TOPIC ALIBABAS ACQUISITION OF LAZADA AND ITS IMPACT ON THE SOUTHEAST ASIAN CONSUMER GOODS MARKET

FACULTY OF COMMERCIAL—o0o— FINAL EXAM TOPIC: ALIBABA'S ACQUISITION OF LAZADA AND ITS IMPACT ON THE SOUTHEAST ASIAN CONSUMER GOODS MARKET Name : Nguyen Hung Cuong Student ID : 207TM63753

FACULTY OF COMMERCIAL

—o0o—

FINAL EXAM TOPIC: ALIBABA'S ACQUISITION OF LAZADA AND ITS IMPACT ON THE SOUTHEAST ASIAN CONSUMER GOODS

MARKET

Name : Nguyen Hung Cuong

Student ID : 207TM63753

Course code : 212_DCO0530_E02

Subject : Contemporary issues in international

business

Lecturer : PhD Truong Hong Ngoc

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

Ho Chi Minh City, April 29, 2022

LIST OF TAB

Figure 1.1 1 Transaction slace and growth of china's online retail market, China E-Retail Market Report 2016, 2017 5 Figure 1.1 2 Alibaba's gross merchandise volume growth, "Will Alibaba's Fiscal 1Q17 Earnings Top Analysts' Esstimate" 6

Y

Figure 2.1.1 1 Internet users per ASEAN Memb= State IWS

2010 est 10 Figure 2.1.1 2 Internet Users per Country and % of total IWS

2010 est 10 Figure 2.1.1 3 Size of Southeast Asia's E-Commerce Market, Temasek Holdings, 2016 11 Figure 2.1.1 4 ASEAN Consumer Expenditure, Euromoitor 12 Figure 2.1.1 5 Usage of E-commerce before, during and after Covid-19, Temasek and Bain & Company 12 Figure 2.1.1 6 The Top 10 Most Visited E-commerce Websites in Southeast Asia 2020 13 Figure 2.1.1 7 How household incomes will change across developed and emerging asean (2019-2030) 14

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LIST OF TABLE 1

INTRODUCTION 4

CHAPTER 1: OVERVIEW OF THE ALIBABA’S DEAL TO ACQUIRE LAZADA.5 1.1 The situation leading up to the event 5

1.2 The cause of the event 6

1.2.1 Looking for new markets 6

1.2.2 Acquiring an established platform was a more appropriate option 7

1.2.3 M&A is easier than building new logistics systems 8

1.3 Timeline of this event 9

CHAPTER 2: THE IMPACT OF THIS EVENT ON THE ASEAN REGION 10

2.1 The effects of this event on the consumer goods market 10

2.1.1 The positive effects 10

2.1.2 The negative effects 14

2.2 The effects of this event on small and medium distributors 16

2.2.1 The positive effects 16

2.2.2 The negative effects 19

CHAPTER 3: PROBLEMS THAT ALIBABA IS FACING THROUGH THIS EVENT 20

3.1 The environment inside the business 20

3.1.1 Human resource management problems 20

3.1.2 The mistake of operation stage: Lazada is not Taobao 21

3.1.3 The influence of competitors 22

3.2 The environment outside the business 24

3.2.1 The risk of losing market share 24

3.2.2 Fake and poor-quality goods will become mass 25

CHAPTER 4: RECOMMENDATIONS 26

4.1 Solutions that Alibaba can take to overcome the obstacles mentioned 26

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

4.1.1 Strengthen distribution network 26

4.1.2 Develop unique marketing tactics 26

4.1.3 Adapt to di昀昀erent cultural aspects of di昀昀erent markets 26

4.1.4 Expand into new regions 27

4.1.5 Strengthen value network 27

4.2 Solutions for small and medium-sized goods distribution businesses in the region 28

4.2.1 Increasing people productivity: 28

4.2.2 Integrating seamlessly: 28

4.2.3 Providing access: 28

4.2.4 Keeping flexible: 28

4.2.5 Controlling cost to serve: 29

4.2.6 Use third-party of fourth-party logistic providers: 29

CONCLUSION 30

ACKNOWLEDGEMENTS 31

REFERENCES 32

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China's e-commerce market is easily seen as the mostdeveloped in the world - it's bigger than Western markets like the USand Europe China's e-commerce market has exploded in recent timesand there doesn't seem to be enough space to increase market share.Against such a backdrop, China's e-commerce giant Alibaba, of course,won't let the game end like that Alibaba, the company owned bybillionaire Jack Ma is aiming for the next e-commerce gold rush, a newlucrative market: Southeast Asia

Following Alibaba's $1 billion investment in April 2016 at avaluation of $1.5 billion, a second deal that later raised that valuation

to $3.15 billion represented exactly that Jack Ma said about businessstrategy to investors in 2016, Alibaba planned to reach at least 1.2billion people outside of China in order to achieve its goal - 2 billioncustomers This statement shows the Chinese giant's ambition todominate the international market, and Southeast Asia is a focus ofAlibaba's plans This group started to buy back a large number ofshares of Lazada in 2016 After that, Alibaba continued to increase thestake by 1 billion USD in 2017 and then invested 2 billion USD inLazada in 2018

This essay builds on the above events and deals with issuesabout Alibaba and Lazada themselves and their impacts on theconsumer goods market and SME distributors

In terms of structure, this essay consists of four chapter:

Chapter 1: Overview of the Alibaba’s deal to acquireLazada

Chapter 2: The impact of this event on the ASEANregion

Chapter 3: Problems that Alibaba is facing through thisevent

Chapter 4: Proposal solutions for Alibaba

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

CHAPTER 1: OVERVIEW OF THE

ALIBABA’S DEAL TO ACQUIRE LAZADA

1.1 The situation leading up to the event

After Jack Ma founded an online directory website for Chinesecompanies looking for international visitors, he came up with a newvision to develop an online platform that allows consumers,manufacturers, and distributors can cooperate, buy and sell directlywith each other

By 2013, his Alibaba was starting to get strong enough, and asevidenced by the fact that Alibaba’s online transactions had 昀椀nallysurpassed the combined transactions of eBay Inc (eBay) and Amazon

In 2014, Alibaba was listed on the New York Stock Exchange and wasvalued at $160 billion Through Alibaba, he not only created millions ofjobs, but also changed the economic and social landscape of thecountry, making China the largest Internet market in the world

The e-commerce market had grown substantially, and theonline retail market was at peak in 2013, with a nearly 60 per centannual growth rate However, this growth was expected to decline to

20 per cent in 2018 due to the economic downturn in the Chineseeconomy (see 1.1.1) In 2016, China’s economy grew at only 6.7 percent—its worst performance in 26 years—and growth was expected toweaken further, to 6.2 per cent in 2018 Growth of gross merchandisevolume (GMV) was the most important performance metric in the e-commerce industry Alibaba’s GMV was at 40 per cent in the fourthquarter of 2015 but was reduced to less than 25 per cent in the samequarter of 2016 (see Exhibit 1.1.2) Although Alibaba still managed toincrease its revenue during this downturn, the company could notignore the fact that competition among e-commerce players wouldbecome sti昀昀er and would potentially jeopardize its leading position

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Figure 1.1 1 Transaction slace and growth of china's online retail market, China E-Retail

Market Report 2016, 2017

Figure 1.1 2 Alibaba's gross merchandise volume growth, "Will Alibaba's Fiscal 1Q17

Earnings Top Analysts' Esstimate"

In 2017, The slowdown in the Chinese economy, domesticcompetition, and expectations from capital markets all motivated thecompany to accelerate its globalization In fact, Alibaba had derivedonly 7 per cent of its total revenue from international retail andwholesale markets in 2016 However, it aimed to generate over 50 percent of its revenues outside China in the next 20 years, while serving 2billion customers around the world, empowering 10 million businesses,and creating 100 million jobs Regardless of the China’s economicsituation, Alibaba was optimistic about China’s e-commerce market,because only 50 per cent of China’s population had Internet access atthat point However, it would take time for Alibaba to grow further by昀椀lling this gap

Jack Ma saw a promising opportunity about the markets inSoutheast Asia are having grown rapidly but was without dominantplayers, probably due to the region’s diverse cultures, languages,

Contemporary Issues In International BusinessNGUYEN HUNG CUONGgeographical conditions, and consumer habits That is why Alibabaseeks to conquer Southeast Asia, takes $1 billion stake in RocketInternet’s Lazada in 2016 and then the company doubles down onLazada with fresh $2 billion investment in the next two years.

1.2 The cause of the event

1.2.1 Looking for new markets

As its home economy slowed and the competition continued torise, Alibaba had to look for a new source of revenue to sustain itsgrowth Southeast Asia was a fast-growing region with an increasingmiddle-class population that could potentially drive the e-commercemarket

Alibaba bought Lazada because the leading e-commercecompany in the region has great appeal, with six di昀昀erent websites ineach country Lazada shoppers spent $433 million on purchases in the昀椀rst six months of 2015, a fourfold increase from the same period lastyear The result of Alibaba’s deal to acquire Lazada is Alibaba gainedaccess to a huge and growing consumer base outside China

1.2.2 Acquiring an established platform was a more

appropriate option

As I have mentioned above, Southeast Asia is having a grownrapidly Despite its attractiveness, the region was challenged by itsfragmented market, infrastructure, logistics, connectivity, and paymentgateways Due to the diversity culture, languages, and The PersonalData Protection Act, Southeast Asian countries have been conductingmany measures to protect the right to personal data, not onlyimproving national law but also establishing and strengtheningprotection mechanisms, which will be hard for Lazada to collect andkeep consumers’ information Given these challenges, entering theregion early through a green昀椀eld investment might have been costlyand risky Thus, acquiring an established platform was a moreappropriate option

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Despite the impressive growth of e-commerce in the region,Southeast Asia was lacking a uni昀椀ed logistics infrastructure.Inconsistent cross-border customs and taxes as well as corruption inemerging markets continued to be barriers to online retail

development In order to deliver an e昀昀ortless shopping experience,Lazada need to focus on building its own logistical supports while

deepening its partnerships with third-party vendors Lazada had

conducted a few rounds of fundraising and had managed to raise about

$700 million However, this cash ran out quickly due to the challenges

of serving six di昀昀erent emerging markets Raising additional capitalwas di昀฀cult due to the size of the investment and the fact that thecompany was not a usual start-up in the 昀椀rst place Lazada had 昀椀guredout how challenging it was to operate a successful e-commercebusiness in Southeast Asia

However, they can’t give up on Southeast Asia, which isconsidered as a big piece of cake with numerous of potentialcustomers “The total value of goods from e-commerce is forecast toreach about 174 billion USD by the end of 2021, will increase to 360billion USD by 2025”- Google, Singapore's Temasek Group and USconsulting 昀椀rm Bain Lazada with the slogan “To make it easy to dobusiness anywhere” has cooperated with third-party contractors called

Lazada eLogistics (LeL) launched in 2012, to develop its own logistics

service by built centers for logistics, ful昀椀lment, includes hundreds ofvans and motorcycle instead of buy or ship its own inventory Thisstrategy is the key to help Lazada “completely beat” Shopee – one oftheir biggest industry competitors, in the delivery time Moreover, it is

the solution for the diverse and fast-growing market like Southeast

suitable platform to conquer the Southeast Asian market, taking

advantage of these advantages helps Alibaba access to a huge and

Contemporary Issues In International BusinessNGUYEN HUNG CUONGgrowing consumer base outside China and save a large amount ofmoney instead of building new logistics systems or establish a similarsubsidiary It would have cost Alibaba years and billions of dollars tobuild such strategic assets to operate in the region if it had chosengreen昀椀eld investments.

All those issues are very unfamiliar to Alibaba, which hasthings so much easier in China Although the country has an array ofethnic groups, most speak Mandarin Chinese Alibaba has to build onlyone site or app to cover a billion people

Another boon is that China’s vast rail network and a profusion

of new highways speed up shipping And lively competition in thelogistics industry reduces costs

Lazada’s position across its six markets would cost billionsupon billions to replicate, with no guarantee of being able to beat it atits own game Put simply, M&A is cheaper for Alibaba than building

1.2.4 Political factors

Of course, it wouldn't be without a political element - asensitive one Alibaba was to establish the logistics, payment, customsand digital integrated eWTP test complex in 2017 Alibaba has beenpromoting eWTP as ‘digital Silk Road’ to complement the BRI and hasbeen the face of private-sector support for digital BRI Alibaba’s eWTP

is an online marketplace platform to link vendors and customers inChina and partner countries It is supported by Alibaba’s technologyand infrastructure in ecommerce, logistics, cloud computing and昀椀nancial payment Although the prospects of the Malaysia-based eWTPare now uncertain after the Mahatir government took power in May

2018, subsequent eWTP projects are under way in Thailand, Pakistan,Rwanda and Russia

Alibaba’s eWTP aligns with the Chinese government’s ‘onlineSilk Road’ policy, an extension of the BRI into cyberspace The StateCouncil’s ‘13th Five-Year Plan for National Informatization,’ released in

2016, o昀฀cially recognized the progress in digital economic cooperationbetween China and BRI countries and called for more activeparticipation of Chinese internet 昀椀rms

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It is hard to 昀椀nd any evidence suggesting that the stateprovided any direct policy initiative or critical funding for Alibaba’soverseas expansion, including the Lazada deal Rather, it was atransaction initiated and executed by the private sector For China’sinternet companies, business opportunities that the BRI projects o昀昀erobviously draws them to support thepolicy, as exempli昀椀ed by theexpansion of Alibaba’s overseas data centers in BRI countries.Nonetheless, the need to reduce the risks of alienating the state mayalso motivate private 昀椀rms to support the state’s geopolitical strategy.

1.3 Timeline of this event

Alibaba's acquisition of Lazada took place in 2 years This isAlibaba's largest cross-border deal

With the following reasons I have mentioned above, in 2015,Lazada faced to the challenge for growth were the preference for brick-and-mortar shopping among customers, with just about 1% of peoplebuying online compared to 10% of international shoppers In addition,Lazada has to solve the problem of lack of credit cards, arrange areliable cash on delivery and delivery system in rural areas It seemsthat this has consumed a lot of Lazada's resources and entered adi昀฀cult situation of being threatened by Alibaba and Amazon

In April 2016, Alibaba Group announced that it intended toacquire a controlling interest in Lazada by paying $500 million for newshares and buying $500M worth of shares from existing investors TheBritish supermarket company Tesco con昀椀rmed the sale of 8.6% of itsholding in Lazada to Alibaba for $129 million Alibaba gave thefollowing reasons for its investment: the market in South-East Asia hasgrowing middle-class income populations, estimated at that time to bearound 190 million people in the region with a disposable income of

$16 - $100 a day, and this was expected to grow to 400 million people

in 2020

In June 2017, Alibaba Group increased its investment in Lazada

by an additional $1 billion, raising its stake from 51% to 83% Alibabainvested another $2 billion into Lazada in March 2018, and founder MaxBittner was replaced as CEO by Alibaba executive Lucy Peng

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

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CHAPTER 2: THE IMPACT OF THIS EVENT

ON THE ASEAN REGION

2.1 The e 昀昀ects of this event on the consumer

goods market

2.1.1 The positive e昀昀ects

First, this cross-border investment event has another side ofadvertising for Lazada This makes the customer base participating inthe Lazada platform to become wider due to the convenience of E-commerce Consumers can shop for everything, and this has led tosigni昀椀cant consumer growth

Figure 2.1.1 1 Internet users per ASEAN Memb State IWS 2010 est.

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

Figure 2.1.1 2 Internet Users per Country and % of total IWS 2010 est.

As we can see in Figure 2.1.1 1, the number of Internet users

in the ASEAN region, namely Indonesia, Malaysia, Philippines,Singapore, Thailand, and Vietnam are very impressive Through thehuge transaction volume of this cross-border trade event of Alibaba, ithas had a signi昀椀cant impact on Lazada and Alibaba brands in the eyes

of ASEAN consumers, which makes them curious and aware of theconvenience of e-commerce Certainly, Alibaba as well as Lazada willincrease the number of users impressively, which will lead to a goodgrowth in the consumer goods market due to the good purchasingpower of this emerging market

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Figure 2.1.1 3 Size of Southeast Asia's E-Commerce Market, Temasek Holdings, 2016

Second, the market is getting bigger and bigger (Figure2.1.1.3), so the market for the consumer goods industry is expanding:With a much smaller investment cost than Traditional Commerce,companies participating in Lazada have an opportunity to access amarket Consumption is larger than before, easy to 昀椀nd, to reach bothsuppliers and customers this allows organizations to buy at lower pricesand sell more products In addition, the sale of more products willstimulate more products to be produced All of the above factorsincrease the market for the national consumer industry, and even

ASEAN

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

Figure 2.1.1 4 ASEAN Consumer Expenditure, Euromoitor

In the period 2018-2020, Southeast Asian countries aredeveloping, and the concept of E-Commerce is more known.Speci昀椀cally, when this event takes place and is accompanied by theimpact of Covid-19 Customers who often tend to use traditionalcommerce have now switched to using E-commerce platforms, theleading of which is Lazada Statistics show that during this period, theconsumer goods industry grew strongly despite the damage of theCovid-19 epidemic

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Figure 2.1.1 5 Usage of E-commerce before, during and after Covid-19, Temasek and Bain &

Company

Figure 2.1.1 6 The Top 10 Most Visited E-commerce Websites in Southeast Asia 2020

Third, Alibaba's acquisition of Lazada along with thedevelopment of technology makes consumers more inclined to usethese online platforms Just with a phone, customers can buy goods at

Contemporary Issues In International BusinessNGUYEN HUNG CUONGany time of the day and at any location within the coverage of Lazadaand Alibaba This seems to have freed the consumer as well as themanufacturer from the constraints of traditional commerce.

With this new experience of online shopping, customers tend

to spend more their free time shopping what they need or easily accessthe products they are looking for and related products that these onlineplatforms suggest This a昀昀ects their purchasing behavior and of coursethe consumer goods industry will continue to grow because of this newconsumption habit

Next, any investment of any size e昀昀ects the wave ofinvestment shifts The takeover serves as a guarantee that the region

is extremely attractive to investors and will spark more companies todelve deeper into the Southeast Asian market

This obviously helps countries in the ASEAN region alsobene昀椀t And so, this can be considered a great place to start abusiness, opening many promising career opportunities Thissustainable development makes businesses have a stable pro昀椀t source.Currently, the income of workers' increases (Figure 2.1.1.7), leading to

an increase in paying for the needs around daily life The fact that theywill spend more leads to an impressive growth in the consumerindustry (Figure 2.1.1.4)

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Figure 2.1.1 7 How household incomes will change across developed and emerging asean

(2019-2030)

Finally, the strategic of Alibaba is to put customers at thecenter, they are willing to sell at cheaper prices This helps customersbecome more sympathetic to use Lazada, which leads to productsbeing bought, sold, and exchanged continuously, which leads to thestimulation of production and growth of the consumer industry

2.1.2 The negative e昀昀ects

First, the expansion of the market size will lead to 昀椀ercecompetition of enterprises in the same industry Because of

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

competition, substitute products are born and threaten the in昀氀uence ofexisting products The replacement products are now improved in manyways, in addition to providing customers with the same bene昀椀ts andfeatures as the current product This competition is evident in the low-cost switching Low switching costs are developed because competition

is often created at lower costs As a result, the consumer will pay alower cost to use the substitute product In addition, low switchingcosts lead to lower overall product prices for consumers, which in turnleads to businesses in the same industry starting to compete on price

Second, one of the di昀฀culties that the consumer industryfaced in the event that Alibaba acquired Lazada and began to expandthe market was the risk for new entrants because of the high barrier toentry Of course, here we are not talking about whether the entry ofnew people takes place and reduces pro昀椀tability, but above all, thedangers of entry

At a certain point, barriers to entry becomes strong and newentrants need to have solid resources and 昀椀nances for operations totake o昀昀 and sustain In addition, existing companies in the industryoperate with high economies of scale, which new entrants will take along time to keep up with It can be seen that these problems make itvery easy for new entrants to be eliminated if they do not meet therequirements of consumers as well as the industry market Thishappens, leading to a change in the structure of the consumer industry,speci昀椀cally, the total output of 昀椀nished products to consumers willdecrease, leading to a decrease in the industry's market share

Moreover, there is an issue that is quite contradictory to thepositive side mentioned above Although GDP per capita in theSoutheast Asian region is rising, it is still low compared to developed

markets Manufacturers are therefore constrained by the spendingpower of consumers, and this leads to the dependence of productionactivities on consumer industry customers

In another aspect, when Lazada as well as e-commerceactivities become popular, the appearance of many fake and poor-quality goods will become common Sometimes consumers tend tochoose cheap products that forget about the quality of the products

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they are using This will a昀昀ect genuine manufacturers in the long run.

In other words, the invasion of counterfeits is fragmenting anddestroying the e-commerce platform itself and the future consumerindustry

Finally, with the huge volume of transactions from Alibaba'sacquisition of Lazada, this event has almost spurred the process of e-commerce This seems to separate consumers somewhat fromtraditional commerce The tendency to consume from traditionalcommerce in the future will decrease signi昀椀cantly, and this will leavesome consumer good products unsold Leads to a change in the marketshare and growth of the consumer industry

distributors.

Every economic system has segments that produce productsand consumers who need them Between these segments is thedistribution system Sometimes the distribution system is itself made

up of several segments and sometimes it controls production as well Insome industries the producers have taken over the distribution of theirproducts No matter how it functions, the role of the distribution system

is to e昀฀ciently 昀椀nd consumers who need particular products and toensure that they have access and the ability to buy them if they want

The distribution system of an economy is never static; newtechnologies are causing fundamental changes in how distributionworks On the surface, such changes might mean one thing, yet whenthe actual mechanics play out, the results can sometimes beunexpected Producers, distributors, and retailers compete for marketshare and a bigger slice of the overall pie with unpredictable outcomes.Using innovative approaches, some companies attempt to cover theentire market segment, from production to retail Others specialize inbecoming an all-purpose intermediary Still, others try to excel in aparticular niche

Contemporary Issues In International BusinessNGUYEN HUNG CUONG

2.2.1 The positive e昀昀ects

Lazada is currently a sales catalyst for many distributors.Although Lazada is not a business strategy, it plays a large role in thedistribution of products to the end consumer

In simple markets of old, producers of goods or services dealtdirectly with the consumers of those o昀昀erings In some modernbusiness-to-business markets, suppliers also interact on a face-to-facebasis with their customers However, in most contemporary markets,mass production and mass consumption have caused intermediaries toenter the junction between buyer and seller These intermediaries haveeither taken title to the goods or services in their 昀氀ow from producer tocustomer, or have, in some way, facilitated this by their specialization

in one or more of the functions that have to occur for such movement

to occur

Apparently, distribution businesses in the region will havemore opportunities to 昀椀nd more potential partners from China or othercountries in ASEAN For example, China is a lucrative market with thetotal population accounting for the 昀椀rst place worldwide The largepopulation makes China have a lot of potential manufacturingenterprises In China, Alibaba is present in every corner of life:shopping, 昀椀nance, online gossip, entertainment, news, health AsAlibaba, China's largest e-commerce group with millions of transactions

a day, decides to enter the Southeast Asian market, small and sized goods distributors in the region will have more opportunities tocooperate with potential manufacturing enterprises and be able tobring their distribution businesses to their hands So, The Chinesemarket is fertile Correspondingly, ASEAN countries are still developing,the market is getting bigger and bigger, helping many distributionbusinesses to connect and cooperate with each other in the trend ofintegration and globalization At the same time, the plan will acceleratethe goal of giving customers the opportunity to access a diverse andunique product portfolio from around the world, not just from China tothe Lazada exchange

medium-Second, Alibaba, whose customers are not only individuals butalso businesses, manufacturers, and distribution channels with quite a

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