The 2010s could be called the golden decade of tech investment in Southeast Asia, with unicorns emerging and the VC ecosystem maturing. A natural question people will ask is what is next?
Covid-19 seems to be turning everything upside down, we should not forget that some fundamentals are not changing, even in “the new normal”.
The six most promising sectors in Southeast Asia are: Fintech, Ecommerce, Logistics, Consumer Brands, B2B, and AI.
Six most promising sectors in SEA over the next decade
Three of the six sectors (Fintech, Ecommerce, and Logistics) are already under the radar of investors. Many players in the sectors have been invested, some have reached unicorn status, and a few are listed or planning for IPO.
The other three sectors (B2B, Consumer Brands and AI) are emerging and we see a number of investments in 2019. Based on experiences from China, they are the next frontiers to make businesses more efficient, and to satisfy the more sophisticated consumers.
Now let’s take a closer look at some interesting facts in each sector.
Almost 300 million adults in the six major countries of Southeast Asia do not have access to adequate, or any, financial services. This shows a huge development potential of Fintech in the region.
Banking condition for adults in the six major countries in SEA (unit:million people)
Another evidence to show the great potential is the fact that of the $73 billion annual loan gap in Indonesia, only less than 2% was fulfilled by fintech by the end of 2018.
Credit disbursement through fintech in Indonesia
It is NOT easy to fulfill this potential or close this gap. However, if we put the time horizon as 10 years, it is enough to see great, successful companies emerge to tackle these challenges.
The ratio of online sales to the total retail value of Southeast Asia is only less than 4% as of 2019, where the same ratio in China is 25%.
This shows that ecommerce in Southeast Asia has plenty of room to grow, especially in the ecosystem out of the big first-generation platforms.
Online sales as percentage of retail value across the world in 2019
It is important to note that ecommerce is not just Lazada and Shopee, or Alibaba, and Amazon. It is a full ecosystem to transform retail. The potential is as big as total retail, of course.
Logistics is the backbone of not only ecommerce, but the economy in general. While a lot of technology investment has gone into last mile delivery, it is just a small part of logistics.
According to Logistic Performance Index by World Bank, Southeast Asia still needs a lot of improvement:
Logistic Performance Index by World Bank
As the social media natives grow in consumption power, there is a golden opportunity for new brands.
The availability of the following infrastructure makes it much faster to build new consumer brands:
Infrastructures for consumer brands building
Many of the above are just emerging (like influencer network) and/or fast growing (payment, logistics).
The likes of cloud kitchens also enable brand building in specific sectors through shared infrastructure and quick testing.
Most of the B2B platforms in Southeast Asia in the 2010s failed to gain traction. We believe they were too early for the market.
Experiences in China show that the key drivers for B2B to take off include:
- Intensified competition & slowed natural growth forces businesses to increase efficiency;
- Efficiency (and decreased) margins of B2C Ecommerce forces players to squeeze margins upstream;
- Higher labour cost and difficulties to recruit;
- Educated ecosystem partners (usually through B2C platforms they have already adopted)
In countries such as Malaysia, Thailand and Singapore, where the economy is relatively developed, businesses are already facing some of the issues above. We believe other countries, in their course of development, will start seeing similar challenges, spurring the growth of B2B.
A survey by IDC in 2018 revealed that the percentage of companies in Southeast Asia adopting any form of AI is significantly smaller than that of the US. Although we do not really believe in such surveys, but the big picture is still telling.
Percentage of companies adopting AI
We also noticed that the top features adopted in Southeast Asia are basic and borderline AI.
The benefits of AI adoption in efficiency and competitiveness are only obvious when the need is urgent, and technologies mature for the specific use case.
As algorithms and basic infrastructure are now commoditised, the essential factor for AI adoption are abundance of (structured & well tagged) data and availability of talent. The former can be solved with time (and urgency), while the latter money.
Each of the sectors mentioned above has shown great potential for development in Southeast Asia. However, startups still need to focus on user needs and experiences if they want to achieve long-term success.
With the adoption of new technology and the emphasis on innovation, more enterprises may surprise us in the future.