Chinese e-commerce giant Alibaba and tech giant Tencent have been fighting a proxy war in the Southeast Asian market. Tencent is seemingly gaining the upper hand because of the merger between Gojek and Tokopedia.
Southeast Asian unicorn companies Gojek and Tokopedia announced on May 17 that they will merge into a new company named GoTo Group.
To put this case into perspective, one can imagine an Indonesian Didi Chuxing merging with Taobao. Gojek is an Indonesian on-demand multi-service platform and digital payment technology company, while Tokopedia is an Indonesian technology company focusing on e-commerce.
The new company GoTo born out of the merger will be the biggest tech company in Indonesia, valued at USD$18 billion, covering sectors such as e-commerce, on-demand services and fintech. According to open information, Gojek and Tokopedia had registered 1.8 billion transactions on their platforms, with the total transaction volume reaching USD$22 billion. By late 2020, the two companies already had two million registered drivers, 11 million vendors and 100 million monthly active users.
Gojek and Tokopedia do not have operation in China and therefore not many Chinese users have heard of the two companies before. However, they are invested by two well-known Chinese companies: Tencent and Alibaba. The recent merger appears to be a partnership between Tencent and Alibaba in overseas market.
This is unusual.
Tencent and Alibaba have been backing a number of enterprises both at home and overseas to fight a proxy war against each other. The two Chinese companies are also competing with each other in e-commerce, mobility and financial service in Southeast Asia.
On the surface, the merger seems to be friendly and smooth cooperation. But it is apparent that there had been extremely difficult negotiations on the merger behind the scene.
Merger or Acquisition?
The merger is in fact the result of the fierce competition between Alibaba and Tencent.
Let’s look at Gojek first. The company was founded by Nadiem Makarim, a business veteran who had worked at McKinsey for three years before pursuing further study at Harvard business school.
Gojek was originally designed to be a call center that provides motorbike-hailing service for white collar workers. In Makarim’s vision, users could make motorbike service appointment via a call to Gojek to commute from the pickup point to their destination. Gojek started with only 20 motorbike drivers and then expanded exponentially. The company expanded its service from motorbike hailing to takeout delivery, shopping, courier, payment and financial service etc., serving nearly half of Indonesia’s population.
On October 30, 2018, Tencent, Chinese e-commerce company JD.com and several other investors poured in USD$1.2 billion into the company. Gojek’s valuation surged to USD$9 billion after the investment.
By February 2020, Tencent became the third biggest shareholder of Gojek, following GIC and Google, holding a 5.02% stake in the company, statistics from Singapore-based venture outfit Momentum Works show. JD.com, which is a Tencent-backed e-commerce company in China, owns 1.88% of Gojek’s shares, making it the 19th biggest shareholder.
Tokopedia, on the other hand, is the biggest e-commerce platform in Indonesia. Founded in 2009, the company runs a C2C business model similar to that of Taobao, connecting vendors and consumers.
Alibaba Group was involved in several rounds of financing for Tokopedia in 2017 and 2018. Softbank and Alibaba were the two biggest shareholders of the company, holding 35.35% and 28.25% of the shares respectively.
The recent merger of Gojek and Tokopedia might actually be a case of acquisition.
Firstly, the gap between Gohek and Tokopedia's valuation is quite big, with the former valued at USD$10.5 billion and the latter at USD$7.5 billion.
It is reported that the two companies would merge on a 6:4 ratio, meaning that the deal is not so much of an equal merger but rather Gojek taking over Tokopedia.
Secondly, one of Gojek's Co-CEOs Andre Soelistyo is appointed as the leader of the merged company, which means that Gojek has greater say in the merger. Tokopedia, on the other hand, has its CEO, Patrick Cao, as the new company's president. After the merger, the two platforms will still operate with their existing management team.
It appears that Gojek and Tokopedia’s management teams have similar power within the new company judging from the managerial positions they have taken. But this is only part of the story.
Under a modern company structure, the CEO enjoys more power than the president, an expert on company management said. “CEO is the manager of the company, who executes the company's policies,” the expert explained. “In comparison, the president of a company is the second in command, responsible for the administration of the company.”
In practice, most companies' CEOs hold the actual power. For instance, Chinese tech giant Tencent's CEO is Pony Ma while Martin Lau serves as the company’s president. Chinese e-commerce leader Alibaba's CEO is Zhang Yong, with J. Michael Evans being the president. Smartphone maker Xiaomi has its founder Lei Jun as the CEO and Zhang Xiang as the president.
Several Southeast Asian investors believe that the merge can be understood as Tencent's proxy Gojek taking over Alibaba's proxy Tokopedia. It is likely that Tokopedia will be gradually marginalized after the merger.
This situation is similar to that of the merger between Meituan and Dianping. In 2015, Meituan and Dianping merged at the valuation of USD7 billion and USD$4 billion. Meituan's CEO Wang Xing and Dianping's CEO Zhang Tao then started serving as the new company’s Co-CEO and Co-president. Several years later, Dianping was taken over by Meituan.
The fall of Aliabab's e-commerce investments in Southeast Asia
The impact of Tencent's victory in the merger of Gojek and Tokopedia will prove to be far-reachig in the future.
The new company GoTo will become one of the biggest lifestyle service providers in Southeast Asia, directly competing with mobility and food delivery service provider Grab and gaming and e-commerce giant Sea.
Sea is, without a doubt, the most competitive tech giant in Southeast Asia. The company is currently valued at USD$115.6 billion, which is 200% of the total valuation of Grab (USD$40 billion) and GoTo (USD$18 billion).
The success of Sea could be attributed to Tencent's generous support.
In 2010, Sea’s mobile game publishing arm Garena received an investment from Tencent. Later the Chinese tech company also participated in Sea's several financing rounds, becoming the company's biggest shareholder. Before Sea's public listing in 2017, Tencent already held a 39.7% stake in the company. On December , 2020, Tencent held 22.67% of Sea’s shares.
Sea started off as a game company. Garena serves as an online game developer and publisher with plenty of resources provided by Tencent. In 2010, Tencent gave popular MOBA game League of Legends’ operation in Southeast Asia to Garena. League of Legends’ developer Riot Games was invested by Tencent. League of Legends is only one of the several popular games that Tencent had given to Garena.
In November 2018, Sea reached a partnership agreement with Tencent, which grants Garena a five-year priority in publishing mobile and PC games from Tencent in Indonesia, Thailand, the Philippines, Malaysia, Singapore and Taiwan. It is apparent that Sea was highly valued by Tencent.
Sea subsequently entered the e-commerce sector in 2015 after its success in the game industry, launching e-commerce platform Shopee.
The development of Shopee was nothing close to a smooth ride as it faced immense competition from Alibaba-backed Lazada and Tokopedia during that time.
Lazada was the emerging e-commerce giant in the Southeast Asian market at first. In 2016, Alibaba poured in USD$1 billion in Lazada and acquired a 51% stake in the company, taking control. Alibaba invested another USD$1 billion in Lazada the next year, increasing its stake in the company to around 83%.
Lazada's market share in Southeast Asia then gradually declined and eventually lost its advantage. It is worth noting that when Alibaba acquired Lazada, the company was ways ahead of Shopee in all Southeast Asian countries.
It only took Shopee one year to catch up with Lazada. According to a report from e-commerce price reference site iPrice, the gap between Shopee and Lazada’s traffic since March 2018 was already very similar.
In 2020, Lazada became the one that was trying to catch up. In Q2 2020, Shopee registered a year-on-year growth of over 150% in total orders, becoming the biggest e-commerce platform in Southeast Asia. In Q3 2020, Shopee was the most visited e-commerce site in six Southeast Asian countries, according to iPrice. To date, Lazada had lost its last popular market the Philippines to Shopee.
Tokopedia, on the other hand, lost its most important market Indonesia to Shopee in 2020 in terms of GMV (Gross Merchandise Value). Shopee’s fiscal report shows the company handled over 430 million orders in Q4 in 2020 in Indonesia, receiving around 4.7 million orders daily, up 128% when compared with the same period in 2019. Whether it was in terms of the data of monthly active users, usage time of Android users or downloads, Shopee ranked the first as the top e-commerce app in Indonesia in 2020.
According to App Annie, Shopee topped the shopping app chart in monthly active users, Android usage time and downloads in Southeast Asia and Taiwan in 2020.
Shopee was then crowned as the biggest winner in the Southeast Asian e-commerce sector.
Alibaba did try to turn the table around and sent different business veterans to help Lazada. In March 2018, Ant Financial’s CEO Peng Lei replaced Max Bittner as Lazada’s CEO and brought in USD$2 billion. Over 100 mid-level staff from Alibaba also went to Lazada with Peng Lei. However, Peng resigned in December 2018, only nine months after entering Lazada as the company’s CEO. Lazada’s executive president Pierre Poignant took Peng’s place. In June 2020, Lazada announced that it had appointed Li Chun as the company’s new CEO and that Poignant will serve as Alibaba CEO’s special assistant.
According to a report from LatePost, Zhang had been personally involved in the matter of helping Lazada regain its market share. After Peng’s resignation, Zhang would travel from Hangzhou to Singapore every month to have a two-day meeting, at which seven markets’ directors would report to him. The hustle lasted till the second half of 2019.
Alibaba's close involvement in the operation of Lazada did not help the company take back its market dominance.
It was indeed quite a slap in the face for Alibaba, an e-commerce giant, to lose the e-commerce market in Southeast Asia to a company that is funded by Tencent.
How did Tencent get the upper hand？
What exactly did Tencent do to win Alibaba in Southeast Asia?
The success of Tencent can be attributed to the company’s investment preferences, localization and operation strategies.
Tencent tends to provide a lot of resources for companies it has invested in and let the companies operate by themselves. For instance, Tencent basically gave Shopee full control over how it would run its e-commerce business since Tencent itself does not have successful experience in the sector.
Shopee hired professional talents that understand the markets that it targets. The company had hired CEO and market managers that actually understand local users and markets. For example, Shopee got South Korean girl group Blackpink for marketing purposes because the group is very popular in Southeast Asia. Ladaza on the other hand refused to consider Blackpink for promotion since people from Alibaba did not know the girl group. “We have never heard of Blackpink in China,” Alibaba’s representative at Ladaza said.
Moreover, Tencent is willing to entrust the business to entrepreneurs while Alibaba tends to rely on experienced and professional managers.
Shopee's CEO Chris Feng for instance spent quite a long time in Indonesia to know more about the market. Feng even learned the local language during his stay there. In contrast to that, Lazada Indonesia's CEO only stayed in the country for a few weeks.
With the support of Tencent, Shopee was able to utilize resources from China. The company set up its China headquarters and R&D center in Shenzhen, employing an R&D team that is even bigger than that of the headquarters in Singapore.
Besides the advantages in human resources, Shopee also makes active use of the e-commerce resources in China. The company has set up investment fairs in Yiwu, Shenzhen and Xiamen, etc. to provide guidance for vendors to enter its platform, encouraging businesses to go overseas with Shopee's platform.
In order to attract vendors to join its platform, Shopee has made it free to open up a shop. The vendors do not need to pay any service fee, annual fee or restocking fee on Shopee. They only need to apply for opening up a shop on Shopee through official channels of the platform. New vendors on Shopee enjoy a three-month exemption of commission.
Shopee has low entry threshold, which makes it easy for vendors to join. The vendors only need a business license provided by the authority in mainland China or Hong Kong to apply to enter Shopee. There is no business experience required. The vendors only need to provide a stocking certificate to be qualified for entering Shopee.
"The number of Chinese vendors on Shopee has been growing exponentially each year," Liu Jianghong, head of Cross-Border E-Commerce at Shopee said.
In contrast, Lazada takes on a more high-end path. People can rarely see Lazada’s vendor recruitment advertisement in China. “Lazada takes a more high-end path so it focuses more on getting the big brands to its platform,” a service provider of Lazada commented, saying that it is actually not easy to pass Lazada's vender screening.
"If a hundred vendors applied to be on Lazada, only about three vendors will get in," he said.
According to the service provider, Lazada’s focus on recruiting vendors with a brand, and therefore has a rather high entry threshold. Only brands that have achieved a revenue of over ten million from their offline business are eligible for applying to be on Lazada, he said. In addition, each business license only grants one registration chance. If the registration was not successful, it would be very hard to apply again, the service provider concluded.
It is apparent that Alibaba was faced with localization issues that companies often encounter when entering a foreign market. In the past two decades, many foreign multinational Internet companies failed massively in the Chinese market because they were too centralized and relied heavily on their international headquarters for making important decisions. It is ironic that Alibaba has fallen intro the same pitfall now.
However, the Internet scene is still at its early stage in Southeast Asia, which means both Alibaba and Tencent have lots of opportunities and time to build up their influence in the region. There remain great uncertainties as to who will be the ultimate winner in ther region.