Investing Intelligently in an E-Commerce Company: Challenges & Potential Innovations

by Dentons
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By 2027, Singapore’s e-commerce market is predicted to grow five-fold – to at least US$5.4 billion (S$7.5 billion), according to a study by Google and Temasek Holdings. E-commerce markets in other parts of Asia are also poised to grow significantly – with many Asian businesses venturing out into markets of developed nations with sophisticated data privacy and consumer laws.

Investors and entrepreneurs are faced with unprecedented opportunities – as well as challenges related to their e-commerce venture, including understanding:

  • Which factors may impact the value of an e-commerce company, especially when business models defy traditional valuation methods? 
  • How can e-commerce companies remain compliant with laws and regulations from each of the countries in which it operates? 
  • As more participants crowd the e-commerce market, how can e-commerce businesses innovate to continue to provide value and capture opportunities?

E-commerce remains a novel area – both in business and law – but with the right guidance, there is no limit to the creative solutions that may abound.

Factors Impacting the Value of an E-Commerce Venture

E-commerce businesses can have valuations which far exceed those of traditional companies within the same industry. For example, Uber, the online transportation network company founded in 2009 is currently valued at approximately US$68 billion – around US$20 billion higher than auto giant General Motors, which has been in existence since 1908. And Uber does not even manufacture cars!

Rather than traditional metrics such as historical profits and logistics costs – e-commerce companies are usually valued based on factors like sales, number of transactions, active users, “hits”, the future state of the industry, potential market size, expected growth, and sometimes an extremely optimistic revenue growth.

However, e-commerce ventures are complex businesses to run – generally capital-intensive, with low profit margins – and entail compliance with laws from various jurisdictions, the handling of sensitive consumer information, and a consideration of how the venture impacts market competition in the relevant country. An e-commerce venture may therefore quickly encounter compliance issues which may significantly decrease its value. 

Legal Compliance Needs of an E-Commerce Venture

Due to the global nature of many e-commerce ventures, compliance with laws in each of the countries it operates is crucial. For example, failing to comply with data privacy and consumer protection laws could not only impact a company’s valuation – but also lead to civil or criminal liability. Below, we highlight some salient compliance issues related to e-commerce– highlighting the importance of hiring legal counsel with a deep understanding of e-commerce compliance needs.

1. Data privacy

When transacting online, consumers almost always share personal data such as their name, contact details, home address and payment card details. Of 194 UNCTAD member states, a total of 107 countries (of which 66 are developing or transition economies) have in place legislation to secure the capture, transmission and use of personal data.   

E-commerce businesses are also generally required to implement security measures to prevent unauthorised access, use and disclosure of personal data. Furthermore, customers must be informed of the purposes for which their data is being collected, and consent to the collection, use or disclosure of their personal data. Finally, it is also crucial for any e-commerce venture to implement procedures to handle data breaches which enable the business to notify customers and relevant authorities promptly and investigate and contain the breach. 

Because compliance requirements may differ between countries, ventures may need to adopt tailored approaches for each jurisdiction

2. Consumer protection

Most countries have adopted laws and regulations to protect consumers who may be at the mercy of errant traders and unethical business practices. Common concerns include the truth of online product descriptions and reviews, fairness of merchant terms of sale, and availability of recourse for late or non-delivery, product defects, or other disputes. 

In Singapore, for example, consumer protection laws include: 

  • Unfair Contract Terms Act, which restricts the extent a merchant can limit or exclude liability owed to consumers; 
  • Consumer Protection (Fair Trading) Act, which prohibits unfair trade practices, including false claims about goods/services or having overly harsh or oppressive terms of sale; and 
  • Consumer Protection (Trade Descriptions and Safety Requirements) Act, which prohibits traders from using false trade descriptions, including in advertisements for goods

Of the 194 UNCTAD member states, 97 (of which 61 are developing or transition economies) have adopted consumer protection legislation that relates to e-commerce. Likewise, a tailored approach for each jurisdiction may be necessary. 

3. Competition laws

All ASEAN member countries have enacted some form of competition legislation and have a regulator to ensure the enforcement of such legislation. Behaviour by e-commerce ventures which may impact a competitiveness analysis may include: 

  • Price obfuscation, which may be seen as anti-competitive. This involves making it difficult for consumers to search and compare prices online, such as by advertising prices of low-quality products on a price comparison website but not making the price of higher-quality upgrades easily observable;  
  • Vertical restraints, on the other hand, may be seen as pro-competitive depending on the context. These are generally non-price-related restrictions imposed by parties on different levels of the distribution chain, and may include restrictions on selling online, submitting offers to price comparison websites, or cross-border sales.

Whether an act may be considered anti-competitive requires complex analysis and professional advice from a qualified legal team should be sought. 

Business Model Innovations

As players crowd the market, innovation is necessary for differentiation and value-capture. The “reverse auction” model may be a viable solution – where sellers compete to obtain business from the buyer in real time, often with added transparency around prices and the buyer’s requirements. 

This model may change the way firms behave with their suppliers worldwide, improving effectiveness of the sourcing process and facilitating access to new suppliers. It may also minimise anti-competitive behaviour among suppliers. This presents e-commerce portals with an interesting opportunity to offer reverse auction services, and for manufacturers to understand buyer needs more clearly.

Next Steps: Capturing Value

The e-commerce market in Asia is growing rapidly and it remains a challenge to accurately value emerging e-commerce businesses. Furthermore, many Asia-based e-commerce companies are venturing out into markets of developed nations with sophisticated competition, data privacy and consumer laws. In innovating and setting up a viable business model, e-commerce businesses would do well to seek appropriate legal advice in order to gain consumer confidence in their target markets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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