Kurtis Eckard, Hilary Eaton, Matheus de Giacomo Araujo,Stephen Smith

April 2015

STUDENTCASESTUDY

Rocket Internet: Clone Factory or Long-TermStakeholder?

INTRODUCTION

As the end of 2014 approached, the Samwer brothers of Rocket Internet faced a conundrum. The Berlinbased company has so far been delivering on its mission to become the world’s largest Internet platformoutside the United States and China, but danger may loom on the horizon.1 The Chinese ecommercegiant, Alibaba, underwent a record-breaking IPO last September and CEO Jack Ma subsequentlyannounced an aggressive but vague global expansion plan for its online marketplaces.2

For Rocket Internet, this meant its market share in Southeast Asia could be in jeopardy. AlthoughRocket’s ecommerce platform, Lazada, had not yet generated operating profit, the online shopping mallwas showing incredible year-over-year growth and gaining traction in the countries of Indonesia,Malaysia, and Singapore. Thus, the Samwer brothers needed to develop a strategy for how to addressthe inevitable arrival of Jack Ma’s Alibaba subsidiaries and keep Rocket Internet ahead of the curve.3

HISTORY

Founded in 2007, Rocket Internet quickly expanded into its five target regions of Europe, Latin America,Russia & CIS, Africa & the Middle East, and Asia Pacific. With 2013 net revenues exceeding $817 million,Rocket Internet has demonstrated its ability to address fast growing opportunities in emerging marketsworldwide.

The Samwer Brothers and Rocket’s BeginningsIn the mid 1990s, the three Samwer brothers Marc, Alexander, and Oliver, between the ages of 12 and16, decided to start a business. There was only one problem: these young entrepreneurs were withoutan idea. The children of two lawyers, the Samwers were raised with a diligent work ethic and ambitionand were always attracted by entrepreneurialism. As the brothers pondered their future businessprospects, Oliver noticed the launch of Netscape and a new concept called cyberspace. He quickly setabout learning everything he could about this new space.

Oliver’s brothers quickly jumped on board and in 1998 they found themselves in Silicon Valley. It washere that they noticed the popularity of a new online auction house called eBay. Before long, they had

1 “Mission Statement,” Rocket Internet, https://www.rocket-internet.com/about.2 Don Reisinger, “Alibaba Taps Taobao for International Expansion,” CNET, November 20, 2014,http://www.cnet.com/news/alibabas-taobao-marketplace-tapped-for-international-expansion/.3 Susan Cunningham, “Rocket Internet - First Mover in Indonesia?,” Forbes, October 23, 2014,http://www.forbes.com/sites/susancunningham/2014/10/23/rocket-internet-first-mover-in-indonesia/.

analyzed the German market and identified a great opportunity for eBay to exploit some untappedopportunities emerging as a result of the growing pains of German reunification.4

At the time, eBay was present only in the U.S. and the Samwers brought the idea to expand to Europe tothe eBay executives, offering to run the division themselves. eBay was nonresponsive. The brothers,sometimes considered ruthless by their competitors, were undeterred and in 1999 launched Alando,their own online auction house in Germany. Alando was a resounding success and quickly became thelargest online auction house in the country. Within three months of the launch, eBay offered to buyAlando for $54 million. Thus began the series of start ups and sell offs that would pave the way forRocket Internet’s founding eight years later.

Envisioning a “United Nations” of entrepreneurs, the Samwers codified their model into what becameRocket Internet. “Scale Fast,” not “Fail Fast” became their mantra.5

BUSINESS MODEL

The Rocket Internet business model is simple: find a proven product in the U.S. or China and adapt it foranother market. In their first five years, the German firm successfully launched over 25 companies in100 countries. By pooling their expertise and best practices across markets, the Samwer brothers havedeveloped a way to launch quality companies in rapid fashion (hence the name). One of their recentlaunches, SpaceWays, went from idea to launch in only eight weeks (See Exhibit 1).

Replication & AcquisitionOnce Rocket Internet determines a successful model, it quickly replicates it in a new region, usually indeveloping markets such as Latin America, Russia, or Africa. The company is defined as an “operatingplatform for building and scaling online companies”6 and its acquisitions are chosen through a rigorousand structured selection process to mitigate any risk of low performance.

Rocket considers only the acquisition of companies that have a minimum potential market size of $1billion and the prospect of reaching $100 million in yearly revenues. Rocket also examines thecompany’s business model to ensure it is replicable in targeted market and that it will have a highdegree of consumer acceptance.

Rocket invests in companies that have proprietary technologies that give them a competitive advantageand an architecture that allows for “speed, stability, security, scalability and standardization” of itsprocesses. Rocket Internet business model is driven by flawless execution and ambitious results.

Adaptation & Scalability

4 Matt Cowan, “Inside the Clone Factory: The Samwer Brothers’ Story,” Wired UK, March 2, 2012,http://www.wired.co.uk/magazine/archive/2012/04/features/inside-the-clone-factory.5 Ibid.6 Ibid.

The company is known for employing aggressive growth strategies and for “going global as fast as youcan.”7 Rocket Internet launches around 10 new ventures per year and invests as much as $20 million inthe early stages to ensure a fast implementation and execution. The average time between kick-off andlaunch is around 100 days. Those who survive the first trials are included in the company’s portfolio andreceive further investments as well as access to Rocket’s extensive network of resources.

The company relies on its global execution capabilities to quickly adapt and scale its businesses.Ambitious entrepreneurs are attracted by the pool of talent Rocket offers that ranges frommanagement and legal consultants, to marketing analysts, engineers, human resources, finance,business intelligence, and, in some cases, regional expertise. Rocket’s team offers technical andoperational knowledge to execute “highly standardized processes” that will help the incubated companyto quickly scale and gain market share. The company also enlists strategic partners, such as payment andtelecommunications providers and retailers to move as fast as possible.

LAZADA

Launched by Rocket Internet in March 2011, the business-to-consumer (B2C) ecommerce platform,Lazada, is often dubbed the Amazon of Southeast Asia. Focusing on consumer goods such as electronics,fashion, toys, and health and beauty, the online retailer has operations in Indonesia, Malaysia,Philippines, Singapore, Thailand and Vietnam. Lazada has more than 12,000 seller partners. Sales haveincreased more than 20 times from January to December 2014.8 Despite significant investment,however, Lazada remains a relatively small business, generating about $59 million in net revenue for thefirst half of 2014, according to filings. The company’s earnings before interest, taxes, depreciation andamortization (EBITDA) for the period was negative $50 million.

ALIBABA

HistoryAlibaba was founded in 1999 by former English teacher Jack Ma, first as a business-to-business (B2B)ecommerce platform that connected Chinese wholesale suppliers with overseas buyers. After reachingprofitability in 2002, Alibaba expanded into the consumer-to-consumer (C2C), B2C, mobile, and cloudcomputing markets. Since its inception, the notoriously secretive Alibaba has come to dominate China’sC2C market with a 95% market share and has captured a formidable 57% portion of the B2C market.9

The company’s September 2014 IPO was the largest ever, rocking the investing world by closing at a

7 Ibid.8 “Southeast Asia Number 1 Online Shopping Mall,” Lazada: Effortless Shopping, http://www.lazada.com/about-us/.9 “Here’s Why Changing Market Dynamics Should Worry Alibaba’s Investors,” Forbes, December 2, 2014,http://www.forbes.com/sites/greatspeculations/2014/12/02/heres-why-changing-market-dynamics-should-worry-alibabas-investors/.

record-breaking $25 billon on its first day.10 Although Alibaba has remained a primarily China-orientedcompany, it has set its sights on Indonesia as the next target market for its international B2C platform,AliExpress,11 and has recently announced plans to open a cloud computing data center in Silicon Valley,12

further indicating its plans to expand globally.

Alibaba’s CompaniesThe Alibaba Group is made up of several smaller companies, three of the best known being Taobao,Tmall, and AliExpress. Taobao is China’s leading C2C platform, pulling in $190 billion in 2013. Tmall isAlibaba’s primary B2C platform, capturing roughly half of China’s B2C transactions and pulling in $82.1billion in 2013. (See Exhibit 3) Taobao and Tmall together make up almost 82% of Alibaba’s earnings.AliExpress, Alibaba’s international B2C platform, has markets in Russia, Brazil, the U.S., and increasinglySoutheast Asia. Although international retail commerce accounts for only 2% of Alibaba’s total revenue,that area grew by 110% in the third quarter of 2014.13 (See Exhibit 4)

Alibaba’s China Problems and Global ExpansionThere’s no doubt that Alibaba is a powerful ecommerce giant, but the company still faces challenges.Most of Alibaba’s revenue comes from its C2C platform, Taobao, but that area of the market is shrinkingdramatically. China’s C2C market is expected to decline by as much as 40% by 2017. In contrast, China’sB2C market is booming. And while Tmall is a force to be reckoned with, capturing around 57% of China’sB2C market, it is a much smaller portion than Taobao currently enjoys in the C2C market.14 With theecommerce B2C market already intensely competitive, Alibaba may have difficulty maintaining itsdominant position in China. (See Exhibit 5)

A changing market structure in China that favors a B2C over a C2C model, coupled with Alibaba’simpressive growth in international retail commerce makes global expansion an obvious next move forthe ecommerce behemoth. Despite some issues with AliExpress (unreliable sellers and an abundance ofcounterfeit goods), it has proven a successful international B2C model. Continuing its internationalrollout, Alibaba recently launched an Indonesian version of AliExpress. While Indonesia’s ecommercemarket is in its early stages of development, it is expected to grow to $18 billion by 2015. Alibaba hasalso been building a logistics network in Indonesia by partnering with Indonesian businesses to makepayment easier for consumers and increase the speed of delivery.15

10 Elizo Baretto, “Alibaba IPO Ranks as World’s Biggest after Additional Shares Sold,” Reuters, September 22, 2014,http://www.reuters.com/article/2014/09/22/us-alibaba-ipo-value-idUSKCN0HH0A620140922.11 Catherine Shu, “Alibaba’s AliExpress Sets Its Sights On Indonesia’s Promising E-Commerce Market,” TechCrunch,February 11, 2015, http://techcrunch.com/2015/02/11/aliexpress-to-indonesia/.12 Andrea Chang, “Alibaba to Open Cloud-Computing Data Center in Silicon Valley,” LA Times, March 4, 2015,http://www.latimes.com/business/technology/la-fi-tn-alibaba-data-center-silicon-valley-20150304-story.html.13 “December Quarter 2014 Results” (Alibaba Group, January 29, 2015),http://www.forbes.com/sites/greatspeculations/2014/12/02/heres-why-changing-market-dynamics-should-worry-alibabas-investors/.14 “Here’s Why Changing Market Dynamics Should Worry Alibaba’s Investors.”15 Shu, “Alibaba’s AliExpress Sets Its Sights On Indonesia’s Promising E-Commerce Market.”

Alibaba vs. Rocket Internet: An Indonesian Collision Course?As AliExpress becomes an increasing presence in Indonesia, Rocket Internet could be in trouble.Indonesia is a key market for Rocket’s ecommerce platform, Lazada, which currently enjoys the numberone spot as B2C retailer in the country, although it has yet to reach profitability. However, neither thislack of profitability nor AliExpress’s entry into Indonesia has Rocket Internet backing down. Rocket hasinvested over $700 million in Lazada, funding that is used to build logistics networks, infrastructure, andpayment solutions.16 Lazada’s CEO has stated the company’s goal to be a regional leader in SoutheastAsia17 and maintaining a strong presence in Indonesia may be key to that goal. But as Alibaba continuesto focus on Southeast Asia and other regional ecommerce businesses enter the market, Rocket Internetmay find it harder to compete. And the global B2C market isn’t the only place Alibaba is looking toexpand—it has also become a formidable mobile competitor and has been busy investing in a diversearray of international Internet and mobile companies.

Rocket Internet’s strengths lie in replicating proven business models in untapped markets, but in anincreasingly competitive ecommerce market, the company will need to decide how to proceed.Although Alibaba’s broader global plans remain opaque, chances are that Rocket Internet may not beable to avoid the Chinese giant forever. Given its current stakes and impending challenges, shouldRocket cut its losses in Southeast Asia, divest, and focus elsewhere or should it innovate and adapt tothe changing ecommerce environment?

ECOMMERCE IN SOUTHEAST ASIA - LOOKING FORWARD

The Rise of M-CommerceThe growth of Internet subscribers in Southeast Asia has boomed in the past few years. This growth hasbeen buoyed by the rapid adoption of smartphones that resulted from the growing affordability ofelectronics and rising incomes in Indonesia.18 Mobile Internet, or m-commerce retailing, has beengaining popularity in Malaysia and has taken up approximately 19% of value sales in total m-commercein 2013.19 In 2014, Rocket Internet invested $445 million in mobile payments in order to tap into the m-commerce boom.20 However, Alibaba has also recently invested $560 million in mobile, which willsignificantly expand its already substantial mobile footprint in Southeast Asia.21

16 John Russell, “Lazada, Rocket Internet’s Amazon Clone In Southeast Asia, Raises $250M Led By Temasek |TechCrunch,” TechCrunch, November 29, 2014, http://techcrunch.com/2014/11/29/lazada-rocket-internets-amazon-clone-in-southeast-asia-raises-250m-led-by-temasek/.17 Ibid.18 Internet Retailing in Indonesia (Euromonitor International, March 2015), http://www.euromonitor.com/internet-retailing-in-indonesia/report.19 Internet Retailing in Singapore (Euromonitor International, April 2014), http://www.euromonitor.com/internet-retailing-in-singapore/report.20 Katie Evans, “Rocket Internet Raises $445 Million to Invest in Mobile Payments in Emerging Markets,” InternetRetailer, August 7, 2014, https://www.internetretailer.com/2014/08/07/rocket-internet-raises-445-million-invest-mobile-payments.21 “Alibaba Is Making $590 Million Investment in Mobile,” Advertising Age, February 9, 2015,http://adage.com/article/global-news/alibaba-making-590-million-investment-mobile/297048/.

Competitive EnvironmentEcommerce is relatively fragmented, but growing quickly in Southeast Asia. As Internet penetration inthe region has increased, the popularity of ecommerce among Southeast Asian populations has likewiserisen. There are still major challenges for ecommerce in these emerging markets, but their rapid growthhas led to a proliferation of ecommerce businesses scrambling to get a foothold before the marketbecomes too crowded. Aside from Alibaba’s entry into the Southeast Asian markets, Rocket Internetfaces some stiff and increasing competition from both international and local players, such as Bhinneka,Agoda, Groupon, Tokopedia,22 Reebonz, Qoo10, among others.23

CONCLUSION

As the Samwer brothers read the news about Alibaba’s expansion plans in Southeast Asia, theywondered not only how Lazada could best deal with this impending threat, but also how Rocket Internetand its investors would react.

Rocket Internet’s model has not escaped criticism. Critics decry them for being simply a “clone factory”without original thought. However, Oliver himself doesn’t shy away from this label and states plainly,“We are not innovators, we are builders of companies.” Rocket’s defenders argue that the realinnovation at Rocket is not in concept, but in operations. Still others make the case that these “anti-copycat” naysayers need only consider that Toyota didn’t invent the car, but after years of copying Germandesigns, they innovated the Prius. The real question is whether or not Rocket Internet can take itsinnovation in operations and apply it to staying ahead in an increasingly competitive Southeast Asianenvironment.

Alibaba’s plans to go global inevitably begin in Southeast Asia with a large Chinese diaspora, commoncultural features, and superior local knowledge. If the Samwers sell off to Alibaba or another competitor,they could be charged as hypocrites after a quick buck at best and, worse, could lose the support ofimportant investors. But do they have what it takes to stay and compete? Can Rocket’s team of talentsbeat the local players?

22 Enricko Lukman, “18 Popular Online Shopping Sites in Indonesia (2014 Edition),” TecInAsia, April 15, 2014,https://www.techinasia.com/popular-online-shopping-platforms-in-indonesia/.23 Daniel Tay, “14 Popular Ecommerce Sites in Singapore,” TecInAsia, May 6, 2014,https://www.techinasia.com/14-popular-ecommerce-sites-singapore/.

EXHIBIT 1: Company launch timeline

2009● Home24 (Europe, furniture retailer)

2010● Dafiti Group (Latin America,fashion/home décor retailer)● Jabong (India, fashion retailer)● Lamoda (Russia/Ukraine/Kazakhstan,fashion retailer)● TravelBird (Europe, vacation couponplatform)● Wimdu (Europe/Australia/US, vacationrental platform)

2011● CupoNation (Europe/India/Brazil,coupon-discount platform [Groupon])● FabFurnish (India, furniture/homegoods retailer)● HelloFresh (US/UK/Europe, fooddelivery)● Lazada (SE Asia, electronics/applianceretailer)● Linio (Latin America, broad-rangeretailer [Amazon])● Westwing (Europe/Latin America,furniture retailer)● Zalora (Asia/Australia, fashion retailer)● Zanui (Australia, home décor retailer)

2012● Easy Taxi (Latin America/Asia, taxiservice)● FoodPanda (Asia/Europe, fooddelivery)● Jumia (Africa, broad-range retailer[Amazon])● Kaymu (Africa/Asia/Eastern Europe,broad-range retailer [Amazon])● Namshi (Middle East, fashion retailer)● Paymill (Europe, credit card paymentplatform)● Traveloka (Indonesia, flight/hotelbooking platform)

2013● Carmudi (Africa/Asia/MiddleEast/Mexico, vehicle buying/selling)● Lamudi (Asia/Middle East/Africa/LatinAmerica, real-estate listing platform)● Lendico (Europe/South Africa, privateloan platform)● Zencap (Europe, crowd-lendingplatform)

2014● EatFirst (UK, food delivery)● Helpling (Germany, housekeepingservice)● Nestpick (Europe, rental platform)● ShopWings (Germany, food delivery)● SpaceWays (UK, self-storage platform)● Spotcap (Europe, small business loanplatform)● Tripda (North & South America/Asiaride-sharing platform)● ZipJet (UK, laundry service)

2015● Bonativo (UK, food delivery)

EXHIBIT 2: Rocket Internet Lazada Fact Sheet

Source: Rocket Internet H1 Update Presentation, November 17th 2014https://www.rocket-

internet.com/themes/rocket3/download/H1%202014%20Results%20and%20Business%20Update.pdf

EXHIBIT 3: China’s B2C Market

Source: Forbeshttp://www.forbes.com/sites/greatspeculations/2014/12/02/heres-why-changing-market-dynamics-

should-worry-alibabas-investors/

EXHIBIT 4: Alibaba Group’s December 2014 Quarterly Revenue

Source: Alibaba December 2014 Quarterly Report Presentationhttp://www.alibabagroup.com/en/ir/presentations/pre150129.pdf

EXHIBIT 5: China’s Projected B2C Growth 2013 - 2017

Source: Forbeshttp://www.forbes.com/sites/greatspeculations/2014/12/02/heres-why-changing-market-dynamics-

should-worry-alibabas-investors/

EXHIBIT 6: Lazada Indonesia Homepage

Source: Lazada Indonesiahttp://www.lazada.co.id

BIBLIOGRAPHY

“Alibaba Is Making $590 Million Investment in Mobile.” Advertising Age, February 9, 2015.http://adage.com/article/global-news/alibaba-making-590-million-investment-mobile/297048/.

Baretto, Elizo. “Alibaba IPO Ranks as World’s Biggest after Additional Shares Sold.” Reuters, September 22, 2014.http://www.reuters.com/article/2014/09/22/us-alibaba-ipo-value-idUSKCN0HH0A620140922.

Chang, Andrea. “Alibaba to Open Cloud-Computing Data Center in Silicon Valley.” LA Times, March 4, 2015.http://www.latimes.com/business/technology/la-fi-tn-alibaba-data-center-silicon-valley-20150304-story.html.

Cowan, Matt. “Inside the Clone Factory: The Samwer Brothers’ Story.” Wired UK, March 2, 2012.http://www.wired.co.uk/magazine/archive/2012/04/features/inside-the-clone-factory.

Cunningham, Susan. “Rocket Internet - First Mover in Indonesia?” Forbes, October 23, 2014.http://www.forbes.com/sites/susancunningham/2014/10/23/rocket-internet-first-mover-in-indonesia/.

“December Quarter 2014 Results.” Alibaba Group, January 29, 2015.http://www.alibabagroup.com/en/ir/presentations/pre150129.pdf

Evans, Katie. “Rocket Internet Raises $445 Million to Invest in Mobile Payments in Emerging Markets.” InternetRetailer, August 7, 2014. https://www.internetretailer.com/2014/08/07/rocket-internet-raises-445-million-invest-mobile-payments.

“Here’s Why Changing Market Dynamics Should Worry Alibaba’s Investors.” Forbes, December 2, 2014.http://www.forbes.com/sites/greatspeculations/2014/12/02/heres-why-changing-market-dynamics-should-worry-alibabas-investors/.

Internet Retailing in Indonesia. Euromonitor International, March 2015. http://www.euromonitor.com/internet-retailing-in-indonesia/report.

Internet Retailing in Singapore. Euromonitor International, April 2014. http://www.euromonitor.com/internet-retailing-in-singapore/report.

“Know Me about South East Asia’s Number 1 Online Shopping Mall.” Accessed April 3, 2015.http://www.lazada.com/about-us/.

Lukman, Enricko. “18 Popular Online Shopping Sites in Indonesia (2014 Edition).” TecInAsia, April 15, 2014.https://www.techinasia.com/popular-online-shopping-platforms-in-indonesia/.

“Mission Statement.” Rocket Internet, n.d. https://www.rocket-internet.com/about.

Reisinger, Don. “Alibaba Taps Taobao for International Expansion.” CNET, November 20, 2014.http://www.cnet.com/news/alibabas-taobao-marketplace-tapped-for-international-expansion/.

Russell, John. “Lazada, Rocket Internet’s Amazon Clone In Southeast Asia, Raises $250M Led By Temasek |TechCrunch.” TechCrunch, November 29, 2014. http://techcrunch.com/2014/11/29/lazada-rocket-internets-amazon-clone-in-southeast-asia-raises-250m-led-by-temasek/.

Shu, Catherine. “Alibaba’s AliExpress Sets Its Sights On Indonesia’s Promising E-Commerce Market.” TechCrunch,February 11, 2015. http://techcrunch.com/2015/02/11/aliexpress-to-indonesia/.

“Southeast Asia Number 1 Online Shopping Mall.” Lazada: Effortless Shopping, n.d. http://www.lazada.com/about-us/.

Tay, Daniel. “14 Popular Ecommerce Sites in Singapore.” TecInAsia, May 6, 2014. https://www.techinasia.com/14-popular-ecommerce-sites-singapore/.