Southeast Asia: path to profitability for digital companies

Digital companies across Southeast Asia are focusing on high-quality revenue and monetisation
With Southeast Asia’s digital economy poised to hit US$100 billion in revenue, Google, Temasek and Bain report on the opportunities for profitable growth

Profitable growth is the holy grail for digital companies – and Southeast Asia’s digital economy appears to be moving in the right direction.

Projected to grow 11% in 2023 to US$218 billion, with revenue from digital expected to break the US$100 billion mark, the region is showing an “unprecedented pivot towards profitability”.

That’s according to the latest e-Conomy SEA 2023 reported released by Google, Temasek and Bain & Company.

Covering six countries comprising Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, the report finds that despite a challenging global climate, the region demonstrates continued GMV growth, albeit slower than previous years, along with accelerated revenue growth.

SEA has weathered global macroeconomic headwinds with more resilience, compared to other regions around the world. GDP remains above 4%, while inflation has lowered to 3%. Consumer confidence is starting to rebound in the second half of 2023 after falling to lower levels in the first half 2023.

What's crucial about the SEA picture, however, is the noticeable shift in focus towards profit with digital companies across the region increasingly zoning in on high-quality revenue and monetisation.

“It is remarkable that both Southeast Asia’s digital economy GMV and revenue continued their double-digit growth momentum,” say Florian Hoppe, Partner and Head of Vector in APAC at Bain.

Florian Hoppe, Partner APAC at Bain

Building sustainable business models

As well as demonstrating the resilience of the region’s digital economy, it shows how the key players are making progress towards more health unit economics and sustainable business models.

“The shift towards profitability coupled with increased digital participation will propel Southeast Asia’s digital economy to greater heights, while driving social progress,” says Fock Wai Hoong, Head, Southeast Asia, Temasek.

Certainly, Bain’s 2030 view remains bullish given the region’s macro fundamentals and the dynamic digital space, with revenue growth and profit levels expected to continue to outpace GMV.

That doesn’t mean the region isn’t impacted by global headwinds, with private funding declining to its lowest level in six years after record highs.

The report suggests however that despite the recent dip in investor appetite, the region could be ripe for future investment with ‘dry powder’ growing to US$15.7 billion in 2022, a surge from US$12.4 billion in 2021.

“This shows there is fuel available to propel SEA’s digital economy to the next stage of growth.”

Digital financial services biggest opportunity

The report points to digital financial services as the top investment sector, with digital payments now making up more than 50% of the regioon’s overall transaction value.

“Digital lending is the single biggest driver of the U$30 billion DFS revenue due to high lending rates and consumer demand, as underbanked consumers and small businesses participate in the digital economy,” the report states.

Competition is rife, with pure-play fintechs extending their lending services to the underbanked segment, while established financial institutions are rapidly shifting their customer bases to digitalised services.

Singapore is expected to be the biggest digital lending market in the region through 2030, while Indonesia is the biggest digital payments market.

Among the other digital businesses that are successfully monetising the SEA digital economy, ecommerce, online travel, transport, and online media are seeing the biggest revenue growth – moving from user acquisition to deeper engagement with existing customers.

Fock Wai Hoong, Head, Southeast Asia, Temasek

Digital financial services remains biggest opportunity

The report points to digital financial services as the top investment sector, with digital payments now making up more than 50% of the region’s overall transaction value.

“Digital lending is the single biggest driver of the U$30 billion DFS revenue due to high lending rates and consumer demand, as underbanked consumers and small businesses participate in the digital economy,” the report states. And Singapore is expected to be the biggest digital lending market in the region through 2030, while Indonesia is the biggest digital payments market.

Competition is rife, with pure-play fintechs extending their lending services to the underbanked segment, while established financial institutions are rapidly shifting their customer bases to digitalised services.

Among the other digital businesses that are successfully monetising the SEA digital economy, ecommerce, online travel, transport, and online media are seeing the biggest revenue growth – moving from user acquisition to deeper engagement with existing customers.

Travel and transport among sustainable digital sectors

E-commerce revenue has reached US$28 billion, marking a 22% increase YoY, with GMV expected to reach US$186 billion in 2025.

The report suggests that to sustain growth and boost profitability, e-commerce companies should focus on growing the number of users and transaction sizes as well as delivering complementary revenue streams such as advertising and delivery services.

Online travel is on track to recover by 2024 as flight passenger volume nears pre-pandemic levels – with the sector’s revenue expected to reach US$14 billion, increasing 57% YoY; and transport is seeing a strong recovery too, reaching US$1.1 billion in revenue, a growth of 47%, with full recovery expected by early 2024.

Online media continues growth of 10% YoY with advertising and video streaming expected to remain the long-term revenue drivers – with the Philippines expected to have the fastest-growing online media sector in the region until 2025 and Thailand to be the largest market overall from 2023-2030.

Digital payments now make up more than 50% of the region’s overall transaction value

Opportunity lies in increasing digital participation and AI

While it’s true that high-value users continue to drive sustainable unit economics – with more than 70% of digital economy transaction values made by the top 30% of SEA spenders – significant growth opportunities lie in increasing digital participation, the report finds.

Non-HVUs present a 1.9X growth opportunity of HVUs and as consumer demand continues to grow, non-HVU appetite to increase spending will grow, provided “barriers such as the end to touch and feel products can be addressed”, the report states.

Digital inclusion has made inroads in SEA over the past years, but consumers beyond metros risk facing a widening digital divide. Addressing these gaps is the collective responsibility of all digital economy stakeholders.

“Keeping the focus on the digital participation gap and resolutely removing barriers such as supply and security issues to enable more Southeast Asians to become active users of digital products and services will help the region unlock further growth in the digital decade.” says Sapna Chadha, Vice President, Google Southeast Asia.

Finally, the report points to new technologies such as AI as key to helping digital companies achieve profitable growth.

As well as enhancing operational efficiency in areas such as inventory management and route optimisation, the integration of AI can increase deeper engagement and digital participation through personalised content recommendations in online media.

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