The high cost of shipping materials and goods around Indonesia – a country comprising more than 17,000 islands – is putting a brake on the development of the e-commerce sector. The largest Indonesian e-commerce player is innovating to break the logistics logjam, and in doing so extend its market leadership.
Ninety One Sustainable Equity team
Juliana Hansveden, Portfolio Manager
Yuxin Lin, Analyst
Logistics account for 8-9% of GDP in the US and Europe. In Indonesia, that figure is a startling 23%. In other words, transporting goods and materials to where they need to be accounts for almost one-quarter of Indonesia’s economic output.
It is hardly surprising that a nation comprising 17,500 islands and 280 million people faces distribution challenges. But logistics costs are often higher in emerging markets, running at 15% of GDP in Thailand, 14% in China and 13% in Malaysia1. Partly, this reflects the economic mixes of developing and advanced economies, with services – which have lower logistics costs as a percentage of merchandise value than agriculture and manufacturing – comprising a larger share of the latter.
Despite high shipping costs, Indonesia has developed the largest e-commerce sector in Southeast Asia2, worth US$53 billion a year and forecast to reach US$87 billion by 20283. Yet the market’s full potential continues to be constrained by inefficient distribution.
For companies that can solve logistical challenges, we think the opportunities are significant, not least because retail growth in Indonesia is outpacing overall economic growth. While Indonesia’s GDP per capita has expanded at 3.2% over the past decade, retail sales have grown at 4.2%4. We expect e-commerce revenue to grow even faster as consumers increasingly adopt online habits.
As an investment team focused on emerging markets, we look for leading businesses in sectors that are growing strongly as a result of long-term structural changes in the economy. On a recent visit to Indonesia – part of a broader research trip that also took in Vietnam – this led us to visit Shopee, the e-commerce arm of Sea Ltd., which we think is well-placed to benefit from the growth of online retail. The largest e-commerce player in the country, Shopee is investing to extend its market leadership through logistics innovation.
Speaking to managers and workers at the Shopee Express sorting centres in Jakarta, we observed a strong focus on improving the cost and quality of delivery services. In fact, these are the two main performance metrics the local leadership team are assessed against. On the cost front, Shopee Express has begun using smarter data analytics to manage the volatility of parcel volumes more efficiently. It also flexes its capacity, partly by working with third-party logistics partners. Automation is also being considered to handle variability in trading flows, though always with an eye on costs and the potential to instead use the lower-tech option of Indonesia’s competitive labour market. In terms of quality and efficiency, attention to detail is helping to drive operational improvements, for example by redesigning the sorting line to align better with the height of workers.
As investors, we put a lot of focus on a company’s competitive advantages, because these are crucial for sustaining a leading position as a market grows. We think logistics is a clear advantage for Shopee, built in our view on three hard-to-replicate characteristics:
The first is scale, which leads to a cost advantage over smaller competitors, since higher order volumes mean higher utilisation of warehouses and delivery networks. Scale also creates potential for higher investment in efficiency innovations.
The second is Shopee’s ability to share distribution cost savings with customers, by offering lower delivery fees or even free shipping. This helps to attract and retain more customers, reinforcing the scale advantage.
Finally, having an in-house logistics capability, rather than just working through third parties, enables Shopee to drive service improvements. For workers, the company can implement incentives that directly motivate service quality. For customers, Shopee can offer options such as immediate return if they are dissatisfied with an item, even before paying cash on delivery, which was difficult to implement with external logistics providers.
Shopee distribution centre, Jakarta
Source: Ninety One, November 2024.
Market dynamics suggest an evolution in favour of the leading e-commerce players in Indonesia, with Shopee gaining 4 percentage points of additional market-share in 20235.
We think Shopee is becoming the clear leader in the sector. But it isn’t the only beneficiary of its logistics innovation. By enabling the growth of e-commerce in Indonesia, Shopee is extending new opportunities to the country’s 66 million micro, small and midsized enterprises, which together contribute nearly two-thirds of GDP and employ 97% of the national workforce6. In turn, that has the potential to drive economic growth and development.
We met with about a dozen other companies during our research trip. While they were very different businesses, what they had in common was the potential to maintain and extend market leadership. In the fast-growing and rapidly changing economies of the developing world, that’s a particularly interesting characteristic for a potential investment.
1 PwC, Supply chain: Indonesian Chamber of Commerce & Industry predicts logistics to grow 6%, July 2023.
2 Indonesian e-commerce GMV (gross merchandise value) accounted for ~47% of total GMV in Southeast Asia in 2023 - Momentum Works July 2024.
3 US International Trade Administration, 2024.
4 World Bank data, 2023.
5 Momentum Works, 2024.
6 Kadin Indonesia (Indonesian Chamber of Commerce and Industry).
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