Southeast Asia’s digital economy – from e-commerce to online media – is set to hit $218 billion in 2023, report shows

Southeast Asia’s digital economies are set to reach $218 billion in total value of transactions this year, jumping 11% from a year ago despite global macroeconomic headwinds, a new report by Google, Temasek and Bain & Company revealed.

“Southeast Asia has weathered global macroeconomic headwinds with more resilience, compared to other regions around the world … Consumer confidence is starting to rebound in second half 2023 after falling to lower levels in first half 2023,” said the report titled e-Conomy SEA 2023.

The yearly report analyzed the five main sectors of Southeast Asia’s digital economy – e-commerce, travel, food and transport, online media and digital financial services.

The report also revealed revenue in Southeast Asia’s digital economy is expected to hit $100 billion this year, growing 1.7 times as fast as the region’s total transaction value.

This is because firms are shifting focus from “growth at all costs” to profitability, in a bid to build “healthy” businesses.

“Southeast Asia’s digital economy is really in the midst of an unprecedented pivot towards profitability. There’s now a laser-like focus on high quality revenue and monetization, which, quite frankly, is incredibly healthy,” Fock Wai Hoong, head of Southeast Asia at Temasek, said on CNBC’s “Street Signs Asia” on Wednesday.

The report covered six major economies: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. It did not address the populations of Brunei, Cambodia, Laos, Myanmar, East Timor and Papua New Guinea.

“Keeping the focus on the digital participation gap and resolutely removing barriers to enable more Southeast Asians to become active users of digital products and services will help the region unlock further growth in the digital decade,” Sapna Chadha, vice president at Google Southeast Asia, said in the report.

Online businesses are moving from acquiring users at high costs, to deepening engagement with existing customers in a bid to steer focus to profitability, the report noted.

“Companies and entrepreneurs now realize that the best way to grow is not grow at all costs, and stretch this early stage mentality across a scale, but quite frankly, to transition as quickly as possible through early stage, growth stage and towards more financial sustainability,” Fock told CNBC’s JP Ong.

The report noted e-commerce platforms are focusing more on engaging high-value users, growing transaction sizes as well as looking to revenue streams such as advertising and delivery services to drive long-term growth. The sector’s gross transaction value is estimated to hit $186 billion in 2025, up from $139 billion in 2023.

As underbanked consumers and small businesses participate in the digital economy, consumer demand has driven digital lending – which the report said comprised the majority of the $30 billion worth of revenue in digital financial services. Singapore is expected to be the biggest digital lending market in the region through 2030.

Thanks to a post-Covid recovery, online travel and transport sectors are on track to hit pre-pandemic levels by 2024, according to the report. Despite a return to in-person dining and cutting of promotions, food delivery revenue – which falls under the transport sector – hit $800 million in 2023, jumping 60% from a year ago.

Thailand is seeing “significant momentum” where online travel is the main growth driver in 2023, growing 85% year-on-year.

Macro headwinds such as inflation and high cost of capital have caused the deployment of private funding to plunge to its lowest level in six years, the report noted.

Despite investors being pickier, “dry powder” increased to $15.7 billion at the end of 2022, up from $12.4 billion in 2021. The report noted the term refers to “the amount of capital that has been committed minus the amount that has been called for investment.”

“This shows that there is fuel available to propel Southeast Asia’s digital economy to the next stage of growth,” the report said.

To attract funding in this current economic climate, digital companies need to show investors that they have clear and viable paths to profitability.

Digital financial services remains the top sector where investors are deploying capital in, due to its high monetization potential.

The report also noted that nascent sectors in the region such as health tech, education tech and automotive are seeing “a growing portion of deal activity,” in a signal that “investors are diversifying portfolios.”