SINGAPORE (Dec 12): Southeast Asia’s internet economy has experienced unprecedented growth over the past year to exceed Google-Temasek initial research projections, with there to be over 330 million active monthly internet users by end-2017 – a 70 million surge in new users since 2015 at 13% compound annual growth rate (CAGR).

Currently, 90% of active users in the region are using the internet on their smartphones, spending an average of 3.6 hours per day on mobile internet, the highest proportion globally.

The Google-Temasek e-Conomy SEA report, which was released in May 2016, predicted for the region’s internet economy to grow to US$200 billion ($270.2 billion) by 2025, and that some US$40-50 billion in investments would be required over a decade to achieve that goal. 

This year has however seen Southeast Asia outpacing the 20% 10-year CAGR projected by Temasek-Google with a growth of 27% CAGR – and, according to the companies’ joint research findings o utlined in e-Conomy SEA Spotlight 2017, is “on a solid trajectory to exceed” the previous 2025 projections.

In particular, e-commerce and ride-hailing have grown the fastest at over 40% CAGR, with the former projected to grow to US$88.1 billion in 2025 from US$10.9 billion in 2017.

E-commerce sales have notably reached US$10.9 billion in gross merchandise value (GMV) in the past year compared to US$5.5 billion a year ago, driven by a surge of marketplaces where small-medium businesses (SMB) sell to consumers to mobile-first platforms such as from Lazada, Shopee and Tokopedia.  

As such, the research notes that Google Searches for top SEA e-commerce brands have grown more than twice over the past two years, with mobile internet users spending an average of 140 minutes per month on the region’s leading e-commerce platforms.

Meanwhile, ride hailing is estimated to reach US$20.1 billion in market size in 2025, from US$5.1 billion in 2017. The segment has experienced dramatic growth over the past two years with more than 6 million rides booked across Go-Jek, Grab and Uber in 3Q17, driven by 2.5 million divers in Southeast Asia alone.

Temasek-Google research however foresees ride hailing to grow at a more moderate pace over the decade over 2015-2025, given its projected growth of 23% growth per annum compared to e-commerce’s forecasted growth of 32% per annum over the 10-year period.

Online travel, which reached US$26.6 billion in 2017 on the back of increased consumption of airline and hotel online bookings, has also grown faster than projected, and is expected to reach 76.6 billion online bookings from 2017’s 26.6 billion.

In 2016, Google-Temasek identified a shortage in homegrown tech talent as one of the key challenges to unlock the growth potential of Southeast Asia’s internet economy. In the two entities’ latest report, it is highlighted that this challenge remains largely unsolved today, especially in the case of senior engineering roles.

According to Rohit Sipahimalani, Joint Head Portfolio Strategy & Risk Group and Head India for Temasek, this is because while locals might have a better understanding of Southeast Asia’s cultural context at the work place, they tend to lack experience in managing companies of a larger scale of over 100-200 people – while the vice-versa applies for foreign hires.

As such, Sipahimalani believes the best bets might be hires from Southeast Asia with experience working overseas.

Another persistent challenged faced by startups and smaller ventures is the availability of funding, especially those unable to raise funds beyond Series A/Seed deals. This is in contrast to Southeast Asian unicorns Go-Jek, Grab, Lazada, Traveloka, Tokopedia, Razer and Sea Ltd, which in total saw US$9 billion raised out of the US$12 billion of capital invested in the region since 2016.

Noting that six out of seven of these unicorns have strategic investors in China, Google and Temasek believe that China’s investment ecosystem would largely contribute to the region’s pace of growth in the near-term.

"Chinese companies have been very late stage investors in Southeast Asia. As the Southeast Asian internet economy begins to scale at fast phase, it becomes an attractive investment to a [broader group of investors]. We are going to see more sovereign funds, conglomerates [and other players] from all parts of the world," says Rajan Anandan, Vice President and Managing Director for Google SEA and India.

"As you see some of these companies progress, we [Temasek] will look at investment opportunities out there. As we see more successful stories out there, there will be more people interested in this phase,” adds Sipahimalani on the topic of later-stage investments.