SINGAPORE, Oct 3 — With the rise of e-commerce, ride hailing and online gaming in South-east Asia, the region’s Internet economy could swell to US$300 billion (RM1.25 trillion) by 2025, three times its current annual size, a report by Temasek, Google and Bain said today.

In particular, Indonesia and Vietnam are the fastest growing digital economies in the region with average growth rates exceeding 40 per cent since 2015, said the "e-Conomy SEA 2019” report, which also looked at Singapore, Malaysia, the Philippines and Thailand.

Singapore, while being one of the smallest in the region in terms of both growth rates and population, is also "punching above its weight” with greater access to talent, a disproportionate number of tech "unicorns” — worth over US$1 billion — and people who spend more per online transaction, said Google South-east Asia managing director Stephanie Davis.

The 65-page study is the fourth in a series of annual reports published by sovereign wealth fund Temasek and Internet giant Google since 2016, in a bid to track the growth of the booming digital economy in the region. Bain and Company joined them in the latest report.

But across the region, including in Singapore, shortage of tech talent remains the main challenge that could limit the thriving Internet economy, even amid progress in financing, consumer trust, Internet access, logistics and digital payments over the years, said Temasek joint head of investment, portfolio strategy and risk Rohit Sipahimalani.

Upward trends in internet businesses

There are 570 million people in South-east Asia. Of them, 360 million are now connected to the Internet, about 100 million more than four years ago. Around 90 per cent access the Internet primarily with mobile devices.

The report identified four main sectors in the Internet economy in the region:

1. The US$38 billion e-commerce industry: online retail, digital marketplaces, online groceries
2. The US$12.7 billion ride-hailing industry: transportation, ride sharing platforms and food delivery services
3. The US$14.2 billion online media industry: subscription video and music streaming services, online gaming and advertising
4. The US$34 billion online travel industry: vacation rentals, flight and hotel booking services

E-commerce is the fastest-growing sector, growing seven times from the US$5.5 billion in 2015. It leapfrogged online travel in 2019 to become the largest sector in the digital economy, with five million orders submitted on average daily, said the report. E-commerce is also on track to hit US$150 billion by 2025, it added.

There are also five times more people who use ride-hailing services now, up from eight million in 2015 to 40 million in 2019.

"In the span of a few years, e-commerce and ride hailing have become an integral part of daily life for millions of South-east Asians, especially those living in big cities. They offer convenience, value and access to services and products that were previously difficult to obtain,” said the report.

Digital financial services

Beyond the four sectors of the Internet economy, the report said that digital finance businesses have also reached an inflection point, with financial technology (fintech) making it possible to reach out to South-east Asians with limited access to traditional banking.

Of the 400 million adults in the region, 198 million are "unbanked” — people with no bank accounts. Another 98 million are underbanked, which means they have a bank account but have limited access to credit, investment and insurance.

The report highlighted five types of digital services:

1. E-payments: Digital payments reached US$600 billion in 2019, and are expected to cross US$1 trillion by 2025. This will make it the payment method used for nearly half of all transactions.
2. Remittance: South-east Asians remitted around US$11 billion in 2019, with more than double — US$28 billion — expected by 2025.
3. Lending: There is a loan book of US$23 billion in 2019, which is on track for a US$110 billion loan book by 2025, due to innovations in consumer and business lending.
4. Investment: In 2019, the total market value of digital investments was US$10 billion, and may increase to US$75 billion by 2025.
5. Insurance: Written premiums for digital insurance reached US$2 billion in 2019, and are expected to rise to US$8 billion in 2025.

However, there will still be casualties among Internet economy businesses, including more established players, said Florian Hoppe, partner and leader of Asia-Pacific digital practice at Bain. One example of this is online marketplace and food delivery operator Honestbee, which is currently in financial trouble.

There are no secret ingredients to success — it takes good management and a viable scaling and funding strategy to avoid failure, he told TODAY.

Citing the example of embattled co-working space operator WeWork, Sipahimalani added that such cases require a fine balancing act between growth and profitability, while also having proper corporate governance. WeWork’s bid to go public revealed that the company had been loss-making.

"What people are saying is that they don’t want models that are focusing on growth and have no visibility on when you are going to break even,” he said.

What about Singapore?

There are five million Internet users in Singapore in 2019, which is nearly equal to its entire population of 5.6 million.

In Singapore, online travel is a US$6 billion industry and is still the largest component of the Internet economy, followed by the US$3 billion in ride-hailing, US$2 billion in e-commerce and US$1 billion in online media.

While Singapore’s growth may pale in comparison to Indonesia and Vietnam, this is due to the country’s smaller market, which is highly connected to the Internet with virtually zero unbanked persons. In comparison, the untapped growth potential in other countries comes from the unbanked populations, those lacking Internet access or living in rural areas.

It may not be the largest in terms of gross merchandise volume, but Singapore is still home to a large number of multinationals who chose the Republic as a means to access the region. It also has more tech "unicorns” than other countries except Indonesia, a rich start-up culture and strong access to talent, international or local, said Davis.

Financing the unicorns

Tech unicorns are companies that are valued above US$1 billion. There are 11 unicorns in the region, five of which are Singapore-based.