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outheast Asia is the new frontier for e-commerce. Alibaba announced last week that it would pay US$1 billion for a majority stake in regional online marketplace Lazada. Late last year, China’s JD.com set up shop in Indonesia. Japan’s SoftBank, along with Sequoia Capital and SB Pan-Asia Fund, invested $100 million in Tokopedia, Indonesia’s largest online marketplace. The list grows bigger every day.

The rate of digital adoption in Southeast Asia is unmatched. The Philippines sends more texts than any other country, and Jakarta is the world’s No. 1 city for tweets. There are more than 250 million smartphone users in the region.

The online marketplace is still small. Only one in four consumers over the age of 16 has ever made an online purchase, according to a survey conducted by Bain & Company and Google of more than 6,000 consumers in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. Southeast Asia’s online retail penetration level is 3 percent, representing only about $6 billion in sales. China and the US boast penetration levels of 14 percent, with online sales exceeding $250 billion.

But the market is approaching a tipping point. According to our survey, 100 million consumers in Southeast Asia have made a digital purchase, but 150 million have researched products or engaged with sellers online. Some industries are already starting to score big: Twenty-four percent of all clothing and footwear and 18 percent of all travel are now purchased online.

Southeast Asia still faces many challenges. As cash-strapped Lazada’s experience shows in building a user base in six diverse emerging markets, providing incentives for merchants and spending on marketing and other upfront costs are difficult.

For one, the region encompasses a range of ethnicities, languages, consumer preferences and regulations. For example, Indonesian law does not allow foreign direct investment in local retail e-commerce companies. Southeast Asia also lacks a solid regional payment and logistics infrastructure.

In addition, surveyed consumers do not yet fully trust e-commerce platforms, feel concerned about the lack of touch-and-feel and have trouble finding the products they want. These complaints about early-stage e-commerce markets are typical. Given the sizable and digitally sophisticated population, the region’s broad acceptance of e-commerce is inevitable.

Southeast Asia is a unique e-commerce market. Consumers here are technology leapfrogs. Outside of tier-one cities, many have bypassed PCs, accessing digital platforms primarily through mobile phones. In Thailand, 85 percent of consumers not living in major metropolitan hubs use mobile devices for their online purchases.

Southeast Asian online shoppers also frequent a large number of sites. In Singapore, no fewer than 12 platforms serve 90 percent of the market.

As a result of this fragmentation, shoppers are more likely to head first to search engines when looking for products as opposed to checking company websites. They show little loyalty to retailers and shop via social media. More than 80 percent of the region’s digital consumers use social media such as Instagram to research products or otherwise connect with sellers. Since sales via social media comprise up to 30 percent of all transactions, companies are rapidly expanding their services to attract consumers.

 In many markets, consumers venture into online retail from physical shopping in search of the cheapest deal. That is not the case in Southeast Asia, where the online experience or choices available are more important, according to our survey.

Also unlike many other markets, where most payments are made via noncash methods such as credit cards and door delivery is preferred, Southeast Asians desire other methods for payment and delivery.

More than one-third of all consumers surveyed in top cities and outlying areas favored paying cash on delivery. Door-to-door delivery is preferred in tier-one cities, but online consumers in other areas preferred to pick up their purchases.

When we measured customer advocacy, local and regional players emerged as the early winners, in large part because they provide a better-tailored experience for local consumers than global competitors offer. Regional leaders such as Lazada have built local logistics footprints in each market to increase delivery reliability. Local start-ups are also breaking new ground: Singapore-based Uskoop consolidates purchases from US retailers to offer consumers steep discounts on delivery fees.

E-commerce is a fast-moving game and major forces are changing the rules. Forward-thinking retailers are investing to maximize the potential of both physical and digital channels. Social-media companies are continually experimenting with expanding the bounds of social commerce. And global players are now poised to compete in Southeast Asia.

Companies hoping to win need to define their engagement model now: where and how to invest, and what approaches to take to manage the complex market. For incumbents, there are three basic rules. First, it’s no longer a game of wait-and-see, experimentation or small bets. It is time to set direction and bet big. Second, winning means taking a nuanced approach and finding the right local partners to serve each market category, segment and geography.

Finally, thriving will take many years. Digitizing a traditional business requires acquiring the right capabilities — not easy in talent-scarce Southeast Asia — and fundamentally changing the company’s operating model.
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Florian Hoppe is a partner in Bain & Company’s Singapore office. Nader Elkhweet is a partner in Bain’s Jakarta office.