Buoyed by a massive internet user base and increasing adoption, the Southeast Asian internet economy is projected to exceed $240 billion in gross merchandise value (GMV) by 2025, nearly $40 billion higher than previous estimates, according to the latest report jointly launched by Google and Singapore’s state investment firm Temasek.
The region’s internet economy will reach $72 billion in GMV in 2018 across the four categories of online travel, e-commerce, online media and ride-hailing, the report noted.
Growing at 37 per cent from a year earlier, the region’s Internet economy has accelerated beyond the 32 per cent compounded annual growth rate (CAGR) between 2015 and 2018, therefore hitting an inflection point, said the “e-Conomy SEA 2018” report.
Google and Temasek, in their 2016 version of the regional Internet economy report, had predicted the digital market would reach as high as $200 billion by 2025. They had also estimated that in order to achieve that goal, the region would need investments of approximately $40-50 billion over a decade.
The uptick 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, and online food delivery.
Online travel is the largest and most established among the four categories of the internet economy in Southeast Asia, which is expected to add up to nearly $30 billion in gross bookings value (GBV) in 2018 and reach $78 billion by 2025. Within the sector, online vacation rentals is emerging as the most dynamic segment, following rising demand for brands such as Airbnb and leading OTAs in the region following suit to offer private homes and rooms.
Despite regulatory uncertainties and low consumer trust, online vacation rentals has the potential to grow to almost $2 billion in bookings by 2025 from about $600 million in 2018, said the report.
Meanwhile, online food delivery has 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 $7.7 billion in GMV, is forecast to grow to almost $30 billion by 2025, including more than $20 billion of online transport and over $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 350 million internet users. In total, according to the report, online media has exceeded $11 billion in 2018, and will reach almost $32 billion by 2025.
E-commerce remains the most dynamic sector, having increased more than 4x since 2015 to over $23 billion in 2018, representing a 62 per cent CAGR over the period. 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 $100 billion by 2025,” the report said.
As the most populous country in Southeast Asia, Indonesia is leading the way with a $12-billion e-commerce market in 2018.
The tiger cubs
“With more than 90 per cent of Southeast Asians connecting to the internet primarily through their smartphones, this is one of the most mobile-first internet regions globally,” the report highlighted.
The GMV of the internet economy stands at 2.8 per cent of Southeast Asia’s gross domestic product (GDP) in 2018, up from 1.3 per cent in 2015, and has a lot of room to grow as the region is still trailing almost 10 years behind the US, where the GMV of the internet economy already accounted for 6.5 per cent of GDP back in 2016.
Vietnam is the most exciting market in this regard, where the ratio of GMV to the GDP is 4 per cent. Meanwhile, the Philippines has the most room to grow with the current 1.6 per cent of GDP.
In terms of CAGR, the Indonesian digital archipelago “is firing on all cylinders”, having the largest ($27 billion in 2018) and fastest growing (49 per cent CAGR 2015-2018) internet economy in Southeast Asia. It is poised to grow to $100 billion by 2025, accounting for $4 of every $10 spent in the region.
Vietnam follows with a 38 per cent CAGR during the period, reaching a GMV of $9 billion in 2018. Next are the Philippines (30 per cent CAGR in 2015-2018 and $5 billion in 2018) and Thailand (27 per cent CAGR in 2015-2018 and $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 startups, we estimate that the Philippines could ignite growth beyond 30 per cent CAGR and fully achieve its long-term potential,” the report added.
Breaking fundraising record
Funds raised in the region crossed the $1 billion mark for the first time in 2015, then more than quadrupled in 2016, when companies raised $4.7 billion, and further doubled that in 2017.
This year, Internet companies are set to make another record as a total amount of $9.1 billion was already raised in the first half of the year, nearly as much as in all of 2017.
“Southeast Asia is progressing ahead of schedule towards the goal of attracting $40 to $50 billion worth of investments that we estimated would be required to build the internet economy by 2025,” the report noted.
While 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 capital, attracting $16 billion of the $24 billion invested in the region, the most dynamic segment was that of companies valued between $10 million and $100 million.
Excluding unicorns’ funding rounds, the report showed an encouraging insight that the average deal size is comparable in Singapore ($6 million), Indonesia ($5 million) and in the rest of Southeast Asia ($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 $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 per cent of the total funding pool, having raised almost $20 billion since 2016.
Meanwhile, investments in nascent sectors of the internet economy such as education, fintech, healthcare and others added up to $3 billion over the past there years.
Fintech is a highlight among these markets, attracting over $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 startups in the region, primarily through seed and Series A deals, signalling the ongoing race to unlock the huge opportunities in this financial services space.