The Rise of B2B eCommerce and Digital Logistics in Indonesia

Indonesia’s B2B eCommerce and digital logistics sector has become Southeast Asia venture capital’s new hunting ground. There were around 16 deals announced just in 1H 2020 totalling at least US$145m (1).

Why are investors ploughing in capital now into an historically overlooked sector? We briefly explore some of the driving factors.  

Starting from a low penetration rate, B2B eCommerce is at an inflection point and looks set for exponential growth. Similar to B2C, which went through an accelerated adoption phase with several unicorns emerging (e.g. Tokopedia, Bukalapak), B2B is now set to catch up with a massive market to capture.

B2B in Indonesia accounts for less than 50% of all eCommerce activity whilst in similar markets it accounts for over 70% (2).

Frost & Sullivan has forecasted a 59% CAGR between 2017-2022 for Indonesian B2B eCommerce sales, around two times the growth rate for B2C eCommerce over the same period.

Indonesian MSMEs (Micro, Small and Medium Enterprises), which account for 57% of GDP, are ready to come online in droves powering the shift from offline to online for the B2B sector.

A CLSA Survey of MSMEs in the retail industry found that 90% of “Mom and Pop” retailers would like to source goods online, however, only 18% do so currently. Start-ups such as Bizzy Digital, an offline-to-online technology platform, have built products centered around offline distributors and offline retailers which allow them to make a gradual step-by-step shift into the online universe.

While the rise of online in B2B retail has for some time seemed an inevitability in Indonesia, its timeline has been accelerated by COVID-19. The epidemic has forced changes in buying behaviour, with physical channels feeling the effects of new social distancing norms and lockdowns.  

When operating at scale, B2B eCommerce can drive sustainable growth and incremental profitability. Compare this with B2C eCommerce, the rise of which was typically fuelled by heavy discounting and subsidies offered to an often fickle customer base.

The time to scale in B2B is potentially longer, but once the customers are “defaulted” into a B2B platform, they are committed for the long-term resulting in very high customer lifetime values.

In addition, monetization avenues for B2B platforms are much more diverse than for B2C and do not majorly rely on a simple commission model on sale of products. B2B platforms can make money from a range of ancillary offers including financing, insurance, data and insights, merchandising, promotion and ads, and digital products. There is evidence in similar markets that the revenue contribution from value-added services is often higher than sales commission fees, potentially leading to a shorter path to profitability when compared with B2C eCommerce.

The embedded finance opportunity in B2B eCommerce and digital logistics is particularly significant. Besides the large digital payments opportunity, there is a US$166b estimated credit gap for Indonesia’s MSME segment. Traditional banks, with an exception of Bank BRI, have largely stayed away from the MSME segment, which has traditionally been characterized by a lack of conventional collateral and no banking history.

Novel fintech platforms (e.g. Investree, Modalku) are able to cut through the red tape by leveraging data and technology to offer right-sized products for MSMEs including inventory financing, digital merchant cash advances, invoice factoring, and buyer financing, amongst others.

Such fintech platforms have established synergistic partnerships with B2B players, with the fintechs providing the know-how, financing, and digital payment capabilities and the B2B players opening up their large MSME customer base and sales data, resulting in higher customer acquisition and retention rates for both types of platforms.

A large part of the US$240b Indonesian logistics sector is ripe for efficiency gains from digital disruption as B2B eCommerce grows. Last-mile solutions have improved significantly alongside the B2C eCommerce revolution. However, as B2B commerce grows so does the need for efficient first-mile and mid-mile solutions.

This space is large and highly fragmented with multiple intermediaries leading to over-investment, underutilization, unreliable service levels, and high costs. A number of quality start-ups are arming themselves with substantial capital as they finally look to solve these long-term structural issues. 

For example, Kargo Technologies with its “uber for trucks” model raised a US$31m Series A in April 2020, and Waresix operating an integrated warehousing and trucking fulfilment platform is reportedly close to finalising a US$50m round (3).

We can confidently say the B2B eCommerce and digital logistics in Indonesia are finally coming of age supported by strong long-term fundamentals with an accelerated timeline due to Covid-19.

We expect the amount raised by early-stage operators in this space 2H 2020 to exceed the amount raised in 1H 2020, with several high-quality start-ups in the market raising funds.

Watch this space.

Shauraya Bhutani - VP - North Ridge Partners

Singapore, July 2020

Note: NRP has existing business relationships with companies mentioned in this post.    

Sources: Macquarie, VentureCap Insights, Crunchbase, CLSA, Frost & Sullivan, DealStreetAsia

(1)    US$145m is the cumulative amount from 11 announced deals as five out of the 16 announced deals did not disclose the amount of the raise.

(2)    B2B eCommerce sales in India, China and Thailand accounted for 93%, 72% and 73% respectively of total eCommerce sales.

(3)    DealStreetAsia reported on 30 June 2020 that Waresix is close to raising a US$50m round (Link)