Unfinished Business: Why E-Commerce in the Philippines is Falling Behind
Buyers and sellers are increasingly digital. Our enabling infrastructure is stuck in analogue.
At the recently concluded annual summit of the Internet and Mobile Marketing Association of the Philippines, I talked about what’s been holding back e-commerce in the country. This is a summary of that keynote.
My assessment comes from my experience founding and running an e-commerce startup. One half of our team manages our own properties, such as AVA, an online fashion brand. The other half helps local brands and retailers accelerate their digital transformation. We’re one of the few 100% Filipino-owned and managed e-commerce companies. We’ve turned cash flow positive this year, surviving when tons of e-commerce startups entering the Philippines have shut down. And our story starting up in an emerging market is taught as a case in Harvard Business School and Stanford GSB.
The Philippines is a consumption driven market. With internet penetration approaching 60%, it only seems natural that e-commerce should be booming to take its fair share of the $1.9 trillion global market.
Except there’s a pervading sense that we’re lagging behind, especially when compared to Indonesia. In the past 5 years, Indonesia has jumpstarted a robust, fast-growing ecosystem with both local and foreign players.
Despite this, long tail seller interest in e-commerce remains huge. Earlier this year, Looie Lobregat decided to launch Linea Etnika, an apparel brand weaving indigenous fabric with chic fashion. Linea Etnika quickly generated a following over social media and in local bazaars. Looie launched an online store using Shopify, at a cost of one-tenth of what she would’ve spent just 5 years ago if she built a custom site from scratch. It’s gotten so easy to distribute and market online that Looie’s major challenges now are offline-related: sourcing and production.
Like Looie, other sellers have taken on to launching their brands in Instagram. Based on an admittedly manual count, we’ve identified over 300+ new local brands and designers that have launched on Instagram in the past 12 months alone. There is undoubtedly more, and this is just the tip of the iceberg.
But unlike Indonesia, the Philippines isn’t seeing a full-on wave of e-commerce investment, with the notable exception of course of Rocket Internet companies. On the flip side, the past two years saw closures from high-profile companies. These include regional brands like the publicly-listed Ensogo, Thailand’s iTrueMart, Rocket’s Kaymu, and grocery startup HappyFresh; along with local e-commerce plays such as TheShop.ph, TasteCentral, and SM’s SMAC Deals. If the big players can’t succeed, how about the small ones?
So why is e-commerce in the Philippines falling behind?
The industry skipped a key step in its development: infrastructure.
If you look broadly at the past 25 years of e-commerce development in the US, Europe, and more recently in China and India, you can generalize that e-commerce develops in 3 distinct phases.
The first phase is laying down the infrastructure. This includes internet connectivity, credit card penetration, electronic payments, logistics, and efficient last mile delivery services. And of course, an enabling regulatory environment.
The second phase is the establishment of platforms. This includes B2C or B2B2C plays like Amazon, Lazada, and Rakuten; or C2C plays like eBay, Taobao, or OLX.
The third phase involves the growth of verticals focused on specific market segments, like fashion, electronics, home goods, or furniture, from either online-only brands, or established retailers launching their .com offerings.
The challenge in the Philippines is that the second and third phases of industry development came way ahead of the development of the first phase.
For example, we have the slowest download speeds:
We’re lagging in the number of people with a bank account:
And our transportation infrastructure ranks worst in the region:
This leads to a number of problems for incumbents, from a bad shopping experience because of shitty internet speeds, to cash-on-delivery making up 70%+ of the market — a very costly and inefficient feature for e-commerce companies.
To jumpstart e-commerce in the Philippines, we need to accelerate the growth of enabling infrastructure. And that requires enormous levels of investment programmed across the next 10 years. Just how much?
The Philippines needs at least $2 billion in e-commerce investment over the next 10 years.
In the report produced by Google and Temasek, the PH e-commerce market for first hand goods, which is worth around $500 million today, can be worth $10 billion by 2025.
The report also estimated an total investment figure for the whole region, and assuming a pro-rated share of this figure based on the total Southeast Asia market size, this implies that the Philippines will need $2 billion to $2.5 billion in e-commerce investment.
Where’s that money gonna come from?
Foreign direct investment is the single most important enabler for e-commerce.
Why not tap the local conglomerates? Because their risk appetite can’t stomach the decades-long investment horizon for e-commerce. Since the economy has been doing so well the past 6 years (6%-7% GDP growth rates), our conglomerates are rightfully focused on building physical infrastructure, with more predictable ROIs and internal rates of return. Let the San Miguels, SMs, Ayalas, MPICs, and Aboitizes of the country handle our roads, airports, and bridges. Bring in Amazon, Alibaba, and Rakuten to build our digital infrastructure.
There’s another reason: e-commerce is a knowledge-intensive industry, and we need the knowledge transfer that a foreign player can bring. The management bench of our local conglomerates are long on bricks and mortar growth, and short on digital transformation.
If there is one thing the Department of Trade and Industry and the newly created Department of Information and Communications Technology should focus on, it should specifically be on a program to accelerate foreign direct investment for e-commerce. As it stands, we already hilariously outgunned. Vietnam FDI is already on track to surpass $20 billion. We won’t even hit half of that figure.
We may have an e-commerce roadmap, but it isn’t aggressive enough in the goal of attracting foreign direct investment. If you’re a global platform, why worry about the Philippines when Indonesia and Vietnam are bigger, more attractive, and have less uncertain regulation? That leads me to my next point.
The economic provisions of the 1987 Constitution are ancient relics of a pre-internet world.
The framers of the 1987 Constitution mandated that ‘mass media’ businesses must be 100% owned by Filipinos. In 2012, the Securities and Exchange Commission released an opinion that e-commerce platforms may be considered mass media entities simply because they “disseminate information to the public through the internet.”
If it sounds ridiculous, it really is. Under that logic, we should demand Facebook and Google to be 100% Filipino owned before operating in the Philippines, which is an equally ridiculous proposition.
Any devious congressman looking for a payoff from Silicon Valley can launch a congressional inquiry to ban Facebook because it’s unconstitutional (I’ll save you the trouble, Mr. Congressman: you can’t get a payout. Just Google “FCPA”)
Anyway, every single global e-commerce player I’ve met looking to expand in the Philippines has expressed concern about the SEC’s opinion on mass media and e-commerce.
This regulatory uncertainty is their reason for thinking twice in entering the Philippines. The uncertainty is a credible deterrent: it was the threat of decades-long litigation that made Telstra pull the plug from launching our third telco.
There are, of course, ways arounds this (like the Philippine Depository Receipts of ABS-CBN and GMA), but most global players wouldn’t want the added political risk in an already risky industry. We can quantify conversion funnels, acquisition costs, and delivery schedules; we can’t measure the mood of Malacanang or the Supreme Court five years from now.
Then, there’s the Retail Trade Law, which requires all retail companies to have at least $2.5 million in paid-in capital before accepting foreign capital. This hurts local companies who want to partner with many regional e-commerce players; or smaller global companies who want to operate in the Philippines. Everyone knows it takes less than $500k to launch a minimally viable e-commerce operation in the Philippines.
Finally, there’s the restriction on common carriage, which must be at least 60% Filipino owned. This prevents a global logistics company like Singpost or Cainiao from competing in the market for e-commerce fulfillment.
What’s the way forward?
There are some enabling legislation we can do along the way, of course, but I believe the only true major enabler is the wholesale revision of the economic provisions of our constitution to allow for more foreign competition in e-commerce. Full stop. Anything short is suboptimal.
The primary goal of our regulatory environment isn’t just to lay down the rule of law; it has a more complicated task: designing markets for the future. Markets don’t just sprout own their own. There is no such thing as an invisible hand. Markets need a wise and prudent hand guiding their development.
In the meantime, expect some big moves from existing players.
The UGG trio — Uber, Grab, and wildcard Go-Jek — are essentially e-commerce companies in a market where logistics is such a big hassle. Expect more action in food, B2B deliveries, and C2C e-commerce deliveries powered by Grab Express, UberRUSH, or Go-Jek.
Conversational commerce, where shoppers and sellers transact via chat apps, will grow. Carousell has already launched in the Philippines. Expect Facebook to slowly rollout Marketplace when the time is right.
We’ve also seen a lot of demand from local brands and retailers in charting an e-commerce strategy independent from Lazada and Zalora by launching their own online stores, staffed by a dedicated e-commerce and digital team.
Finally, anticipate more aggressive moves from Alibaba. And what if I told you that Amazon is actually testing the Philippine market, but not in the way you’d expect? That’s for a different post altogether.
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