Viet Nam and Indonesia are expected to become the two largest business-to-consumer e-commerce markets in Southeast Asia in the next five years.

This is according to a recent report by global research company Frost & Sullivan, which also predicts the region's e-commerce market will double in five years.

Total revenue from business-to-consumer (B2C) e-commerce in the six largest Southeast Asian countries, including Viet Nam, is expected to grow at nearly 18 per cent, from US$11.2 billion in 2015 to $25.2 billion by 2020, according to the report. The estimate excluded hotel and flight booking revenues.

According to Cris Duy Tran, lead consultant in e-commerce and digital transformation at Frost & Sullivan Asia-Pacific, the astounding rate of digital adoption, young and tech-savvy consumers, and increased disposal income are boosting growth in the region.

Indonesia has some 326 million SIM subscriptions and 88 million active internet users, while Viet Nam has some 127 mobile phone subscribers and nearly 40 million active internet users, according to various estimates.

Tran noted that specialized and peer-to-peer e-commerce marketplaces, such as Singapore's Carousell and Indonesia's Tokopedia, are aggressively pursuing a "mobile-first" strategy in the region, with niche services such as those in travel, food delivery and luxury goods also holding great opportunities. 

"E-commerce players are beginning to compete beyond price points and logistics and moving into new areas such as Online-to-Offline (O2O) e-commerce and loyalty programmes," Tran said. 

The region, however, still poses significant challenges for e-commerce companies. Many online retailers struggled to achieve profitability with several acquisitions in 2015, Tran said, citing the cases of Foodpanda that left Viet Nam and Groupon that exited Thailand and Phillippines.

Complex geographies and low credit-card ownership are the two other barriers. Only less than seven per cent in all Southeast Asian markets, except for Singapore and Malaysia, own a credit card. Viet Nam's credit card penetration rate was only 1.9 per cent in 2014. In some countries, less than half of the population has a bank account.

Yvonne Lim, enterprises solutions director at SingPost eCommerce, said cross-border payment is a huge challenge for e-commerce companies in the region, but that can be simplified with more payment gateways recently making an entry into the region, such as Stripe, Alipay or Apple Pay.

Besides this, Southeast Asia's e-commerce is also benefiting from the rapid expansion of the Chinese e-commerce market, Tran noted.

"Given the massive adoption of e-commerce in China, Southeast Asia is set to follow a similar upward trajectory, even though at present, e-commerce only represents less than 2.5 per cent of all retail sales," he said. "The region is well-positioned for more M&A activities during the forecast period and we expect to see more exciting market developments in the near future," he added.

Speaking last week at the Singapore Week of Innovation and Technology, Khailee Ng, managing partner at 500 Startups, said Southeast Asian governments and VCs are "under-estimating" the region's potential for exponential growth in the internet economy.

"If Southeast Asia does not put enough money into VCs and the start-up scene, other people will. In fact, it's already happening," Ng said. 

VNS