E-commerce is seen as a panacea for the ongoing coronavirus pandemic, but it should be seen as one part of a larger and more complex system, involving other elements such as manufacturing and logistics. An ASEAN initiative to address bottlenecks in such systems should be lauded and supported.
19 May 2020
If you think that e-commerce is the panacea for the coronavirus pandemic, think again. While online purchases have surged as nervous customers avoid going out, it masks other vulnerabilities in supply networks which support e-commerce. E-commerce provides convenience, but it is only one element at the front line of a complex supply chain system. If the supply chain structure on which e-commerce depends on is weak, all the technological sophistication that props up e-commerce would not be able to sustain it. The current crisis is a good time to take stock of the vulnerabilities of key players in the e-commerce supply chain and expound on why ASEAN is right to undertake a comprehensive set of initiatives in its Digital Integration Framework Action Plan.
E-commerce is primarily appreciated for services like website operations, online marketing, order management system and customer care. It is, however, reliant on other players down the line. The primary actors in this system are the producers and suppliers of goods. While inventories last, e-commerce will continue to ease the lockdown pains for consumers during the pandemic. But once those are depleted, the spotlight will focus on the “hidden figures” in the chain – the producers and manufacturers of goods first of all. Since the coronavirus is affecting everyone, including the workers who run production floors, backlog in intermediate materials should be expected, if not already taking place. In the fashion industry, for example, production has shifted out from China to other countries like Vietnam and Bangladesh. Compared to China, these countries have lower infection rates. Nevertheless, they have been affected by shortages of China-made materials, from zippers to buttons. A similar thing is happening in electronics which depends on components from Covid19-affected China and other Southeast Asian countries. Even the pharmaceutical industry has been reported to be dependent on a particular key chemical from China. The virus shock affecting manufacturing impacts the entire supply chain up to the customer-facing e-commerce businesses.
Transportation and logistics are other major elements in the e-commerce system. In Southeast Asia, there is growing demand and appetite for e-commerce abetted by improving connectivity, the rise of the middle class and a social media culture. But the geographical complexity of the region makes logistics a number one pain point for e-commerce.
Logistics is a source of comparative advantage especially for e-tailers; it can spell a big difference in cost efficiency as well as customer experience. This explains why the big e-tailers have sought to integrate their supply chains backward through acquisitions or partnerships with third party logistics suppliers. They want, in particular, to acquire control of critical bottlenecks such as warehouses and delivery networks. Lazada, an e-commerce platform based in Singapore, for example, has invested in warehouses across the region and targets to have 20 warehouses in Asia over several years. Red Mart, another logistics service provider, is also investing in warehouses as well as delivery trucks. Alibaba has struck a partnership with the Cainiao Network to draw on the latter’s delivery capabilities while avoiding getting stuck with redundant assets. The partnership is handy especially during annual sales events like 11/11, when delivery services ramp up but whose scale is not needed during other periods.
Within logistics, the last-mile delivery, the part of the e-commerce chain that delivers to the customers, is critical. This includes the messenger and courier companies, postal systems or smart lockers. In some countries, the last-mile also involves convenience stores that can receive both payment and parcels.
The lesson from this pandemic is that the complex supply chain network of e-commerce are links of the same chain and the chain is only as strong as its weakest link.
The economic shock from the coronavirus has had varying effects on employment in the logistics and last-mile delivery sectors. In the United States, for example, the delivery sector shed thousands of jobs in February 2020 although warehousing and storage operators added employment. There will be more pressure on the logistics and last mile delivery sector, for example, if messengers and truck drivers are themselves affected by the virus and quarantined.
So far, there has been no reported pain points in the payment space from the coronavirus, unless the liquidity problems of businesses metastasise into cases of insolvency as small businesses default on their loans due to shrinking consumer demand.
The lesson from this pandemic is that the complex supply chain network of e-commerce are links of the same chain and the chain is only as strong as its weakest link. In short, the consumer might be more familiar with convenient and cutting-edge e-commerce websites and highly-connected payment systems, but this itself is supported by a more traditional system, which includes logistics and last-mile delivery as well as manufacturers of goods.
In this context, the ASEAN Digital Integration Framework Action Plan ratified last year is spot on in being comprehensive in addressing bottlenecks that can stymy the long-run growth of e-commerce. Some of the initiatives seek to simplify customs clearances and procedures and review de minimis thresholds and duty drawback procedures. Other measures focus on trade facilitation policies with a focus on improving logistics services as well as the development of cross-border retail payment. There is also a drive to promote more payment innovation and entrepreneurial development as well as cooperation on consumer protection. Given that all these initiatives will help strengthen supply chains overall, it deserves the cooperation and support of ASEAN countries.
Dr Gloria Pasadilla is an Associate Fellow at the ASEAN Studies Centre, ISEAS – Yusof Ishak Institute.
ISEAS Commentary — 2020/66
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