Southeast Asia’s digital economy is on track to hit $200 billion gross merchandise value (GMV) in 2022, three years earlier than was anticipated, said Google, Temasek and Bain & Company in its released new e-Conomy SEA report.
SEA’s digital economy is on course to achieve 20 percent year-over-year growth despite economic headwinds, said the report.
According to the report, digital economy sectors are following three growth trendlines. E-commerce continues to accelerate, food delivery and online media are returning to pre-pandemic growth levels, while travel and transport recovery to pre-COVID levels will take time.
The report also found that as digital adoption normalises, strategies shift from acquisition to engagement.
According to the report, out of SEA’s 460 million internet users, 100 million have come online in the past 3 years.
After years of acceleration, digital adoption growth is normalising. The majority of digital players are now shifting priorities from new customer acquisition to deeper engagement with existing customers to increase usage and value.
According to the report, e-commerce adoption is high across both urban and suburban consumers while services offered by the remaining sectors are mainly used by people living in urban areas.
Suburban adoption of sectors such as groceries, travel and music-on-demand remains nascent and offers headroom for growth. Amidst global macroeconomic headwinds, reduced disposable income, skyrocketing prices, and lower product availability, there is tapering of demand from SEA consumers.
The report also found that growth trajectories of sectors follow three distinct trendlines.
1) S-Shaped: Standing strong in its pole position, e-commerce continues to thrive and is expected to hit 16 percent GMV growth despite the post-pandemic partial resumption of offline shopping and a greater focus on profitability by platform players.
Marketplaces are shifting priorities from new customer acquisition to deeper engagement with existing customers to boost frequency, value and loyalty. Merchants are starting to improve profitability by reducing promotions and discounts while monetising value-added services.
2) Return to Trendline: Digital sectors such as food delivery and online media are facing slowdowns after peak periods triggered by the pandemic.
Food delivery returns back to trendline growth after tripling through the pandemic and is expected to hit 14% growth in GMV.
Among paid online media sectors, its GMV growth tapers to 9%; music and video growth returns to normality; digital ads maintain momentum; and gaming is seeing a consumption pullback.
3) U-Shaped: Transport and online travel sectors are expecting strong recovery, 43 percent and 115 percent year on year growth respectively, as mobility exceeds post-pandemic levels and international travel resumes.
However, sectors face headwinds such as increasing fuel prices, supply shortages, and continuing travel restrictions in high-value corridors (e.g. China, Korea, Japan), while consumer demand is suffering from skyrocketing prices. Recovery is expected to be gradual and take years to reach 2019 levels.
The report also found that digibanks race for mass and unbanked consumers while established banks fast-track digitalisation.
According to the report, double-digit growth is seen across all DFS sub-sectors – payments, remittance, lending, investment, insurance – due to enduring offline to online behaviour shifts post-pandemic.
Digibanks are gaining traction amongst young digital natives while high net worth and affluent customers remain loyal to established financial services providers given their existing deposit balances and multiple investments.
Due to a highly conducive growth environment, the DFS landscape has become increasingly diverse and competitive since 2019, especially with new entrants such as digibanks that are leveraging existing merchant and consumer networks to reach the unbanked and underbanked population.
Concurrently, established banks are building on inherent strengths and investing in efforts to fast-track digitalisation – and both digibanks and incumbents are fighting neck-to-neck for the attention of mass and unbanked consumers.
The report also found tech funding maintains strong momentum despite investors’ prudent disposition.
With a 13 percent growth in deal value from first half of 2021 to first half of 2022, technology funding remains robust and Southeast Asia continues to be a hotbed for tech investments, despite investors becoming more cautious in the current macroeconomic environment.
In private markets, venture capitalists (VCs) remain vested in the region with $15 billion dry powder to sustain deals.
However, early-stage and late-stage investments are heading in different directions – early-stage is flourishing while late-stage is on downtrend, impacted by dim IPO prospects.
Singapore and Indonesia remain primary investment destinations in 2022 while Vietnam, and the Philippines are seeing growing investors’ interest over the longer term.
DFS overtakes e-commerce as the top investment sector, with record funding of $4 billion in first half of 2022. Payments retain the lion’s share of DFS deal activities.
Over 80 percent of VCs surveyed expect to increase focus on healthtech, software as a service (SaaS) and Web 3.0, while edtech cools post-pandemic.
Meanwhile, SEA’s digital economy is expected to grow twice as fast as GDP in most Southeast Asian countries and could reach up to $1 trillion by 2030 if the full potential can be unlocked.
According to the report, fundamentals of the digital economy remain solid and there’s substantial headroom for growth in nascent sectors and unpenetrated markets.
Progress in digital economy growth enablers such as payments, funding, logistics, internet access and consumer trust have resulted in unprecedented digital economy growth.
To be able to continue scaling sustainably, SEA digital economy needs to drive progress of a new set of growth enablers.
Accelerating on the path to profitability and achieving digital inclusion of those living in suburban areas, coupled with progress on environmental, social, and governance (ESG) factors will be key to progress in the digital decade.
The report also notes the digital economy in Singapore is expected to grow by 22 percent to reach $18 billion this year, with the potential to reach approximately $30 billion in 2025.
This GMV growth will be driven by e-commerce – the largest digital sector that is expected to hit $11 billion in 2025 – a $9 billion recovery in online travel; and high digital adoption in e-commerce (97 percent) and food delivery (92 percent).
Meanwhile, Singapore alongside Indonesia remains one of two primary investment destinations in the region, with deal value growing from $4 billion in the first half of 2021 to $7 billion in the first half of 2022.
Digital financial services (DFS) continue to attract the most investor interest, making up 25 percent of the country’s investment pool at $1.9 billion in the first half of 2022.
With 50 percent of VCs expecting deal activity in Singapore to increase in the long term, it will continue to be a regional investment hub with a strong pipeline of start-ups and access to a wide variety of capital sources.
SEA’s top 10 e-commerce platforms web traffic rises 64% between Q3 2019 & Q2 2022