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:
- The online economy’s predicted 10-year compound annual growth rate (CAGR) has skyrocketed from 20 percent to 27 percent since last year’s study
- As a result, Southeast Asia’s internet economy is now on course to be worth more than US$200 billion by 2025, as Google and Temasek had forecast last year
Internet-based business accounted for 2 percent of the region’s GDP this year, and Google and Temasek now expect that share to reach 6 percent by 2025.
Digging down into specific sectors, the biggest growth since the previous study period was seen in ecommerce and ride-hailing, which experienced CAGRs of 41 percent and 43 percent respectively. They are also expected to see the most significant growth between now and 2025.
Southeast Asia’s online economy size (billions US$). Source: e-Conomy SEA Spotlight 2017, Google/Temasek
The report notes that it does not cover sectors such as mobile payments, online education, or digital healthcare, as these “are still in [an] early stage of development and monetization in Southeast Asia.”
$11b ecommerce market
Google and Temasek focus 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$10.9 billion in gross merchandise volume this year.
Southeast Asia’s ecommerce market size (billions US$). Source: e-Conomy SEA Spotlight 2017, Google/Temasek
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.
Speaking at the report’s launch event today, Rajan Anandan, Google vice president and managing director for Southeast Asia and India, 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$5.1 billion this year, with the estimated number of rides booked by users each day quadrupling over the same period from 1.3 million to 6 million.
Southeast Asia’s ride-hailing market size (billions US$). Source: e-Conomy SEA Spotlight 2017, Google/Temasek
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.
Southeast Asia’s ride-hailing driver base (period end, estimated number of drivers). Source: e-Conomy SEA Spotlight 2017, Google/Temasek
“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.”
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.
Anandan said that Southeast Asians spend more time on the internet using a mobile device than people from anywhere else in the world.
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.
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.
In their previous report, Google and Temasek had suggested that VC investment as a proportion of GDP would have to reach a similar level to that in India in order for Southeast Asia’s online economy to hit the magic US$200 billion mark.
However, US$9 billion of that went to the region’s seven internet unicorns – Go-Jek, Grab, Lazada, Razer, Sea, Traveloka, and Tokopedia.
Funds raised by Southeast Asian internet companies (billions US$), 2016-Q3 2017. Source: e-Conomy SEA Spotlight 2017, Google/Temasek
Where funding has been made available for smaller companies, it has been at the seed and series A stages, where 1,095 out of 1,370 venture investment deals tracked by Google and Temasek were targeted.
Fundraising by Southeast Asian internet companies (number of deals), 2016-Q3 2017. Source: e-Conomy SEA Spotlight 2017, Google/Temasek
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. Only 94 series B and C deals, and eight deals at series D and above, were recorded over the studied timeframe.
“The problem now is the ‘valley of death’ has moved to series B and C,” said Sipahimalani – something that appears to have been the view of many investors for some time. “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.