Posted on

Soybean Market Opportunities, Demand And Supply Outlook

Bar chart showing the world's top 5 soybean importing countries in 2017. China was the world's largest soybean importer with total soybean Imports valued at US$ 39.6 billion in 2017, followed by the European Union with US$ 3.7 billion, Mexico with US$ 1.7 billion, Japan with US$ 1.5 billion, and Thailand with US$ 1.2 billion.

Demand

Global demand for soybeans has increased 145% since the 1990/91 marketing year. This compares with 76% for corn, 35% for cotton, 31% for rice, and 21% for wheat. Growth has been driven by growing demand for protein, and vegetable oil consumption for food. The growth momentum appears set to continue. China, the world’s largest importer of soybeans accounting for two thirds of global soybean imports in 2017 according to UN trade data, imports soybeans for its meat, poultry, and dairy industry which has been booming as Chinese citizens increasingly add more protein to their diets as incomes rise and living standards increase. China is on track to overtake the U.S. to become the world’s largest dairy market according to Euromonitor International, and currently is the world’s largest egg consumer and producer, and the world’s largest meat importer.

Bar chart showing the world's top 5 soybean importing countries in 2017. China was the world's largest soybean importer with total soybean Imports valued at US$ 39.6 billion in 2017, followed by the European Union with US$ 3.7 billion, Mexico with US$ 1.7 billion, Japan with US$ 1.5 billion, and Thailand with US$ 1.2 billion.

Protein intake among Chinese citizens has been steadily growing reaching 96.7 grams per capita per day during 2011-2013 and has reached levels comparable to developed neighbors such South Korea (96 grams per capita per day). However, it has yet to reach levels comparable to other developed nations such as the United States (108.7 grams per capita per day), and Germany (101.7 grams per capita per day) suggesting room for Chinese soybean demand to grow.

Column chart showing average protein supply (in grams per capita per day) (three year average) in China, South Korea, United States, and Germany. In 2008-2010, average protein supply was 91.7 in South Korea, 92.4 in China, 101.3 in Germany, 110.7 in the United States. In 2009-2011, average protein supply was 93 in South Korea, 93.7 in China, 102 in Germany, 109.3 in the United States. In 2010-2012, average protein supply was 94.3 in South Korea, 95.3 in China, 101.7 in Germany, 109 in the United States. In 2011-2013, average protein supply was 96 in South Korea, 96.7 in China, 101.7 in Germany, 108.7 in the United States. Data from the Food and Agriculture Organization of the United Nations.

This is particularly true for animal protein which at 38 g/capita/day (3-year average) in China has not yet reached the levels of neighbors Japan (48 g/capita/day), and South Korea (46 g/capita/day), as well as developed nations such as the United States (69 g/capita/day), and Germany (61 g/capita/day).

Chinese meat demand has pushed up meat imports over the past few years and China is the world’s largest meat importer. China’s growing appetite for imported meat should help drive EU soybean demand. As the world’s largest meat exporter, the EU has been a major beneficiary of China’s growing meat consumption which in turn helped push EU soybean imports; the EU is the world’s second largest soybean importer and the world’s largest importer of soybean meal which is used mainly as animal feed. With China driving global meat demand, soybean demand from the EU, the world’s second biggest importer, is poised to grow as well.

India also presents a tremendous growth driver. Incomes and living standards have been rising and India’s average protein supply is a on a firm uptrend but it still about half of China’s suggesting ample room for growth.

Column chart showing the average protein supply in grams, per capita, per day on a 3-year average in China and India. During 2005-2007, average protein supply was 55 grams per capita per day in India, and 87.4 grams per capita per day in China. During 2006-2008, average protein supply was 56.7 grams per capita per day in India, and 89.1 grams per capita per day in China. During 2007 – 2009, average protein supply was 57.3 grams per capita per day in India and 90.8 grams per capita in China. During 2008 – 2010, average protein supply was 58 grams per capita per day in India, and 92.4 grams per capita per day in China. During 2009-2011, average protein supply was 58.7 grams per capita per day in India, and 93.7 grams per capita per day in China. During 2010-2012 average protein supply reached 59.3 grams per capita per day in India and 95.3 grams per capita per day in China. During 2011-2013 average protein supply reached 59.7 grams per capita per day in India, and 96.7 grams per capita per day in China.

In fact, according to the results of a survey conducted by Indian Market research Bureau (IMRB), 73% of urban rich Indians are protein deficient, with 93% of them unaware about their daily protein requirements. With nearly 80% of Indian households expected to rise to middle income status by 2030, up from 50% today, the U.S. Soybean Export Council sees India as a prime export market in the future.

Supply

The top five largest soybean producers are the United States, Brazil, Argentina, China, and India.

Bar chart showing the leading countries in soybean production worldwide. During calendar year 2018-2019, the United States was the leading soybean producer in the world, producing 120.52 million metric tons, followed by Brazil with 119 million metric tons, Argentina with 55.3 million metric tons, China 15.97 million metric tons, India with 10.93 million metric tons, Paraguay with 8.85 million metric tons, Canada with 7.27 million metric tons, Ukraine with 4.83 million metric tons, and Russia with 4.03 million metric tonnes. According to preliminary figures for calendar year 2019-2020, Brazil was the leading soybean producer worldwide with 126 million metric tons, followed by the United States with 96.68 million metric tons, Argentina with 50 million metric tons, China with 18.1 million metric tons, Paraguay with 9.9 million metric tons, India with 9.3 million metric tons, Canada with 6 million metric tons, Russia with 4.36 million metric tons, and Ukraine with 4.05 million metric tons. Data from the United States Department of Agriculture Foreign Agricultural Service.

China, the world’s largest soybean importer and consumer is likely to remain a major import market in the years ahead. Domestic soybean production meets just about 20% of China’s domestic demand of about 100 million metric tons, and while there is potential for the country to increase domestic output by improving yields (particularly with the government reportedly making efforts to boost soybean production), this is unlikely to satisfy demand so the country will continue to depend heavily on imports going forward.

Even if China doubles its soybean production by doubling its yields to match the United States (China’s average soybean yield on the same area of land is about 40% that of the U.S. according to Heilongjiang Academy of Agricultural Sciences), China could potentially increase its production by about 15 million metric tons, which is not even one-fifth of China’s estimated 84 million metric ton soybean import volume during marketing year 2019/2020 according to data from the USDA.

India, the world’s fifth largest soybean producer, is currently a net exporter of soybeans but its net exports have been declining as domestic production is outpaced by domestic demand which suggests that as incomes grow and protein intake increases, the country may well end up becoming a net importer, unless they dramatically increase soybean yields; India’s average soybean yields on the same area of land is just 25% that of the U.S. according to data from the USDA.

That would leave current soybean export leaders Brazil, and the United States to continue dominating the soybean export market in the years ahead.

The fragility of the U.S.-China relationship suggests Brazil is in a better position to capitalize on China’s soybean demand in the long term, presenting opportunities for Brazilian soybean suppliers. The long term impact of losing China as an export market for U.S. soybeans was abundantly clear when prior to the Phase 1 trade deal, the USDA’s long term projections for soybean planting in the U.S. expected only marginal increases and was not expected to recover to pre-trade war levels.

Agribusiness players ADM (NYSE:ADM), Bunge (NYSE:BG), Cargill, which buy crops from farmers, then transport, store and/or process the crops and sell the processed crops to food, feed, and energy buyers all have operations in Brazil and should benefit from improved South American origination volumes as Chinese soybean imports grow along with rising protein demand.

In the short term however, China will likely to continue to buy U.S. soybeans not just as part of a trade deal secured in January this year which helped end a nearly two year trade war between the two nations, but also perhaps to buy time as the country makes the necessary investments to cost effectively diversify its soybean sources in the long term, since top supplier Brazil may be unable to keep up with Chinese soybean demand. The opportunity in Russia is particularly compelling. Russian soybean exports to China have grown 51 times from just 15,000 metric tons in 2013/14 to 763,000 metric tons in 2018/19. Although this is less than 1% of China’s approximately 100 million metric ton soybean consumption currently, the long term potential is significant considering China’s top soybean producing region – Heilongjiang – is just across the China-Russia border from Russia’s top soybean producing region – the Amur region, which if developed could offer China soybeans at very cost effective prices with the added advantage that Russian soybeans are non-GMO (compared with the United States where 94% of US soybean acreage comprises GMO soybeans as of 2018).

All is not lost for U.S. soybeans however. The EU is gradually phasing out palm oil for its domestic biodiesel use, and U.S. soybeans could be a beneficiary of this move. About half of the EU’s 3.9 million metric tons of crude palm oil imports were used as feedstock for biodiesel, 40% used for consumer products such as food and cosmetics, and 10% used for heating and electricity as of 2017 according to OilWorld. While much depends on the soybean oil content and oil extraction technology, generally speaking, one ton of soybeans can produce approximately 20% soybean oil give or take 5% or so. That suggests that satisfying EU’s oil demand for use in biodiesel would require 10 million metric tons of soybeans, equivalent to about 10% of U.S. soybean production currently, and the byproducts of soybean processing i.e., soybean meal can be used in its growing meat and poultry industry, helping fulfill the EU’s soybean meal requirements. While this represents a potential demand of two-thirds of the 15 million metric tons of soybeans imported by the EU in 2018-2019, it amounts to just 25% of the nearly 40 million metric tons of soybeans the U.S. exported to China pre-trade war.

Nevertheless, it should still cushion the blow for companies such as ADM for whom soybean trading accounts for 16% of revenue with most of their origination from North America. In its latest annual report, ADM’s Ag Services and Oilseeds operating unit saw profit drop 4% which the company attributed to weaker North American grain margins and volumes, in part due to changing weather conditions and the U.S.-China trade tensions. Within the Ag Services and Oilseeds unit, Ag Services (which includes results from its origination business which buys grains from farmers) recorded a 23% drop in operating profit, compared with a 45% increase a year earlier.

The company benefited from China’s increased soybean consumption before the trade war and if Brazil replaces the United States as China’s leading soybean supplier or takes an increasing share of Chinese soybean imports, the EU could help partially fill in the void for U.S. soybean producers and traders such as ADM.

Posted on

Bright Prospects For China’s Cold Chain Logistics Sector

Column chart showing China's cold chain logistics market size (in RMB billions). China's cold chain logistics market was valued at RMB 81 billion in 2011, RMB 109 billion in 2013, RMB 181 billion in 2015, RMB 236 billion in 2017 (forecast), RMB 368 billion in 2019 (forecast), RMB 470 billion in 2020 (forecast).

China’s cold chain logistics market has been growing steadily over the past several years. According to management consulting firm L.E.K. Consulting, China’s cold chain market grew from RMB 81 billion in 2011 to RMB 181 billion in 2015 representing a growth rate of over 20% annually.

Column chart showing China's cold chain logistics market size (in RMB billions). China's cold chain logistics market was valued at RMB 81 billion in 2011, RMB 109 billion in 2013, RMB 181 billion in 2015, RMB 236 billion in 2017 (forecast), RMB 368 billion in 2019 (forecast), RMB 470 billion in 2020 (forecast).

Yet, there is still ample potential for growth. China’s cold chain logistics network currently represents a relatively small part of the overall logistics industry, with just about 19% of the Chinese market having access to cold chain technologies, compared to 85% in Europe and Japan. This explains why the cargo damage to fresh product (such as fruits and vegetables which accounts for the greatest demand for cold chain logistics services) within China’s cold chain is reportedly as high as 20% to 30% – which is considerably higher than the average 5% to 10% in developed countries.

Furthermore, the market for cold chain logistics is expected to be driven by consumption upgrades (for instance with regards to consumer expectations on product freshness and quality), and growing demand for agricultural commodities such as fresh fruits and vegetables, as a result of rising incomes and living standards.

Considering these growth drivers, market research firm Reportlinker, projects China’s cold chain logistics market to reach RMB 522.5 billion in 2025 from RMB 295.6 billion in 2018 representing a CAGR of 8.5% between 2018 and 2025.

Fundamental growth drivers: rising fresh produce demand along with increasing quality and freshness expectations as living standards rise, driven by rising incomes, and an expanding fresh food e-commerce sector

Demand for cold chain logistics stems largely from five agricultural products including meat, aquatic products, quick-frozen foods, fruits and vegetables, and dairy products, among which cold chain for fruits and vegetables accounts for the greatest demand. With incomes growing and its middle class expanding, demand for such agricultural products are enjoying robust demand in China.

According to data from the China Chamber of Commerce for Import and Export of Foodstuffs, Native Produce, and Animal By Products, in 2019 China imported approximately 6.83 million tons of fruit with a total value of US$ 9.5 billion, representing a year-on-year increase of 24% 25% respectively.
With China’s fruit exports amounting to 3.61 million tons at a value of US$ 5.5 billion in 2019, up just 4% and 14% year on year respectively, China is a net fruit importer and is likely to remain so, as per capita fruit consumption grows while economic policy focuses on high-tech industries and high-value manufacturing sectors.
Data released by the National Bureau of Statistics show that per capita consumption of fresh fruits among urban residents was 56.423 kilograms in 2018, up from 47.6 kilograms 2013. With per capita fruit consumption growing steadily, the Chinese Academy of Agricultural Sciences projects China’s fruit market will reach US$ 460 billion in 2024.

China’s growing interest in milk and dairy products is also poised to contribute to demand for cold chain logistics. China today is the second largest dairy market behind the United States, the third largest milk producer in the world, with about 13 million dairy cows up from just 120,000 cows in 1949.  The average dairy product consumption per capita has increased from almost just 6 kilograms in 1999 to 36 kilograms in 2019. Yet, there is plenty of potential with China’s per capita consumption of dairy products being half of the rest of Asia and less than one third of the world average according to Milk Quotient report published by the China Dairy Industry Association and Dutch dairy producer Royal Friesland Campina last month in Beijing.

China’s burgeoning fresh food e-commerce sector is expected to drive some of the demand for these products. China fresh food e-commerce industry has been growing steadily over the past few years; according to Euromonitor and Qianzhan Industry Research Institute, in 2019, China’s fresh food e-commerce market was valued at around RMB 288.8 billion up 19.1% 2018 when the market was valued at RMB 242.4 billion in 2018. Yet, with fresh food e-commerce accounting for just 5.6% of the total fresh food industry market in China in 2019, there is tremendous potential for growth.

Column chart showing China's fresh food e-commerce market size, growth, and proportion of total fresh food market size. China's fresh food market was valued at RMB 43.6 trillion in 2015, RMB 47.3 billion in 2016, RMB 47.4 billion in 2017, RMB 49.5 billion in 2018, and RMB 51 billion in 2019. China's fresh food ecommerce market was valued at RMB 828 million 2015, RMB 1.324 billion in 2016, RMB 1.752 billion in 2017 RMB 2.424 billion in 2018, and RMB 2.888 billion in 2019. China's fresh food ecommerce market's sure of the country's overall fresh food market stood at 1.9% in 2015, 2.8% in 2016, 3.7% in 2017, 4.9% in 2018, and 5.66% in 2019. China's fresh food ecommerce market growth rate was 80.7% in 2015, 59.9% in 2016, 32.3% in 2017, 38.4% in 2018, and 19.1% in 2019. Data from Cushman and Wakefield.

However, the bigger growth driver is from fresh food e-commerce’s need for cold storage warehouses closer to the consumer to enable cheap and fast delivery as opposed to the conventional notion that warehouses and distribution centers should be near ports and airports. Much of China’s cold storage warehouse stock is located in provinces with some of the world’s busiest ports. For instance, Liaoning which has the biggest warehouse stock by area in China is home to the Port of Dalian (the world’s 16th busiest port), Guangdong which has the 5th largest logistics warehouse stock is home to the Port of Guangzhou (the world’s 5th busiest port), and Shanghai which has the 11th biggest logistics warehouse stock in China is home to the Port of Shanghai (the world’s busiest port).

Bar chart showing China's cold storage logistics warehouse distribution by storage area (in square metres). The Province with the highest cold storage logistics warehouse by storage space area is Liaoning with 1.065 million square metres, followed by Henan with 1.059 million square metres, Sichuan with 684.9 thousand square metres, Jiangsu with 567.5 thousand square metres, Guangdong with 399.2 thousand square metres, Shandong with 387.3 thousand square metres, Shaanxi with 373 thousand square metres, Tianjin with 363.5 thousand square metres, Beijing with 282.9 thousand square metres, Hubei with 258.5 thousand square metres, Shanghai with 235 thousand square metres, Heilongjiang with 150 thousand square metres, Hebei with 132 thousand square metres, Hainan with 81.7 thousand square metres, Zhejiang with 80 thousand square metres, Hunan with 75 thousand square metres, Chongqing with 72,600 square metres, Fujian with 58,680 square metres, Guangxi with 49,850 square metres, Anhui with 49,218 square metres, Jiangxi with 40,000 square metres, Yunan with 36,000 square metres, Shanxi with 25,300 square metres, Guizhou with 12,000 square metres.

Opportunities in China’s fragmented cold storage warehouse market

Cold storage is a major part of the cold chain logistics industry; according to projections from L.E.K. Consulting, transportation, cold storage, and other services are expected to make up 40%, 30%, and 30% of China’s cold chain logistics market, respectively in 2020.

Currently cold chain storage represents a small part of China’s logistics warehouse stock; according to Warehouse In Cloud (WIC), China’s total cold storage logistics warehouse stock was about 6.65 million square meters in 2019, accounting for just 2.15% of the total logistics warehouse market. Along with the development of China’s cold chain industry, the market for refrigerated warehousing is poised to experienced solid growth.

China’s cold storage market is fragmented with the top 10 cold storage operators commanding a market share of around 21%. One of the country’s largest property developers China Vanke (HKG:2202), is a notable player in China’s cold storage space. The company purchased Swire Cold Chain Logistics from Swire Pacific (HKG:0019) in 2018, propelling Vanke into the ranks of China’s 10 largest temperature controlled-storage providers.

Under its logistics and warehousing Service Platform ” VX Logistic Properties”, has been aggressively acquiring and building its portfolio of high-standard warehouses, cold storage warehouses, as well as cold storage integrated logistics parks. In 2019, China Vanke served more than 850 customers, covering e-commerce, manufacturing, catering, retailing, etc. According to their 2019 financial results, the annual utilization rate of their cold storage warehouses stood at around 82% in 2019. China Vanke is also one of the consortium of investors that participated in the buyout of GLP, cheap the world’s leading logistics solution provider.

Another player worth watching is Alibaba (NYSE:BABA) whose logistics subsidiary Cainiao has been actively building distribution centers equipped with cold storage and delivery facilities to offer B2C cold chain logistics services, which are expected to grow along with the country’s growing fresh food e-commerce sector.
Alibaba’s cross-border ecommerce platform TMall Global offers end-to-end cold chain logistics services including warehousing, processing, packaging, and transportation enabling merchants from around the world sell fresh foods to Chinese buyers. Once in China, the goods are stored in TMall Global’s warehouses and are delivered to consumers within 24 hours.
Alibaba’s marketplace TMall Global has introduced a cold storage logistics option to enable foreign merchants to sell fresh food to Chinese buyers. The service supports refrigeration across warehousing, processing, packaging, and transportation. It also offers customs clearance online. Once the goods have reached China they can be delivered within 24 hours. Cainiao Logistics offers the full chain of services, from cargo storage in bonded warehouses, to packaging and last mile delivery.

Posted on

China’s Software-As-A-Service (SaaS) Market Offers Tremendous Growth Potential

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

The public cloud market is growing at a rapid clip around the world. The worldwide public cloud services market is projected to grow from US$ 182.4 billion in 2018 to US$ 331.2 billion by 2022 representing a CAGR of 16.08% according to research from Gartner. The fastest growing market segment is expected to be cloud system infrastructure services, also known as Infrastructure as a Service (IaaS) which is expected to grow from US$ 30.5 billion in 2018 to US$ 76.6 billion by 2022, representing a CAGR of 25.89%. The second fastest growing market segment is expected to be Cloud application infrastructure services, also known as Platform as a Service (PaaS), which is expected to grow from US$ 15.6 billion in 2018 to US$ 31.8 million by 2022 representing a CAGR of 19.49%. Meanwhile the market for cloud application services, also known as Software-as-a-Service (SaaS) is expected to grow from US$ 80 billion in 2018 to US$ 143.7 billion by 2022 representing a CAGR of 15.77%.

The story is the same in China where, much like the rest of the world, China’s cloud market has also been on an uptrend.

A column chart showing China's cloud computing market size in billions of yuan. China's cloud computing market was valued at RMB 9.7 billion in 2015, RMB 17 billion in 2016, RMB 26 billion in 2017, RMB 41.3 billion in 2018 (forecast), RMB 60.8 billion in 2019 (forecast), RMB 84.3 billion in 2020 (forecast), and RMB 110.9 billion in 2021 (forecast).

China’s IaaS market is the fastest growing cloud computing segment and is dominated by homegrown tech giants Alibaba (NYSE:BABA) and Tencent (HKG:0700). And although the country’s SaaS market has received relatively little attention compared to the IaaS segment, it is a significant part of China’s overall cloud computing market, being estimated to reach a market value of RMB 47.3 billion in 2020 which accounts for about 56.1% of China’s cloud market which is estimated to reach market value of RMB 84.3 billion the same year.

China’s SaaS market has been growing steadily over the past several years.

A column chart showing China software-as-a-service market size (in RMB billions). China's software-as-a-service market was valued at RMB 3.49 billion In 2013, RMB 5.98 billion in 2014, RMB 9.89 billion in 2015, RMB 12.75 billion in 2016, RMB 16.87 in 2017, RMB 23.21 billion in 2018 (forecast), RMB 33.7 billion) in 2019 (forecast), and RMB 47.34 billion in 2020 (forecast).

Yet, there is still ample potential for growth. China’s SaaS market is expected to reach approximately RMB 47 billion (US$ 6.7 billion) in 2020 according to Statista while the global SaaS market is expected to reach US$157 billion by 2020. This means China would account for just about 4% of the global SaaS market while accounting for about 16% of global GDP indicating ample potential for growth.
Furthermore, according to a 2019 report issued by Alibaba Cloud Research Center, while the number of Chinese companies is 3 times that of the United States, China’s SaaS output is just 24% of the U.S.

There are several growth drivers to support China’s SaaS market. Unlike in the west, a growing number of Chinese firms are not tied to legacy IT infrastructure and they are increasingly moving directly to the cloud, leapfrogging the traditional enterprise software generation in much the same way Chinese citizens leapfrogged the desktop/laptop phase and went straight to mobile. In the medium term, the COVID pandemic may prompt SMEs to accelerate cloud adoption to control costs, facilitate remote working, and online sales. Over the longer run, the industry is likely to enjoy tailwinds thanks to China’s made in China 2025 initiative which aims to upgrade China manufacturing base by developing high-tech Industries including electric cars, robotics, artificial intelligence, agricultural technology engineering new synthetic materials. Cloud computing is among the many technologies expected to drive this development (others include big data and IoT).

Opportunities for local and international SaaS companies

China’s higher end SaaS segment is largely dominated by foreign SaaS behemoths such as Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and SAP (ETR:SAP) whose product offering often comes with a hefty price tag. Homegrown SaaS companies such as Kingdee (HKG:0268), Digiwin, and Yonyou (SHA:600588) on the other hand are not as powerful in terms of functionality compared their foreign counterparts, however their product offering has been improving in terms of sophistication and capabilities, and they are usually significantly cheaper which makes them a very compelling option to fulfill the needs of China’s Small and Medium Enterprises (which make up almost 99% of business establishments in China) as well as state enterprises. This has helped local SaaS providers carve out a niche for themselves in China’s nascent SaaS market while competing against foreign, well-established players.

The country’s SaaS market is highly fragmented the top 10 vendors accounting for only about 30% that the market as of 2018 according to research from PR Underground. Local rising star Kingdee dominated the market with a market share of just 5%, followed by Microsoft, SAP, Salesforce (NYSE:CRM), Oracle, Veeva Systems (NYSE:VEEV), Zoho, Beisen, Yonyou, and Newdo which collectively made up the top 10.

Pie chart showing the market share of China's SaaS vendors during the first half of 2018. Kingdee was the market leader with a 5.1% market share followed by Microsoft (5%), SAP (4.3%), Salesforce (4%), Oracle (3.8%), Veeva Systems (2.6%), Zoho (2.6%), Beisen (2.2%), Yonyou (2%), Newdo (1.8%), and others accounted for the balance 64.5%,

Many of China’s SaaS market verticals are also dominated by homegrown companies. Kingdee for instance, leads in HR, ERP, and accounting. Beijing-based Forceclouds, and Shanghai-based MacroWing lead in document and data management tools for the clinical research, pharmaceutical, and medical device industries. Beisen and DOIT provide CRM solutions in partnership with Tencent.

America boasts a number of SaaS behemoths; in one category America has born-in-the-cloud SaaS companies such as Salesforce, Workday (NASDAQY:WDAY), ServiceNow (NYSE:NOW), Splunk (NASDAQ:SPLK), and Atlassian (NASDAQ:TEAM); in another category there are established software giants with a growing cloud business such as IBM (NYSE:IBM), Oracle, Microsoft, SAP, and Adobe (NASDAQ:ADBE); and finally there are IT vendors with a growing SaaS cloud offering such as Google (NASDAQ:GOOGL) and Cisco. The world’s top three SaaS companies are American; Microsoft, Salesforce, Adobe with market shares 17%, 12%, and 10% respectively of in 2019 when the SaaS market reached US$ 101 billion according to analysis by Synergy Research.

Chinese SaaS companies on the other hand are still at a relatively early stage of growth. However, in much the same way America’s SaaS market growth spawned a number of homegrown SaaS giants, there is potential for Chinese SaaS companies to blossom along with the growth of China’s SaaS market. Notable SaaS companies worth watching include:

Kingdee

Kingdee is one of China’s largest providers of ERP software with a focus on SMEs, and is one of China’s leading SaaS players with a market share of 5%. Kingdee first started out as an ERP software company building a large user base of enterprise customers. This user base helped Kingdee’s cloud transformation, enabling it to introduce its own cloud products to its existing user bas

In FY 2019, Kingdee’s cloud services revenue grew 54.7% year-on-year accounting for 39.5% of revenue during the year up from 30.2% in 2018 according to their 2019 annual report. Cloud revenue’s share of total revenue is likely to increase going forward as traditional ERP customers migrate to the cloud. Traditional ERP systems are gradually being replaced by SaaS which is generally more cost-efficient and easier to use and manage compared to traditional ERP systems. Notable enterprises upgrading to Kingdee’s “Kingdee Cloud Cosmic” (a cloud platform for large enterprises) include one of China’s largest courier companies SF Express (SHE:002352), Chinese edtech unicorn VIPKid, and Chinese state-owned defense corporation Norinco. The company is targeting cloud revenue to contribute 60% to total revenue by 2020.

While it may seem that cloud can cannibalize Kingdee’s traditional software business, according to figures from its annual report, it is evident that this is not the case with much of Kingdee’s cloud growth being driven by new customers During FY2019, of Kingdee’s “Kingdee Cloud Galaxy” (a digital cloud service platform for medium and large enterprises, and fast-growing enterprises) customer base, 77% of clients were new to ERP, 13% were from competitors, and just 10% were existing clients.

Armed with a wide product range of cloud software spanning e-commerce, supply chain and intelligent manufacturing, a healthy balance sheet (the company’s borrowings stands at RMB 199 million while it has a cash pile of RMB 3.18 billion), a strong brand name among local SaaS companies, and an impressive user base of SMEs as well as large enterprises suggest Kingdee is well placed to capitalize on China’s growing SaaS market.

Posted on

Chinese EdTech Startups With Tremendous Growth Potential

Bar chart showing leading edtech unicorns worldwide in 2020, by valuation, (in US$ billions). The startups are ByJu’s (from India) valued at US$ 10 billion, Yuanfudao (from China), valued at US$ 7.8 billion, Zuoyebang (from China) valued at US$ 6.5 billion, VIPKid (from China) valued at US$ 4.5 billion, Udemy (from the United States) valued at US$ 2 billion, Coursera (from the United States) valued at US$ 1.7 billion, Duolingo (from the United States) valued at US$1.5 billion, ApplyBoard (from Canada) valued at US$ 1.4 billion, Course Hero (from the United States) valued at US$ 1.1 billion, Udacity (from the United States) valued at US$ 1.1 billion, and Quizlet (from the United States), Guild Education (from the United States), Knowbox (from China), iTutorGroup (fromm China), Zhangmen (from China), Huike (from China), 17zuoye (from China), Age of Learning (from the United States), and HuJiang (from China), valued at US$ 1 billion each. Data from HolonIQ.

Chinese edtech startups accounted for 50% of all global VC investment in edtech, during the period 2016-2018 according to market research firm HolonIQ.

Chinese have traditionally placed tremendous importance on education. The gaokao, China’s notoriously tough entrance examination, is known as one of the toughest exams in the world, and gaokao scores are now being increasingly accepted in universities worldwide for admissions purposes. The sheer competition for top schools, and jobs, is driving demand for tutoring Chinese parents spare no expense so it is not surprising that education is big business in China.

However, the distribution of quality educational resources to match demand for such resources is inconsistent; urban students generally have greater access to top-notch educational resources while their rural peers often do not.
Experienced, highly qualified teachers also tend to teach in urban schools while schools in lower tier cities generally grapple with lesser-experienced teachers, and some schools suffer shortages. But the problem is not just limited to urban vs rural educational resource distribution. Even within urban cities, the distribution of English teachers for instance is inconsistent, with some cities and schools being able to hire native English teachers while others struggle.

Online education is a feasible solution to these problems. Online education offers numerous other benefits as well. Lesson schedules can be made flexible, lessons can be customized to suit the student’s learning pace and existing knowledge, artificial intelligence and other technologies can be utilized to make the learning experience more fun,
and parents can be given updates on the child’s progress, and areas that need to be improved. VIPKid for instance, a leading platform connecting Chinese children with English tutors from North America provides progress data to parents such as what the child has learnt, and what needs to be improved.

With, more and more Chinese students having access to the internet, mostly through smartphones, and some others through desktop devices such as laptops and PCs, long-sighted edtech startups have been quick to capitalize on the opportunity of using the internet to bring forth a more even and equitable distribution of online resources to match demand which has been growing along with rising disposable incomes which enable a growing number of China’s ambitious tiger parents to shell out top dollar for online after-school supplemental education resources.
China’s after-school tutoring revenue has grown from RMB 2 billion in 2011, to RMB 3.9 billion in 2017, representing a CAGR of 11.6% according to figures from research firm Frost & Sullivan. The market is expected to reach RMB 5.6 billion by 2021, representing a CAGR of about 9% during 2017-2021.

This has helped spawn a vibrant edtech market, which has emerged to be one of the biggest in the world. Of the 19 leading global edtech unicorns, 9 are from China (eight from the United States, one from India, and one from Canada).

Bar chart showing leading edtech unicorns worldwide in 2020, by valuation, (in US$ billions). The startups are ByJu’s (from India) valued at US$ 10 billion, Yuanfudao (from China), valued at US$ 7.8 billion, Zuoyebang (from China) valued at US$ 6.5 billion, VIPKid (from China) valued at US$ 4.5 billion, Udemy (from the United States) valued at US$ 2 billion, Coursera (from the United States) valued at US$ 1.7 billion, Duolingo (from the United States) valued at US$1.5 billion, ApplyBoard (from Canada) valued at US$ 1.4 billion, Course Hero (from the United States) valued at US$ 1.1 billion, Udacity (from the United States) valued at US$ 1.1 billion, and Quizlet (from the United States), Guild Education (from the United States), Knowbox (form the China), iTutorGroup (form China), Zhangmen (from China), Huike (from China), 17zuoye (from China), Age of Learning (from the United States), and HuJiang (from China), valued at US$ 1 billion each. Data from HolonIQ.

Online education accounts for just about 10% of China’s overall education market according to Deloitte. However, as online learning gains acceptance, this share is expected to climb in the years ahead. The number of online education users in China is expected to climb to 263 million by 2022, up from 42 million in 2012 according to research from iResearch.

Column chart and line graph showing the number of online education users in China, 2012-2022 (estimate), (in millions of people). The number of online education users in China is expected to reach 263.7 million people in 2022, up from 42 million in 2012. Data from iResearch.

Here are some notable startups poised to grow along with China’s online learning opportunity.

VIPKid

Backed by tech giant Tencent (HKG:0700), VIPKid connects Chinese students (aged 4-15) and English teachers from around the world (predominantly North America). VIPKid has been a notable beneficiary of China’s demand for English language training for children; in 2018 the market was valued at RMB 21.3 billion (approximately US$ 3 billion), registering a 104% growth year-on-year. The number of users jumped a whopping 168% from 5.7 million in 2017 to US$ 15.3 million in 2018 according to a 2019 report from data monitoring firm Trustdata.

Founded in 2013, and launched in 2014, the startup was one of the first to capitalize on the shortage of native English speakers in China at the time. While taking advantage of what seems to be very strategic timing, VIPKid also established a strong brand for itself by building a reputation for maintaining high quality standards with all tutors undergoing a rigorous assessment before being accepted as VIPKid teachers (the startup reportedly receives about 20,000-30,000 teacher applications per month, and 90% of them are rejected).

This focus on quality, as well as its first-mover advantage, among other reasons helped VIPKid’s meteoric rise to unicorn status in less than five years. VIPKid boasts 700,000 students, 100,000 teachers, a student retention rate of 95%, and according to data in a 2018 Chinese Online Youth English Education white paper published by the Chinese Academy of Sciences, VIPKid has been noted as a market leader with a market share of 67.2%. According to a report by Trustdata, VIPKid held a market share of 68.4%, followed by 51Talk (11.6%), Da Da English (7.8%), and vipJr (5.7%) as of 2018.

Pie chart showing leading online English education platforms in China by market share (%) in 2018. VIPKid led the market with a market share of 68.4%, followed by 51Talk (11.6%), DaDa English (7.8%), vipJr (5.7%) and others (6.5%) according to figures from market research firm Trustdata.

English language training (ELT) is still very much in demand by parents of school-aged children in China; the ELT market is expected to grow from US$ 41.51 billion in 2017 to US$ US$ 75 billion in 2022, representing a CAGR of 12.56% according to Statista with much of that being driven by the online English education segment as noted in a research report by research firm Global Information Inc.

While demand is growing, the supply side on the other hand is not expected to keep pace. China has tightened regulations on teachers’ backgrounds and qualifications which may have the effect of smaller language schools struggling to recruit qualified foreign teachers.

This suggests plenty of runway left for VIPKid’s growth story. However, competition is increasing, particularly with online learning giants such as TAL Education and New Oriental Education rolling out their own online English education courses. Furthermore, VIPKid’s one-on-one classes are generally not as profitable as group classes so VIPKid, which has so far yet to turn a profit, may find itself struggling with greater losses as it fights for market share.

However, VIPKid has made efforts to differentiate itself, for instance all of VIPKid’s teachers are from North America ; by comparison, 69% of 51talk’s teachers are from Southeast Asia. Additionally, VIPKid is working to increase the efficacy of its teaching materials (such as syntax, vocabulary, accents etc) by utilizing its vast trove of data from the more than 2 million English classes it offers monthly. VIPKid has also taken its global model a step further by aiming to bring quality native speaking Chinese teachers to students overseas where demand for Chinese language education is growing in leaps and bounds. VIPKid has already gained some ground as an education platform in North America so the startup may find it easier to enroll overseas students compared to most of its rivals who have a very limited presence beyond China’s boundaries.

Makeblock

STEM education and robotics startup Makeblock develops hardware, software, and robotics hardware targeted at schools, educational institutions, hobbyists, children, and families. With a userbase of more than 10 million, Makeblock are sold in more than 140 countries, and its products are used in more than 25,000 schools around the world. The robotics education market is expected to witness tremendous growth in the coming years driven in part by schools’ continuing emphasis on STEM (Science, Technology, Engineering, and Mathematics) education. Market research firm HolonIQ foresees the global robotics education market to nearly triple to US$ 3.1 billion by 2025, from US$ 1.3 billion in 2019.

The market is riding on the back of a large and fast-growing robotics market in the Middle Kindgom; Chinese companies installed 154,000 industrial robots in 2018, more than double that of Japan’s 55,200 and more than triple that of the United States’s 40,400 according to the International Federation of Robotics. This strong performance helped China maintain its position as the world’s largest industrial robot maker for the sixth consecutive year, accounting for 36% of global robot installations. By value, China’s robot installations grew 21% year-on-year to reach US$ 5.4 billion in 2018. China’s robot density (the number of robots per 10,000 persons used in the manufacturing industry) has also been on an uptrend, growing from 68 in 2016, 97 in 2017, and 140 in 2018.

Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry in 2016, by leading countries. At 631 industrial robot installations per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world, followed by Singapore 488, Germany 309, Japan 303, Sweden 223, Denmark 211, United States 189, Italy 185, Belgium 184, Chinese Taipei 177, Spain 160, Netherlands 153, Canada 145, Austria 144, Finland 138, Slovenia 137, Slovakia 135, France 132, Switzerland 128, Czech Republic 101, Australia 83, United Kingdom 71, China 68, Portugal 58, Hungary 57. Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2017. At 710 installed industrial robots per 10,000 manufacturing sector employees, the Republic of Korea had the highest robot density in the world in 2017, followed by Singapore (658), Germany (322), Japan (308), Sweden (240), Denmark (230), United States (200), Chinese Taipei (197), Belgium (192), Italy (190), Netherlands (172), Austria (167), Canada (161), Spain (157), Slovakia (151), Slovenia (144), Finland (139), France (137), Switzerland (129), Czech Republic (119), China (97). Data from the International Federation of Robotics.
Bar chart showing the number of installed industrial robots per 10,000 employees in the manufacturing industry, 2018. At 831 installed industrial robots per 10,000 manufacturing sector employees, Singapore had the highest robot density in the world in 2017, followed by the Republic of Korea (774), Germany (338), Japan (327), Sweden (247), Denmark (240), Chinese Taipei (221), United States (217), Italy (200). Belgium (188), Netherlands (182), Austria (175), Slovenia (174), Canada (172), Spain (168), Slovakia (165), France (154), Switzerland (146), China (140), Finland (140),Czech Republic (135). Data from the International Federation of Robotics.

Since 2017, China’s robot density has exceeded the world average.

Column chart showing China’s robot density (number of industrial robots per 10,000 employees in the manufacturing sector) vs world average. In 2016,2017, and 2018, China’s robot density was 68, 97 and 140, respectively while the world average was 74, 85, and 99 respectively. Data from the International Federation of Robotics.

China’s robot density is expected to continue its upward march in the years to come. With China’s robotics industry growing at a rapid clip, the need for skilled robotics professionals and talent will no doubt increase in the future, suggesting bright prospects for Makeblock.

Posted on

Malaysia’s Growing Digital Economy: Opportunities And Sectors To Watch

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

Malaysia’s digital economy, as defined by its government registered an average growth of 9% annually between 2010 and 2016 in value-added terms, exceeding Malaysia’s overall GDP growth rate during the period. In 2018, Malaysia’s digital economy grew 6.9% year-on-year to reach RM 267.7 billion, contributing 18.5% to the national economy (up from 18.3% in 2017) according to the Department of Statistics. Although the 2018 growth rate of 6.9% is lower than in 2017 when it grew 9.8%, it is still higher than the country’s overall GDP growth rate of 4.7% recorded for the year according to data from Bank Negara.

This growth momentum is likely to continue thanks to a combination of government support, a youthful, tech-savvy population, and increasing digitization of SMEs among other factors.

On the consumer front, Malaysia boasts favorable demographics to support its growing digital economy. Of Malaysia’s approximately 31 million population, about 42% are aged 24 years and below according to the CIA and the median age of the country’s population is 29.2. This compares with neighboring countries such as Thailand where the median age is 39, Singapore (35.6), and Vietnam (31.9). A relatively young population as well as high incomes have helped push Malaysia’s internet penetration rate to 85.7% as of 2018, which is higher than the approximately 60% penetration rate in the region.

On the enterprise front, large enterprises currently dominate Malaysia’s digital economy as they adopt digital technologies such as e-commerce at higher rates than SMEs, partly due to larger enterprises having greater access to funding and technical expertise. For instance less than 44% of Malaysian SMEs use e-commerce for their business according to data from a 2018 report by SME Corp.

Bar chart showing usage of ICT tools and systems among Malaysian SMEs. 86.5% of Malaysian SMEs used desktop / laptops, 90.1% used internet connections, 91.4% used smartphones, 43.8% used e-commerce, 70.5% used social media, 50.2% used Finance & Accounting systems, , 28.8% used HR systems, 18.8% used POS systems, 14.5% used inventory systems, 12.5% used Customer Relationship Management (CRM) systems, 12.3% used supply chain management systems, 11.5% used order fulfillment systems and 10.5% used Enterprise Resource Planning (ERP) systems.

However, government support (such as the government’s PeDAS program which is aimed at assisting rural SMEs reach a larger consumer base through e-commerce platforms) and a growing breadth of affordable digital enterprise solutions could spur Malaysian SMEs to shift towards digital applications in the future. With SMEs accounting for nearly 99% of Malaysia business establishments, their digital transformation could contribute significantly to the growth of Malaysia’s digital economy.

To add further impetus to Malaysia’s digital economy which is already riding high on strong fundamentals, the Malaysian government has put in place several incentives to encourage greater market expansion and is aiming for the digital economy to contribute 20% to the national economy by 2020, up from 17.8% in 2015.

Some of the incentives include:

  • A RM 210 million allocation under Budget 2020 for the purposes of accelerating the development of digital infrastructure such as industrial parks, and in public buildings such as schools.
  • RM 21.6 billion allocated under Budget 2020 for the five-year National Fiberization and Connectivity Plan (NFCP) which will ensure high-speed connectivity throughout the country along with an additional RM 250 million to increase broadband connectivity in rural and remote areas such as Sabah and Sarawak with technologies such as satellite technology.
  • Under the Malaysia National Industry 4.0 framework, the Industry4WRD Readiness Assessment Intervention Program or in short known as ‘Industry4WRD Intervention Fund’ was launched by the government in Budget 2019. It is a financial support facility for Malaysian SMEs in the manufacturing and related services sectors to adopt Industry 4.0 applications and technologies such as the Internet of Things (IoT), sensor technology, artificial intelligence, robotics, 3D printing and others.

With many tailwinds to support market expansion, the International Data Corporation (IDC) predicts that by 2022, 21% of Malaysia’s GDP will be digitized, up from about 18% currently.

Sectors and industries to watch within this burgeoning market include:

E-Commerce

E-commerce is one of the few verticals in Malaysia that is relatively ahead of the digitization race with the e-commerce sector alone contributing 8% to Malaysia’s GDP in 2018. Already one of the fastest growing e-commerce markets in Southeast Asia, there is still ample growth ahead with the sector expected to expand to nearly US$ 6 billion by 2024.

Column chart showing Malaysia’s e-commerce revenue, 2017-2024. Malaysia’s e-commerce revenue was 2,651 million in 2017, 3,030 million in 2018, 3,680 million in 2019, 4,337 million in 2020, 4,974 million in 2021 (estimated), 5,433 million in 2022 (estimated), 5,750 million in 2023 (estimated), and 5,995 million in 2024 (estimated.

B2C e-commerce has garnered the most attention contributing to the top-lines of online retails such as Lazada (owned by Alibaba (NYSE:BABA)), Shopee (owned by SEA Group (NYSE: SE), and Zalora (owned by Global Fashion Group (ETR:GFG)).

However B2B e-commerce is poised to catch up as SMEs jump into the e-commerce bandwagon. Alibaba looks set to capitalize on this growth opportunity having emerged as one of the most aggressive players in encouraging and facilitating Malaysian SMEs to adopt e-commerce to reach a global customer base. Under its eWTP (e World Trade Platform), Alibaba collaborated with the Malaysian government to launch the world’s first Digital Free Trade Zone (DFTZ) at Kuala Lumpur International Airport (KLIA) Aeropolis in 2017 to assist local businesses sell their products in overseas markets through online e-commerce, and position Malaysia as a regional e-commerce hub. And in April this year, Alibaba’s logistics arm Cainiao Smart Logistics Network celebrated the inaugural flight of a new dedicated cargo route between Hangzhou and Kuala Lumpur.

Electrical and electronics

Malaysia is a global electrical & electronics (E&E) hub, with major players such as Intel, Hewlett Packard, Osram, Broadcom, Western Digital, and Samsung having manufacturing and distribution operations in the country notably Penang. Malaysia’s E&E industry (which can be categorized into 4 sub-sectors namely electronic components, consumer electronics, industrial electronics, and electrical products) is the biggest segment in the country’s manufacturing sector. Malaysia is the world’s 7th largest E&E exporter and the E&E sector accounts for 38% of Malaysia’s exports.

As Malaysia’s digital economy grows, spurring greater demand for mobile devices, semiconductors, storage devices, and other hardware, Malaysia strong E&E industry is well-placed to satisfy demand and profit. Only 62% of businesses in Malaysia are connected to the internet, 46% have fixed broadband, and about 28% have a web presence of some kind according to the World Bank. This is lower than the EU average where 96% businesses are connected to the internet, 95% have fixed broadband, and 75% have a website.

In an effort to incentivize Malaysian SMEs to adopt digitalisation measures for their business operations including electronic point of sale systems (e-POS), Enterprise Resource Planning (ERP), and electronic payroll systems, the Malaysian government will provide a 50% matching grant of up to RM 5000 per company for subscription to such digital services under Budget 2020. The government will also allocate RM 550 million to provide smart automation matching grants to 1,000 manufacturing and 1,000 services companies automate their business processes.

Furthermore, the imminent launch of 5G technology in the country (expected by the third quarter of 2020) should add a further boost to the E7E sector thanks to the offering of 5G-compatible smartphones, tablets and other devices. Satisfying this growing demand for electrical and electronic components suggests revenue growth opportunity for local E&E players such as Inari Amertron Bhd (KLSE:INARI).

Although the country’s E&E sector has been hit by production shocks as a result of Covid-19, these blips are likely to be temporary and should recover in the long term as market fundamentals remain supportive.

Cloud services    

IDC projects Malaysia’s overall IT spending to be approximately US$ 11 billion in 2020, with much of that shifting to managed and cloud services.

Research firm GlobalData foresees Malaysia’s digital spending to reach US$ 25.2 billion by 2023 from US$ 16.5 billion in 2018 (representing a CAGR of 8.9% during the period). Much of that spending will be on client computing and cloud solutions.

Bar chart showing Malaysia's ICT market growth rate (CAGR) a leading 5 IT solution areas, 2018 2023. Mobility is expected to grow at a CAGR of 20.9%, cloud computing 19.1%, data and analytics 17.6%, storage 14.3%, outsourcing 10.1% during the forecast period.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

By vertical, the manufacturing sector is expected to account for the lion’s share of ICT spend in 2023.

Cloud adoption is largely concentrated among Malaysia’s larger enterprises while adoption among SMEs, (which accounting for 98.5% of Malaysian business establishments make up the backbone of Malaysia’s economy) is relatively low. However this is poised to change with the Malaysian government encouraging SMEs to adopt digital technologies such as cloud computing, thanks to favorable provisions in Budget 2020.

Yet again, Alibaba has made its moves in Malaysia with its cloud computing arm Alibaba Cloud partnering with local domain registrar WebNIC to tap into this relatively underserved market.

Posted on

Breonics’ Disruptive Organ Repair Technology: Potential Solution To Transplant Organ Shortage

Are chart showing the number of donors, transplants, and people on the transplant waiting list in the United States, 1991-2018. The number of organ donors in the United States increase from 6,953 in 1991 to 17,554 in 2018. The number of transplants performed in the United States increased from 15,756 in 1991 to 36,529 in 2018. The number of people on the US transplant waiting list increased nearly five-fold from 23,198 in 1991 to 113,759 in 2018. Data from the US Health Resources and Services Administration (HRSA)

Of the few options available to End Stage Renal Disease (ESRD) patients, transplantation is the most cost effective and offers a relatively better quality of life. Yet, the supply of transplant organs falls far short of demand and as a result the transplant waiting list has continued to increase over the past few decades. American bio-science company Breonics’ Exsanguinous Metabolic Support (EMS) technology, which is a medical device that could repair donor organs and test their viability, aims to address the global transplant organ shortage, starting with kidneys (more than 80% of patients on the U.S. transplant waiting list were waiting for kidneys). The company is currently raising its Series A capital to fund clinical trials.

The demand for organ transplantation has increased worldwide over the past few decades due to increased incidence of organ failure. However the supply of organs for transplantation has remained relatively stagnant resulting in an escalating shortage of organs for transplantation over the past few decades. In the U.S. alone there were about 113,000+ patients on the national transplant waiting list as of July 2019, up from 23,198 in 1991 (representing a nearly five-fold increase), and every 10 minutes another person is added to the list. This is despite the number of donors increasing from 6,953 to 17,554, and the number transplants more than doubling from 15,756 to 36,529 during the same period.

Are chart showing the number of donors, transplants, and people on the transplant waiting list in the United States, 1991-2018. The number of organ donors in the United States increase from 6,953 in 1991 to 17,554 in 2018. The number of transplants performed in the United States increased from 15,756 in 1991 to 36,529 in 2018. The number of people on the US transplant waiting list increased nearly five-fold from 23,198 in 1991 to 113,759 in 2018. Data from the US Health Resources and Services Administration (HRSA)

Part of the reason for the stagnant transplant organ supply is due to the fact that under current medical standards of care, donors have to be free of certain illnesses, have to be below the age of 75, and donor organs have to be harvested within 30 minutes of death. However, of the more than 2.5 million annual deaths in the United States, just 2% occur under circumstances that meet this criteria; for instance the death takes place outside the hospital where the deceased’s organs could be preserved, or they suffer from conditions such as most cancers or certain incurable infections that make the organ unfit for donation. As a result, most organ donors in the U.S. are from living donors or from donation after brain death and this means that more than 95% of potential organs are not being considered for transplantation given the limitations of the current standards of medical care.

Pie chart showing the number of deceased and living transplant organ donors in the United States in 2018. In 2018, the U.S. had 10,722 deceased transplant organ donors and 6,831 living organ donors.

The desperate situation has spurred a search for solutions ranging from offering incentives for organ donation to development of technologies and methods to increase organ preservation. There is also a growing interest in using suboptimal organs from donors which are currently not considered for transplantation.

American bioscience company Breonics’ EMS platform offers a potentially ground-breaking solution towards addressing the global transplant organ shortage by expanding the window of opportunity for harvesting the donor organ. According to Breonics, under the 30-minute window, less than 4% of all mortalities in the U.S. are potential organ donors, but with their technology, the addressable market expands to at least 15%. Although the technology can be used for the repair and regeneration of lungs and livers, Breonics is initially targeting kidneys which has the biggest waiting list and is the most transplanted organ. 83.7% of patients on the U.S. transplant waiting list are waiting for kidneys.

Pie chart showing the transplant waiting list by organ type in the U.S. As of July 2019. 83.7% of patients on the U.S. transplant waiting list were waiting for kidneys, 11.6% for livers, 3.3% for hearts, 1.2% for lungs, and 1.5% for other organs (pancreas, intestines, and combinations).

And at 21,167 transplants performed in 2018, kidney transplants were the most performed transplants in the U.S. last year, far exceeding the 8,250 liver transplants performed the same year.

Bar chart showing the transplants performed in the United States by organ type in 2018. Of the transplants performed in the United States in 2018, 21,167 were kidney transplants, 8,250 were liver transplants, 3,408 were heart transplants, 2,530 were lung transplants, 835 were kidney/pancreas transplants, 192 were pancreas transplants, 104 were intestine transplants, and 32 were heart/lung transplants.

The opportunity is not limited to transplant patients but also to the dialysis population in the United States which is estimated at over 600,000 people as of 2016, as well as those newly diagnosed with End Stage Renal Disease (ESRD) which is estimated at over 120,000 according to the National Kidney Foundation; 30 million or 15% of the U.S. adult population was suffering from Chronic Kidney Disease (CKD) in 2017 according to National Center for Chronic Disease Prevention and Health Promotion, and of the 30 million U.S. CKD patients, about 0.4% or 120,000 patients are in Stage 4 which will likely pave the way for ESRD or total kidney failure which means they will likely need a transplant or dialysis in the near future. CKD is an under-recognized public health crises that causes more deaths than breast cancer or prostate cancer.

Line chart showing the prevalence of Chronic Kidney Disease (CKD) stages 1-4 in the United States by year during the period 1988-2016 (% of prevalence). Between 1988-1994, U.S. CKD patients made up 11.8% of the population, of which 4.1% of CKD patients were in Stage 1; 3% were in Stage 2; 4.5% were in Stage 3; and 0.2% were in Stage 4. In 2015-2016, CKD patients made up 14.2% of the population of which 4.7% were in Stage 1; 3.4% in Stage 2; 5.8% in Stage 3; and 0.4% in Stage 4.

The incidence of ESRD has been on an upward trend in the United States which is the result of rising rates of diabetes and hypertension which are the two most common causes of kidney disease, according to data from the U.S. government’s Renal Data System.  The prevalence of ESRD more than doubled between 1990 and 2015, from 727 ESRD patients per million U.S. residents in 1990 to 2,087 ESRD patients per million U.S. residents in 2015 according to the United States Centers for Disease Control and Prevention – Chronic Kidney Disease Surveillance System, United States.

Column chart showing the incidence of end-stage renal disease in the United States from 1990 to 2015. In 1990 there were 727.4 end stage renal disease patients per million United States residents. By 2015 the figure had ballooned to 2087 point for end-stage renal disease patients per million U.S. residents.

There is no cure for ESRD and patients have three options: (i) no treatment which results in death; (ii) dialysis which generally has a negative impact on quality of life; and (iii) transplant which offers a relatively average longer life expectancy and better quality of life.

Dialysis is also more costly; the ESRD population in the U.S. represents 1% of the U.S. Medicare population, but they account for 7% of the Medicare budget. Medicare spending for ESRD patients stood at US$ 35 billion in 2016. 80% of this, equal to US$ 28 billion, was spent on hemodialysis care costs (approximately US$ 90,000 per patient annually). Spending for transplant patient care on the other hand stood at US 3.4 billion, equal to less than 10% of Medicare spend on ESRD patients. The U.S. government is reportedly exploring avenues to trim the relatively high cost associated with dialysis through measures such as improving care in the early stages of kidney disease, increasing access to kidney transplants and favor home dialysis over clinic-based dialysis treatment.  

Transplantation is generally accepted to be superior not just in terms of cost effectiveness but also in terms of life for the patient. However, the biggest barrier limiting greater access to transplants is the supply of suitable donor kidneys. 12 people die every day (roughly 5,000 annually) waiting for a kidney transplant according to the National Kidney Foundation.

Breonics is addressing this pressing problem by broadening the criteria for organ donation by expanding the window of opportunity for harvesting the organ from the current 30 minutes, to two hours post mortem. Under current medical standards of care (SOC) transplant surgeons cannot transplant kidneys that have been exposed to warm ischemia for more than 30 minutes as the damage caused to the kidney due the lack of blood supply for more than 30 minutes could potentially harm the patient. This is why the organ donor pool in the U.S. is currently largely dependent on living donors or donation after brain death (DBD) which represents just a small fraction of deaths from traumatic injuries each year, approximately 4%, while organs from deceased by cardiac arrest are not considered because the damage caused to the organs as a result of prolonged lack of blood flow make them unusable. In contrast, brain dead patients are usually in an ICU on life support until they are declared brain dead by brain criteria, and thus their organs do not experience significant warm ischemic damage because the restriction of blood flow to the organs is only for a relatively shorter period of time, often in terms of minutes.

Breonics’ EMS technology can repair damage to organs that have been damaged from warm ischemia for up to two hours. Thus, with Breonics’ technology, the donor pool can be expanded to include the currently huge yet untapped pool of potential donors who died from cardiac arrest and uncontrolled brain deaths (such as from a stroke) because the transplant team can be called to hospital immediately after the time of death, obtain family consent as needed and still harvest the organs within the expanded window afforded by Breonics’ technology. The company’s EMS platform is the first technology that can be used to intervene after cardiac arrest and repair ischemically damaged kidneys and other organs for transplantation. Brenonics’ perfusate medical device can also assess the viability of the kidney prior to transplantation, thereby reducing discard rates due to false negatives. The U.S. reportedly discards 3,500 kidneys annually, and 17% of donated kidneys were discarded during the 10 year period between 2004 and 2014. The reason for the waste was because doctors in the U.S. were less inclined to using lower quality kidneys, however a panel of transplanted experts found that as many as 50% of the kidneys that were discarded could have been transplanted according to the National Kidney Foundation. The discard rate has only been increasing according to the study; in 2016, the discard rate reached 20%. Breonics has successfully resuscitated and repaired over 100 human kidneys that were discarded for being too damaged for transplant. The company estimates its technology has the potential to increase the number of kidneys available for transplant in the United States from the current 19,000+ to an additional 150,000 per year by 2021. Breonics will be reimbursed by the Organ Procurement Organization for every kidney Breonics successfully repairs, and provides for transplant which is guaranteed under the Renal Care Act of 1982.    

Posted on

Untapped Opportunities In Green Chemistry Market

Pie chart showing primary oil and natural gas demand by sector, 2017 (%). Transport was the biggest oil consuming sector, accounting for 56% of oil demand in 2017. Transport was followed by Petrochemicals (14%), Buildings (8%), Other industry (5%), Power (5%) and Other (12%). Power was the biggest natural gas consuming sector in 2017 accounting for 40% of natural gas demand in 2017. Power was followed by Buildings (21%), Other industry (15%), Petrochemicals (8%), Transport (4%) and Other (12%). Data from the International Energy Agency.

Chemicals are used to produce almost everything in the world today. The chemical and petrochemical industry represents the largest contributor to industrial energy demand worldwide accounting for about 10% of global total final energy consumption and about 7% of greenhouse gas emissions associated with industry according to the International Energy Agency. Yet, as the world becomes increasingly decarbonized, the decarbonization of the chemical industry which is one of the biggest fossil fuel consuming sectors suggests ample opportunity for growth in the global green chemistry market opening potentially lucrative business and investment opportunities.

The global market for green chemistry, which includes bio-based chemicals (also known as green chemicals), renewable feedstocks, green polymers and less-toxic chemical formulations is projected to grow from US$ 11 billion in 2015 to nearly US$ 100 billion by 2020, representing a CAGR of 55.5% according to figures from Pike Research.

The growth is underscored by several drivers including greater awareness of the negative environmental impact of petrochemicals, increasing legislative pressure to reduce emissions, and increasing end consumer demand for sustainable and “green” products, which in turn is prompting large retailers and other institutions to adopt policies to source bio-based products and raw materials.

Currently, the chemical industry relies heavily on fossil fuels with petrochemicals (which convert fossil fuels such as oil and gas into products such as plastics, fertilizers, packaging, clothing, paints and coatings such as varnishes, cosmetics, medical equipment, detergents, tires etc) accounting for 90% of the total feedstock demand for the manufacture of chemical commodities. Driven by rising economic growth among other reasons, global demand for petrochemicals has nearly doubled since 2000 (much of it due to increased plastic consumption worldwide) according to data from the International Energy Agency (IEA). The petrochemical sector which currently accounts for about 14% of global oil demand and about 8% of global gas demand is expected to see its share of oil and gas consumption increase driven by greater plastics consumption in developing economies (outweighing the drag to demand from recycling efforts in developed economies) and the difficulty in finding suitable alternatives.

Pie chart showing primary oil and natural gas demand by sector, 2017 (%). Transport was the biggest oil consuming sector, accounting for 56% of oil demand in 2017. Transport was followed by Petrochemicals (14%), Buildings (8%), Other industry (5%), Power (5%) and Other (12%). Power was the biggest natural gas consuming sector in 2017 accounting for 40% of natural gas demand in 2017. Power was followed by Buildings (21%), Other industry (15%), Petrochemicals (8%), Transport (4%) and Other (12%). Data from the International Energy Agency.

Of the nearly 10million barrels of oil per day growth in total oil demand in 2030, the chemical sector is expected to account for more than a third. Furthermore, of the 850 billion cubic meters increase in global gas consumption, the IEA expects the chemical sector to account for 7%.

There a few key possibilities for the decarbonization of the chemical industry, notable options include greater electrification of production processes, and replacing petroleum feedstock (which produces fossil fuel based chemicals), with alternatives such as bio-based feedstock such as plants and organic waste (to produce what is known as “green chemicals”). This suggests that as the world adopts measures to combat climate change, the traditional chemicals industry is ripe for disruption and the green chemistry market is in prime position to meet the global need for a decarbonized chemical sector.

Notable startups in the green chemicals game include Texas-based Solugen, a developer and manufacturer of plant-based alternatives for petroleum based products. In May this year, the startup raised US$ 32 million in its Series B round. Y Combinator, Refactor Capital, Western Technology Investment and others participated in the round.

Sub-sectors within the green chemistry market to watch include:

Bio-plastic 

Much of the growth in petrochemical demand over the past decade has largely been driven by greater demand for plastics which has outpaced demand for other bulk materials such as steel, cement or aluminum. According to figures from the International Energy Agency, plastic production has nearly doubled since 2000 and looks set to continue growing driven by rising per capita plastic demand from emerging economies where plastic consumption per capita is just a fraction of developed economies. For instance, in South Korea, one of the world’s largest consumers of plastic,  per capita plastic consumption stands at 98.9 kilograms per person as of 2015, compared with just 5.5 kilograms per person in Africa, 9.3 kilograms per person in India, and 27.8 kilograms per person in Brazil.

Bar chart showing the per capita consumption of major plastics (plastic resin) in 2015, (kilograms per capita), for selected countries and regions. At 98.9 kg per person, South Korea is one of the world’s biggest consumers of plastic products. Per capita plastic consumption for other countries in the chart are as follows: Canada (98.6 kg/person), Saudi Arabia (86.8 kg/person), United States (81.3 kg/person), Western Europe (62.2 kg/person), Japan (54.4 kg/person), China (45.1 kg/person), Mexico (32.9 kg/person), Brazil (27.8 kg/person), India (9.3 kg/person), and Africa (5.5 kg/person). Data from the International Energy Agency.

However, with countries around the world facing a growing problem of plastic pollution, there is a pressing need for environmentally-friendly alternatives. While recycled plastic could be a growth feedstock in the future (according to an article published in National Geographic, of the 8.3 billion tons of plastic produced over the past six decades, only 9% has been recycled) opening growth opportunities for companies such as UK-based Recycling Technologies, there is considerable potential for bio-plastics to also emerge as a growth market; European plastics trade association PlasticsEurope estimates that of the roughly 335 million tons of plastic produced every year, just about 1% are bio-plastics and demand is on an upward trend and according to trade association European Bioplastics, global bio-plastic production capacities are set to increase in the years ahead which suggests growth opportunities for bio-plastics manufacturers such as NatureWorks and Green Dot Plastics.

Bar chart showing global production capacities of bio-plastics (in 1,000 tons). Global bio-plastic production capacity is expected to increase from around 2.1 million tons in 2018 to 2.6 million tons by 2023. Data from European Bioplastics.

Bio-fertilizers

Fertilizers are an integral component in agriculture. As the world moves towards sustainable agriculture practices and organic food, bio-fertilizer is primed to be a beneficiary as synthetic fertilizers, which have harmful effects on the environment such as groundwater contamination, are replaced with bio-fertilizers which are environmentally friendly. Unlike synthetic fertilizers which are mostly fossil fuel based, bio-fertilizers are mostly derived from plants, and other organic residues such as animal waste.

The global bio-fertilizer market was valued at US$ 946.6 million in 2015 and the market is projected to grow at a CAGR of 14.08% between 2016 and 2022, according to forecasts from research firm MarketsAndMarkets.

The demand is underpinned by growing demand for organic food (which comprises just about 2% of total agriculture produced globally), and a growing need for sustainable agriculture (about 30% of land globally is considered degraded according to analysis by research firm Boston Consulting Group and 28% of cropland (including 56% of irrigated cropland) is in water stressed regions).

London-based bio-fertilizer startup Bio-F Solutions is an exciting startup to watch in this promising sector. Founded by a team of staff and students from the Department of Life Sciences at Imperial, the startup is pioneering a bio-fertilizer made of algae which contains microorganisms that remove naturally occurring nitrogen in the atmosphere and ‘fix’ it in the soil thereby enriching the soil enabling it to be used for new crops.

Nitrogen, phosphorus and potassium, also known as NPK, are the “Big 3” primary nutrients in commercial fertilizers, of which nitrogen is considered to be most important nutrient as plants absorb more nitrogen than any other nutrient. This is because nitrogen is essential to the formation of protein which is a key building block of the tissues of most livings things.

Bar chart showing world demand for fertilizer nutrient use, 2015-2020 (in thousand tons). Demand for nitrogen is expected to grow from 110 million tons in 2015 to 118 million tons by 2020, representing a CAGR of 1.5%. Demand for Phosphate is expected to grow from 41 million tons in 2015 to 46 million tons by 2020, representing a CAGR of 2.2%. Demand for Potash is expected to grow from 33 million tons in 2015 to 37 million tons in 2020, representing a CAGR of 2.4%. Data from the Food and Agriculture Organization (FAO).

Although nitrogen makes up 80% of the earth’s atmosphere, it is in a form that is unavailable to plants. For plants to absorb this key nutrient, atmospheric nitrogen must be ‘fixed’ through methods such as crop rotation, green manure or compost. Bio-F Solutions’ algae-based fertilizer takes advantage of microorganisms present in algae (free-living bacteria which includes the cyanobacteria, also known as blue-green algea), which are naturally capable of transforming atmospheric nitrogen into fixed nitrogen which are usable by plants.

Posted on

As Bangladesh’s Startup Scene Blooms, These Startups Are Poised To Thrive

Bar chart showing the top 10 countries with highest increase in Ultra High Net Worth (UHNW) population during the five year period between 2012 and 2017 according to data from Wealth-X. Bangladesh’s UHNW population grew 17.3% making the country with the fastest growing UHNW population during the five year period. Bangladesh was followed by China (13.4%), Vietnam (12.7%), Kenya (11.7%), India (10.7%), Hong Kong SAR, China (9.3%), Ireland (9.1%), Israel (8.6%), Pakistan (8.4%), United States of America (8.1%).

Bangladesh rarely comes to mind when thinking about startups but with a population of some 160 million (which makes it the world’s eighth most populous country) over 46% of which belong to the entrepreneurial and tech-savvy “Gen Z” generation of youngsters aged 24 and below (over 50% of the country’s citizens have internet access and 90% of them use the internet through their smartphones), and a stellar economic growth which has propelled Bangladesh to number one position in a number of indicators (such as the five year growth of UHNW people and per capita economic growth), could this rising South Asian nation emerge as a dark horse in the startup landscape?

Unlike its giant neighbor India, which is one of the most attractive countries for startup entrepreneurs and investors, Bangladesh doesn’t stand out as a startup nation and its startup ecosystem is at a relatively infant stage of development. However, with the frontier market having a number of ingredients that could potentially cook up a potentially vibrant startup economy, Bangladesh has potential to quietly emerge as an unexpected startup success story in the coming years.

Once one of the poorest countries in Asia, Bangladesh’s economy has been booming over the past few years so much that the South Asian nation has shot up to be the world’s fastest growing Ultra High Net Worth (UHNW) country according to studies by New York-based global UHNW market intelligence and research firm Wealth-X which measured the compound annual growth rate of UHNW populations across countries worldwide since 2012.

Bar chart showing the top 10 countries with highest increase in Ultra High Net Worth (UHNW) population during the five year period between 2012 and 2017 according to data from Wealth-X. Bangladesh’s UHNW population grew 17.3% making the country with the fastest growing UHNW population during the five year period. Bangladesh was followed by China (13.4%), Vietnam (12.7%), Kenya (11.7%), India (10.7%), Hong Kong SAR, China (9.3%), Ireland (9.1%), Israel (8.6%), Pakistan (8.4%), United States of America (8.1%).

Bangladesh’s HNW population is projected to grow at a CAGR of 11.4% between 2018 and 2023, the world’s third fastest growing HNW population behind Nigeria (16.3%) and Egypt (12.5%) but ahead of China (9.8%) and India (9.7%).

Bar chart showing the fastest growing HNW countries between 2018-2023 (CAGR %). Nigeria is expected to see the world's fastest growing HNW population with its HNW population growing at a CAGR of 16.3% between 2018 and 2023. Nigeria is followed by Egypt (12.5%), Bangladesh (11.4%), Vietnam (10.1%), Poland (10%), Kenya (9.8%), China (9.8%), India (9.7%), Philippines (9.4%) and Ukraine (9.2%). Data from Wealth-X.

Meanwhile studies from British weekly magazine revealed that Bangladesh registered a 45% increase in per capita income in terms of Purchasing Power Parity over the last five years, propelling the country to number one position along with China and India to emerge as the countries with the highest per capita economic growth globally during the period.

Bangladesh’s economic transformation has been helped in part by a thriving industrial sector (notably its garment sector which accounts for about 80% of the country’s export revenue and about 20% of GDP) as well as overseas remittances from Bangladeshis working overseas. The country’s economy grew 7.86% during FY 2018, up from 7.28% in 2017. The momentum is likely to continue with the country forecast to be the third fastest growing economy in the world in 2019 with a projected GDP growth rate of 7.4%, according to a report by the United Nations titled World Economic Situation and Prospects. Meanwhile, the country’s middle and affluent class (MAC) is growing at a rate of around 10%-11% per annum and if this pace of expansion continues, the MAC population is expected to nearly triple to about 34 million by 2025 (equal to about 12% of the population) from about 12 million 2015 (equal to about 7% of the population) according to Boston Consulting Group.

Apart from an exciting economic growth story, Bangladesh also boasts attractive demographics with a population of some 160 million (making it the eighth most populous nation in the world) over 46% of which are aged 24 years and younger. The median age is 27.1, making it the fourth youngest population in South Asia behind Afghanistan (which has a median age of 19), Pakistan (24.1), and Nepal (24.5) according to figures from the CIA. The total number of internet users in Bangladesh reached 91 million at the end of December 2018 over 93% of which are mobile internet users according to figures from the Bangladesh Telecommunication Regulatory Commission. Yet, with internet penetration at less than 60%, there is still ample potential for growth in internet users. This tech-savvy, youthful generation presents a potentially major driving force for the country’s digital economy and as they climb up the income ladder and their buying power grows, they could potentially drive Bangladesh’s consumer market as well opening tremendous opportunities. This suggests Bangladesh, which has so far been off the radar of international startup entrepreneurs and investors, could become an increasingly important market going forward.

Flight Expert

Founded by a company that has been an active player in Bangladesh’s travel industry for over two decades, homegrown Online Travel Agency (OTA) startup Flight Expert which helps travelers find, compare and book flights and accommodation, leveraged its advantage of being backed by a company with years of experience and knowledge about the local travel industry, as well as an established reputation in the country’s travel agency industry to successfully position itself as one of the most popular OTAs in Bangladesh.

Like most other emerging and frontier markets, Bangladesh’s travel market is on the rise and with Bangladeshis becoming increasingly digitized, the country’s nascent online travel market is taking off as well, propelled by a growing appetite for travel thanks to rising incomes and rising internet penetration among its young and increasingly tech-savvy workforce.

There is reason to be optimistic about the sector’s prospects going forward. With a direct contribution of just 2.2% to the country’s GDP as of 2017 (lower than neighboring South Asian countries such as Nepal (4%), Sri Lanka (5.3%), Pakistan (2.9%), India (3.7%), and Maldives (39.6%)), Bangladesh’s travel and tourism sector was valued at BDT 427.5 billion in 2017 (about US$ 5.3 billion) according to data from the World Travel and Tourism Council (WTTC) – suggesting ample potential for growth in the long run. The WTTC forecasts Bangladesh’s travel & tourism sector to expand by 6.2% between 2018 and 2028 to reach a value of BDT 824 billion (about US$ 10.2 billion), making it the fifth fastest growing travel and tourism market in the world during the 2018-2028 period, and the second fastest in South Asia behind India.

Bar chart showing the market value (in US$ billions) of the travel and tourism sector in 2017 and 2028e in selected South Asian countries. India’s travel and tourism market was the biggest with a value of US$ 91.3 billion in 2017. India was followed by Pakistan (US$ 8.8 billion), Bangladesh (US$ 5.3 billion), Sri Lanka (US$ 4.5 billion), Maldives (US$ 1.5 billion) and Nepal (US$ 0.9 billion). By 2028, it is estimated that India’s travel and tourism market will be valued at US$ 194.7 billion, Pakistan (US$ 16,4 billion), Bangladesh (US$ 10.2 billion), Sri Lanka (US$ 8.2 billion), Maldives (US$ 2.7 billion), and Nepal (US$ 1.5 billion).

This bodes well for OTAs and Flight Expert, as one of the pioneering OTAs in Bangladesh is poised to benefit. A report by ResearchAndMarkets expects Bangladesh’s mobile travel booking industry (which includes offline and online bookings) to witness a CAGR of 21.4% to reach US$ 9.65 billion by 2025. Meanwhile Flight Expert CEO Salman Bin Rashid estimates OTAs will account for about 45% of Bangladesh’s travel market by 2025, up from an estimated 3%-4% currently.

ShopUp

Bangladeshi social commerce platform ShopUp helps small businesses with online stores on social media (notably Facebook) automate their businesses by providing solutions to business processes such as automating inventory and order management, invoice generation, accounts, etc.

The startup’s automation services are provided free of charge, a godsend for the thousands of Bangladeshis who struggle to find a job and aspire to earn a living selling products online but are hampered by limited capital. ShopUp has helped jumpstart tens of thousands of social commerce entrepreneurs who used the platform’s services to automate the backend processes in online store management, enabling them to focus on other aspects of the business such as product development etc.

The company’s chief revenue stream comes from fees charged for marketing and delivery and there is ample scope for growth in this area as Bangladesh’s social commerce scene continues its upward march. Like many other countries in Asia such as Indonesia and Vietnam, social commerce, particularly F-commerce is a sunrise industry in Bangladesh and over the past few years, the country’s growing social commerce sector has given birth to thousands of social commerce businesses (estimated at over 150,000 compared to just about 2,5000 formal e-commerce businesses according to data from the E-Commerce Association of Bangladesh).

And the growth story is just beginning. Hootsuite’s Digital 2019 report revealed that despite having an internet penetration rate of about 55% (with an internet userbase of about 91 million), just 37% of these internet users (equal to just about 34 million) are active social media users, representing a social media penetration rate of just 20%.

Bar chart showing the active social media user penetration rate (%) as at January 2019 in selected Asian countries. Brunei has one of the highest active social media user penetration rates with 94% of its population actively using social media. Other Asian countries and their respective active user penetration rates are: South Korea (85%), Singapore (79%), Philippines (71%), China (71%), Vietnam (64%), Japan (61%), Indonesia (56%), Bhutan (51%), Myanmar (39%), Laos (39%), Nepal (33%), Sri Lanka (30%), India (23%), Bangladesh (20%), Pakistan (18%) and Afghanistan (10%). Data from Hootsuite and We Are Social.

And the number of internet users making online purchases is even smaller. According to a 2018 report by IDLC Finance Ltd, online sales account for less than 1% of Bangladesh’s retail sales, compared with 5%-6% for India. Meanwhile on the seller side, less than 30% of Bangladesh’s workforce is female according to the International Labour Organization which represents a tremendous untapped market of potential social commerce entrepreneurs for ShopUp.

However, the more exciting part of ShopUp’s growth story is not in Bangladesh’s social commerce landscape but in the country’s nascent fintech sector, which has tremendous potential to grow thanks to a huge unbanked population (estimated at 70% of the total population), increasing smartphone penetration and a relatively undeveloped financial system. Having started out by providing solutions for the automation of business operation processes such inventory control and order management, over the past few years ShopUp has successfully transformed its product offering to include automation services in the areas of credit assessment for small business owners who are generally left out of the formal credit system. Using algorithms and big data, ShopUp’s automated credit appraisal platform aims to solve this challenge for the majority of Bangladesh’s 10 million Micro, Small and Medium Enterprises (MSME) who lack access to much needed working capital.

REPTO Education Center

The global educational technology market is on an upswing (Frost & Sullivan foresees the global education technology market growing from US$ 17.7 billion in 2017 to US$ 40.9 billion by 2022, representing a CAGR of 18.3%) and in Bangladesh which suffers from low educational attainment, edtech could well be a key solution to address the country’s imminent skills shortage as the country transforms into middle-income country.

Bangladesh’s own homegrown online education platform REPTO Education Center, which is a graduate of Bangladeshi startup accelerator GP Accelerator, offers online courses, classes and training, focused on tertiary level students, and working adults, somewhat similar to Udemy and the startup appears well placed to capitalize on what promises to be a potentially substantial opportunity.

In Bangladesh, education demand is on the rise and there is a greater need for education opportunities, particularly higher education and skills-based education. According to education sector market intelligence company ICEF Monitor, tertiary enrollment in Bangladesh tripled between 2000 and 2012 and surpassed two million students in 2012. Yet, as of 2012, just 13.39% of Bangladesh’s college-age students were enrolled in tertiary education, compared with 27.18% in China, 24.37% in India, 30.66% in Indonesia, 37.21% in Malaysia and 61.46% in Japan the same year according to data from the World Bank indicating ample potential for increase in the years ahead as Bangladesh’s education system matures along with a growing economy.

Bar chart showing gross enrollment ratio in tertiary education (% of college-age population) in selected Asian countries, in year 2000 and 2012. The percentage of college-age students enrolled in tertiary education increased from 48.74% in 2000 to 61.46% in 2012 in Japan, from 25.74% in 2000 to 37.21% in 2012 in Malaysia, from 14.88% in 2000 to 30.66% in 2012 in Indonesia, from 9.55% in 2000 to 24.37% in 2012 in India, from 7.72% in 2000 to 27.18% in 2012 in China, and from 5.45% in 2000 to 13.39% in 2012 in Bangladesh. Data from the World Bank.

Of Bangladesh’s 160 million plus people, 46% are aged 24 years and younger according to data from the CIA and they are becoming increasingly digital. For most of these young adults, skills development institutes are out of reach, either due to cost constraints (most of the courses are unaffordable for the majority of working adults in Bangladesh which ranked 176th in the world out of 228 countries in 2017 in terms of per capita income according to data from the CIA), or geographical constraints (most of these institutes are located in Bangladesh’s capital city Dhaka), or language constraints (foreign courses offered by online education platforms such as Coursera or Udemy are primarily conducted in English, a language most Bangladeshi’s are not proficient at; Bangladesh ranks 63rd out of 88 countries in education company EF Education First’s English Proficiency Index).

REPTO Education addresses all these problems for Bangladesh’s burgeoning workforce; the online courses can be accessed online anywhere, are generally more affordable than courses offered by traditional brick-and-mortar educational institutions, and most of the platform’s courses are offered in Bangladesh’s official language, Bengali.

Posted on

Increasing Global Electrification Offers Growth Opportunity For Power Utilities

Bar chart showing the total number of connected devices 2015-2025 (estimate) (in billions of connected devices). In 2015, the number of active connected devices amounted to nearly 14 billion. By 2025, this is expected to grow to over 34 billion, with non-IoT devices (which includes all mobile phones, laptops, tablets , PCs and fixed line phones) amounting to 12.7 billion connected devices and IoT devices (which includes all B2B devices) amounting to 21.5 billion connected devices.

Promising growth opportunities for power utilities as increasing global electrification as a result of rising electricity penetration and usage in emerging markets, greater usage of technologies such as IoT and AI, and the electrification of the transport sector could propel electricity demand in the long term.

Global electricity demand could be set to increase in the long term driven by rising electric vehicle ownership, data centers, and economic growth in emerging markets which could help offset drags to electricity demand from energy efficiency which faces diminishing returns.  According to analysis from Bloomber NEF, global electricity demand is expected to increase 57% by 2050, reaching around 38,700 terawatt-hours from 25,000 terawatt-hours in 2017 driving new investment in power generating capacity. Meanwhile Norway-based quality assurance and risk management company DNV GL foresees electricity’s share of the global energy mix to more than double to 45% in 2050.

The Information Technology Revolution

The Information and Communications Technology (ICT) revolution is electricity intensive, with approximately 3%-5% of the world’s electricity in 2015 being consumed by the ICT technology sector, according to a research paper published by Swedish researcher Anders Andrae, mostly through huge power-hungry data centers (also known as ‘server farms’). Without dramatic increases in efficiency, the communications industry is expected to use 20% of the world’s electricity by 2020 according to Anders Andrae as more people come online, and technologies such as smartphones, cloud computing and the Internet of Things (IoT), which require computer power, play an increasingly pivotal role in an increasingly digitized world.

A 2018 report by Hootsuite and We Are Social found that in 2017 about 4 billion people around the world use the internet (a 7% increase compared to 2016), with nearly a quarter of a billion people coming online for the first time in 2017. Africa saw the highest growth rate with the number of internet users across the continent increasing by more than 20%, driven by affordable smartphones and data plans. But that leaves a little less than half of the world’s nearly eight billion people without access to internet, and as they come online in the future, electricity demand should increase in tandem. US researchers expect power consumption to triple in the next five years as one billion more people come online in developing countries, and technologies such as Internet of Things (IoT), Artificial Intelligence, driverless cars, and robots, grow in usage in developed nations.

While the emergence of the Internet of Things (a system which connects everyday things such as cars and home appliances to the internet enabling them to collect and share data), could potentially offer energy saving opportunities (as the data generated from these IoT devices could be used to devise energy saving technologies, and energy saving programs to reduce energy demand), it is not clear whether these would be enough to offset the increase in electricity usage from the proliferation of billions of electricity-powered IoT devices worldwide as well as the electricity-powered data centers necessary to analyze and store the data generated from these IoT devices. The sheer number of active IoT devices expected to be in use in the future far exceeds the number of smartphones, and tablets used currently; IoT Analytics reports that the number of connected things (or IoT devices) in use worldwide has reached 7 billion in 2018, and this is expected to triple to 21.5 billion devices by 2025, which is about twice the number of non-IoT devices (i.e., smartphones, laptops, tablets etc) in use in 2018.

Bar chart showing the total number of connected devices 2015-2025 (estimate) (in billions of connected devices). In 2015, the number of active connected devices amounted to nearly 14 billion. By 2025, this is expected to grow to over 34 billion, with non-IoT devices (which includes all mobile phones, laptops, tablets , PCs and fixed line phones) amounting to 12.7 billion connected devices and IoT devices (which includes all B2B devices) amounting to 21.5 billion connected devices.

While some IoT devices such as sensors may use fractional amounts of electricity, others such as connected vehicles for instance, consume considerably greater amounts of electricity. And it is not just the physical devices themselves that require electricity to operate, but also the bi-directional data transfer between IoT devices, and servers in the network; according to figures from Roger Nichols, 5g Program Manager at Keysight Technologies, it takes approximately 2kWh to download one Gigabyte of data over the internet (which is equivalent to using a 2000watt steam iron continuously for an hour). Meanwhile a 2012 paper by EnerNOC Utility Solutions found that it takes about 5.12 kWh to download one Gigabyte of data with data centers accounting for 48% of the power consumed, end users accounting for 38% and the transport network accounting for the balance 14%.

Pie chart showing the energy usage breakdown to download one Gigabyte of data over the internet (in kWh per GB). The total energy required to download one GB of data is about 5 kWh per GB, with data centers accounting for 48% (equal to 2.47 kWh), end users accounting for 38% (1.96 kWh) and transportation accounting for the balance 14% (0.70 kWh).

Similar to IoT, the rapid rise of Artificial Intelligence could help reduce power consumption in certain cases; for instance, Google is reportedly using DeepMind AI to reduce energy consumption in its data centers by as much as 30%. However, as AI technologies increasingly permeate important sectors like healthcare, communication, transport, business, finance, and education, it remains to be seen whether this could offset higher power consumption as a result of the greater usage of AI-powered devices (from low-power devices such as voice-operated AI assistants such as Amazon Echo, and Google Home, to relatively high-power machines such as autonomous cars), and increased data center workloads to process and store the massive data volumes (the raw material of AI) required for these AI solutions to function. According to a publication by Seagate, the amount of data created worldwide will grow to 163 zettabytes (ZB) by 2025, which is ten times the amount produced in 2017. The report also reveals that by 2025, 75% of the population will be connected, creating and interacting with data. Meanwhile, IDC expects that the “average rate per capita of data-driven interactions per day is expected to increase 20-fold in the next decade as our homes, workplaces, appliances, vehicles, wearables, and implants become data enabled”. A self-driving car for instance, gathers and analyzes tremendous quantities of data about the environment to navigate and drive the vehicle. This requires massive computing power which in turn is drawn from huge amounts of electricity. According to auto parts supplier BorgWarner Inc, some of today’s prototypes for fully autonomous vehicles consume two to four kilowatts of electricity – which is equivalent to the energy consumed by 50-100 laptops.

Economic growth in emerging markets

In 2017, world electricity demand increased 3.1% or 780 TWh significantly higher than the overall increase in world energy demand according to figures from the International Energy Agency (IEA). China and India together accounted for 70% of this growth while another 10% came from other emerging economies in Asia, largely due to rapid economic growth. In China, electricity demand grew 6% (or 360 TWh) on the back of a roaring economy which grew 7%, while India saw electricity demand rise 12% (or 180 TWh), far outpacing the country’s GDP growth rate of 7% for the year 2017.

Yet, there is still ample potential for growth. Although electricity penetration is 100% in China (the world’s largest electricity producer) according to the World Bank, electricity per capita stands at just 4.28 MWh per person, considerably lower than Canada (14.84 MWh per person), the United States (12.83 MWh per person), Oman (7.00 MWh per person), and Russia (6.71 MWh per person) as of 2016 according to figures from the IEA.

Bar chart showing the electricity consumption per capita, top 15 countries, 2016 (MWh per person). Iceland had the highest electricity consumption per capita at 53.91 MWh per person, followed by Norway (23.69 MWh per person), Bahrain (19.51 MWh per person), Qatar (15.48 MWh per person), Finland (15.47 MWh per person), Kuwait (15.28 MWh per person), Canada (14.84 MWh per person), Luxembourg (14.27 MWh per person), Sweden (13.76 MWh per person), United Arab Emirates (13.05 MWh per person), United States (12.83 MWh per person), Chinese Taipei (10.88 MWh per person), Korea (10.62 MWh per person), Australia (9.91 MWh per person), and Saudi Arabia (9.82 MWh per person) according to data from the International Energy Agency .

Bar chart showing the electricity consumption per capita, 2016, for selected emerging markets (MWh per person). Russia’s per capita electricity consumption is one of the highest among emerging markets at 6.71 MWh per person, followed by Malaysia (4.66 MWh per person), China (4.28 MWh per person),Chile (4.18 MWh per person),Hungary (4.18 MWh per person), South Africa (4.03 MWh per person), Turkey (3.11 MWh per person), Thailand (2.87 MWh per person), Brazil (2.5 MWh per person), Mexico (2.29 MWh per person), Egypt (1.78 MWh per person), Peru (1.46 MWh per person), Colombia (1.44 MWh per person), India (0.92 MWh per person), Indonesia (0.87 MWh per person), and the Philippines (0.8 MWh per person) according to data from the International Energy Agency.

Thus, electricity demand from the Middle Kingdom will come from increased electrification of the economy such as transport (by 2040, the IEA expects about 25% of vehicles on Chinese roads are expected to be electric, up from less than 10% in 2018), and consumption (the IEA foresees that by 2040, the average Chinese household will consume nearly twice as much electricity as today), and manufacturing which, at 4,441 TWh accounted for 70% – the biggest share – of China’s electricity consumption in 2017 according to statistics from China’s National Energy Administration.

Pie chart showing China’s electricity consumption by sector in 2017 (in GWh and % of total electricity consumption). At 4,441,300 GWh (equivalent to 70%), China’s secondary industry accounted for the biggest share of the country’s electricity consumption in 2017. Tertiary industry consumed 881,400 GWh (14%), households consumed 869,500 GWh (14%) and primary industry consumed 115,500 GWh (2%) according to data from the China National Energy Administration.

In the manufacturing sector, rising electrification of energy-intensive industries such as food and beverage, glass, pulp and paper, steel, and chemicals in the long run partly in response to the Chinese government’s aim to reduce greenhouse gas emissions, and the country’s rise up the manufacturing value-chain by adopting industrial robotics and other technologies requiring electricity such as cloud computing, AI and IoT as part of its “Made in China 2025” strategy, could propel electricity demand from China’s manufacturing sector, in what has been an ongoing trend; according to the IEA, China’s industrial sector electricity demand has increased approximately 9% annually, outpacing demand growth for all other fuels, pushing up electricity’s share of industrial energy consumption from about 10% in 1992 to 18% by 2012.

Meanwhile India (already the world’s third biggest producer and consumer of electricity behind the United States and China), is poised to emerge as a major growth driver for global electricity demand with the country’s electricity penetration at 84.5% as at 2016 according to data from the World Bank, leaving about 15% or 150 million of the country’s one plus billion citizens, most of whom are located in rural areas, without access to electricity – which would rank it among the world’s top ten most populous countries if Indians living without electricity were an independent country. Furthermore, India’s per capita electricity consumption is one of the lowest among emerging markets at just 0.92 MWh per person in 2016, which is lower than Peru (1.46 MWh per person), Egypt (1.78 MWH per person), and Mexico (2.29 MWh per person) according to IEA data.

The Indian government’s ambitious US$ 2.5 billion plan (known as the “Saubhagya scheme”) to electrify all Indian households has helped push up the country’s electricity penetration rate since the plan was announced in 2015, however with millions of Indians still lacking access to electricity, there is potential for further growth in electricity demand in the long run as these Indians gradually get connected to the grid.

India’s power consumption is expected to more than quadruple by 2035-2036 driven by increasing electricity penetration, industrial expansion, and greater economic growth which will contribute to rising per capita income which in turn will push consumption of electric appliances such as air-conditioners as consumer incomes increase.

Electrification of the transport sector worldwide

Accounting for about 27% (equal to about 25 million barrels per day) of 2016 global oil consumption (estimated at 94 million barrels per day), the road transport sector is the single biggest consumer of oil according to data from the International Energy Agency.

Pie chart showing global oil demand by sector, 2016 (% share). At 27%, the Passenger Vehicle sector accounted for the biggest share of global oil consumption in 2016, followed by Freight (17%), Petchem Feedstocks (12%), Other (12%), Buildings (8%), Aviation (6%), Steam & Process Heat (6%), Power Generation (6%), and Maritime (5%) according to data from the International Energy Agency.

However with Internal Combustion Engine (ICE) vehicles being gradually replaced by Electric Vehicles (EVs), the global road transport sector is becoming increasingly electrified which could result in a decline in fossil fuel’s share of global oil demand while electricity demand increases, suggesting a bright future in the long term for power utilities.

Several factors could serve as growth drivers for the electric vehicle industry. Electric vehicles convert about 90% or more of their energy into moving the vehicle and thus due to their low energy loss, electric vehicles are generally viewed as more energy efficient than conventional vehicles which convert a maximum of 35% of their energy into moving the vehicle.

Furthermore, as the impacts of climate change such as global warming become increasingly severe, there is a growing sense of urgency to take steps to mitigate its effects. Renewable energy has been identified as a key solution to tackle climate change and as renewables gradually displace conventional fossil fuels in electricity generation (fossil fuels such as coal, oil and gas currently account for over two-thirds of electricity generation worldwide according to the International Energy Agency), the electrification of the transport sector which could help decarbonize the sector by reducing its dependence on oil, is expected to follow, helped in part by strong policy support (a number of countries such as France and Britain have announced plans to phase out fossil fuel vehicle sales) and falling costs of components such as EV batteries (analysis from Mack Institute show that EV battery costs have declined 16% annually between 2007 and 2017).

This is reflected in optimistic projections for EV numbers going forward. EVs currently make up a small proportion of the global car fleet (as of 2017 just 1.3% of all the vehicles in the world are electric according to analysis from McKinsey), however, their share is rising as EV sales steadily increase.

Bar chart showing global passenger electric vehicle sales from 2012 to 2018 (estimated) (in thousands of units). In 2017, 1.09 million electric vehicles were sold worldwide, up from 695 thousand in 2016, 448 thousand in 2015, 289 thousand in 2014, 206 thousand in 2013 and 122 thousand in 2012 according to data from Bloomberg New Energy Finance. For 2018, electric vehicle sales are estimated to be 1.59 million.

Consequently, EV’s share of the global car fleet is expected to grow in the next two decades. According to the International Energy Agency (IEA), just about 3.1 million passenger vehicles were electric in 2017, and this is expected to increase to 125 million by 2030. Meanwhile forecasts by DNL GL reveal that by 2042, half of the world’s fleet of road vehicles – light and heavy will be electric. Projections from BloombergNEF echo a similar view; by 2040, EVs are expected to make up 55% of new car sales and the total number of EVs is expected to reach 559 million, equal to 33% of the global car fleet.

As EVs displace fossil fuel-powered ICE vehicles in the years ahead, this opens a potential growth opportunity for power utilities as the transport sector’s oil demand is replaced with electricity. The International Energy Agency foresees oil demand being cut by 3.3 million barrels per day by 2040 thanks to a projected 300 million EVs on the road. According to BloombergNEF, EVs displaced 17.8 thousand barrels of oil per day as of the end of 2016. Going forward BloombergNEF expects electrified buses and cars will displace a combined 7.3 million barrels per day of transportation fuel in 2040.

Bar chart showing fuel displaced by EVs on the road (in thousand barrels a day) in between 2011 and 2017 (estimated). 17.8 thousand barrels of oil were displaced by EVs as of the end of 2016, up from 10.1 thousand barrels per day in 2015, 5.8 thousand barrels per day in 2014, 2.9 thousand barrels per day in 2013, 1.2 thousand barrels per day in 2012 and 0.3 thousand barrels per day in 2011. 28.4 thousand barrels per day are expected to be displaced by EVs in 2018 according to figures from Bloomberg New Energy Finance.

While the rise of EVs serves as a drag to oil demand, the opposite is true for electricity. Electricity demand from EVs worldwide (which is equal to just about 0.2% of total global electricity consumption in 2017) has been increasing over the past few years and this trend is expected to continue as the global EV fleet grows. The IEA estimates global electricity demand from all EVs increased 21% over 2016 to reach about 54 terawatt-hours (TWh) in 2017, an amount which is slightly higher than Greece’s electricity demand.

Posted on

Southeast Asia E-Commerce: Opportunity and Optimism Abound

Southeast Asia digital spend by category, 2016 (US$ billions)

Rising internet penetration, a young population, and rising incomes are pushing Southeast Asian shoppers online, thereby opening exciting opportunities for business and investment.

Southeast Asia’s 655 million plus population is increasingly migrating towards a digital-centric lifestyle, going online to conduct day-to-day activities such as shopping, entertainment, payments, and transport. Driven by an expanding middle class and a youthful, tech savvy population (about 43% of Southeast Asia’s inhabitants are aged 24 years and below according to data from the CIA), this evolution of consumer culture is expected to drive the region’s internet economy in the years ahead and e-commerce has emerged as one of the top categories for digital spending according to Bain & Company; of the region’s estimated US$ 50 billion internet economy in 2016, e-commerce accounted for US$ 15 billion or 30%, second only to travel and tourism which accounted for US$ 22 billion (equal to about 44%) of digital spending.

Southeast Asia digital spend by category, 2016 (US$ billions)

The dynamism is reflected in the growth numbers with Southeast Asia’s e-commerce sales of first-hand goods reaching US$ 10.9 billion in 2017, up from US$ 5.5 billion in 2015, representing a CAGR of 41% according to data from Google and Temasek’s “e-Conomy SEA Spotlight 2017” report.

Yet, there is still plenty of growth potential. With just about 390 million people in Southeast Asia connected to the internet, (making it the world’s third biggest internet population), internet penetration in the region stands at about 59%, thereby offering an untapped market of over 200 million people.

Bar chart showing the population of internet users and non-internet users in Southeast Asia by country as at December 2017. Indonesia had the highest number of internet users (143.26 million people) as well as the highest number of non-internet users (123.53 million people). After Indonesia, countries with the highest number of internet users are as follows: Philippines (67 million), Vietnam (64 million), Thailand (57 million), Malaysia (25.08 million), Myanmar (18 million), Cambodia (8.01 million), Singapore (4.84 million), Laos (2.44 million), Brunei (0.41 million) and Timor Leste (0.41 million).

And among this army of internet users, just a handful of them are active online shoppers and e-commerce accounts for just about 1% of total retail sales for most countries in Southeast Asia according to a report by ResearchAndMarkets. In Singapore, one of the region’s most mature e-commerce markets, online sales made up just 2.1% of total retail sales in 2015 – the highest proportion among Southeast Asian countries according to a report by Google and Temasek. This compared with China where e-commerce accounted for about 12.1% of total retail sales in 2015, according to the National Bureau of Statistics.

Unsurprisingly, there is an air of optimism about Southeast Asia’s e-commerce growth prospects and the region is expected to be the next rising star of e-commerce in Asia. Asia-Pacific e-commerce sales grew 31.1% in 2017, according to data from eMarketer, however nearly 83% of those sales came from China alone, the world’s biggest e-commerce market. Japan, South Korea and India make up the top four e-commerce markets in Asia-Pacific, which leaves Southeast Asia as the next frontier for e-commerce growth thereby opening opportunities for business and investment in the region. BMI Research projects Southeast Asia’s e-commerce sales to explode from US$ 37.7 billion in 2017 to US$ 64.8 billion by 2021, representing a CAGR of 14.5%.

Indonesia

Boasting the fourth largest population in the world, the largest population of internet users and the largest economy in Southeast Asia, Indonesia is often touted as one of the most promising e-commerce markets in the region.

Indonesia’s e-commerce market was valued at US$ 8 billion in 2017 according to McKinsey and the market is forecast to grow eight-fold to US$ 55-65 billion by 2022, representing a grand CAGR of over 45% driven by increasing internet penetration and a growing consumer class; just about 53% of the country’s 260 million plus population is connected to the internet, leaving an unconnected population of over 120 million, and the country’s consumer class is projected to grow from 45 million in 2010 to 135 million by 2030 according to analysis by McKinsey Global Institute which represents huge potential for internet retailers.

With e-commerce accounting for 1.6% of Indonesia’s total retail sales as of 2016 (compared with 13% in China the same year) according to a report by AusTrade, and with just 15% (equal to about 30 million) of Indonesia’s adult population of 195 million being active online shoppers as of 2017, Indonesia’s e-commerce market, already the largest in Southeast Asia, is still at an infant stage of development and these driving forces are expected to propel the number of Indonesian online shoppers to 43.9 million people by 2022 and Indonesia’s online sales are expected to make up about 20% of total retail sales by 2020 according to estimates by Indonesia’s Trade Ministry. ResearchAndMarkets released a year 2018 report which foresees Indonesia to have the highest e-commerce growth rate in the region through 2025, and the potential has lured the likes of e-commerce giants Amazon, Alibaba who are aiming to capture a slice of this ever-growing pie which is currently dominated by homegrown head honcho Tokopedia with a 14% market share according to data from CLSA. Tokopedia is followed by Singapore-rebased Shopee with a market share of 11%, Bukalapak and Alibaba-backed Lazada with 6% each. 28% is taken up by other e-commerce platforms (such as Zalora, Blibli, MatahariMall and China’s JD.com-owned JD.id) while 36% of Indonesian online sales is generated by social media platforms, (notably Facebook and Instagram) and messaging apps (such as Whatsapp).

Part of the reason for the rise of social commerce in Indonesia could be attributed to a few factors; Indonesians are avid social media users (according to Hootsuite, Indonesia has the world’s fourth biggest population of Facebook users, and the world’s fourth biggest population of Instagram users, and according to Twitter, Indonesia has the world’s fifth biggest population of Twitter users), and Indonesian online shoppers seem to have a preference for interacting one-on-one with the seller prior to making a purchase. Banking on this consumer culture, a number of Indonesian SMEs began selling their wares online using available online channels such as social media, way before e-commerce platforms became ubiquitous. As a result, social commerce developed before e-commerce websites became mainstream with social commerce accounting for as much as 50% of online sales in Indonesia before dropping to 36% in 2017 as e-commerce websites gained traction.

While e-commerce is gathering momentum among Indonesian online shoppers, quite the opposite is taking place in China, the world’s biggest e-commerce market, where social commerce is gradually taking root and finding its place alongside well-entrenched e-tailing websites. Barely three years old, Pinduoduo, a Chinese social commerce platform launched in 2015, filed for an IPO this year, raising US$ 1.6 billion in what was the second-biggest Chinese IPO in the United States.

Hence, if the ongoing evolution of the relatively more mature Chinese e-commerce is anything to by, social commerce is likely to remain a formidable channel in Indonesia’s e-commerce sector going forward. However, the growth opportunity for dedicated e-commerce platforms could be more exciting as they potentially continue taking up market share from social media platforms. According to McKinsey, Indonesian online sales through e-commerce websites is forecast to grow eight-fold from US$ 5 billion in 2017 to US$ 40 billion by 2022 while online sales from social media is expected to rise about five-fold or so from US$ 3 billion in 2017 to US$ 15-25 billion by 2022.

Bar chart showing Gross Merchandise Volume (GMV) in Indonesia’s e-commerce market in 2017 and 2022 (forecast) (US$ billions). In 2017, Indonesia’s total GMV was estimated at over US$ 8 billion with about US$ 5 billion being generated by e-tailing websites and over US$ 3 billion being generated by social commerce channels. By 2022, Indonesia’s GMV is forecast to grow to US$ 55065 billion with US$ 40 billion being generated by e-tailing websites and US$ 15-25 billion being generated by social commerce channels.

So far, certain categories have been high flyers in Indonesia’s e-commerce growth wave. Much like in other Asian e-commerce markets such as India, Indonesian online shopping baskets tend to contain products in Fashion (the leading product category as per one market survey); Electronics & Media; Furniture & Appliances; Food & Personal Care; and Toys, Hobby & DIY product categories.

Although integrated e-commerce platforms such as Tokopedia, Lazada, and Blibli have been taking the limelight, specialist e-commerce websites that cater to these popular product niches are also showing promise. Seven-year old Islamic fashion e-tailing startup Hijup for instance, was ranked 20th in the number of visits to e-commerce sites in Indonesia in the second quarter of 2018 with a monthly average of 930,000 visits and has topped the list as the most followed e-commerce business on Instagram.

Much like the ongoing evolution of mature e-commerce markets such as China and India, where a proliferation of specialist e-tailing websites such as China’s Gome and Vipshop (which specialize in home ware and fashion respectively), and India’s Pepperfry and Ajio.com (which specialize in furniture and fashion respectively) take market share from integrated e-commerce bigwigs such as Alibaba in China and Flipkart in India, there is tremendous long term growth opportunity for such specialist sites in Indonesia as the country’s e-commerce market matures.

Indonesia’s largest luxury retailer, Masari Group appears to have spotted one such gap; luxury fashion. Although Indonesia isn’t particularly noted for its affluent class (unlike India or China for instance where swelling high income consumers has given birth to a burgeoning luxury fashion e-commerce market), the country is seeing a steady growth in its population of affluent consumers. And yet, there is no clear e-commerce platform for luxury fashion and unlike in India or China where existing e-commerce players are adding a luxury fashion component to their respective websites (Indian e-commerce giant Flipkart’s fashion arm Jabong for instance is piloting a ‘Jabong Luxe Store’ while Chinese e-commerce behemoth Alibaba launched ‘Luxury Pavilion’, an invite-only platform for premium and luxury brands to strut their stuff) so far there has yet to be such a move towards a dedicated platform for luxury brands by Indonesian e-commerce websites. Sensing an opportunity to offer an avenue for the country’s affluent demographic to shop online for high-end fashion wear, accessories, and shoes, Masari Group launched an e-commerce website showcasing products from brands such as Les Petits Joueurs, Rodo, Dorateymur to name a few.

Malaysia

A young, tech-savvy population with relatively high incomes, and a strong infrastructure make Malaysia a potentially lucrative e-commerce market.

As Malaysians increasingly turn to online channels for their shopping needs, e-commerce has been steadily growing its share of Malaysia’s GDP; e-commerce’s share of Malaysia’s GDP stood at 6.1% or RM 74.6 billion in 2016 according to Malaysia’s Statistics Department, up from 5.9% or RM 68.3 billion of in 2015. Online sales made up about 2.5% of Malaysia’s total retail sales in 2015 and the figure is expected to reach 4%-5% this year according to online deal website 11street. A 2016 report by yStats foresees Malaysia’s e-commerce sales jumping five-fold by 2025.

Several factors suggest that Malaysia, Southeast Asia’s fourth-largest economy according to data from the IMF is at an inflection point of e-commerce growth; internet penetration stands at about 78% as at December 2017, according to data from Internet World Stats, the country’s middle class is expanding (Malaysia, ranked third among Southeast Asian nations in terms of GDP per capita by PPP as of 2017 according to figures from the CIA, and incomes are rising among Malaysia’s youthful population (the median age of the country’s population is 28.5 as of 2017 according to the CIA, making it the country with the sixth-youngest population in Southeast Asia, younger than Thailand (median age: 37.7), Singapore (34.6), Indonesia (30.2), Vietnam (30.5), and Brunei (30.2). And with about 45% of the country’s population aged 24 and below according to data from the CIA, the long term outlook for Malaysia’s online sales growth is bright as these tech-savvy youngsters rise up the income ladder.

Although pundits point out that Malaysia’s logistic infrastructure may pose a bottleneck to the country’s burgeoning e-commerce sector, it is still worth noting that regionally Malaysia’s infrastructure is second only to Singapore according to the World Economic Forum’s Global Competitiveness Index 2017-2018. This could make delivery quality, speed and costs relatively more competitive in Malaysia compared to regional peers, which could better enable Malaysian e-tailers to profitably offer free shipping (an important advantage in an era where free shipping is increasingly becoming a competitive necessity) which incentivizes buyers to spend more money shopping online and thereby propel the domestic e-commerce market forward.

Bar chart showing the World Economic Forum's Global Competitiveness Index, 2017-2018 Infrastructure score for selected Southeast Asian nations. Singapore ranks highest with a score of 6.5, followed by Malaysia (5.5), Thailand (4.7), Indonesia (4.5), Brunei (4.3), Vietnam (3.9), Philippines (3.4), Laos (3.3) and Cambodia (3.1)

With the e-commerce space in Malaysia seemingly ripe for the taking, competition is heating up among e-tailers both foreign and local for a share of the pie. The horizontal e-commerce space is crowded with well-established players dominating the arena such as Alibaba-backed Lazada, Singapore-based Shopee, and homegrown e-commerce pioneer Lelong. Competition could get stiffer in the years ahead with deep-pocketed e-commerce heavyweights such as Amazon (which has already established operations in neighboring Singapore) and Chinese e-tailer JD.com (which has tied up with retail giant Walmart to tackle the Southeast Asian market) potentially setting up shop in Malaysia.

Vertical e-commerce however offers ample opportunity. Similar to most e-commerce markets, Fashion is the leading online shopping category in Malaysia, and there has been a blossoming of a number of local and international fashion and fashion-related platforms, the success of which minted a fair number of millionaire founders. Homegrown online beauty store Hermo was acquired by Japanese beauty portal iStyle, netting Gobi Partners (Hermo’s ex-investors) a 91% Internal Rate of Return (IRR) in just one and a half years. Meanwhile Fashion Valet, another homegrown fashion e-commerce platform successfully closed its Series C round this year with an investment from Malaysia’s main sovereign fund Khazanah.

Apart from Fashion, other popular categories include Electronics; and Sports & Hobbies. Opportunities exist in other verticals which are tremendously popular offline but have yet to established online. Furniture is one example; Malaysia’s furniture market has grown in along with the growth of the country’s middle class and the country’s has a vibrant furniture industry, currently ranked as the world’s eighth largest furniture exporter as of 2017 and has a target of being among the world’s top five furniture exporters by 2022.

While horizontal e-marketplaces such as Lazada and Rakuten sell furniture online, specialist online furniture marketplaces are a relatively new concept in Malaysia and there is so far no dominant specialist furniture e-commerce site in Malaysia as is found in other countries such as Pepperfy and Urban Ladder in India, and Wayfair(NYSE:W) in the United States. Malaysian furniture online stores iHias and Apver could be poised to ride this potential.

Vietnam

With its relatively high internet penetration rate, youthful, tech-savvy workforce, and rising status as a low-cost manufacturing hotspot, Vietnam’s e-commerce sector could be one of the hottest growth stories in the region propelled by domestic as well as cross-border e-commerce.

With about 64 million of its approximately 96 million population connected to the internet (reflecting an internet penetration of about 67% according to data from Internet World Stats) and about 40% of the population aged 24 and below (the median age is 30.5) according to the CIA, Vietnam’s e-commerce market, which accounts for a meager 1% of the country’s total retail sales is a growth opportunity. Online sales grew 25% in 2017 to US$ 1.75 billion up from US$ 1.4 billion in 2016 according to data from Statista, driven by its young, tech-savvy workforce who happen to be among the most frequent online shoppers in Southeast Asia. According to the Visa Consumer Payment Attitudes Study 2017, Vietnamese were the second most frequent online shoppers with 84% of the 517 Vietnamese respondents saying they shopped online at least once a month, behind only the Thai respondents, 85% of which shopped online at least once a month.

And although challenges such as a relatively weak logistics weak infrastructure network (Vietnam ranks sixth out of nine selected Southeast Asian countries in terms of infrastructure according to the world Economic Forum’s Global Competitiveness Index, and logistics costs account for about 21% of Vietnam’s GDP as of 2016 according to figures from the World Bank) and low online payments penetration continue to dog Vietnam’s e-commerce sector, they have not deterred e-commerce behemoths such as Lazada, Amazon, JD.com and Shopee who, clearly playing the long game, continue to invest heavily as they race to capture market share in the Vietnam’s burgeoning online retail market. Euromonitor projects Vietnam’s e-commerce market to expand from US$ 1 billion in 2016 to US$ 2.3 billion by 2020, representing a CAGR of over 23%.

Like most other e-commerce markets around the world, fashion is the leading product category, with Vietnam’s working class women who have money to spend but little time to stop by every store, instead peruse a variety of online stores at the convenience of their internet-enabled devices to hunt for clothes, handbags, shoes and fashion accessories. Fashion is the most product popular category not just on e-commerce portals but also on social commerce channels such as Facebook.

Bar chart showing the most popular categories among online shoppers in e-commerce platforms and social commerce platforms according to a 2017 survey by Q&Me Vietnam Market Research. Fashion was the most popular category with 73% of e-commerce shoppers and 68% of social commerce shoppers spending the most on fashion products over the past 12 months. Fashion was followed by IT / Mobile phones, Food and beverage, Cosmetics, Kitchen appliances, Books / Stationery, Sports goods, Ticketing, Supplements / Functional foods, Consumer electronics, SPA / Beauty services, Flowers and plants, Music / Video.

After fashion, IT products, cosmetics, food and beverages, and books and stationery according to a 2017 survey conducted by Vietnamese market research firm Q&Me. While there is clearly tremendous potential for Vietnam’s domestic e-commerce market going forward, the more exciting part of the story however is Vietnam’s rising status as a manufacturing hotspot and the implications this status has on e-commerce. As manufacturing costs rise in China as result of rising costs of labor and land among others, a number of China-based manufacturers are shifting some or all of their manufacturing facilities away to other countries, a strategy known as the “China+1” production model. Thanks to its geographical advantage of being located close to China, Vietnam (particularly northern Vietnamese provinces such as Hai Phong) has been a major beneficiary of this trend, which has had the effect of widening the country’s manufacturing base, and boosting the area’s GDP and real estate demand. Vietnam’s ascent has a manufacturing hotspot gives the country’s local businesses an advantage in selling to the global market, which suggests bright prospects for Vietnam’s cross-border e-commerce sector.

Global e-tailing giant Amazon has clearly noticed Vietnam’s potential in this space. This year, Amazon announced a partnership with the Vietnam E-Commerce Association (VECOM) to allow local and small and medium-sized enterprises to sell and export Vietnamese-made goods through the platform. Alibaba-backed Lazada has also jumped into the ring with the company revealing that it was developing tools to help sellers peddle their wares to Southeast Asian countries in which Lazada has operations such as Malaysia. Tiki.vn, backed by Chinese e-tailer JD.com has launched a cross-border e-commerce channel, “Tiki Global”, to enable consumers to purchase foreign products directly from foreign manufacturers.

Philippines

In a country where logistics infrastructure is lacking and shopping malls function as “destinations” whereby they represent more than just places to shop, dine and entertain friends, but also serve as places of worship, workout classes and more, e-commerce may not necessarily displace Philippines’s plethora of shopping malls in the near term. The long term outlook however for online retailing in Southeast Asia’s second most populous country is a lot more exciting.

Retailing is big business in the Philippines with the country being home to three of the top 10 largest malls in the world in terms of Gross Leasable Area according to a ranking compiled by WorldAtlas. For Filippinos however, shopping malls are not just places to shop, dine, watch movies and hang out with friends; shopping malls also function as places to pay bills, worship, workout (such as Zumba classes), conduct government transactions (such as applying for driver’s licenses and business permits) and more.

With shopping malls performing an ever-growing list of functions to cater to a shopping lifestyle somewhat unique to the Philippines, the rise of e-commerce may not necessarily spell the demise of the country’s shopping malls (at least in the near term) as has been the case in the west. Furthermore with Philippines being a notable infrastructure laggard (the country’s logistics infrastructure network that is among the weakest among Southeast Asian nations), the resulting relatively uncompetitive delivery charges could be a turn off to the country’s price conscious shoppers (at about US$ 8,300 per person Philippines’ income per capita is also among the lowest in the ASEAN region according to data from the CIA) which means online retailers may be compelled to absorb bulk of the delivery cost at the expense of their bottom lines. This challenge may impede Philippines’ e-commerce sector from achieving its fullest potential going forward.

Bar chart showing the 2017 GDP per capita (Purchasing Power Parity) among Southeast Asian nations according to data from the Central Intelligence Agency. At US$ 93,900 per person, Singapore had the highest GDP per capita. Singapore was followed by Brunei (US$ 78,200), Malaysia (US$ 29,000), Thailand (US$ 17,900), Indonesia (US$ 12,400), Philippines (US$ 8,300), Laos (US$ 7,400), Vietnam (US$ 6,900), Myanmar (US$ 6,200), Timor Leste (US$ 5,400) and Cambodia (US$ 4,000).

Although the near term view for Philippines’s online retail market may not appear to be as potentially lucrative compared to regional peers such as Indonesia or Vietnam, that however does not necessarily reflect a lack of long term potential. With just about 1% of Philippines’s total retail sales coming from e-commerce in 2017 according to The Philippine Retailers Association, and with the country expected to overcome its infrastructure inadequacies over the next decade through development programs such as the ‘Build, Build, Build’ program, Philippines’ e-commerce businesses could be set to ride a wave of growth in the long term in a market that could prove to be one of the biggest in Southeast Asia; among Southeast Asian nations, Philippines has the second largest population (estimated at over 100 million in 2017 according to data from the CIA), the second largest population of internet users (estimated at 67 million in 2017 according to Internet World Stats), and the second-youngest population with a median age of 23.5 (behind Timor Leste where the median age is 18.9 according to data from the CIA).

Like many other e-commerce markets in Southeast Asia, Philippines’ online retail sector is driven by its youth and as this tech-savvy generation climbs up the income ladder in the years ahead, there is tremendous growth potential for online consumption growth. Unsurprisingly, a report by Google and Temasek projects Philippines’ e-commerce sector to be worth US$ 19 billion by 2025, overtaking Malaysia and Singapore.

 

Part 5 of this series is coming soon. Sign up for the LD Investments newsletter to get the article delivered straight to your inbox.