as a springboard,” said an investor to LatePost.

With high attrition at all levels, it’s no wonder that Lazada’s personnel roster has yet to stabilize. Since 2018, Lazada has gone through at least three heads of departments in four Southeast Asian countries.

Frequent turnover not only reduces Lazada’s ability to execute plans, but affects customer satisfaction too. Malaysian sellers told LatePost that because Lazada’s team switches up so frequently, it is extremely difficult to form working relationships with the company.

COVID-19: A new frontier 

The pandemic has accelerated the e-commerce industry’s growth, but to the benefit of Alibaba’s competitors. After pulling ahead in 2019, Shopee introduced Shopee Mall, where major, established brands can set up online shops. It also invested USD 192.9 million in marketing and promotional activities, which included fees for football star Cristiano Ronaldo to be its spokesperson.

In mid-2019, Lazada shifted toward a strategy of reducing losses. Several advertising channels have said that since then, Shopee has mainly bought CPI (cost per install) ads, paying the advertising channel whenever users download an app, while Lazada has mainly bought CPR (cost per result) ads, paying the advertising channel only once a user has bought something using an app. This reflects the changing market strategies of both companies, with Shopee still investing heavily in user acquisition, while Lazada focuses on cost control.

Zhang Yong no longer flies to Singapore each month. Alibaba delegates responsibilities to those who have a more rooted presence in Southeast Asia, like Li Chun, who has been with Lazada for over three years.

Li graduated from Peking University, worked for eBay’s China operation and then at the US headquarters, racking up 12 years of experience altogether. After returning to China in 2014, he joined Alibaba, serving as CTO at its B2B group. In June 2017, he was appointed as co-president of Lazada’s technology, product, strategy, and consumer businesses. Those who know Li well, praise him as a “dedicated and professional manager” who is “relatively pragmatic and humble.”

Two years after Li was assigned to lead Lazada, he took on another hat as Lazada Indonesia’s CEO in July 2019, managing both leadership positions. This was during Lazada’s lowest point. Li spent half of his time in Jakarta. A supplier told LatePost that Li focused on “putting aside all disputes and progressing onward together,” with Lazada Indonesia no longer imposing confining partnership conditions on its suppliers. The company also became more active in soliciting merchants. This allowed Lazada to garner support from its sellers and delivery bases.

Li’s leadership has borne fruit. From June 2019 to May 2020, although Tokopedia and Shopee were still the most popular apps in Indonesia, fresh downloads of Lazada’s app topped charts, according to App Annie. By June 2020, Li was promoted as CEO of Lazada Group.

The pandemic has been challenging for Lazada, as it gave competitors the right context to acquire a massive number of paying customers. By the third quarter of 2020, monthly visits to Shopee were four times that of Lazada’s in Southeast Asia, and 20 times that of JD.com’s. Lockdowns across Southeast Asian cities didn’t stop Shopee from investing in large-scale marketing campaigns either. For example, the largest screen of the Orchid Garden Mall in downtown Jakarta continued to display Shopee’s advertisements prominently, even when fewer people strolled by.

Lazada moved slower. A Lazada Indonesia insider told LatePost that after the outbreak of COVID-19 in Jakarta in March and April 2020, Alibaba had withdrawn almost all of its employees in Indonesia, making it the first Chinese company to pull its staff out of the country.

By the third quarter of 2020, monthly visits to Shopee had reached almost four times that of Lazada, with the market value of its parent company, Sea Limited, hitting one-fifth that of Alibaba Group.

Yet when the SARS epidemic unfolded in 2003, Alibaba took a different tack, requiring its employees to stick to their job scopes as they worked from home. Taobao took flight at this juncture as Alibaba raced forward. More than 17 years later, Alibaba is a changed company—stronger, but much more cautious.

This entry is adapted from an article published by LatePost. It was translated by Lin Lingyi.

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