By the Angsana Council
This article draws on key insights from the Angsana Council and Bain & Company collaborative report on Southeast Asia’s Pursuit of the Emerging Markets Growth Crown. It is supplemented with further research contributed by Sean Becker, Angsana Council Research Intern.
The traditional act of summoning a taxi with a phone call or flagging it from the roadside has become a distant memory. In its place, we now turn to the convenience of mobile applications, replete with green, white, or yellow icons, which seamlessly compare prices and summon transportation with a few taps. All across Southeast Asia, innovative companies leveraging technology are reshaping legacy industries that were once considered impervious to change.
“Tech Enabled Disruptors” or TEDs have established dominance across sectors like aviation, logistics, retail, banking, and transportation, underscoring their significance and exemplifying the seismic shift in the region’s economic landscape. The impact of TEDs is particularly pronounced across Southeast Asia given the ‘sweet spot’ it is in. Its relatively young demographic, and a population of internet users that have quadrupled in the last decade, makes this region inclined towards adopting new technology. The addition of 67 million new digital consumers is spurring the creation of new ventures and economic growth. With supportive public policies and sufficient capital, we should expect more exciting TED unicorns from the region.
Southeast Asian TEDs have become dominant in the business landscape, transforming informal transactions into organized platforms like e-commerce and capturing market share. In tandem, governments across the region have taken constructive steps to embrace entrepreneurship, with company registrations growing over the past eight years. The digital economy resulting from TEDs is projected to reach $1 trillion in GMV by 2030. There is an evident wealth of value creation to be further realized by Southeast Asian TEDs while in other regions less competitive government-backed companies have begun putting a drag on growth. Southeast Asian TEDs drive innovation, compelling traditional industry players to adapt or risk falling behind, enhancing the region’s competitiveness compared to other Asian counterparts.
One key area where TEDs have changed the economy’s most basic function is financial technologies (fintech), particularly payments. This sector benefits from the compounding effect of ‘super apps’, moving various physical infrastructures into an integrated platform connected by financial services. Big players like Grab and GoTo have diverse social media, food delivery, and logistics operations and are now delving into hegemonic financial services (including banking licenses). It should come as no surprise that in 2021, fintech was the largest sector by deal value and volume.
Figure 1: Dominance of fintech in deal volume
Increasing competition from TEDs has spurred competition and innovation across digital banking. Regional banks like DBS invest heavily in SMEs and lower service costs, promoting vertical integration. TEDs can offer benefits like inclusion, improved services, reduced costs, and enterprise expansion. In the face of widespread costs arising from disruptions in centralized payment systems, TED challengers pressure national champions to perform.
While these TEDs are revolutionizing payment and finances, the digitisation of payments also forms the backbone to the technification of sectors such as e-commerce and logistics. For example, by leveraging the region’s decentralized network of drivers, motorcyclists, and cyclists, TEDs have ushered in an era of logistics juggernauts such as Grab, Gojek, J&T Express and Ninjavan.
Perhaps rather surprisingly for Southeast Asia, marking a shift in the region’s tendency to prop up national champions and state-backed corporations, governments here have encouraged competition between insurgents to shore up domestic logistics capabilities. Southeast Asia is demonstrating a new model of spurring economic growth, embracing innovation through TEDs to reduce prices and increase efficiency. While these TEDs have already made enormous strides, regional momentum is swinging even more in their favor.
Abundant venture capital has supercharged the accessibility to available capital, with funding for Southeast Asian startups reaching over $24 billion in 2021. The region has minted over 50 unicorns to date. Investors have committed significant dry powder of USD 15.7 billion to TEDs and are banking on Southeast Asia’s burgeoning digital economy to emerge stronger from these headwinds.
Relying on long-term public capital is proving to be more challenging. Southeast Asian TEDs have struggled to sustain post-IPO returns due to weak and inconsistent public investments. Still, despite recent global headwinds, Southeast Asian IPOs show signs of rebounding, raising USD 3.3 billion in the first half of 2023 compared to USD 3.1 billion in the same period last year. This is in part due to the void left by Chinese companies withdrawing from larger markets like the US. An economic slowdown and homemade restrictions have shrunk China’s shadow, allowing Southeast Asian TEDs to attract foreign investors seeking emerging market exposure in a high-growth region.
Figure 2: IPO performance in Southeast Asia relative to other regions
Southeast Asia with a total population of about 690 million presents a market of similar value to India which has a population of about 1.43 billion. Where Southeast Asia can break ahead is by improving on fundamentals while bringing the region into a more integrated economic structure.
Southeast Asia continues to hold untapped economic potential due to insufficient skills development and inadequate infrastructure investment- two fundamentals for the development of a strong TED ecosystem. Greater investment into education, coupled with additional attention into STEM is needed to raise the talent competitiveness of the region that would enable the growth of more TEDs. Beyond traditional infrastructure projects such as roads and electricity provisions, governments particularly in Indonesia and the Philippines need to pay increased attention to providing digital infrastructure such as increased broadband connectivity.
Figure 3: Several Southeast Asian states continue to underinvest in infrastructure
Investors looking to invest into emerging markets continue to be daunted by the 11 separate economies in Southeast Asia which TEDs need to navigate before it can tap into its overall market potential. Baby steps in facilitating cross-border trade could be tracked in ASEAN’s establishment of cross-border payment systems through QR codes. The Digital Economic Framework Agreement (DEFA) aims to cultivate a more harmonized digital economy in areas such as establishing interoperability in digital trade and transactions, and developing a framework for cross-border data transfer and privacy standards. Southeast Asia could potentially double its projected value of its digital economy (from USD 1 trillion by 2030 to USD 2 trillion) if core aspects of DEFA are implemented. Harmonizing digital connectivity and supply chains is key to making Southeast Asia an economic powerhouse.
Technology is crumbling the old barriers. TEDs put pressure on traditional national champions to be more efficient and productive, and create new value. They spotlight the extant potential of the digital economy for Southeast Asia. So far, the growth experienced has come with little public sector facilitation (except in Singapore) but more can be done. If and when policies and infrastructure, both at the state and regional level, awaken to this potential, then the decade will be Southeast Asia’s.