Is it Southeast Asia's turn after China?

Yes, it's our time to shine, even though it won't be in quite the same way as China when their economy took off into the internet stratosphere slightly more than ten years ago.

Source: Nick Nash, Managing Partner, Asia Partners, SFFxSWITCH 2019

Much of the hype about Southeast Asia is driven by structural factors and an understanding of history. GDP growth rates of more than 5% per year (see image below) will put Southeast at the 'above average' end of global growth distribution in a post-COVID era, and cause disposable income of Southeast Asian households to more than double. More than half of the population in the region is aged 35 and under, providing a demographic dividend to SEA amidst a rapidly aging China, Western Europe and the US. A young, rising middle class has been historically associated with large tech company formation in China, Korea, and Japan in the past.

SEA's estimated real GDP growth is consistently above 5% from 2021-2025 (Source: IMF)

Here are some quick facts that show you how bullish investors are about Southeast Asia:

• With 350m online users, Southeast Asia's internet economy is projected by Google and Temasek to exceed $240bn in value by 2025

• Some of China's biggest VC firms are opening offices in Singapore (including Qiming Ventures and GGV capital, which manage a combined total of $10.2bn)

• In 2019, Chinese investment in SEA startups increased eightfold and more, whereas VC investment in Chinese startups fell by more than 50% in 4Q 2019

To win big in Southeast Asia, one could either only target Indonesia, the fourth largest country in the world, or aim for the entire Southeast Asian region to become a truly regional company, like Grab or Gojek.

At this point you might ask - "Then why not just aim for the whole region? Well, it is a lot harder and there is a lot more complexity! A truly regional organisation requires a very unique organisational structure where a company springboards from one of the countries in the centre to the rest of the region. The closest analogy is Western Europe in 20th century which saw the rise of Unilever, Nestle, booking.com, etc. In this context, it looks like Singapore is becoming a springboard of choice into Southeast Asia. Singapore has long been a preeminent destination for setting up a regional headquarter to pursue business opportunities across ASEAN. More recently, big Chinese tech firms have made their moves to Singapore. Ant Financial, ByteDance and Tencent have all set up regional offices here.

Source: Article from Tech in Asia, published September 15 2020 by Doris Yu

Why do I say that the ASEAN region won't take off in the same way that China did so ten years ago?

That is because companies will have to spend most of their time localising in each of the ten ASEAN countries and understanding the consumer. While China internally is diverse, Southeast Asia is even more diverse - Mobile penetration is different, GDP per capita is different, and consumer tastes and channels are different. Turns out, Shopee can understand the consumer in a way that Amazon's most amazing database cannot solve, because a vast majority of its workforce is out there in the field doing field operations. Locals know how to design and market a game in Garena that will work for Southeast Asian audience. Garena's ecosystem has combined localised game operations, payments, eSports events, video streaming, content sharing, user chat, and online forums to grow its revenue tremendously, to the point that gaming Giant Tencent has granted Garena a 5-year right of first refusal to publish Tencent’s mobile and PC games across Southeast Asia and Taiwan.

Southeast Asia has cross border complexities that China doesn't know how to do, and Americans don't know how to do. This means that local companies are able to build successfully without worrying as much at being killed by the large multinationals that grew up in other countries. After a failed attempt to replace the management level in Lazada with Chinese employees, the strategy for Chinese tech giant Alibaba has become to invest in local players rather than operate in ASEAN directly. According to TechCrunch, Tencent and Alibaba have held business negotiations with startup companies in at least a dozen Southeast Asian e-commerce or Fintech businesses. These investments that we see in the public sphere (See below) are only the tip of the iceberg.

Tencent and Alibaba's investment wars in Southeast Asia. Source: Momentum Works. Read their awesome blog, the Lowdown, here.

To conclude, Southeast Asia is entering a golden age of rising affluence and demographic dividends. In finance terms, it is the next great market for Beta returns (as long as investment monies from China does not turn valuations too frothy to justify based on fundamentals). There will definitely be more Chinese companies and investors eagerly trying to enter this attractive market in the next decade. Although Southeast Asia is not quite on the same level as China yet, data and trends have shown that it is truly a region with a vast potential for economic and technological development. It's our turn to shine!