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. According to Statista1, Asia’s e-commerce revenues are predicted to grow by 22.4% to $1.36 trillion in 2020 and reach $1.92 trillion by 2024, accounting for 61.4% of the global market.


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.


Rapid growth in Asia’s e-commerce (B2C) markets


A powerful engine for economic growth

The economic benefits of e-commerce are stark. Historically, Asian countries with higher e-commerce penetration have experienced higher GDP growth.


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. In Asia, participation in e-commerce could lift total factor productivity by 30%.


Estimated impact of e-commerce participation on total factor productivity2


As economies gradually emerge from their lockdowns, we believe Asia is uniquely positioned to ride the e-commerce wave and enjoy higher growth on the back of the following key success factors:

1. Robust logistics networks
Efficient logistics services are vital to fulfil deliveries of online purchases to end-consumers – be that domestically or internationally. According to the World Bank’s logistics performance index3, Asia accounts for 17 of the world’s top 50 performers. Within Asia, Japan and Singapore are the two top-performing countries, while in China, logistics operators can now fulfil urgent deliveries within 12 hours in select city clusters and within 24 hours nationwide4. In Indonesia, infrastructure reforms have helped reduced logistics costs from 27% of GDP in 2015 to 22% in 20205. It is this robust logistics performance that provides the stage for Asian e-commerce companies to capitalise on the region’s growing middle class.

2. Growing middle class
Since 2015, Asia’s middle class has overtaken those of Europe and North America. According to the Brookings Institute6, 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.

3. Improving financial infrastructure
Fintech is a key enabler of e-commerce. In India, more shops and e-commerce platforms are reportedly urging consumers to pay via digital wallets to avoid the spread of the infectious disease7. That said, while individual countries have their own regulations to protect customers’ personal data and financial information, regional payment regulations will go a long way to boost Asia’s e-commerce eco-system.

4. Rapid innovation
Asia’s retail market is still dominated by small physical retailers with insufficient digitalisation and online retail expertise. This gives innovative e-commerce players an opportunity to tap the potential in these ‘fragmented’ markets.

In China, for example, in the early weeks of the COVID-19 outbreak, many farmers had to scrap tonnes of rotting produce. Coming to the rescue, e-commerce giants JD.com and Alibaba-owned Taobao quickly launched rural live-streaming initiatives to help the farmers set up online stores and transport their produce directly from farm to home.

In bringing ‘fragmented’ brick-and-mortar farmers onto the e-commerce platform, live-streaming, together with the last-mile, on-demand local services (“Daojia” in Mandarin Chinese), is expected to be a new e-commerce format that will experience rapid growth. Over in India, as the visibility and acceptance of e-commerce rise, more small enterprises are likely to adopt technology in their business models, thereby attracting greater investment and capital flows.

Understanding the implications

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.

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.

The dynamism of the e-commerce market also means that investors’ analytical framework needs to evolve along with the changing competitive landscape.
 

1. Statista: Digital Market Outlook, data extracted on 31 May 2020.

2. These figures illustrate coefficients and confidence intervals from two firm-level estimations: (a) the impact of e-commerce participation on total factor productivity controlling for firms’ age, size, foreign ownership, export status, and human capital; and (b) the impact of e-commerce participation on the share of exports in total sales controlling of firms’ age, size, foreign ownership, and human capital. The error bars refer to the 95% confidence intervals around the estimated coefficients. For Asia, the estimated coefficients imply that participation in e-commerce is associated with a 30% increase in total factor productivity and an increase in the share of exports to total sales by close to 2 units, corresponding to a 50% rise.

3. The World Bank’s Aggregate logistics performance index (LPI), 2018. Asian (developed and emerging) countries: 16 (Japan, Singapore, China, South Korea, etc), Non-Asian developed countries: 34 (Germany, Sweden, Belgium, Austria, etc), non-Asian emerging countries: 4 (Chile, Panama).

4. Morgan Stanley Research: The Rise of China’s Supercities: New Era of Urbanization, P. 83.

5. Eastspring Investments: Emerging opportunities in Southeast Asia’s largest logistics market, May 2020.

6. Brookings Institute: The Unprecedented Expansion of the Global Middle Class – An Update, by Homi Kharas, February 2017. P. 14. Middle class = households with income between USD11 and USD110 per person per day in 2011 purchasing power parity (PPP) terms.

7. Rapyd: Asia Pacific eCommerce and Payments Guide, June 2020.