Views from the Asia trading floor

The Internet economy of Southeast Asia

An update based on a report from Google and Temasek

Southeast Asia’s Internet economy is going from strength to strength, growing at an impressive rate of 37% a year. That’s the message delivered by the latest report issued jointly by Google and Singapore’s state investment firm Temasek, entitled ‘e-Conomy SEA 2018’.

Going forward, the outlook is equally buoyant: supported by a booming Internet user base and increasing adoption, gross merchandise value, or GMV, is projected to exceed USD 240 billion by 2025. Four categories are particularly important, the report notes, namely online travel, e-commerce, online media and ride-hailing. These are forecast to reach a GMV of USD 72 billion in 2018.

The sector’s compounded annual growth rate (CAGR) topped 32% between 2015 and 2018, hitting an inflection point according to the report. It’s also growing faster than Google and Temasek had predicted in earlier versions of their report. Back in their 2016 edition, they anticipated that the digital market would take until 2025 to hit the USD-200-billion mark. They had also estimated that in order to achieve that goal, the region would need investments of approximately USD 40 to 50 billion over a decade. The uptick of USD 40 billion in the projection was caused by significant business size and growth of new markets such as online vacation rentals, subscription music and video-on-demand, as well as online food delivery.

Online travel is the largest and most established among the key four categories in the region. The latest report forecasts that it should hit almost USD 30 billion in gross bookings value (GBV) in 2018 and reach USD 78 billion by 2025. Within this sector, online vacation rentals is emerging as the most dynamic segment, aided by rising demand for brands such as Airbnb and leading online travel agencies in the region following suit to offer private homes and rooms. Despite regulatory uncertainties and low consumer trust, online vacation rentals have the potential to grow to almost USD 2 billion in bookings by 2025 from about USD 600 million in 2018, said the report.

At the same time, online food deliveries have been included in Google and Temasek’s report for the first time, as big players like Grab and Go-Jek have further boosted mobility in the food segment and aim to become ‘everyday apps’. The ride-hailing sector, which stands at USD 7.7 billion in GMV, is forecast to grow to almost USD 30 billion by 2025, including more than USD 20 billion of online transport and over USD 8 billion of online food delivery. Making another first-time appearance is subscription music and video-on-demand, which is propelled by the region’s growing army of 350 million Internet users. In total, according to the report, online media has exceeded USD 11 billion in 2018, and will reach almost USD 32 billion by 2025.

E-commerce remains the most dynamic sector, swelling more than fourfold since 2015 to top USD 23 billion in 2018. The growth of the three largest e-commerce companies in the region alone (Lazada, Shopee and Tokopedia) has been more than 7x.

On the back of the increased consumer trust in e-Commerce demonstrated by Southeast Asian Internet users, we have revised our projections and now estimate that the e-Commerce sector will exceed USD 100 billion by 2025,’ the report said.

As the most populous country in Southeast Asia, Indonesia is leading the way with a USD 12 billion e-commerce market in 2018.

With more than 90% of Southeast Asians connecting to the Internet primarily through their smartphones, this is one of the most mobile-first Internet regions globally,’ the report noted.

The GMV of the Internet economy stands at 2.8% of Southeast Asia’s gross domestic product (GDP) in 2018, up from 1.3% in 2015. It also has a lot of room to grow, given that the region is still trailing almost a decade behind the US, where the GMV of the Internet economy accounted for 6.5% of GDP back in 2016. Vietnam is the most exciting market in this regard, where the ratio of GMV to GDP is an impressive 4%. Meanwhile, the Philippines has the most room to grow with its current 1.6% of GDP.

The Indonesian digital archipelago ‘is firing on all cylinders’, the report noted, having the largest (USD 27 billion in 2018) and fastest growing (49% CAGR 2015–18) Internet economy in Southeast Asia. It is poised to grow to USD 100 billion by 2025, accounting for USD 4 of every USD 10 spent in the region. Vietnam follows with a 38% CAGR during the period, reaching a GMV of USD 9 billion in 2018. Next are the Philippines (30% CAGR in 2015–18 and USD 5 billion in 2018) and Thailand (27% CAGR in 2015–18 and USD 12 billion in 2018). The Internet economy in the Philippines is still a relatively untapped opportunity.

Despite having the second largest Internet user base (75 million) in Southeast Asia, the Philippines have not yet generated unicorns nor shown the dynamism of the Indonesian and Vietnamese markets. With increased focus and investments from regional unicorns and local start-ups, we estimate that the Philippines could ignite growth beyond 30% CAGR and fully achieve its long-term potential,’ the report added.

The funds raised in the region crossed the USD 1 billion level for the first time in 2015, more than quadrupled in 2016, when companies raised USD 4.7 billion, and doubled that again in 2017. This year, Internet companies are set to make another record. A total of USD 9.1 billion was raised in just the first half of the year.

‘Southeast Asia is progressing ahead of schedule towards the goal of attracting USD 40 to 50 billion worth of investments that we estimated would be required to build the Internet economy by 2025,’ the report noted.

Southeast Asia’s nine Internet unicorns, including Bukalapak, Go-Jek, Grab, Lazada, Razer, Sea Group, Traveloka, Tokopedia and VNG, have to date received the majority of this whopping dose of capital, attracting USD 16 billion of the USD 24 billion invested in the region. That said, the most dynamic segment was that of companies valued between USD 10 million and USD 100 million. Excluding unicorns funding rounds, the report showed an encouraging insight that the average deal size is comparable in Singapore (USD 6 million), Indonesia (USD 5 million) and in the rest of Southeast Asia (USD 4 million).

It would be wrong to conclude, based on these figures, that companies and investors are overlooking opportunities in Malaysia, the Philippines, Thailand, and Vietnam. The growing interconnectedness of the Southeast Asian Internet economy, coupled with the rise of unicorns with regional ambitions, require us to go beyond country-by-country considerations and to assess how each company deploys resources against regional opportunities.’

Despite having raised only USD 2 billion out of the total, Internet economy companies headquartered in Malaysia, the Philippines, Thailand and Vietnam have enjoyed a burgeoning deal flow, with more than 800 deals completed. Companies in the four major sectors of e-commerce, online media, online travel and ride-hailing took up more than 80% of the total funding pool, raising almost USD 20 billion since 2016. Meanwhile, investments in nascent sectors of the Internet economy such as education, fintech, healthcare and others added up to USD 3 billion over the past three years.

Fintech is a highlight among these markets, attracting more than USD 500 million of investments in the first half of 2018 alone, more than twice as much as in all of 2017. Fintech funding went to more than 300 start-ups in the region, primarily through seed and Series A deals, signalling the ongoing race to unlock the huge opportunities in this financial services space.