Why a Gojek-Tokopedia merger should be treated with caution by investors

Gojek and Tokopedia - the two most valuable unicorns in Indonesia, with a combined valuation of US$18 billion - are reportedly close to a merger. Why is this happening, and how will it change the tech ecosystem in Southeast Asia?

Tokopedia is the highest-valued home-grown consumer-to-consumer e-commerce platform in Indonesia, worth US$7.5 billion. It received more than US$2 billion in its past two rounds of funding from investors led by Softbank and Alibaba Group, which owns the South China Morning Post.

Gojek might be a more familiar name, running ride-hailing, food delivery and payment services. It is valued at US$10.5 billion and counts Google, Tencent and Singapore's GIC among its biggest shareholders. Its founder, Nadiem Makariem, became Indonesia's education minister in 2019.

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While they are hailed as champions of Indonesia's booming tech ecosystem, they are both currently facing a tough situation.

Tokopedia's position is under threat from Shopee, part of the Singapore-based Sea Group. According to online shopping aggregator iPrice, Shopee leads Tokopedia in all key public metrics in Indonesia, including website visits, app ranks, and social media engagement. It also employs 60 per cent more people in the country.

My young colleagues in Indonesia, who have been working from home since March and are highly dependent on deliveries, say Tokopedia's promotions have become much more "stingy" compared with Shopee.

Gojek, meanwhile, is facing increasing pressure from its larger regional rival Grab. Its market share in the valuable food delivery segment reduced from over 90 per cent in 2017 to less than 50 per cent last year, with Grab taking 53 per cent, according to Momentum Worksin ourFood Delivery Platforms in Southeast Asia 2021 report. Gojek tried to expand outside Indonesia over the past two years, but has not reached meaningful market share in markets such as Thailand, Vietnam and Singapore.

Its subsidiary Gopay, once the leading mobile wallet in Indonesia, is also losing market share to Jakarta-based OVO, according to Bank of Indonesia analysis in September 2019, the last time official numbers were made available.

Shopee's mobile wallet ShopeePay is also growing fast in 2020, eating into the market share of existing players.

The Tokopedia logo atop the company's building in Jakarta, Indonesia. Photo: Bloomberg

WHY THE MERGER?

Both Tokopedia and Gojek are losing money and market share. Raising additional funding from the private market is becoming quite hard, and Softbank, Tokopedia's main investor, has publicly said it will not bail out any portfolio company. Therefore both need to find ways to save themselves.

Gojek has held talks with Grab in recent months on a potential merger. This would make sense as, regulatory concerns aside, such an alliance would remove costly competition in their overlapping business areas and allow the combined entity a faster path to profitability. Besides, there are many successful ride-hailing consolidations, including Uber businesses with local companies in China (Didi), Southeast Asia (Grab), Middle East (Careem) and Russia (Yandex).

However, the talks did not go well. The key issues, as we understand, were what percentage each would own in the combined entity, and how Indonesia would be managed post merger.

In the meantime, Tokopedia is reportedly in discussions with a few special purpose acquisition companies for a potential listing through acquisition. If Gojek can piggyback on this, they can potentially spin a larger Indonesia tech story, which some public market investors might be interested in.

DOES IT MAKE SENSE?

Since the news came out, I have seen a number of reports and commentaries hailing the move as "brilliant". Some are even comparing the potential synergy of Gojek-Tokopedia to Amazon, which runs both e-commerce and logistics.

However, I feel that most of this bullishness is missing the point. The merger, if it materialises, will not actually change the current competitive landscape, or make the companies more viable.

For the merger to make sense, the combined entity will need not only a story, but also a viable path to fend off competition, achieve profitability and the ability to execute well on that path.

The competition aspect is already difficult. Grab has regional leadership and Sea Group has a profitable video gaming business, unlike Gojek and Tokopedia.

Sea Group's Free Fire is filling the void left by India's ban on Chinese games last year and has also become popular in Latin America.

Catching this trend, Shopee has also expanded its e-commerce business into Brazil, and is rumoured to be preparing a Mexico launch.

Similarly, Grab's strong position in other markets puts it in a comfortable position to invest in Indonesia for the long term. To put it in perspective, the Momentum Works Food Delivery Platforms in Southeast Asia report estimates Singapore's gross merchandise volume (GMV) to be about 65 per cent of Indonesia's in 2020, despite being a very small market of less than 6 million people compared with more than 270 million inIndonesia.

A Gojek driver checks his mobile phone near Tokopedia's building in Jakarta, Indonesia, as reports about merger talks emerged. Photo: Bloomberg

UNCLEAR SYNERGIES AND INTEGRATION CHALLENGES

Will the businesses create synergy? In this case, there are two conceivable synergies: Gojek's delivery network for Tokopedia's e-commerce business, and a payment/fintech play.

However, integrating merged/acquired businesses can be hard, especially ones in different sectors, and with no clear party in the lead.

Tokopedia has already been tapping into Gojek and Grab for local deliveries, while in the payment space, Tokopedia and Grab are major share users (and heavy users) of OVO.

It is, in two words, very complex.

Making the synergies work requires continuous top-notch execution. That might be a tall order under so much competitive and cash pressure.

As for the comparison to Amazon, I think there is a misunderstanding about Amazon's business model (business-to-consumer e-commerce, which is fulfilled by Amazon) and Alibaba's Taobao model (consumer-to-consumer e-commerce, and the Cainiao network linking third party logistic companies). The case in Indonesia is much more similar to the latter.

Gojek driver helmets are seen in Jakarta, Indonesia. Photo: Reuters

INDONESIA IS A LONG GAME

Some might compare Gojek and Tokopedia's positions to Sea Group before its initial public offering: an unproven business model that is losing money and unable to secure additional private funding.

However, there are some key differences here. What Sea had was high growth in a number of expanding markets, and a cash cow.

Tech start-ups flourish in Indonesia because of its large population and market potential. However, over the years many have learned the lesson that becoming profitable in the country requires a long-term game and a lot of patience.

Grab and Sea can use their market leadership and more profitable businesses elsewhere to continuously fund their growth in Indonesia, while Tokopedia and Gojek do not have that luxury.

Investors need to treat this merger with caution, and objectivity.

Jianggan Li is the founder and CEO of Momentum Works, a Singapore-based venture outfit. He previously co-founded Easy Taxi in Asia, and served as managing director of Foodpanda. He holds an MBA from INSEAD and a degree in Computer Engineering from Nanyang Technological University.

This article originally appeared on the South China Morning Post (SCMP).

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