Sunday, 2024 July 21

Why the Gojek and Tokopedia merger is set to fuel Alibaba and Tencent’s competition in Southeast Asia

Two of Indonesia’s biggest startups, e-commerce marketplace Tokopedia and ride-hailing service Gojek, joined forces last month to merge as the GoTo group, giving birth to a regional technology powerhouse that accounts for 2% of the Southeast Asian country’s GDP.

The newly merged entity, valued at USD 18 billion with tentacles spanning across e-commerce, ride-hailing, logistics, and financial services, has a combined two million drivers, 11 million merchants, and a total transaction volume of USD 22 billion by 2020. The merger is expected to fortify its competitiveness against two of its nemeses in the region—Grab and Sea group.

Grab has not always been a foe. Rumor had it once that Gojek and Grab, the Southeast Asian ride-hailing duo, were in merger talks. However, the deal fell apart due to regulatory concerns, given that both Grab and Gojek have dominating positions in Southeast Asia’s ride-hailing market. So the combination of Grab and Gojek would easily be ruled as monopolistic by the regional’s trustbusters.

For the merger between Gojek and Tokopedia that led to the GoTo group, though, regulatory scrutiny is less of a concern as the two have very few overlapping businesses.


The biggest piece of the pie

According to the e-Conomy SEA 2020 report by Google and Temasek, the Southeast Asian Internet economy will exceed USD 240 billion by 2025, which means that the size of the market gained in the next few years will be bigger than the whole market today.

Around 350 million, or more than half, of the 600 million population in Southeast Asia are mobile internet users. The region also has one of the youngest demographics in the world, with over 50% of its population under the age of 30. Its young demographic and fast-growing economies are both conducive to the development of e-commerce, which, per the e-Conomy report, will reach USD 172 billion by 2025.

Currently, the regions’ e-commerce penetration rate is 38%, almost half of China’s 67.7%, translating to much room for growth.

Indonesia, on the other hand, as the most populous country in Southeast Asia, accounts for about 48% of the entire region’s e-commerce market, with a size of USD 83 billion. The island country has always been the most important market across the region.

In 2019, Tokopedia was the most visited e-commerce platform in Indonesia, but that strength didn’t last long. Shopee, the e-commerce arm of Singapore’s Sea group, managed to pull off a successful rise and doubled its gross merchandise value (GMV) to USD 35.4 billion in 2020, snatched up 57% of the total e-commerce market in Southeast Asia, and became the number one e-commerce player in the region.

Industry insiders believe that the marriage of Tokopedia and Gojek can achieve synergies that would better position GoTo group in its competition against local rivals like Shopee.

As Nitin Pangarkar, a professor at the business school of the National University of Singapore, puts it, “Even though It’s hard to make money out of transportation service, it leads to higher transaction frequency. Food delivery service, on the other hand, is much more profitable. The two services combined will lead to a high volume of user transactions that help hold users closely in a platform and bring up profit-making opportunities.”

Internet analysts believe that transportation, food delivery, and payment services are the three core pillars of “super apps.” By having all three pillars under its belt through the merger, GoTo will also be able to fast-track its push to build the super app for Southeast Asia.

The concept of super apps comes from China, where users just need one such app to do a wide array of things, from hailing a taxi, paying for a meal, keeping up with a friend, to booking a flight. From WeChat to Meituan, Chinese internet companies are obsessed with super apps. This obsession has found a new fandom in the region through the flow of Chinese venture capital to Southeast Asia.

In addition to GoTo, Grab is the other regional force that’s also trying to build a super app to some extent of success. The company in April announced its IPO plan via a SPAC (Special purpose acquisition company) merger with the technology-focused investment firm Altimeter Capital in the United States. The deal is expected to value Grab at USD 40 billion.

GoTo is vying to reach a similar valuation. It plans to list in New York and Jakarta as early as this year, aiming for a valuation of between USD 35 and 40 billion, according to people familiar with the matter, more than double the combined valuation of Gojek and Tokopedia in their latest fundraising, respectively.

On a separate note, Sea group is already listed on Nasdaq with a market capitalization of USD 128 billion in early March.


In the shadows of giants

Sea group is often referred to as the Tencent in Southeast Asia. One reason is that its founder Li Xiaodong had been very vocal in competing against Tencent when it started as a mobile gaming business named Garena; other than that, it modeled its business and corporate structure after Tencent. The company eventually got the attention and investment from Tencent in 2012, as well as a license to operate its popular “League of Legends” game in the Southeast Asian market.

In 2017 Garena rebranded itself to Sea group while its gaming business retained the Garena name. Tencent and Sea furthered their tie-up as they entered into a long-term publishing partnership through which Sea was given the right of first refusal to publish Tencent’s mobile and PC games in Indonesia, Taiwan, Thailand, the Philippines, Malaysia, and Singapore.

With its initial success in gaming, Sea launched its mobile wallet service SeaMoney in 2014 and then e-commerce platform Shopee in 2015 to compete against Gojek and Tokopedia on mobile payment and e-commerce.

According to Sea’s prospectus, Tencent holds 39.8% of Sea shares, while founder Li Xiaodong owns only 20.7%. To some industry observers, Tencent is the giant that stands behind Sea group.

In a similar analog, Alibaba is the giant that stands behind GoTo. Alibaba and SoftBank are the only two investors with double-digit stakes in GoTo, ahead of others such as Google and Temasek (a Singaporean holding company). Back in August 2017, Alibaba invested exclusively in Tokopedia’s USD 1.1 billion Series F funding, reportedly taking a stake of more than 40%. It then led a USD 1.1 billion Series G funding round in November 2018 with Masayoshi Son’s SoftBank Vision Fund, becoming one of Tokopedia’s major shareholders.

The competition between Goto and Sea is starting to look like a proxy war between Alibaba and Tencent in Southeast Asia, which is a well-known narrative in the Chinese internet sector, especially after Alibaba’s Lazada failed to catch up with Sea’s Shopee.

The GoTo group, by pooling resources from both Tokopedia and Gojek, now represents a more complete Alibaba ecosystem in the region, making it more of a forceful challenger to the other regional behemoths like Sea and Grab.


This piece first appeared in the GeekPark.


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