INSIGHTS | Southeast Asia: A choice between two models
Jul 4, 2019
A version of this first appeared in our members-only newsletter on June 29, 2019. Freely available on our site now, it soon won’t be. Become a member and read it first.
On June 21, leaders from the Association of Southeast Asian Nations (ASEAN) met in Bangkok. One large item on the agenda: how to maintain relationships with rivals US and China. Just 2 days before regional leaders met, another, very different, conference was held just a few blocks down.
In its fourth year, TechSauce is the largest tech conference of its kind in Southeast Asia. My second year attending the conference and my second time in Southeast Asia, I found myself discovering firsthand what many had told me before: the region is poised to see its tech industry grow faster than anywhere else in the world.
For many years, entrepreneurs and VCs in China have talked about the opportunities presented by SEA with many saying the region is like China 10 years ago. While we at TechNode don’t cover SEA directly, we have covered the entry of tech giants into the market extensively. That, however, doesn’t quite capture the energy, ambition, and hunger, as well as contradictions, I experienced this year.
Bottom line: Location and history link Southeast Asia equally to China, India, and the West. Now enjoying catch-up growth, the region is both poised for fast development—and gets to start fresh with little infrastructure, or dominant players, set in stone. The region will not follow the same path, or use the same companies, but the way it is like China 10 years ago is that it’s choosing among models that have gone before. So far, we can say Silicon Valley is winning social and search, Chinese-inspired (and funded) local players are winning e-commerce and payments, and transportation—like many other fields—is a local synthesis of both.
By the numbers:
- The OECD predicts the region’s GDP growth will average 5.2% between 2018 and 2022
- Cambodia, Laos, and Myanmar will grow the fastest
- In 2017, the Southeast Asian internet industry was estimated to be worth $50 billion
- Expected to be worth $200 billion by 2025
- Singapore has the highest rate of internet use (81%), while Laos has the lowest (22%)
Cultural crossroads: With historical, cultural, political, and economic connections to China, India, and Europe, Southeast Asia is a real meeting point for peoples and cultures. But its history is also one of fragmentation and disunity: Different groups with different cultural backgrounds and religions—Buddhist, Hindu, and Muslim—not only had typical sectarian conflicts, but were also divided amongst European colonizers. However, in 1967, the region came together to form ASEAN.
Turbulent history: Southeast Asia has often been seen somebody else’s chessboard—but it’s the region’s residents who ultimately decide which outsiders stay and which go. First colonized by European powers, then a battleground between Japanese and Allied forces, then a theater for the conflict between communist and capitalist forces, autonomy was hard-won for most states in the region. Even after all that, the region showed steady and strong GDP growth up until 1997 when the Asian financial crisis hit. While GDP growth did rebound, political turmoil ensued as governments transitioned to functioning democracies, territories gained their independence, and the region has had to adjust to a stronger China.
Demographic dividend: Unlike many other parts of the world, including China, Southeast Asia is not looking down the barrel of a grey haired gun. The region looks well positioned to have a strong workforce all the way up until 2030. 68% of the current population will be working age in 2025. As manufacturing moves away from China, many SEA countries are trying to shift their economies to emphasize industry.
As the population becomes better educated, more urban, and more affluent, demand for better (convenient, safe, high quality) products and services increases. In China, the mobile internet filled gaps in the offline world by providing affordable solutions to consumers’ pain points. Local players are applying this lesson to regionally specific pain points like banking.
Fragmented market: Unlike China 10 years ago, Southeast Asia is not a single country nor a single market. Broadly divisible between mainland and islands, the region has 11 distinct and independent countries. While ASEAN has done a great deal to standardize import/export policies, that hasn’t changed the fact that different regulatory regimes exist in countries with uneven development
A choice between two models: The Trump administration would like us to believe that we have to choose between a Cisco world and a Huawei world. This may be true places where market dominance or regulation keep one side out of the race, but in Southeast Asia, giants from around the world compete with local players as people vote with their attention. Facebook, WhatsApp, and Instagram have a place on people’s phones alongside Line (South Korea), WeChat (China), and Grab (Singapore). Southeast Asia does not carry the legacy of xenophobia seen in the West nor are their choices limited to only local players as in China. Instead, the tech industry is a reflection of the regions unique history, mix of cultures, and geographic positioning.
First move, US: More global in DNA, US tech champions Google and Facebook are the top choices for most users in their respective verticals. No one does search better than Google (sorry Baidu) and Facebook provides an easy way to get and stay connected. Instagram, with its visual appeal, has also done quite well, with many using it to supplement their activity on other platforms. Meanwhile, no one cares about WeChat.
Still room for China: In China, many expect easy victories in SEA due to similar culture—indeed, the Chinese diaspora, both ancient and contemporary, exert significant influence—but this hasn’t translated into large scale adoption of consumer solutions outside of payments and e-commerce. Both WeChat and Alipay are available as payment options in more and more places, but still haven’t seen wide-scale adoption outside of global businesses with an existing relationship (e.g., 7-11) or ones catering to Chinese tourists.
A local twist: Chinese players have done best as models—and funders—rather than competitors. “Copy to SEA,” often with Chinese backing, has created success stories, especially in O2O services like ride hailing and food delivery (Grab and Gojek, emulating the Didi/Kuaidi rivalry) while e-commerce is starting to take off, following a very China model.
While China’s out of the game in social, it’s got a healthy influence in transportation; hina-backed and -influenced apps dominate e-commerce and delivery. Alibaba has invested heavily in both Lazada (Singapore) and Tokopedia (Indonesia). Tencent is backing Lazada rival, Shopee. Both giants have, instead of trying to expand their brand and operations into the region, have invested in companies that started locally. JD and Amazon have taken an opposite approach, expanding with their brand and trying to hire locally. They, however, not only entered the game late but also don’t seem to be having much success, with JD even scaling back their presence.
Looking forward: The region is poised for rapid development and change, especially in the tech industry. Given uneven economic situations in the various countries, however, that development and change will vary. Singapore, while affluent and influential in the financial sector, is already a mature market. Indonesia, on the other hand, is one of the biggest markets in the region and still has lots of room to develop. While TechNode doesn’t have any plans to cover Southeast Asia directly, we will definitely be keeping the region on our radar.