The Southeast Asian internet economy is expected to grow to an estimated US$200 billion by 2025, driven by the growth of the first-hand e-commerce market, according to a study released by Google and Temasek, the Singapore government’s investment arm.
The first-hand e-commerce market, defined by the study as “the online expenditure on electronics, apparel, household goods, and groceries”, is looking at a compound annual growth rate (CAGR) of 32% over the next ten years, to reach about US$88 billion by 2025, with the potential to climb to about US$120 billion.
This marks a significant outpacing of offline retail, which is only looking at a ten-year CAGR of 7%.
Three Unique Factors are Driving Growth
“There are three factors unique to SEA that will drive growth. The first is the young population with about 70% below the age of 40, the lack of big-box retail, especially in the Philippines and Indonesia, and the rapidly growing middle class, which has a forecasted GDP growth of 5.3% over the next ten years,” noted the report.
These factors lead to more people gaining access to the Internet, and would also drive up the availability of products online. The study expects all SEA countries to have an e-commerce market worth more than US$5 billion.
Another driver of the internet economy in SEA is online travel, which is expected to reach about US$90 billion by 2025, with hotels and airlines making up 85% of this segment, with low cost carriers driving the majority of the growth in that segment due to prominence in SEA, as well as the higher online penetration. The remainder 15% will come from the online rides segment, which features Uber and Grab, with the growing number of riders driving growth in the subsegment.
The third highest driver for the internet economy will be online media, from advertisements and gaming, which will contribute about US$20 billion by 2025, and have been marked as highly profitable sectors.
However, the growth of the internet economy to its potential of US$200 billion still requires a push, namely about US$50 billion worth of additional investments over the next ten years, according to the study. This amount assumes that venture capitalist investments as a percentage of GDP reach similar levels as India, and that SEA’s GDP grows at a CAGR of 5.3%.
In addition to that, there are several more problems that need to be addressed, with the first being the lack of senior developer and CXO-level talent, which causes regional startups to rely on expat talent from China and the United States. The study proposed the implementation of new, tech-focused educational programs to create a future talent pipeline.
There are also no scalable e-payment alternatives at the time of the study, resulting in an increase of Cash-on-Delivery transactions, which would in turn increase the risk and cost to merchants.
Another matter that needs to be addressed is low internet speeds and penetration rate due to regulatory and geographical constraints, according to the study, which cited the Philippines as an example, noting that the country has the second slowest internet in Asia, due to the duopoly structure in place there. The study advocated innovative PPP Initiatives (Public-Private Initiatives) to make high-speed internet a commodity in SEA.
Logistics is another matter, with governments implored to invest and focus on improving road and rail networks, which are critical to a fast and efficient delivery system.
A final obstacle to be addressed is the lack of consumer trust, according to the study. At the time of the study, consumers were still wary of making transactions online, due to various security issues such as fraud. The study cited Indonesia, where orders from the country are 12 times as likely to be fraudulent as the global average.