Chapter 1: Fundamentals and regulation aspects of E-commerce
- Definition of E-commerce
There are various definitions of electronic commerce, or E-commerce. The most widely used definition is the sale and purchase of goods and services through electronic networks and the internet, encompassing a broad range of commercial activity. It is important to also note that the definition of mobile commerce (M-Commerce) which is the sale and purchase of goods and services using mobile (smart) phones. This is an important consideration in developing countries as the growth in smart phone usage is outstripping access to conventional computers/laptops. The term E-commerce also covers activities throughout the entire value chain of the transaction process, and includes activities such as the delivery of the good to the consumer’s preferred location.
- Overview of the business models associated with E-commerce
There are a variety of business models that fall under the broad banner of E-commerce. Table 1 provides a summary of these different models.
- Definitions of the business models listed above are provided below:
- B2B: describes transactions that exist between businesses, such as one involving a manufacturer and wholesaler, or a wholesaler and a retailer;
- B2C: refers to transactions that are from a business to a consumer. Businesses might exclusively trade with consumers through electronic means, conduct sales through traditional physical brick-and-mortar stores or sell both online and in physical stores;
- C2C: refers to commercial transactions between consumers through a third party (i.e. an online platform provider). An auction, where multiple consumers can bid for the same product or service, is a common method used to complete a transaction in this instance. Third party providers, such as eBay, benefit by charging a flat fee or a commission on the purchase price;
- C2B: refers to commercial transactions where consumers (individuals) offer products and services to businesses. The simplest example of this is the emerging gig economy where potential employees offer their skills and time to potential employers;
- G2B: refers to commercial transactions between a government and the private sector; and
- G2C: refers to commercial transactions between a government and a private individual.
- Scale of business models
The B2B and B2C business models are the two most significant in terms of market value. According to UNCTAD, B2B E-commerce markets are valued at around US$19.9 trillion globally. B2C markets are significantly smaller, totalling US$2.2 trillion globally. Whilst the B2B market constitutes the largest share of global E-commerce markets, the B2C segment is expanding quickly, with most of the future growth expected to come from the Asia Pacific region as a result of the rapidly expanding middle class in the region.
- Overview of the value chain
Each business model described above has a specific value chain (i.e. the end-to-end process from where the transaction commences to where it finishes). The key elements of the B2C value chain are Product Sourcing, Customer Interface, Delivery and After sales service.
Figure 1 below depicts the value chain from start to finish within the B2C business model.
The following sub-sections discuss this process in greater detail, working from left to right of Figure 1.
- Product sourcing
An E-commerce business, just like a traditional brick-and-mortar business, must initially source its products. Part of this process includes managing its supply chain in terms of inbound logistics and inventories. E-commerce has, however, presented new opportunities for product sourcing, as companies can potentially avoid warehousing and storage costs by acting purely as the conduit between the manufacturer and the final customer. Assuming the E-commerce retailer is trading physical goods, there is an opportunity for the firm to enhance efficiency by placing an order with the manufacturer to be delivered only when the product needs to be shipped to the final customer, thus saving storage and warehousing requirements. Alternatively, to maximise efficiency, an E-commerce retailer may allow the manufacturer to use their own logistics capabilities to deliver direct to the customer, therefore minimising any storage or handling time by the E-commerce retailer.
- Customer Interface
The customer interface links the consumer with the seller’s products and services. Customers can access information on what is being traded, choose their selected items and complete their transaction. The customer interface may take the form of two integrated systems between businesses (in the case of B2B transactions, businesses can directly link their systems to communicate with one another so that they do not need to use a public platform), or alternatively a third party interface, such as a website or app that customers can directly access, can be used (in the case of B2C, where publicly available interfaces are used). Businesses may decide to develop their own websites to sell direct to customers, or sell via a third party platform, such as Amazon or Qoo10. Transactions through third party platforms are reflecting the fact that the platform serves as a link between the customer and the seller (e.g. Zalora). The decision to use a third party platform as the customer interface presents challenges and opportunities. It is cheaper (at least in the short term) compared to creating a bespoke platform and it is likely to provide access to a wider customer base. Consumers are also more likely to trust an established platform as opposed to the new website of an independent retailer. Third party platforms can therefore reduce barriers to entry for businesses, potentially leading to increased competition. However, once a business has established itself on a third party platform, it may be difficult to trade outside of that platform, which could limit future growth.
Delivery remains one of the key challenges for E-commerce. Online platforms can enable access to global markets, but the physical challenge of delivering products to final customers still remains. Delivery can involve interactions between different types of firms, such as logistics companies or postal services. Delivery also requires reliable infrastructure to be in place. The costs associated with delivery and the time it takes for consumers to receive goods presents a key challenge for businesses to overcome as they compete on customer experience. The growth of E-fulfilment services in recent years has enabled E-commerce companies to deliver a more compelling end-to-end customer experience. E-fulfilment is defined as the people, processes and technology required to deliver an online order to a customer. Dedicated companies have been set up to service this need, offering organisations participating in E-commerce the opportunity to outsource this critical part of their value chain.
Within the delivery phase, three sub-stages form the E-fulfilment value chain. This is shown in Figure 2 below.
There are three key areas where E-fulfilment services could provide substantial advantages for
- End-to-end capabilities: This could include flexible pick-up timings, packing solutions, inventory management, and fulfilment solutions (defined as the process of receiving, packaging and shipping orders for goods.). These elements fit within the warehousing and shipping section of the E-fulfilment value chain; and
- Enabling cross-border E-commerce transactions: E-fulfilment can help small and medium sized enterprises (SMEs) to extend their reach into new markets. By outsourcing to a focused logistics or E-fulfilment company, SMEs are more likely to have access to international partnerships and networks that can assist with cross-border transactions and deliveries.
- Last mile delivery: The introduction of automated lockers has led to progress within the last mile delivery phase. In 2016, Singapore Post introduced Singapore’s first island wide open parcel locker service. This allows retailers and consumers to rent a locker to deliver and collect their goods securely. This process can take place at any time during the day overcoming the issue of having to have someone available to collect a good. It also means returning a product is easier as goods can simply be left in the locker ready for collection. The introduction of ‘Federated Lockers’ has also begun within Singapore, which has the aim of creating a nationwide common parcel locker system. This will be the first of its kind in the world. The project will involve the large scale deployment of parcel lockers within Singapore, aiming to ease the last mile delivery challenges currently being faced. It is a centralised system that can be used by all logistics companies, rather than each company having to set up lockers themselves. The theory behind this method is that it will be cheaper for businesses and consumers to have one provider for locker systems.
- After sales service
As well as competing on price, E-commerce firms compete on customer service by providing
additional offerings such as online customer query resolution and free return of products. The return of products is one of the biggest challenges for online retailers. Many companies offer a free returns service to reduce the burden on the customer, whilst others still charge a fee to cover the associated costs.
- Overview of the E-commerce landscape in ASEAN, the current state of E-commerce development in each of the AMS and its growth potential
This section provides an overview of the current E-commerce landscape in ASEAN, and is structured as follows:
- Firstly, the key current business models in ASEAN are outlined, as well as the expected growth trajectories within the region;
- Secondly, the current state of E-commerce in all AMS is explored in greater detail; and
- Finally, the impact of E-commerce on the value chain in ASEAN is presented, before looking more closely at the changes in five heavily disrupted industries.
- Overview of the current retail E-commerce markets in ASEAN and their likely evolution
- Current scale of E-commerce markets in ASEAN
- Since the opening of the internet for commercial use in the early 1990s, E-commerce has grown significantly both in terms of revenue and the number of markets where it is operational. In the six largest economies within ASEAN (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, hereafter referred to as the ASEAN6), retail E-commerce has a total market size of US$7 billion.
- Table 2 below shows the market size within these AMS.
- Table 2 shows that in 2015 the market size per capita was highest in Singapore, and lowest in Indonesia. This demonstrates that E-commerce has penetrated further into Singapore than other AMS, but the potential for E-commerce growth is greatest in Indonesia, especially given its significant population. Internet users per capita is also highest in Singapore, and lowest in Indonesia and Thailand, thus showing a correlation between internet usage and the size of the E-commerce market per capita.
- The level of market penetration of E-commerce varies significantly across nations. To assess E-commerce adoption across ASEAN, internet retail sales as a share of brick-and-mortar based retail sales can be considered. UNCTAD data shows that Singapore, Malaysia, Thailand, Indonesia, Vietnam and the Philippines all currently generate less than 4% of their retail sales online. The country with the highest proportion of retail sales from E-commerce within the study of 42 selected countries is The Republic of Korea, at 16%. The equivalent figure in China is 7%.
- Table 3, highlights key characteristics of E-commerce markets in ASEAN, outlining the current state of the sector for the ASEAN6. Each of these countries is then discussed in greater detail in the following sub-sections.
The growth projection for the Indonesian E-commerce sector is a compound annual growth rate (CAGR) of 20.1% (2017- 21). The largest sectors within E-commerce in Indonesia are
entertainment media (e.g. books, videos and games), consumer electronics, fashion and travel. Logistical infrastructure and internet penetration are relatively weak compared to other members of the ASEAN6, making it harder for E-commerce retailers to reach consumers. Factors that are supporting the development of E-commerce include a growing middle class (expected to be 140 million by 2020, from 74 million in 2014), and a young population (70% of the population is under the age of 40).
The current growth projection for the Malaysian E-commerce sector is a 23.2% CAGR from 2017-21. The largest sectors within E-commerce are travel, followed by entertainment
credit card usage for the region, which is at 9%, and good transport infrastructure for product sourcing, logistics and delivery. Despite these factors, the online retail segment is still
less than 1% of total retail sales. Reasons for this include a lack of trust in online retailers, in terms of product reliability and safety of payment mechanisms, and poor local logistics
infrastructure. Questionnaire responses indicate that a number of successful platforms have emerged in Malaysian E-commerce markets, namely Lazada, Zalora and Lelong.
- The Philippines
The current growth projection for the Philippines E-commerce sector is a CAGR of 17.3% between 2017 and 2021. According to the Singapore Post, the largest online retail sector within the Philippines is consumer electronics, followed by food and groceries. Euromonitor (2017), however, found that media products, such as in-game purchases, is the largest sector.
Set against this, however, according to the Philippines Retailers Association, only approximately 3% of the total retail market is based online. One driver of the low level of E-commerce adoption in the country is the small proportion of people who own a credit card; specifically, there are only 2.5 million credit cards in a population of around 100 million. The fragmented geography of the Philippines also makes it a challenge to have reliable courier services, particularly serving the more rural areas.
Like many countries in ASEAN, the Philippines has many citizens working as migrants overseas. This has created opportunities for these citizens to buy domestic products online whilst overseas to deliver to family and friends still residing in the Philippines. Online stores targeting such customers have emerged. Island Rose, as an example, is an online flower retailer that allows consumers from all over the world to purchase gifts to be delivered within the Philippines.
Singapore has a high online penetration rate (78%) and a population which spends a large amount of time online (5.3 hours a day through desktop, and 2.4 hours a day through mobile devices). Also, the existing export and import infrastructure is strong. Singapore has comparatively low market entry barriers compared to other ASEAN Member States, evidenced through its rating as the second most free economy in the world in the 2014 index of Economic Freedom, behind only Hong Kong.
The growth projection for the Singaporean E-commerce sector is a CAGR of 11.2% (2017-21). The largest sectors within E-commerce are travel, fashion and beauty, entertainment
and lifestyle, IT and electronics and general insurance. Key drivers of growth in the market are high internet penetration and smartphone adoption, strong financial infrastructure, and
good logistical facilities.
Over the period from 2009 to 2014, B2C online business such as Reebonz, Qoo10, Luxola, Groupon, Deal.com.sg, NoQStore, Bellabox, VanityTrove, Kwerkee, Zalora, Food Panda, Taobao, HipVan, Omigo, Rakuten and Lazada have entered the market. There have also been new entrants in terms of C2C online businesses, for example Clozette and Carousell, as well as platforms like Uber and Grab (Grab offers both C2C and B2C services through GrabCar, GrabHitch and GrabTaxi).
Despite Singapore possessing the right enablers for E-commerce markets to flourish, retail E-commerce adoption rates are not as high as Japan or South Korea. This may be due to the
convenience of shopping malls, and the culture of shopping in traditional brick-and-mortar outlets. A survey by IMDA revealed that one of the top reasons for not shopping online was a
“preference to shop in person or deal personally with a service provider”. Questionnaire responses also highlighted this is a barrier in Singapore.
Online retail adoption could, however, increase due to the following reasons:
a. Recent labour policy changes have reduced the supply of labour in the market, prompting retailers to look again at E-commerce, as trading online tends to be less labour intensive than selling via brick-and-mortar stores;
b. Recently, there has been an emergence of strong E-commerce players in the region, such as Alibaba, which has led to cost reductions and increased quality of service for customers;
c. The new federated locker system will improve last mile delivery. In addition, the introduction of a ‘shopping mall’ by SingPost, which offers a complete suite of E-commerce logistics solutions, will also drive online retail sales. Shopping through online retailers will include in-shop online ordering and flexibility in delivery and pickup timings; and
d. Changi Airport’s E-commerce AirHub facility, which is designed to speed up the processing of parcels flown in from abroad will decrease the time taken for online purchases to be delivered to final customers. This will be done by increasing mail-sorting capability by three times and reducing processing time by half, and driven by the introduction of a fully automated mail-sorting system that will increase mailbag processing capability from 500 per hour to more than 1,800 per hour. The facility is expected to be ready during the second half of 2017.
The growth projection for Thailand’s E-commerce sector is a CAGR of 15.9% (2017-21). The largest sectors within E-commerce are travel, fashion, electronics & media. The key click-and-mortar players include Tesco Lotus, 7-Eleven and CP-ALL.
The challenges within Thailand are similar to those of Indonesia, mainly surrounding a lack of trust. 62% of online shoppers in the country are reluctant to give out their credit card information online. Other issues include the high cost of E-payment and logistics, expensive telecommunications and internet access, and a lack of capital to assist start-up companies.
The growth projection for Vietnam’s E-commerce sector is a CAGR of 16.5% (2017-21). The largest sectors within E-commerce are fashion, electronics & media, food & home appliances.
As of 2016 there were 45 million internet users in the country, and over 34 million smartphone devices sold. The most popular method of payment for E-commerce transactions is cash on delivery, followed by bank transfer and payment card.
The top 5 B2C Vietnamese websites according to questionnaire responses are Thegioididong.com.vn; Nguyenkim.com; Fptshop. com.vn; Dienmayxanh.com; and VienthongA.vn. The top 5 C2C Vietnamese websites are Vatgia.com; Chotot.com; 5giay.vn;
Chodientu.vn; and Webmuaban.vn.
Reasons for poor adoption of E-commerce in the country include concerns over the quality of products, security worries, high prices, and delivery costs. Many of these issues stem from the lack of logistics infrastructure within the country and inefficient E-commerce practices. Trust is a big issue for consumers online, who often prefer to purchase from brick-and-mortar companies.
- Brunei Darussalam
The uptake of E-commerce has increased within Brunei Darussalam in recent years, as access to mobile and internet capabilities has increased. However, the majority of E-commerce is limited to the accommodation and transport booking sectors. For example, Royal Brunei Airlines has an online reservation system. Hoteliers also have e-booking services.
- Lao PDR
A lack of investment in telecommunications infrastructure, and the low rate of formal banking and credit card use are two reasons why E-commerce is not widely used in Lao PDR. While broadband access is widely available in the capital, Vientiane, country-wide access to the internet is mainly through mobile devices.
There is a growing number of websites being set up in Cambodia which mainly cater for a small number of consumers in the major cities with better access to the internet. Impediments to growth are inadequate infrastructure and low levels of credit card penetration.
As of 2015, Myanmar’s internet penetration was around 22% of the population, a figure which has grown from under 3% in 2013. Internet access has, however, historically been unreliable and slow. There have been attempts to establish a presence online within the real estate and automotive industries in recent years. The growth in smart phone penetration (at 45% as of November 2015) bodes well for further E-commerce development going forward.
- Likely evolution of E-Commerce in ASEAN
Key drivers of growth in ASEAN include a rapidly expanding population and a rising middle class (expected to grow from 190 million people within Southeast Asia in 2012 to 400 million by 2020).
This growth is also being supported by a high penetration of smart phones (see Figure 3 below), an increase in sales through M-commerce, more payment and shipping options, and major brands entering local E-commerce markets.
There are several challenges that E-commerce markets in ASEAN are facing. These include poor E-commerce infrastructure (such as banking infrastructure) and a lack of E-commerce regulations.
- Impact of E-commerce on the value chain in ASEAN
This section considers the impact that E-commerce has had on the value chain in ASEAN Member States (AMS) in comparison to traditional brick-and-mortar sales channels. It looks at the differences in cost structures, the availability of information, and the supply chain and logistics functions of firms. Finally, the new business models that have emerged in the E-commerce space within the region are outlined.
- Differences in cost structures
Online retailers are not as physically constrained as their brick-and-mortar counterparts. They can offer a wider variety and quantity of goods without the need for a physical shop floor to showcase their products and services. Businesses are able to save on both fixed and variable costs, such as rent, labour and other overheads related to maintaining a physical presence on the high street.
Many of the costs associated with cross-border trade are reduced as the physical presence required to trade is diminished. As a result, more new and existing companies are expanding their sales into new markets and geographies. For example, Rakuten, a Japanese firm, has set up their regional headquarters in Singapore to reach other ASEAN markets.
- Availability of information
E-commerce has increased the availability of information, both to consumers and businesses at all stages in the value chain. Providers in digital markets collect and make use of large quantities of data and information on consumer preferences. This can be used to the mutual benefit of producers and customers by better meeting consumers’ needs through tailoring products to individuals’ preferences.
Competitors’ price movements are also more visible in digital markets. The availability of online algorithms used to identify and respond to price movements means companies are able to react automatically to changes in their competitors’ prices. Companies, such as Zalora, have visibility of any price changes to products made by online competitors, and can react to these changes almost instantly. Pricing algorithms are discussed in greater detail in Section 8, with a focus on the implications for competition.
- Supply chain/logistics
A supply chain is defined as an “entire network of entities, directly or indirectly interlinked and interdependent in serving the same consumer or customer”. This includes logistics, manufacturing and procurement. The growth of E-commerce has led to changes in the supply chain. Shorter delivery times are being demanded by online shoppers, and companies want to differentiate themselves in the market.
Some retailers have implemented a ‘drop-shipping supply chain’, where an order is passed directly onto a wholesaler/manufacturer, removing the need to have a physical warehouse to store the products, therefore decreasing costs. Cleo-cat fashion and Blogshop have adopted such processes in Singapore.
E-commerce companies have also started to acquire or develop elements of the supply chain,
rather than rely on other companies to complete these parts of the customer journey. This is often used to gain greater control over the entire customer experience. For example, Jindong Mall, has recently been given a licence for its logistics subsidiary, allowing it develop an in-house logistics framework rather than rely on third party infrastructure.
- New business models
E-commerce is creating new customer-centric business models. Advancements in data analytics allow better targeting of products and marketing via the most effective distribution channels to consumers, who are demanding a more unique and efficient customer experience.
Price Comparison Websites (PCWs) which allow consumers to easily compare and filter different suppliers of goods or services, have become prevalent across ASEAN. PCWs make their money from advertising, and also commission from the company the customer purchases from. CompareXpress.com in Singapore, CompareHero.my in Malaysia, and Websosanh in Vietnam, all adopt this business model. In online marketplaces such as Amazon, actual sales are made, whereas on PCWs, consumers are directed to retailers’ websites.
- Key competition and other regulatory challenges and/or barriers faced by businesses in the E-commerce sector for ASEAN Member States (AMS) and how they hinder competition and growth of the E-commerce sector in the region
Businesses competing in E-commerce markets may face two distinct types of barriers. Firstly, there may be barriers to the growth and development of E-commerce markets affecting all
firms in the market (barriers to expansion), such as restrictive forms of regulation, or broad technological delays. The quality of connectivity infrastructure may also be considered a barrier to the growth and development of E-commerce in ASEAN. Secondly, there may be barriers to entry that apply to potential entrants or small firms (e.g. economies of scale or network effects). These two types of barriers are explored in the following sub-sections.
- Barriers to expansion
A barrier to expansion is defined as “something that prevents a firm already in the market from being able quickly and cheaply to increase its output”. The presence of these barriers inhibits the development of E-commerce markets in ASEAN and affects all firms, including incumbents. In order for E-commerce markets to flourish, the service provided to customers must be trustworthy, and suitably efficient, such that it is an attractive alternative to brick-and-mortar transactions. Throughout ASEAN, however, there is a lack of trust among customers when completing transactions online, for instance with regards to data protection, banking fraud, unfulfilled deliveries, and the inability to return products. 20% of Malaysian SMEs report E-payment concerns as one of the main obstacles to the development of E-commerce. This lack of trust, ultimately stemming from a lack of technological infrastructure in the region, and a weak regulatory environment has prevented E-commerce markets from growing to their full potential and has inhibited the growth of firms trading across borders. These two categories of barriers are explored in greater detail in the following sub-sections.
- Level of technological infrastructure in ASEAN
Despite significant investment in their technological infrastructure, many AMS still lag behind in global rankings in terms of speed, efficiency and reliability of internet services. Multiple questionnaire respondents highlight the current level of technological infrastructure as an emerging issue or barrier to the development of E-commerce in their jurisdiction. These issues are separated into three key areas: Information and Communication Technology (ICT), broadband and mobile internet, and logistics and delivery.
ICT: The ICT Development Index (IDI) published by the International Telecommunication Union (ITU) scores countries and ranks them based on 11 benchmarks covering three key areas: ICT access, ICT use and ICT skills.
Rankings of AMS on the basis of this index vary significantly. Of the AMS, Singapore is ranked the highest in 20th place with a score of 7.95, whereas Lao PDR is ranked lowest, in 144th place with a score of 2.45. The rankings of all AMS are presented in Table 6 below.
The average IDI value for AMS in 2016 was 4.5, marginally below the global average of 4.9. However, there are clear signs of improvement in Cambodia, Myanmar and Lao PDR (the three lowest ranked AMS), which achieved the highest year-on-year change among AMS. Broadband and mobile internet: A broadband divide exists in many nations within ASEAN between the richer metropolitan cities that have strong and stable internet coverage, and the poorer rural regions that have very limited connectivity. The connectivity infrastructure in ASEAN also varies significantly between AMS, affecting businesses’ ability to sell online, and consumers’ access to E-commerce markets. Average internet speeds and the cost of accessing the internet in the ASEAN6 are presented in Table 7 below. Figures for the UK and USA are provided for comparison.
Table 7 highlights the differences in the speed and cost of access to the internet across AMS. Whilst the Philippines has the slowest average broadband speed of the ASEAN6, it is also the most expensive both in nominal terms and as a percentage of average income. Research suggests that faster broadband is available in the Philippines, offering speeds of 20, 50 and 100Mbps, but the associated costs make it even more unaffordable than the current situation. Singapore is the only AMS that has comparable speeds and costs to the established networks in the UK and USA.
The UNESCAP (2013) outlines how there is an opportunity for a pan-regional terrestrial fibre optic network which could provide fast broadband connectivity to the entire region, allowing AMS to realise the full potential of E-commerce on a domestic and international level. For a project such as this to be successful, the cooperation of governments and other international organisations across ASEAN would be essential, and access to significant funding would be required.
Logistics and delivery: To enhance the speed and reliability of E-commerce processes, and reduce delivery costs, improvements in logistics and delivery systems are needed across ASEAN. For nearly half of Singaporeans, the primary reason for not buying online is delivery concerns. However, research suggests that the number of parcels delivered within ASEAN will grow at an annual growth rate of 23% between 2016 and 2020, largely driven by the growth of E-commerce within the region. Given that only Singapore and the Philippines have liberalised their postal industries, the ability to manage the increase in the volume of deliveries arising from E-commerce will be a challenge for the state owned postal operators to overcome. However, the market for courier services is less regulated so there is an opportunity for last-mile delivery to be performed via these providers to meet this increase in demand.
The fact that some AMS are archipelagos also causes significant logistical restraints for the sale of goods via the internet. For example, with about 2,000 inhabited islands in the Philippines, the delivery of goods is both expensive and time consuming. As a result, E-commerce is currently largely only available to wealthy consumers, or those living on better connected islands.
- Regulatory and legal barriers inhibiting E-commerce transactions and cross-border trade
Cybersecurity: As well as the current level of technological infrastructure in the region, the regulatory and legal environment across the region has also failed to protect transactions from cyber-threats. Sophos (2013) found that four of the top five worldwide riskiest countries for cyber-attacks are in ASEAN and that Asia has the most spam sources by continent. It is therefore apparent that work is required on regulations to tackle cybersecurity issues, in order to build trust among consumers and allow E-commerce to flourish in the region. UNCTAD (2013) highlights coordination in regulations tackling cybercrime, consumer protection and recognition of electronic signatures as critical requirements, in addition to the establishment of a regional online dispute resolution facility.
AMS are focusing on cybersecurity as an area for development, with S$10 million set aside to
fund work in this sector over the next five years. This ASEAN Cyber Capacity Programme has been designed to develop the technical, policy and strategy-building capabilities required within AMS that will allow businesses to operate confidently within E-commerce markets. Senior officials across AMS recognise that a secure and resilient cyberspace is a critical enabler for AMS to harness the opportunities from digital technologies and E-commerce to achieve economic growth and improve living standards throughout ASEAN.
Customs and taxes: National tax policies were raised in questionnaire responses as an issue or barrier to E-commerce within ASEAN. Specifically, responses suggested that consumers and businesses are discouraged from purchasing goods from overseas firms because of uncertainty and a lack of awareness of customs and tax rules. There are also variations in the import duties and taxes payable when purchasing goods from another AMS in ASEAN. Import duties and taxes on a $50 handbag range from $0 to $19.55. The breakdown of these duties and taxes in each country is presented in Table 8 below.
The degree to which foreign companies are able to compete with domestic players therefore varies across the region. As a result of import duties, firms exporting to another country in ASEAN are at a disadvantage in comparison to domestic firms.
Non-tariff barriers also restrict firms from abroad, as highlighted by UNCTAD (2016). Although such barriers may have a main objective unrelated to trade, such as protecting public health or the environment, they may have the adverse effect of inhibiting cross-border trade. Complex technical, sanitary and phytosanitary measures are particularly prevalent barriers across ASEAN. Pre-shipment inspection and price control measures have also been identified as barriers regularly restricting cross-border trade in ASEAN.
Application of competition policy and law: Differences in approaches to the application of competition policy and law in AMS also pose challenges to firms looking to operate internationally across ASEAN. This is particularly important with regards to the use of vertical restraints by firms operating in online markets (i.e. when a restraint may be deemed anti-competitive by authorities). International differences in approaches to applying competition policy and law gives rise to an additional burden for the firms, as they may need to adapt their conduct depending on the different approach adopted in the different territories where they wish to conduct their business. The recent Booking.com case is a good example of such a case, with different competition authorities reaching different conclusions on the use of wide and narrow MFN clauses in the hotel booking industry. Online booking platforms had to adapt their conduct in different jurisdictions as a result.
AMS are however working hard to overcome problems and improve the harmonisation of regulations, for example by introducing the ASEAN Competition Action Plan (ACAP) 2016-2025, which aims to improve the consistency of regulations and build trust for consumers looking to complete transactions in other jurisdictions. The increase in globalisation, fuelled by E-commerce, has led to a rise in the challenge to identify and combat anti-competitive conduct, and mergers which may lead to a lessening of competition across international borders. AMS are already conducting training on how best to approach situations like this, which is an essential first step in creating effective cross-border enforcement. UNCTAD highlighted that membership of the International Consumer Protection and Enforcement Network would be another beneficial move to improve regional cooperation. At present, only the Philippines and Vietnam are members.
- Barriers to entry
Barriers to entry can be defined as “a cost of producing which must be borne by a firm that seeks to enter an industry but is not borne by firms already in the market”. Barriers to entry limit the ability of new entrants to enter and expand output in a given market. These barriers can be considered under four broad categories: economic advantages enjoyed by incumbents; costs and network effects that inhibit consumers from switching suppliers; legal barriers; and the conduct of incumbent firms. These barriers are present both in brick-and-mortar and online markets, but there are differences in the prevalence and magnitude of some of these barriers between the two sales channels. This section considers each of the four categories in turn, highlighting any important features of E-commerce markets throughout.
- Economic advantages enjoyed by incumbent firms
Incumbent firms in a market may benefit from certain economic advantages that new firms or smaller players are unable to achieve, by virtue of their size. Economies of scale and scope, privileged access to essential inputs, technologies or information, and an established sales network all put smaller firms and new entrants at a disadvantage. This sub-section focuses on two potential economic advantages that have been impacted by the growth and development of E-commerce: economies of scale, and privileged access to inputs, technologies or information.
Economies of scale: Economies of scale arise when the average cost per unit of output decreases with the increase in the scale of the output produced, and economies of scope occur when it is cheaper to produce two products together than to produce them separately. In such instances, new entrants or smaller firms are unable to produce as efficiently as larger firms, or firms producing a range of related products.
Whilst economies of scale apply to brick-and-mortar firms as well as to online retailers, they appear to represent less of a barrier to entry in E-commerce markets as the fixed costs of entering a new location or market via the internet are significantly lower. In E-commerce markets there is no need to build or rent a physical retail space to sell goods. The costs of making a website accessible in a new location are relatively low, for example the cost of translating the website into the local language as compared to the cost of establishing a brick-and-mortar retail presence in other countries.
Incumbent firms do still benefit from some economies of scale in E-commerce markets, therefore some barriers for new entrants remain. The ability to spread marketing costs over a larger quantity of goods sold remains a constraint for online retailers seeking to grow or enter new markets in comparison to larger incumbent firms.
Privileged access to inputs, technologies or information: Access to supporting infrastructure, such as logistics, inventory and payment systems may also constitute a barrier to entry. Vertical integration by an incumbent platform or single-sided firm may affect other firms’ ability to gain access to these systems.
Some also consider the data that a firm holds on its customers to be an asset that incumbent
firms have privileged access to. The rise in the quantity of data that some firms are collecting in E-commerce markets is under close consideration by some competition authorities around the world. The question facing authorities is whether this data, often referred to as Big Data, constitutes a barrier to entry and therefore is likely to enhance a potential position of market power.
Big Data is defined as: “the use of large scale computing power and technologically advanced software in order to collect, process and analyse data characterised by a large volume, velocity, variety and value.”
The presence of Big Data has grown significantly over recent years through the automated collection of information on online activity, including from social networking sites. Firms are able to use complex algorithms automatically to sieve through this data to identify the patterns and trends in consumers’ behaviour. Consumers benefit if firms pass on any efficiency gains from the use of this data, improve the quality and scope of their goods/services, and/or offer more targeted advertising.
On the other hand, there are concerns that the additional insights that firms have of their customers may be an asset that smaller firms or new entrants are unable to replicate, and therefore increase a potential firm’s position of market power. However, general consensus on this issue has yet to be reached. Owning large datasets does not necessarily lead to market power, or act as a barrier to entry per se, especially in E-commerce markets where competition is dynamic. In many markets, data can be collected from multiple sources, and such customer insights are not expensive, even for small companies and new entrants, to gain access to. When, on the other hand, such data cannot be replicated, it is important to understand whether such data constitutes an essential facility without which competitors are unable to operate. This is not a new issue in competition policy.
Competition authorities’ approaches to dealing with E-commerce related cases where Big Data is a factor should be no different to those in offline markets. The OECD (2017) states that although further research is needed in this area, traditional antitrust tools can be adapted and applied to tackle data-related anti-competitive practices. Nonetheless, Big Data remains a widely debated area of competition policy at the time of finalising this handbook.
- Costs and network effects that obstruct consumers from switching suppliers
Switching costs for consumers also make it harder for new entrants and smaller firms to compete with large incumbent players. Switching costs make it more expensive for consumers to purchase a good or service from an alternative supplier beyond the direct price charged. These costs may be monetary or non-monetary. For example, the time spent in creating an account with a new provider is considered a non-monetary cost of switching. Some costs may not materialise, such as costs arising from the risk of online fraud, but in these instances the risk that an additional cost will be incurred may deter consumers from switching providers. Switching costs may arise naturally, or may be created or increased as a result of the actions of incumbent firms in order to restrict the entry and expansion of smaller firms. For example, loyalty reward schemes are designed by incumbent firms to increase switching costs for consumers to alternative providers.
The established reputation of an incumbent represents a barrier for new online retailers. For consumers considering switching there is a risk that the new retailer may not be reliable. The quality of the service (e.g. reliability of delivery times, return policy, etc.) and the product itself (e.g. if it is a counterfeit) are both untested. A consumer is therefore more likely to purchase from a retailer it has used before, and trusts.
Switching costs are present both in brick-and-mortar and online sales channels. In E-commerce markets some switching costs have emerged for consumers, making it harder for new entrants and smaller firms to compete with incumbent online retailers. There are more risks involved in switching to an alternative retailer in the online space than in brick-and-mortar markets. This is because in an online environment consumers are less able to assess the risks they face in terms of the reliability of the service, the quality of the products, the treatment of their personal data, and the safety of sharing their payment details. These potential risks constitute a switching cost that makes consumers more likely to use an incumbent online retailer whom they have purchased from before, and that they trust, as opposed to a new online retailer offering the same product, thereby creating barriers to entry. Accreditation from independent consumer bodies, as well as testimonials and reviews from customers, can go some way towards reducing these switching costs, although consumers may not necessarily know whether to trust such endorsements.
Network effects can also create switching costs for consumers. Network effects are present when the value that one user places on a good or service increases as the number of other users of that good or service rises (that is the scale of the network). If an individual, and a large proportion of that individual’s network, are using a good or service provided by one firm, there is a cost to that individual from switching to an alternative provider in that fewer people are using the other service. The value that the individual derives from consuming the good or service provided by a smaller firm is lower (as the value depends on the size of the network, which is smaller). The network effects therefore constitute a barrier for new entrants and smaller firms.
While network effects are present in both brick-and-mortar and online markets, the emergence
and growth of E-commerce has resulted in the development of many new platforms in multi-sided markets where network effects are highly prevalent, such as online marketplaces, PCWs and social media sites.
Network effects are less of a barrier to entry if individuals multi-home; that is, they use multiple
providers of a good or service. Consumers may prefer the use of a platform which provides access to a large number of products or services, but if they can easily source the products or services from other platforms (i.e. multi-home) the larger scale of the incumbent network does not necessarily constitute a barrier. By contrast, if there is a cost to multi-homing then the barrier to new entrants and smaller firms is greater.
In online markets multi-homing is common, therefore network effects do not always represent
a significant barrier to entry for new entrants and smaller firms. Moreover, even in cases when
consumers single-home, the advent of a better product or service can induce those consumers to switch. Facebook is a good example of a firm overcoming network effects when it displaced MySpace as market leader in social media. Similarly, Taobao’s displacement of eBay in the Chinese online marketplace sector also highlights this.
- Legal barriers
“Legal advantages such as regulatory rules that limit the number of market participants” can also constitute barriers to entry, in particular with regards to IP rights. This is with regards to industrial property, namely patents for inventions, and copyright laws, whereby new entrants and smaller firms may not be able to access patented technology or copyrighted content.
Most academics agree that IP rights are crucial for certain markets to function effectively, though they can have the effect of restricting entry. Other legal barriers may derive from “government licensing requirements and planning regulations, statutory monopoly power and tariff and non-tariff barriers”.
- The conduct of incumbent firms
Finally, the conduct of large incumbent firms may restrict entry to a particular market when they are able to exercise market power and thereby exclude or marginalise competitors. The conduct of firms in E-commerce markets, either unilaterally or in coordination, which presents a discussion of when such conduct is likely to lead to anti-competitive effects.
Additionally, switching costs for consumers may be increased as a result of the actions of incumbent firms.
 ADBI (2016), page 1.
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 nchannel (2016).
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 Prime Minister’s Office Singapore. See: http://www.pmo.gov.sg/newsroom/dpm-tharman-shammugaratnam-opening-ceremony-singapore-post-regionalecommerce-
 AT Kearney (2015), page 2.
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 DBS (2015), page 20-22.
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 DBS (2015), page 22.
 DBS (2015), pages 22-24.
 Philippine Competition Commission (2017).
 DBS (2015), pages 22-24.
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 DBS (2015).
 DBS (2015), page 13.
 IMDA (2014).
 DBS (2015), page 13.
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 DBS (2015).
 Firms that conducts business online and also through ‘traditional’ offline brick-and-mortar channels.
 The Paypers, (2017).
 Electronic Development Transactions Agency, (2017).
 Qandme.net. (2016).
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 Qandme.net (2016).
 Vietnam Net (2016).
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 Export.gov (2016b).
 Export.gov (2016c).
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 Export.gov (2016d).
 Nielsen (2014). Middle class defined as people that “have the financial means to make purchase decisions based on their level of disposable income.”
 DBS (2015), pages 12-14.
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 BusinessDictionary.com (2017).
 Nomura (2016).
 Competition Commission of Singapore (2015), page 11.
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 Bishop, S. and Walker, M. (2010), page 81.
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 There are 175 countries in the IDI rankings published by the ITU.
 UNESCAP (2013), page 5.
 Philstar (2016).
 AT Kearney (2015), page 17.
 Nomura (2016).
 Postal services is, however, currently a government monopoly in the Philippines.
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 Price control measures are “those implemented to control or affect the prices of imported goods in order to, inter alia, support the domestic price of certain
products when the import prices of these goods are lower; establish the domestic price of certain products because of price fluctuation in domestic markets,
or price instability in a foreign market; or to increase or preserve tax revenue. This category also includes measures, other than tariff measures, that increase
the cost of imports in a similar manner (para-tariff measures).” UNCTAD (2016), page 5.
 A wide MFN is a vertical restraint that ensures that no other competitor will be given more favourable terms by a supplier/customer/platform – for instance
being able to sell at a lower price. A narrow MFN restricts a firm from setting a lower price in its own store, but it is free to agree to a lower price with a
competing store e.g. a hotel that enters a narrow MFN agreement with a hotel booking platform, cannot set a price on its own website lower than the price on
the booking platform, but it can agree to lower prices on competing platforms.
 ASEAN Competition Policy and Law (2016
 ASEAN (2017).
 AT Kearney (2015), page 12.
 Bishop, S. and Walker, M. (2010), page 75.
 Whish, R. and Bailey, D. (2015), page 194.
 Ibid, page 46.
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 Bloomberg (2011).
 The Economist (2006).
 Whish, R. and Bailey, D (2015), page 920.
 WIPO (2011).
 Center on Law and Information Policy (2011).
 Whish, R. and Bailey, D. (2015), page 194.
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