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What can we learn about e-commerce in Africa from Jumia’s IPO filing?

30 April 2019 1 comment

 

There has been growing discussion about the potential of e-commerce in developing countries. This discussion intensified recently when pan-African e-commerce firm Jumia went public in the US, becoming the “first African unicorn”.

The IPO prospectus, a 270-page outline of the firm released as part of this filing, has sparked much debate. Elsewhere, TechCrunch has dug into the financial intricacies of Jumia, and online debates have raged linked to the question “Is Jumia really an African firm?” (see here and here).

I won’t detail those two issues here. Instead, below I will discuss the insights that the prospectus provides us about e-commerce platforms operating in Africa. This is especially useful as we have been struggling with a lack of detail on e-commerce, with firms reluctant to share commercially sensitive information.

 

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1) The market for e-commerce in Africa is already large, and growing rapidly
Jumia announces that it had 4 million active customers in the year 2018, growing rapidly from 2.7 million in 2017. This translates into “Gross Merchandise Volumes”  (GMV) of €828.3m in 2018, from €507m in 2017. As these figures suggest, e-commerce is bringing in a significant number of customers on the continent and is growing at a rate of over 50% in the last year.

Regionally, the largest countries for Jumia’s business are Nigeria (29% of GMV) and Egypt (20.5%). Interestingly, in the largest 5 markets, only 50% of goods are delivered in primary cities with the rest evenly split between secondary cities and rural areas. Most customers are mobile users, which comprise 81% of all traffic in 2018.

 

2) …but making profits is a challenge. Jumia is a loss-making firm
The growing size of e-commerce has not yet translated into profits. Jumia made a €170m loss in 2018.

This is attributed to a number of factors. As a platform, sales are mainly made by third-party sellers (90%). So the €828m GMV translates to just €130.6m revenue for Jumia.  Jumia then faces high costs for operating including warehousing, delivery, sales and advertising and the platform. Once these are considered, the €130.6m turns into a €170m loss.

How does Jumia plan to become profitable in the future? By becoming a market leader in Africa, Jumia will rely on expanding markets to increase sales volumes over the coming years. Alongside this, they describe the potential of reduced costs in fulfilment (storing and delivering goods) and growing use of mobile payments that should make each transaction more efficient over time.

 

3) The role and prospects for Jumia platform sellers
Jumia has 81,000 sellers and the prospectus hints that quite a number of these are African, although there is no data provided. Interestingly, commissions from sellers for sales only contributed moderately to revenues. Jumia makes similar amounts of revenue from services such as fulfilment (delivery costs to buyers) and “value-added services” (premium services for sellers).

As Jumia grows, its aim is to attract ever more sellers to the platform. “Competition between sellers is…essential to our monetization, as it increases the appetite for sellers to use our services”. This statement suggests that the platform will move low margins and high competition, with sellers relying on value-added services as a source of expansion. For local sellers, these future directions suggest concerns about this platform supporting widespread upgrading of local SMEs in Africa.

 

4) Data is an important component of the relationship with sellers
We know that data is vital to many platforms, and Jumia is no different. A seller score “..a data-driven scoring of a seller’s performance” is a key aspect of Jumia’s relationship with sellers. The score is important to the success of sellers, where platform algorithms use this score to determine the order of products in searches. Jumia also gamifies the “seller score”, associating it with a range of other advantages for sellers.

In order to support sellers, Jumia supports third-party financial services for its sellers, using this score as a way to demonstrate creditworthiness. This mirrors alternative credit-scoring schemes we have seen elsewhere in Africa.

 

5) African e-commerce platforms face significant and often unexpected risks
Many of the challenges for Jumia are similar to those challenges of e-commerce elsewhere [1]. One key challenge repeatedly mentioned is the “…failed deliveries, excessive returns, late collections, unrecoverable receivables and voucher abuse”, with 14% of all sales (by revenue) being failed deliveries or returns. These risks particularly emerge from the use of cash payments on delivery (COD), a common approach to payments for online goods in developing countries.

Beyond this challenge, an eye-opening aspect of the prospectus is the unexpected challenges encountered by Jumia:

  • In Kenya, a Jumia warehouse was robbed and €500K of merchandise was stolen
  • In Egypt, a €5000 fine was imposed by authorities due to the platform offering “unlisted drugs”
  • In Kenya, a scam involving electronic payments suppliers led to €550K losses
  • Jumia has undertaken investigations around allegations of internal fraud and bribes in countries such as Nigeria and Morocco connected to relationships with platform sellers

 

6) Policy challenges for e-commerce in Africa are significant
In line with other platforms, Jumia operates a relatively “asset light” way across multiple countries in Africa. Even with close to a billion euro in GMV, and with offices in 18 countries, it is a tiny direct employer with around 4,800 staff in Africa.

This “asset light” approach, however, comes into collision with African governments’ desire to regulate e-commerce. Jumia discusses the challenges faced in a number of countries including taxes, particularly VAT on imports; uneven data protection rules, and restriction of cross-border personal data transfer; and regulation on financial and mobile payments.

There has been pressure for harmonising such rules globally in order to support cross-border business models of digital firms such as Jumia. However, African governments are keen to ensure that they are able to operate their economies appropriately, including collecting taxes and nurturing local firms, in the face of e-commerce imports [2]. It is therefore understandable that policy might vary according to the political goals of different nations in Africa. These challenges are likely to intensify coming years given current disagreements on harmonising e-commerce at the WTO, and African CFTA discussions on e-commerce rules still at an early stage [3].

Platform firms, therefore, require careful mapping of national rules and regulations, and in Africa the “asset light” model may only be viable to well-funded platforms. For smaller platforms, it may be better to focus on a smaller subset of countries.

 

In summary, the Jumia prospectus indicates that digital economies are expanding and we can expect to see a growing set of firms operating across the continent. However, given the challenges encountered by Jumia, easy profit and growth are not a given. For platform sellers, e-commerce provides new potential market opportunities, but careful consideration of how platforms best support them, will be vital to success.

 

References
[1] UNCTAD (2015) Information Economy Report 2015 – Unlocking the Potential of E-Commerce for Developing Countries, UNCTAD, Geneva, Switzerland.
[2] Azmeh, S. & Foster, C. (2018) Bridging the Digital Divide and Supporting Increased Digital Trade: Scoping Study, Discussion Paper, GEG Africa, Pretoria, South Africa. http://www.gegafrica.org/item/782-bridging-the-digital-divide-and-supporting-increased-digital-trade-scoping-study
[3] Foster, C. & Azmeh, S. (2018) E-Commerce and the African Continental Free Trade Agreement (AfCFTA), Discussion Paper, GEG Africa, Pretoria, South Africa. http://infomediation.net/publication-e-commerce-and-the-african-continental-free-trade-agreement-afcfta/

 

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Cloud Computing in China

29 June 2018 Leave a comment

In the last decade, cloud computing has become an important information support technology in different countries. According to research by Synergy Research Group shown in the following figure, the global cloud computing market has been dominated by a few big players, and most of them are from developed countries especially the US. The Chinese firm Alibaba Cloud is catching up and competing with these international technology giants. We explain this phenomenon from the following three aspects.

Cloud Infrastructure Services – Market Share Trend
(IaaS, PaaS, Hosted Private Cloud)

Market Drivers

Since the global economic crisis in 2008, the business sector has been looking for ways to reduce costs. Cloud computing can assist this. It enables the provision of services with five essential characteristics: on-demand self-service, broad network access, resource pooling, rapid elasticity, and measured service [1]. Using cloud computing technology, companies do not need to invest heavily in infrastructure when starting a business or offering new services. They only need to pay cloud service providers for what they will use, and do not need to buy expansive IT equipment, which normally involves a high fixed cost plus operational costs related to maintaining, monitoring, and managing IT systems.

Simultaneously, in recent years we have witnessed the rapid development of (mobile) Internet and wide application of Internet-based technologies. In China there exists a huge online and mobile user population with tremendous purchasing power. The business sector calls for technologies like cloud computing to process ubiquitous and intellectual information [2]. Furthermore, cloud computing is characterized by low cost, high efficiency, and environmental benefits, which satisfies the sustainable development principle.

Technology Innovation and Accumulation

Cloud computing enables the integrative use of different existing technologies, including broadband communications, Internet, distributed computing, distributed database, virtualisation technology and distributed processing technologies. These technologies form the basis of cloud computing as an innovative mode of computing (for more information, refer to [3] and [4]). Obviously, dominant technological giants from developed countries have advantages in this field for their accumulated know-how in different technologies. To compete with them, Alibaba as a latecomer has had to innovate in technologies, and build up experience in providing services.

In February 2009 Alibaba Cloud developed its own computing operating system called Apsara, and Alibaba Cloud was the first company to be able to provide 5K cloud computing capability in the world. By November 2016, Alibaba Cloud was a global leading player in cloud computing, and Apsara was selected as one of the 15 most representative scientific and technological innovations of the World Internet. To make these achievements, Alibaba Cloud has engaged in years of collaboration with private companies e.g. Taobao, a Chinese online shopping platform, and the public sector e.g. the Chinese state-controlled railway sector in operating its online ticketing service.

Policy Support

Scholars have confirmed that governments could play an important role supporting companies in developing countries catch up technologically [5][6]. The Chinese government has taken measures to promote the Chinese cloud computing industry. In 2010, the government backed the formation of industrial alliance China Cloud Computing Technology and Industry Alliance (CCCTIA). Significant financial support has been provided. For example in October 2011, a grant of 1.5 billion RMB (c.US$225m) was given to cloud computing pilot demonstration projects. Also a tax allowance was provided for cloud-related R&D initiatives. To set an example for other organisations, different government sectors purchased cloud services from private companies like Alibaba Cloud.

When the cloud computing industry entered into the expansion stage, the government began to get involved in standardisation of technologies and services. The Decree No. 05 issued by the State Council in 2015 was set to regulate the market and ensure its development. At present the cloud computing industry in China has entered into the mature stage, and Alibaba Cloud has been recognized for its high-quality, low-cost services. The Chinese government is pushing hard for the integration of cloud computing and other emerging industries like big data and artificial intelligence. This signals that Chinese companies will be supported to take a lead in these fields in the future.

Authors: Jiaying Li, Ping Gao

Reference

[1] Fortiş, T.-F., Munteanu, V. I., & Negru, V., 2012. Towards a service friendly cloud ecosystem. In Proceedings of the 11th IEEE International Symposium on Parallel and Distributed Computing (ISPDC), pp. 172-179.

[2] Mell, P. & Grance, T. 2010. The NIST definition of cloud computing. Communications of the ACM, 53, 50.

[3] Buyya, R., Yeo, C. S., Venugopal, S., Broberg, J., & Brandic, I., 2009. Cloud computing and emerging IT platforms: Vision, hype, and reality for delivering computing as the 5th utility. Future Generation Computer Systems, 25, 599-616.

[4] Zhang, Q., Cheng, L., & Boutaba, R., 2010. Cloud computing: State-of-the-art and research challenges. Journal of Internet Services and Applications, 1, 7-18.

[5] Gao, P., & Yu, J., 2014. Has China caught up in IT? Communications of the ACM, 53 (8), 30-32.

[6] Landini, F. & Malerba, F., 2017. Public policy and catching up by developing countries in global industries: a simulation model. Cambridge Journal of Economics, 41, 927-960.

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