Google and Singapore sovereign fund Temasek released their latest report on the state of Southeast Asia’s online economy today, following their inaugural study published in May last year.
The earlier edition predicted that the region’s number of internet users would grow from 260 million to 480 million by 2020. Google and Temasek estimated that Southeast Asia’s internet economy would be worth US$200 billion by 2025, built on the back of around US$50 billion in investment.
In today’s report, the two firms have adjusted those predictions upward.
Rapid user growth
By the end of this year, the region will be home to 330 million active internet users, representing a compound annual growth rate (CAGR) of 13 percent since 2015.
For over 90 percent of those users, a smartphone is their preferred method of accessing the web – underlining the seminal role that mobile devices will continue to play in the region’s future economic growth.
Speaking at the report’s launch event today, Rajan Anandan, Google vice president and managing director for Southeast Asia and India, said that Southeast Asians spend more time on the internet using a mobile device than people from anywhere else in the world. Each of them devotes an average of 3.6 hours per day to accessing the internet, compared to Chinese users’ 3 hours, US users’ 2 hours, and 1 hour per day by the Japanese.
Thais are the heaviest users, spending 4.2 hours using the internet on their mobile device each day, closely followed by Indonesians who average 3.9 hours per day.
Value outpaces predictions
The study also indicates that the Southeast Asian online economy will be worth US$50 billion by the end of this month, setting it on a course to surpass the US$200 million predicted for 2025 by last year’s report.
That represents a 10-year CAGR of 27 percent, far outpacing the 20 percent predicted by Google and Temasek last year.
The report says that internet-based business accounted for 2 percent of the region’s GDP this year – up from 1.3 percent in 2015 – and expects that share to reach 6 percent by 2025.
Digging down into four specific sectors, Google and Temasek calculate that online travel hit US$26.6 billion in value this year, driven mainly by growth in airline and hotel bookings.
Ads and gaming helped online media and entertainment to reach US$6.9 billion.
The biggest growth was seen in ecommerce and ride-hailing, experiencing CAGRs of 41 percent and 43 percent respectively.
The study did not examine sectors such as mobile payments, online education, or digital healthcare, as these were considered “too nascent” to include in the report at this stage, Anandan said.
$11b ecommerce market
The Google and Temasek report focuses on business-to-consumer (B2C) ecommerce models, including marketplaces that enable small and medium-sized enterprises (SMEs) to sell to consumers. Second-hand goods marketplaces, consumer-to-consumer platforms, online classifieds, and sales via social media were left out of the equation.
Despite the narrower focus, the report found B2C ecommerce touched US$10.9 billion in gross merchandise volume this year.
Google web searches for ecommerce companies have doubled in the past two years, with Southeast Asian consumers spending an average of 140 minutes every month on the each of the region’s two leading local ecommerce sites (the report doesn’t name these, but they are presumably Alibaba-owned Lazada and Sea-owned Shopee).
By comparison, US consumers spend an average of 80 minutes per month browsing their country’s top ecommerce site (again, this wasn’t explicitly identified, but is presumed to be Amazon).
From now until 2025, the report predicts ecommerce to see the largest growth of any sector, expanding by around eight times its current value to hit US$88.1 billion.
Anandan ascribed stellar growth over the past two years to the uptake of the marketplace model and the impact it has had on offline SMEs’ ability to sell online. “What’s really growing is small businesses selling to consumers,” he said.
Magic carpet ride
Ride-hailing services have collectively doubled their GMV over the past two years, from US$2.5 billion in 2015 to US$5.1 billion this year, with the estimated number of rides booked by users each day quadrupling over the same period from 1.3 million to 6 million.
One statistic highlighted by Anandan was the expansion in the number of drivers working with ride-hailing firms since 2015. Two years ago, the ride-hailing driver base comprised around 600,000 individuals across the region. In 2017, that figure has grown fourfold to reach 2.5 million.
“We think this is a big deal, especially for these economies that are looking to create jobs,” he said. “This is a significant expansion in the driver base.”
By 2025, Google and Temasek predict ride-hailing to be a US$20.1 billion business in Southeast Asia, though Anandan cautioned that the actual value may end up considerably higher.
“When you look at the charts, the curves keep going up, so we think the best is yet to come when it comes to ride-hailing.”
A new valley of death
As underlined in last year’s study, significant investment will be required to support this growth and ensure it can reach its potential.
Speaking at today’s event, Rohit Sipahimalani, who heads Temasek’s India operations and is joint head of the fund’s portfolio strategy and risk group, noted that there has been a boom in venture investment into Southeast Asia since last year’s report.
Close to US$13 billion has been pumped into Southeast Asia’s startup scene between the start of 2016 and Q3 2017, equal to 0.18 percent of regional GDP – the same as the figure for India.
However, US$9 billion of that went to the region’s seven internet unicorns – Go-Jek, Grab, Lazada, Razer, Sea, Traveloka, and Tokopedia.
“That’s not very different to what we saw in 2015,” said Sipahimalani. “What’s interesting though is that more money has gone to smaller companies, so clearly we are seeing an acceleration across the whole ecosystem.”
In particular, the effect of this increased availability of funding has been felt at the seed and series A stages, where 1,095 out of 1,370 venture investment deals tracked by Google and Temasek were targeted.
“Now, 25 percent of companies funded [over the studied period] have been funded at series A. That’s a significant change,” he said. “New VCs have come into the region, plus our subsidiary Vertex – they’ve all played an important role in accelerating investment in series A companies.”
While that has been a boon for early-stage startups, it appears to have become tougher to secure growth-stage funding for those companies making the next step. Series B and C deals “dropped drastically,” with 94 recorded over the studied timeframe. Eight deals at series D and above were tracked.
“The problem now is the ‘valley of death’ has moved to series B and C,” said Sipahimalani. “As more companies and funds come into the region, I think that will change. But it is still something that needs to be bridged.”
A more pressing challenge facing Southeast Asian internet startups is that of talent, he added – in terms of both senior engineering expertise and “overall leadership talent to really manage a hyper-growth environment.”
“[Startups] can choose to hire people from overseas markets who have the experience, but they lack the cultural context.” On the other hand, regional hires may understand the local market a lot better than their foreign counterparts, but don’t have the business experience to match.
“[We may see Southeast Asians] who emigrated to the West, have gained experience there, who are encouraged by the growth of the internet economy in Southeast Asia and may be enticed to come back,” Sipahimalani concluded.
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