A BIG CHANGE is under way in Asia’s technology industry. As investors avert their eyes from the government-imposed nightmare engulfing China’s internet champions, a cohort of South-East Asian counterparts is booming. Tot up the value ascribed by the market to just three listed and soon-to-be listed consumer-app giants with headquarters in Singapore and Jakarta, and the figure approaches a quarter of a trillion dollars. Add to that the $70bn or so combined worth of a whole field of new unicorns—privately-held startups worth $1bn or more—and South-East Asia is surely fulfilling hopes, long-held, that a big emerging market consumer-tech sector would rise outside China.
On December 2nd Singapore-based Grab, a consumer-technology firm, will list on America’s Nasdaq by means of a merger with a special purpose acquisition company (SPAC). The record-breaking SPAC transaction is expected to value Grab at $40bn. Another giant, GoTo Group, formed from the merger of Indonesia’s Gojek, a ride-hailing firm, with Tokopedia, an e-commerce company, will follow in the first half of 2022. Sea, largest of the three giants, and parent to regional e-commerce pioneer Shopee, was the earliest to list, in 2017. The company’s market capitalisation has risen eight-fold since the end of 2019, to $160bn, making it the largest listed company in South-East Asia.
The three companies are each some combination drawn from ride-hailing and food delivery, financial services and mobile gaming. The precise blend varies from firm to firm, but the same idea runs through the core of each. It is to bring hundreds of millions of consumers together into a network of services. These may be low-margin, but the transaction volumes in question are vast. The model is often referred to as a super-app, or app-cluster strategy. In their domestic markets the companies are already behemoths. With a fleet of over 2m drivers, GoTo by itself boasted total transactions of $22bn last year, equivalent to 2% of Indonesia’s GDP.
The prospects for South-East Asian consumer tech have been alternately hyped up and talked down over the past decade. Optimists, currently in the ascendant, point to a market of 650m people poised for rapid economic growth. Mark Goodridge, an equity analyst at Morgan Stanley, a bank, notes that online retail made up just 6% of retail sales in the countries of the Association of Southeast Asian Nations (ASEAN) in 2019, compared to around 15% in America and about 30% in China.
But sceptics note the region’s fragmentation. South-East Asia’s markets are anything but a contiguous economic bloc. Even in the biggest, like Indonesia, multiple languages are spoken, to say nothing of widely differing income levels and infrastructure capacity. That no doubt contributes to the huge losses that are being racked up. None of the big companies are reliably profitable. In the third quarter of the year, Sea’s losses widened to $571m, a year-on-year increase of a third. The two largest companies, Grab and Sea, have made a combined $17bn of net losses since the beginning of 2018.
The sea of red ink does not alarm investors. They demanded consolidation in order to make the market more orderly and investable, and, by and large, have got it. Mergers and acquisition activity in tech in South-East Asia exploded this year. By late November the volume of deals had already reached $61bn, equivalent to all activity for the past decade. Those transactions helped create the super-app strategy embraced so enthusiastically by consumers. “What customers want is deeper, faster digital solutions, which are not done in a fragmented way. They don’t want six wallets, they don’t want five e-commerce options and three food delivery companies,” explains Patrick Cao, president of GoTo Group.
The triumph of GoTo Group, Grab and Sea, of course, came at the expense of powerful American and Chinese rivals. Alibaba still has a local presence through e-commerce firm Lazada, but, having led only two years ago, the firm has slipped into the second tier of competitors. With around 137m visits in 2020, according to IPrice, an e-commerce data aggregator, Lazada was slightly less than half as popular as Sea Ltd’s Shopee, the regional leader (although it is losing considerably less money). Since Uber beat a retreat in 2018 (its operations were bought by Grab), no American company has built a significant presence in e-commerce or in ride-hailing.
As local firms see it, that is ample proof were it needed that a focus on localisation has borne fruit. In their telling, a lack of wealthy, homogenous home markets has forced them to tailor their products and services for specific places. For the most ambitious among their executives, it is a competitive edge that will work globally, too. The idea later would be to design slightly differing versions of their apps for different European markets and for America.
Consolidation and scale should in theory lead to profits. The firms can bundle services together, and different lines of business can complement one another. Ming Maa, president of Grab, notes that in the second quarter of the year, 66% of the two-wheeled drivers in Indonesia, Vietnam and Thailand were working on both delivery and transport, up from 58% in the same period in 2020. That lowers costs.
How soon will profits arrive? It is promising that Grab’s take rate—revenue as a proportion of the total value of rides taken or deliveries made—has risen from 9.5% in 2018 for mobility and 5.6% for deliveries in 2018 to 21.7% and 17.1% respectively in the third quarter of this year. The company’s preferred measure of profitability: adjusted earnings before interest, tax and depreciation relative to gross bookings, is chosen to flatter, but at least the 12% margin it yields for mobility is more than twice as high as Uber’s 5.5%. Grab’s argument that a lack of profitability is a choice linked to rapid expansion is not wholly unconvincing.
The three firms’ ambitions to loom large in finance, however, means a long diversion from the path to profit. Their aim is understandable. “Financial services is something every super app needs to have. You have a supply chain, you have a customer base, you want to reduce your own dependence on others’ financial services,” says Venugopal Garre, an analyst at Bernstein, a broker. But Grab’s financial-services ambitions will certainly drag on profitability, as Moody’s, a credit-rating agency, noted early this year.
South-East Asia’s tech boom is by no means isolated to large companies. There are 35 private firms valued at $1bn or more in ASEAN countries, according to research by Credit Suisse, a bank. Of those, 19 reached unicorn status this year. True, America and China already have hundreds of tech firms valued in the billions of dollars. But that is a relatively recent development, notes Nick Nash of Asia Partners, a private equity firm focused on the sector. The two countries only had ten such unicorns as recently as 2013 and 2014 respectively, before the numbers began to surge.
Far from the stereotype of cash-bleeding startups, some South-East Asian firms have been remarkably disciplined in fundraising. Mr. Nash uses the example of SCI E-commerce, which specialises in cross-border retail and helps international brands access South-East and East Asia. The company has become one of the region’s fastest-growing firms having raised less than $70m in funding. Its revenues have surged to over $100m in 2020. Unlike many, it already has positive cashflow.
And while the tech firms that have emerged in South-East Asia have done so only from a few sectors—ride-hailing, consumer e-commerce, food delivery and online gaming among them—the mix is broadening by the month. Listings by companies as varied as Singapore’s Doctor Anywhere, which offers video consultations with doctors, and Malaysia’s Carsome, an online marketplace for used-car sales, are in the offing.
For now, just as in America and China a few firms led the consumer internet for years, most attention is focused on South-East Asia’s leading trio—Sea, GoTo and Grab. First among equals is Sea, whose recent expansion outside its home region sets it apart. Sea’s highly-profitable gaming arm, Garena, is responsible for “Free Fire”, a wildly popular mobile game which gives the company a footprint globally that the other two companies lack. Its move abroad in e-commerce is no small beer. According to Apptopia, a Boston-based research company, Shopee is now Latin America’s most popular e-commerce app, coming from a standing start at the end of 2019. The company launched in Poland and Spain in September and October respectively, and has quietly launched in India, too.
South-East Asia’s tech champions follow a model that is flourishing elsewhere, too. As well as Latin America’s Mercado Libre in Latin America, South Korea has both Kakao and Coupang, with market capitalisations of around $50bn apiece. Given the turmoil in China’s tech sector, such firms are popular and likely to become more so. Take one leading fund, the JPMorgan Pacific Technology Fund, which has $1.5bn of assets under management. At the end of September it counted no Chinese companies at all among its top four holdings. Its largest single exposure, at 7%? The company called Sea, that is coming to epitomise Asian tech’s gathering sea change.
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Source: Business - economist.com
