Indonesia’s ecommerce logistics giants brace for a price war

As these companies raise funds in the hundreds of millions of dollars and secure valuations worth a billion or more, a price war may be imminent.

Unlike their ecommerce partners with their glitzy billion-dollar valuations, Indonesia’s third-party logistics companies mostly stay in the background. But that has changed in the past few months.

First, SiCepat raised a US$170 million series B round, which founder The Kim Hai claims makes the company as a “soonicorn.”

Ecommerce, Indonesia, J&T Express, logistics, Sicepat

Photo credit: J&T Express

Just weeks later, J&T Express – founded by Jet Lee, formerly the Indonesia CEO for Chinese mobile phone brand Oppo – banked a whopping US$2 billion as it mulls an initial public offering in the US. The pre-money valuation is reported to be US$6 billion.

Despite being in the business for less than a decade, these companies have been able to go up against established incumbents by adopting an ecommerce-first approach, which lets them ride on their partners’ exponential growth.

While SiCepat and J&T both claim profitability, the recent fundraising will be essential in their quest for market dominance.

Pricing makes the difference

The pandemic has sharply increased ecommerce transactions in many countries, and Indonesia is no exception, says J&T Express CEO Robin Lo. At the same time, online marketplaces, which are still unprofitable, are trying to reduce cash burn, a lot of which can be attributed to shipping subsidies.

This means that for ecommerce-focused logistics companies, the margins will get tighter.

When ecommerce companies roll back shipping subsidies, logistics companies are asked to bear the costs, according to the co-founder of an Indonesian logistics firm who declined to be named. In return, they get volume commitments from the platforms.

Corporate rates can go as low as 40% less than the published rate.

“It’s no wonder that J&T, SiCepat et al. require large capital injections – they need to give very low prices to ecommerce platforms,” he says. “The hope is that the large volumes they get can cut down costs.”

Corporate rates can go as low as 40% less than the published rate, says a regional manager for logistics at a major ecommerce platform. For instance, the corporate rate for next-day delivery can go for 5,000 rupiah (US$0.34) per kilogram. That’s the typical rate, although platforms like Shopee and Lazada often push down prices in exchange for volume. J&T Express is said to have gone even lower at 4,500 rupiah (US$0.31) per kilogram.

“What is the cost like at rates like that?” the source asks.

But pricing pressure doesn’t come from just the ecommerce platforms.

Ecommerce, Indonesia, J&T Express, logistics, Sicepat

Photo credit: SiCepat

Third-party logistics is a commoditized service with little room for differentiation. “The question is always who can do it cheaper at an acceptable level of service,” says the ecommerce manager.

One way for providers to stand out is to offer instant and same-day deliveries, which are more expensive but popular among consumers. These services are the domain of regional giants like Grab and Gojek as well as newcomers like Indonesian startup Paxel, which is growing but considered more niche.

Grab and Gojek do have an important advantage here. Both companies have the necessary ride-hailing infrastructure and allow their riders to take on multiple deliveries, transporting people, packages, or food.

Same-day deliveries would require significant operational changes.

Having numerous use cases makes the ride-hailers’ network dense and more cost-efficient – an advantage that next-day players looking to get into the same-day space don’t have. Of course, customers are generally willing to pay a premium for instant or same-day services. But it’s difficult to add that capability to a normal logistics operation.

“It would require significant operational changes,” says the logistics founder. Regular service requires large sorting centers at a few hub locations to consolidate parcels, while same-day service requires the opposite: a larger number of smaller, decentralized hubs.

The solution for next-day logistics players “is to work with logistics companies that already offer same-day or instant deliveries,” he explains.

As such, it seems like the race to the bottom will continue, and that’s where capital injections come in. The funds can let logistics companies shoulder these costs in return for gaining market share as their ecommerce partners grow.

Regional ambitions

The endgame for a cash-burning strategy is to start increasing prices once they secure market share.

“I think this is what Shopee has realized,” says the ecommerce manager, referring to how the platform recently reduced incentives for in-house couriers. “They can’t subsidize too much anymore, so they start to cut costs.”

In short, it is consumers who will eventually pay. For instance, sellers on Tokopedia can offer customers free delivery by opting into a program offered by the Indonesian ecommerce platform. But in return, the merchants pay for the privilege: They are charged a service fee per transaction, and it’s likely that they increase the price of goods to pass on the costs to consumers, the logistics founder notes.

If raising prices is out of the question, then improving margins would come from optimizing costs through automation.

“We have automatic sorting machines in several big sorting hubs that can sort up to 30,000 packages with 108 destinations per day,” says J&T’s Lo.

The ecommerce source adds that J&T also has a retail service, putting it in competition against established players like JNE Express (which has been in the business since 1990) – a move that could help with margins. “Retail” here refers to the usual logistics services that existed long before ecommerce came along, which are subject to less time pressure and thus can be more efficient.

Ecommerce, Indonesia, J&T Express, logistics, Sicepat

Photo credit: J&T Express

That said, it’s probably possible for firms in Indonesia to slash ecommerce logistics costs even further. What may be considered very low in the country is actually the norm in places like China, says the source.

He adds that China does have certain demographic aspects in its favor such as infrastructure, which makes it easy to move goods around the country. Also, China’s internet penetration is very high, so there’s enough ecommerce volume to go around and achieve economies of scale. Major Chinese cities have high population densities, and this makes delivery more efficient for couriers.

Indonesian President Joko Widodo is prioritizing infrastructure, but the country’s archipelagic state makes it a more challenging terrain for logistics. Yet that can prove to be helpful when an Indonesian company expands regionally – the way J&T has done. (It’s unclear whether SiCepat has similar ambitions.)

“Once you have conquered Indonesia, the other Southeast Asian countries have relatively simpler challenges,” says the ecommerce source. “The Philippines may perhaps be a bit more challenging, being an archipelago, but it’s not as challenging as Indonesia.”

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