When the pandemic hit Southeast Asia, its impacts destabilised nearly every industry, but it also brought together the ingredients that have enabled the region’s digital economies to flourish. Since early 2020, adoption of ecommerce and digital payments have soared beyond even the most optimistic expectations, and that growth shows no sign of stalling.
According to the most recent edition of Google’s annual eConomy SEA report, written in partnership with Temasek and Bain & Co., ecommerce adoption surged 75% in 2021, especially in urban Southeast Asia. Food delivery services saw their business activity rise by 71% within the same period.
Exhibit 1: Sectors leading Southeast Asia’s digital economy growth
The widespread shift to online services has led to a concurrent rise in the use of digital payments. Compared to 2021, gross transaction value of online payments in 2022 rose 14% to $806 billion in 2022. Post-pandemic, the fintech industry will likely continue to make significant inroads as offline-to-online behaviour sets into a “new normal” for consumers everywhere.
Exhibit 2: Digital financial services ($ billion)
Both ecommerce and financial services are among the industries that are leading Southeast Asia toward achieving their “digital decade.” Others include transportation & food, online travel and online media.
Deep-diving into Southeast Asia’s leading digital segments
These incredible growth margins cannot overshadow the truth that most industries did suffer a post-COVID hit, from which many are still recovering. As a result, industries’ recoveries have been uneven, their trajectories determined by a number of pre-pandemic fundamentals and current headwinds.
Take for instance the ecommerce industry, which is currently in the midst of an S-shaped recovery, following on from the rapid pace of adoption in the immediate wake of the pandemic. Adoption has cooled somewhat, but remains robust.
Exhibit 3: Expected growth trajectory
In comparison, food delivery and online media are returning to their pre-pandemic trendlines after two years of outsized growth as consumers return to public life and in-person experiences. Travel and transport will remain laggards for some time, especially considering the dramatic plunge in growth they experienced with the onset of COVID-19. The report notes these two industries have a way to go before they achieve full recovery, as suggested by their U-shaped recovery.
These industries will inevitably suffer from drops in growth, especially as global economic headwinds make themselves felt and some spending moves back offline. The potential slump will likely be mitigated by the continued growth of online retail which will continue to gain ground, especially in the realm of grocery items. This year, grocery items are expected to grow at a higher rate than non-grocery items, though this will likely even out over the next three years.
Exhibit 4: Southeast Asia e-commerce GMV ($ billion)
After nearly three years of upheaval, online travel is recovering throughout the region, although a full-recovery will be a years-long effort. As borders reopen and quarantine requirements loosen, “revenge travel” is taking root in Southeast Asia in line with global trends. By 2025, the trend will drive higher spending levels in terms of hotel, airlines and vacation rentals booking than previously recorded in 2019.
However, demand will remain dampened due to “choked” inflow of travellers from mainland China, Japan and Korea, the biggest sources of high-value tourism demand in Asia Pacific. International travel is still eking its way forward, but domestic travel has rebounded, especially in Malaysia and Indonesia.
Exhibit 5: Southeast Asia travel GMV ($ billion)
Unlike other segments, the online media and entertainment (video, music, gaming and ads) industries have witnessed a slowdown in growth after the pandemic-induced surge in adoption. While online video and music-on-demand have come down to realign with historical trendlines, gaming is facing a 6% drop in engagement, though this growth is expected to return with time.
Digital ads, on the other hand, have remained an outlier by maintaining momentum post-pandemic. However, economic headwinds such as higher inflationary pressure could exert a downward impact on the industry in the near-term.
The report attributes the sluggish growth of video-on-demand to low penetration among non-affluent consumers. More affordable subscription plans and localised content could bring those numbers up, given enough time.
Exhibit 6: Online media GMV ($ billion)
The report also highlights several nascent sectors that are in the early stages of an accelerating trajectory: healthtech, software-as-a-service (SaaS) solutions, Web3 and edtech. Within the next decade, venture capitalists expect deal activity to increase by a staggering 87% across both the healthtech and SaaS sectors.
For healthtech and SaaS, access issues are key drivers of increased activity in these segments. Especially in light of the pandemic and rising costs of living, healthtech adoption is seen as a solution to enabling access to lower-income groups. SaaS products with embedded finance solutions are cultivating interests among investors as Southeast Asia’s startups begin maturing and demands for real results come to fruition.
Though many of these established and burgeoning segments will continue to find headroom to grow, the report warns that as Southeast Asia’s digital economies mature, a shift in priorities is taking place. Investors and companies are increasingly focusing on transforming customer acquisitions into a matter of quality over quantity, especially as local customer demands become more sophisticated.
In order for these segments to achieve recovery and leap into the next “digital decade,” more effort is needed to better understand customer behaviour shaped by the pandemic and the wider economic landscape. Doing so will ensure Southeast Asia can unlock new strategies for sustainable, long-term growth.
