The proliferation of counterfeits and fake information on giant online retail platforms could drive a $20 billion addressable market in vendor verification.
Is that brand-name phone cord you purchased online the real deal? What about those pumped-up sneakers that seem curiously underpriced? Are you sure the glowing five-star review for that runner’s watch is from a real buyer?
Indeed, the global e-commerce sector has some trust issues. In a 2017 Ipsos online survey of 24,225 internet users in 24 developed and developing countries, 22% of respondents said they never shop online. Of these, 49% gave “lack of trust" as the reason.
Bringing order to the wild west of e-commerce is a growing imperative—and opportunity—as third-party vendors, counterfeit products and fake reviews proliferate online. To ensure buyer confidence and supply-chain integrity, and to assuage regulatory concerns, e-commerce companies are turning to the rather staid Testing, Inspection & Certification (TIC) sector, which Morgan Stanley analysts estimate has a total addressable market of $20 billion that has barely been tapped.
E-commerce Pain, TIC Gain
TIC companies have been around since the dawn of the Industrial Revolution, testing components, verifying supply-chain vendors and examining consumer products for quality and safety. It’s a less-than-glamorous role, one many analysts have written off as too mature to stage a growth comeback.
In a recent report, The Online Trust Economy: Behind the Screens, Morgan Stanley Research takes a different view. Looking at three critical global e-commerce markets—the U.S., China and India—analysts found that a mere 13% of products originate from certified vendors. Indeed, the report's lead author, Edward Stanley, an equity analyst covering the European business-services sector, says that only about $2 billion of the roughly $20 billion TIC market has been realized, adding: “At the current run rate of adoption, we believe an incremental $3.5 billon could be captured by the TIC companies through 2022."
Regulatory scrutiny could be a significant driver of this potential growth. A wave of new regulations across the largest e-commerce markets aims to formalize vendor and product verification requirements for the platforms that host them. To achieve the scale needed for compliance, the e-commerce giants may need a lot of TIC help.
To analyze the TIC revenue opportunities, Morgan Stanley analysts looked at examples of new and proposed regulations in the U.S., China and India designed to bolster consumer trust in domestic and international e-commerce activity, as well as the largest business-to-business and business-to-consumer platforms in each.
U.S.: Regulation in Focus
The U.S. has one of the fastest growing online markets globally. But as growth continues, so does the task of maintaining high consumer standards that keep pace with national regulations.
The two key moments are:
1. The Consumer Product Safety Improvement Act of 2008, laying out product-safety mandates for manufacturers to complete third-party testing and certify that their products comply with all applicable requirements before selling them to consumers, and
2. The Federal Trade Commission, in 2016, adopting Organization for Economic Cooperation and Development e-commerce guidelines designed to reduce risks and increasing transparency for consumers.
The dominant players in U.S. e-commerce aim to conform to these regulations, says Brian Nowak, who covers the U.S. Internet sector, but they also want to ramp up voluntary efforts to improve B2B and B2C platforms around the world. This includes enhancing trust via certification programs that are likely to benefit TIC players.
China: Regulatory Tightening
China boosted its e-commerce regulations in early 2019 to counter online fraud and safeguard consumers. These included recommended fines and take-down mechanisms for violators.
“In China, we expect to see an incremental acceleration, as platforms and the government pressure vendors to comply with the newly implemented e-commerce laws," says Stanley. For example, China's largest e-commerce marketplace now offers users a filtering tool to search for suppliers with certifications. Post-certification vendors have reported spikes in web traffic of up to 60%, according to Morgan Stanley’s web traffic analysis based on 200 vendors.
“Penetrating the large and fast-growing Chinese domestic testing market has long been a growth story just out of reach for the Western TIC companies. We believe this opportunity in Chinese e-commerce, supported by recent regulation enforcement will create a wider addressable market and the potential to cross-sell testing services into the Chinese domestic market,” says Stanley.
India: Draft Regulation
India, still a relatively small player in the B2B and B2C e-commerce space, exhibits significant growth potential. The report estimates that India's economic growth and the proliferation of domestic online shoppers could be among the strongest in the world over the coming decade.
India drafted new regulations to fight online retail fraud and protect consumers in February of 2019, but it has yet to be implemented. Still, its largest e-commerce retailer has already taken matters into its own hands and now requires sellers to provide certification to be listed on its platform.
“While India is at the opposite end of the e-commerce maturity spectrum vs. China and the U.S., growth is expected to be strong,” Stanley says. “Such restrictions on the online listings of third-party vendors means that the TIC companies providing these Inspection and Certification services are likely well-placed for future structural growth.”
For Morgan Stanley Research on e-commerce certification, ask your Morgan Stanley representative or Financial Advisor for the full report, “The Online Trust Economy – Behind the Screens (Part 1): Testing & Inspection" (Jan 13, 2020). Plus, more Ideas from Morgan Stanley thought leaders on our Tech, Media and Telecom 2020 page.