Southeast Asia’s internet economy on track to exceed $100b this year: Report

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The burgeoning internet economy in Southeast Asia continues to grow at an unprecedented pace, hitting $100 billion so far this year, a 39-per cent increase from $72 billion in 2018, thanks to the region’s 100 million new online users, according to the latest report jointly launched by Google, Singapore’s state investment firm Temasek, and Bain & Co.

The two pacesetters in Southeast Asia are Indonesia and Vietnam that, going forward, are expected to witness robust growth driven by a slew of factors such as growing middle-class coupled with a rising ‘netizen’ population in the backdrop of strong domestic consumption.

The internet economy in both these regions has recorded a growth rate of over 40 per cent year-on-year. And these are not the only ones.

Other countries that are poised to witness robust growth in the years to come are Malaysia, the Philippines, Singapore, and Thailand, wherein the internet economy grew between 20 and 30 per cent annually.

“This pace of growth has exceeded all expectations,” the 64-page report said.

With a quarter more to go before the year ends, Google, Temasek and Bain estimate that the Southeast Asian internet economy to further exceed $100 billion in gross merchandise value in 2019.

The region is now home to 360 million internet users, with 90 per cent of them connecting to the internet through their mobile phones. This massive population of online users is expected to further fuel the growth of online transactions value to $300 billion by 2025, or $60 billion higher than the 2018 estimates, the report stated.

To achieve the $300-billion target for the internet economy, Southeast Asia will require funding of $40-50 billion. From 2015 to the first six months of this year, the region has already attracted close to $37 billion in funding.

“Six years ahead of that estimate, the region is already close to meeting that mark,” the report said.

The growth of the internet economy, however, is yet to spread evenly across Southeast Asia. Seven Metropolitan areas, which house just 15 per cent of the region’s population, still account for more than 50 per cent of the internet economy, that has the potential to grow twice as fast in areas outside the big cities, bringing all Southeast Asians on board.

“While the journey to the first $100 billion may have been full of surprises, the best days of Southeast Asia’s Internet economy are clearly ahead,” the report said.

Growth drivers

E-commerce and ride-hailing continue to beat the most optimistic predictions, while online media and online travel keep growing at a steady rate with ample room to expand further.

The dominance of e-commerce and ride-hailing is not surprising considering that Southeast Asia is home to ride-hailing giants Grab and Gojek and Alibaba Group Holding Ltd’s e-commerce sites.

This year, e-commerce has overtaken online travel to become the biggest sector of the internet economy. About 150 million people bought or sold items online this year, from just 49 million in 2015, and the market is projected to quadruple from $38.2 billion this year to $153 billion by 2025.

The bulk of that growth will come from Indonesia, where the e-commerce market is poised to expand from $21 billion to $82 billion, the study showed.

Ride-hailing is the region’s second-best performer, overtaking online media in 2019. It exploded with more than 40 million users at present from just eight million four years ago. In terms of value, ride-hailing more than quadrupled from $3 billion in 2015 to almost $13 billion so far this year.

Ride-hailing’s 2025 potential exceeds $40 billion, up from just $29 billion predicted previously, thanks to booming food delivery sector, which is also estimated to cross $20 billion in six years.

Online media has risen by almost four times in the last four years to reach $14.2 billion in 2019 as Southeast Asians have embraced the sector in a big way, whether streaming videos, listening to music, or play the latest games. The sector is expected to grow to $32 billion by 2025.

“One of the biggest factors underpinning the strength of online media is the growth of the internet user base,” the report showed. More than 100 million new internet users have come online in the region between 2015 and 2019.

Online travel, which used to dominate the region’s internet economy being one of the first services to move online, grew to $34.4 billion in 2019, up from $19.4 billion four years earlier, backed by the rise of budget hotel chains.

The study also encompassed digital financial services for the first time. According to the report, digital payments are moving into the mainstream and expected to exceed $1 trillion by 2025, buoyed by the fact that 98 million of Southeast Asia’s 400 million adults are underbanked and another 198 million have little to no access to finance.

Pack leaders: Indonesia and Vietnam

Indonesia’s internet economy is estimated at $40 billion in 2019, more than quadruple the size since 2015. The country is also well on track to cross the $130 billion mark by 2025, with e-commerce and ride-hailing pushing up the growth.

Vietnam’s internet economy, on the other hand, is also booming, hitting $12 billion this year, similar to Singapore’s figure, thanks to a vibrant e-commerce space where homegrown firms Sendo and Tiki compete with regional players like Lazada and Shopee.

The Philippines, whose internet economy is the smallest in the region at $7 billion in 2019, has the most room for growth of the six Southeast Asian countries, according to the report. The internet economies of Thailand and Malaysia were at $16 billion and $11 billion, respectively.

The report said the potential of Malaysia, the Philippines, and Thailand continues to be limited because these three pose regulatory uncertainties when it comes to ride-hailing.

The lack of homegrown unicorns also explains the lower levels of funding received by the three nations as compared to their neighbors, according to the report.

Healthy fund flow

Global venture funding in the second quarter of this year dropped 17.5 per cent from the same period last year, pulled down by a significant slowdown in the global economy. Southeast Asia, however, is an exception. Funding flows into the region continued to grow at a healthy pace, with internet firms raising $7.6 billion in the first six months of the year.

That amount raised the total funding flow in the region from 2015 to this year to $37 billion, which means Southeast Asia is only $3 billion shy from hitting the funding requirement of between $40 billion and $50 billion to achieve the $300-billion target for the internet economy.

Notably, e-commerce and ride-hailing have dominated the funding scene in Southeast Asia, attracting two in every three dollars raised since 2016. For ride-hailing alone, more than $14 billion of funding flowed into the sector over the past four years. E-commerce attracted a total of $9.9 billion worth of investments during the said period.

Southeast Asia’s unicorns attracted $24 billion of the total $37 billion raised while aspiring unicorns, which drew about $1.1 billion in funding in the first half of 2019, have raised $5 billion since 2016.

Not to be discounted, over more than 3,000 internet economy startups cornered over $7 billion in funding in the last four years.

“With an internet economy now on track to reach $300 billion by 2025, it is reasonable to expect that investors will continue to deploy capital in Southeast Asia,” according to the report.

Lack of talent remains a challenge

The Google-Temasek-Bain report had previously identified six key challenges – funding, internet access, consumer trust, talent, logistics, and payments – that the region needs to tackle to ensure the seamless growth of the internet economy.

Most of the challenges have been addressed, except for talent. According to the report, the lack of readily available talent remains an unresolved challenge for the ecosystem. However, the study found that internet firms in Southeast Asia have launched upskilling programs to fill the gap in digital skills amid tight labor markets.

“The good news is that the internet economy is maturing to a point where seasoned founders and early employees from the first wave of startups are emerging to lead new ventures and pass on their experience,” the report noted.