Cross-border e-commerce: The final frontier

"We want to be the Alibaba and Silicon Valley outside of China and US." So said German internet start-up factory Rocket Internet earlier this year, speaking at an investor meeting alongside its major shareholder, Investment AB Kinnevik. The firm also outlined its plans to rule the internet across multiple categories - but without encountering China's Alibaba Group or Silicon Valley e-commerce doyens Amazon and eBay.

Alibaba is on the brink of a $25 billion IPO in the US, which would be the largest stock market offering ever seen. Rocket is on a similar path, albeit towards a smaller goal.

The firm has announced plans to raise EUR750 million through a listing on the Frankfurt Stock Exchange later this year. It has also recently created Global Fashion Group, combining five fashion e-commerce brands it has established in emerging markets, including Jabong in India and Zalora in Southeast Asia. Rocket and Kinnevik are the largest stakeholders in the new venture.

The move endows Rocket with scale and potential cross-border clout, and serves as further evidence of its Alibaba-size ambitions. The key difference between the two is that while Alibaba operates in one market, Rocket has a presence in many. It remains to be seen whether the Chinese company seeks to convert its domestic dominance into a global proposition.

The transitional periods in which the two companies find themselves and the areas of commonality and contrast in their business models and ambitions, naturally invite questions about the future of e-commerce. Is it possible for companies to enter new markets through organic growth and which operational forms - B2B, B2C, C2C - travel easiest?

No easy task

The challenges presented by cross-border expansion were all too apparent when eBay and Amazon tried to crack China in the early to mid-2000s. The former was effectively shut out by an aggressive Taobao, Alibaba's C2C platform, while the latter bought local player Joyo but failed to achieve much traction with it.

J.P. Gan, managing partner at Qiming Venture Partners, says he has seen little evidence of Alibaba risking the same fate in new markets. "They're doing well by providing a platform for multinational brands to enter China as well as helping Chinese merchants to sell products overseas," he says. "I don't see them becoming an independent international e-commerce player without a China angle."

Rocket, on the other hand, appears to have international expansion written into its DNA, with a strategy that involves taking concepts that have worked in developed markets and rolling out replicas in the developing world. But there is skepticism as to whether Global Fashion Group constitutes a true cross-border entity.

"What they have done is to restructure so they could list the parent company," says Adrian Vanzyl, CEO of Ardent Capital, which has a number of e-commerce investments in Southeast Asia. "The company itself, including the brand, products, business model and customer base are still very different. It is a financial not an operational restructure - they are not putting everything together to be an equivalent to Amazon."

Founded in 2007 by Samwer brothers, Rocket is active in more than 100 countries, generating revenues of $1 billion last year through e-commerce and online marketplaces for everything from taxis to meal deliveries.

In a previous interview with AVCJ, Tito Costa, managing director for Rocket in Southeast Asia, noted that although the company is replicating approaches in different regulatory environments and local situations, he sees the footprint, model and mindset as the same. "We take on the market risk of acquiring enough customers at a reasonable cost and getting the customers to buy enough to make it profitable in the long run," Costa said.

Rocket's biggest e-commerce success has been Zalando, Europe's largest online fashion retailer, which is preparing for a listing. In Southeast Asia, the company has gained traction with Zalora, a copycat of US player Zappos, and Amazon-clone Lazada. According to Ardent's Vanzyl, Rocket owns the largest e-commerce players in the region, given the two sites previously raised about $700 million within two years.

The fragmented nature of the Southeast Asia market requires a degree of localization. Zalora provides brands and styles that are relevant to particular markets, such as Muslim collections for Indonesia and Malaysia as well as specific local offerings for Vietnam and the Philippines. Logistics systems are also run independently.

Compared to Rocket and Amazon, domestic players like Singaporean online cosmetics retailer Luxola and luxury bags seller Reebonz are much smaller in size. One of the reasons is that scaling up by entering new markets is difficult for them.

"It's very difficult to expand into new geographies but this is something Rocket has definitely excelled at," says Vinnie Lauria, managing partner at Golden Gate Ventures. "As a regional investor, that's something we look to help with, through connections on the ground, partnerships, and sharing inside information between our CEOs in different markets."

However, the fragmentation of Southeast Asia arguably works in Rocket's favor. Taking on incumbents that have already achieved scale in their home markets is another challenge entirely. Amazon and eBay found this in China, where Rocket has also struggled. India is similarly problematic. Amazon has arrived and is spending aggressively to acquire market share, prompting domestic players Flipkart and Snapdeal to follow suit, raising ever larger rounds of funding.

Aladdin's cave

In this context, Alibaba's foray into the US is interesting. Last month the Chinese company unveiled 11main.com, an e-commerce business offering similar services to Amazon and eBay as a marketplace for smaller vendors. The site will come into operation in November, but there are numerous obstacles in its path.

First, it took Amazon and eBay a long time to get established in the US, so 11main must be patient in collecting data and developing an understanding of US consumers. Second, Alibaba's competitive advantage at home - the so-called Alibaba ecosystem - is less telling in overseas markets. For example, users have the option of paying for goods by credit card; it is not a case of Alipay, Alibaba's payment service, or nothing.

In addition, while the Alibaba B2B platform has allowed Chinese suppliers to gain traction with US customers, the same does not necessarily apply to the approximately 8 million merchants doing B2C trading through Tmall. Developed markets consumers will favor familiar international brands over Chinese names they do not know.

This doesn't mean B2C is impossible for Alibaba in the US, it's just hard to build anything like the market share it enjoys at home. In emerging markets like Russia and Turkey, Aliexpress, Alibaba's international subsidiary, has become a leading player. Hans Tung, managing partner at GGV Capital, estimates that only the top 10% of Alibaba merchants offer products of sufficient quality to stand a chance in developed markets.

"Over time, I don't see a problem in Chinese products being accepted by users outside of China. The main task is to make sure the delivery and payment settlement systems work in a way to which overseas users are accustomed," he says. "It will require Chinese companies to overcome cultural barriers and develop a better understanding of foreign markets through hiring more local staff. It's a learning process."

As for smaller Chinese internet players, David Wei, founding partner and chairman at Vision Knight Capital, argues that most of them shouldn't go international if they are targeting areas already dominated by local players. Without a truly disruptive technology, there is very little these companies can offer local consumers apart from cross-border transactions.

"A company cannot just decide one day to be an international player. The company's international operations must bring extra value to the local consumers," Wei says. "If Taobao allows US consumers to buy products from China, or enables Chinese consumers to buy products from the US, then Taobao cross-border is necessary. Otherwise, it's not necessary."

As a result, US internet companies have focused on cross-border transactions in China. EBay partnered with PayPal to enable Chinese merchants to open shops online and sell Chinese-made products to US consumers. Amazon wants to export directly to the Shanghai Free Trade Zone, giving Chinese consumers direct access to US-made products.

On this basis, Rocket's Global Fashion Group initiative is not meaningful unless it creates synergies between India, Southeast Asia, Middle East and Russia. Golden Gate's Lauria agrees with Vanzyl of Ardent that Rocket's primary motivation is to form a giant holding company for purposes of the IPO.

"They have a bunch of other companies, from taxi ordering to food delivery, and there has been no announcement about these consolidating. Maybe they will in the future though."

The notion that a listed Rocket might ultimately carve out its fashion e-commerce segment through a sale to trade buyers is also treated warily, given the complex nature of the management structure. But Vanzyl believes combining the entities could also serve an operational end - improving efficiency and lowering costs by removing duplicated infrastructure, warehousing, call centers and payment systems.

Loose threads

Despite Rocket's dominant presence in Southeast Asia, Ardent sees a huge gap running all the way down to multiple categories below. With this in mind, it is investing in e-commerce sites that are in competition with Lazada and Zalora but focus on particular categories, such as health supplements.

This idea of expanding into different verticals is also visible in China. Venture capital firms are making investments along these lines and there have even been cases of strategic players facilitating an exit by acquiring niche operators in order to boost their own coverage. Earlier this year, VC-backed online retailer Vipshop agreed to buy a 75% stake in Lefeng.com, adding cosmetics and fashion products to its platform.

"Vipshop is a good example of how an e-commerce company can grow from one vertical to become more general," GGV's Tung says.

A final issue in the cross-border debate revolves around asset-light marketplaces versus asset-heavy online retailers. Lauria argues that it is easier for a marketplace like Alibaba to enter new geographies but the experiences of eBay and Craigslist suggest it doesn't apply to emerging markets. Ardent's Vanzyl adds that it ultimately depends on a company's long-term game plan, and whether it is willing to commit huge sums to creating logistics systems from scratch.

"The marketplace model is much cheaper because you're not holding the inventory," he says. "But in the long term, individual brand online retailers have more sustainable margins and therefore a competitive advantage."

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• Topics
• Consumer
• Technology
• Greater China
• Southeast Asia
• Venture
• Venture
• Southeast Asia
• China
• Alibaba Group
• Rocket Internet
• TMT
• Consumer
• Qiming Venture Partners
• Golden Gate Ventures
• GGV Capital