Challenges facing e-commerce start-ups in Vietnam

The typical strategy has been for new companies in Vietnam to try to recreate foreign business models that have been tried and tested in modern western countries such as the US.

But for e-commerce start-ups, the experts say, these companies have found out the hard way that it’s not that easy.

In fact, retail ecommerce sales, excluding travel, have failed miserably in Vietnam, totalling just US$1.71 billion in 2016, which amounts to only 1.1% of total retail sales in the country, according to official statistics.

But far worse, current predictions are that by 2020, that figure will expand to a meagre 1.5% of total sales.

The reality of internet businesses in Vietnam deviates from what is obtainable in western countries such as the US because the challenges to profitability are different requiring substantially much more upfront investment.

The following factors are some of the key reasons according to experts as to why the Vietnam internet business ecosystem – especially e-commerce – has not proven lucrative and profitable.

Distrust

Vietnamese of all income levels have yet to embrace online shopping, due to online fraud. Phishing is commonplace on the internet and people are sceptical that they will have any recourse should their credit card information be stolen online.

Consequently, the entire e-commerce industry has been relegated to cash-on-delivery to mitigate this challenge.

Cost of broadband

Vietnam has enjoyed tremendous growth in mobile internet, which is the popular means for people to access the web.

In 2016, more than half of the country accessed the internet at least once a month with many surveys reporting average internet users spent nearly 25 hours per week online. One survey found that 74% of smartphone users used a messaging service more than once per week.

But about all Vietnamese buy online are subscriptions to cable and satellite TV. One survey showed that 78% had paid for cable TV and 40% had paid for satellite TV, while only 13% of users had ever purchased an online video.

Logistics

Amazon.com and eBay are great companies that depend on the US postal system to serve their customers. However, in Vietnam, it’s much more complicated without such a postal system. Online businesses operate delivery motorbikes, which increase the cost of doing business here.

Vietnamese open market

In Vietnam, there are markets just about everywhere. There are live markets, supermarkets, and even vendors selling things on the pavement in major cities—and all compete on price.

Because nearly all e-commerce businesses are formalized for access to the banking system, they pay taxes. In Vietnam, a 10% VAT can put an online business at a disadvantage when the informal competitors do not collect the same.

Literacy rates

Illiterate citizens may be unable to participate directly on e-commerce sites that require reading and writing skills. Many parts of the country, have literary rates less than 30%. Without investing in the education of these citizens, the pool of potential customers for e-commerce is greatly reduced.

E-commerce has potential

E-commerce in Vietnam could be very profitable, say the experts, noting it will just take time and effort. Leaders of the country must understand that besides launching websites, there are many other elements that affect profitability that must be addressed.

These include setting up a Vietnamese system to effectively prosecute fraud and improve business trust in the internet; and most importantly, investment in education to improve literacy rates.

To make the web work for business, Vietnamese public and private sector leaders need to focus less on how to improve the number of total domains registered and instead fix the physical business ecosystem.

The internet is redesigning commerce and will continue to reshape industrial segments in Vietnam, say the experts.

But entrepreneurs – particularly those in web-based businesses – need to realize the hurdles they must overcome to be both successful and profitable in the Southeast Asian country before they jump in.

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