Are we there Yet?'s Test of Investor Patience

Negative operating margins were finally starting to shrink. Tokopedia could change that.
Updated on
At Closing, May 24th
36.70 USD
At Closing, May 24th
197.37 USD

The e-commerce tussle between China's Alibaba Group Holding Ltd. and Inc. looks set to enter a new arena, with the latter now eyeing an investment in Indonesia. is in talks to inject funds directly into PT Tokopedia, one of the country's largest e-commerce operators, Bloomberg's Yoolim Lee and Selina Wang wrote Tuesday. The Beijing-based firm, backed by Wal-Mart Stores Inc., may invest "hundreds of millions of dollars," which could take Tokopedia's value north of $1 billion. That indicates might purchase a significant minority stake in Tokopedia, and implies that its interest goes beyond a purely financial one.

By revenue, is more than double the size of Alibaba. By earnings and market capitalization, though, Alibaba comes top. That's because gets more than 90 percent of its product revenue from selling its own inventory, while Alibaba mostly connects merchants with buyers. So although enjoys a better reputation for genuine and higher-quality goods, that consumer kudos has yet to translate into annual profits.

Through the Line's differentiated business model helps it garner stronger sales, but that hasn't translated into profit

Source: Bloomberg

Should invest in Tokopedia, it'll be following Alibaba's taking control of Lazada Group SA and its own strategy of building from the ground up. But Tokopedia is a different kind of e-commerce player in that it follows the merchant model used by Alibaba rather than the direct-sales approach employed by

This begs the question of what value can get out of the investment. It's possible the Chinese company will seek ways to integrate operations, cutting overlap in areas ranging from customer service to logistics. A decade ago, took the decision to build its own delivery systems in China, going as far as deploying drones last year.

In Indonesia, a vast equatorial archipelago of some 17,000 islands, logistics remains a key challenge. Yet the size of's footprint in Southeast Asia's largest nation is unclear, as is whether it will stick to the well-worn Chinese playbook of keeping a tight control over sales and engaging in delivery all the way to last mile.


Economies of scale in China are helping narrow its operating loss as a percentage of revenue

Source: Bloomberg

Combining operations might also risk's hard-earned reputation for quality. Yet, if keeps to its full end-to-end model in Indonesia, investors can expect several more years of slim margins as well as probable losses before any economies of scale are realized.

It's possible a middle ground could be found, with offering only logistics to Tokopedia and its users, while keeping its own customer service and websites separate.

Such a move would help share the cost of infrastructure and allow to minimize the risk to its reputation from engaging with third-party merchants. It would still require to commit to an infrastructure rollout in Indonesia, but traffic from Tokopedia should help cover the costs.

For shareholders, the risks are reduced, but not eliminated. They've hung on through years of losses and are finally seeing negative operating margins start to shrink. Being told to wait a little longer while tries to make a go of it in Indonesia may come as a blow.

(Updates to add Wal-Mart backing in second paragraph. A previous version of this column corrected the wording in the third paragraph to more accurately describe's revenue source.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Tim Culpan in Taipei at

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