Google and Singapore sovereign fund Temasek published the latest edition of their annual report on Southeast Asia’s digital economy.

Google and Temasek have revised up their growth projections for the future of region’s digital economy in the four verticals including on-demand food delivery in the “ride-hailing” vertical, vacation rental bookings in “online travel,” and on-demand music and video streaming in “online media.” 

Southeast Asia’s online economy reached USD 72 billion in value this year, and is projected to triple to USD 240 billion by 2025 – 20% higher than the USD 200 billion Google and Temasek had estimated in their first report two years ago.

The gross merchandise volume (GMV) of Southeast Asia’s online economy accounts for 2.8% of the region’s economy – more than twice as much as in 2015. GMV is projected to reach 8% of regional GDP by 2025. For comparison, GMV accounted for 6.5% of GDP in the US in 

The first half of 2018 saw USD 9.1 billion in funding – including venture capital, private equity, and public market investment – pumped into Southeast Asia’s tech companies, compared to USD 9.4 billion for the whole of 2017. Southeast Asian tech enterprises have raised a total of about USD 24 billion since 2015.

However, USD 16 billion – or two-thirds – of that capital has gone to just nine companies: Bukalapak, Go-Jek, Grab, Lazada, Razer, Sea, Traveloka, Tokopedia, and VNG.

Looking at developments within the studied verticals, the report found that:

Ecommerce has been “the most dynamic sector” of Southeast Asia’s online economy over the past three years, having grown over 4x since 2015.

Indonesia’s ecommerce market leads Southeast Asia, accounting for USD 1 in every USD 2 spent online in the region and hitting USD 12 billion in value.

Online travel is “the largest and most established” of the four verticals, reaching USD 30 billion in gross bookings value (GBV) this year and heading towards USD 78 billion GBV by 2025.

* Online Flights is the largest and most established segment within Online Travel, worth billion in online bookings in 2018 and growing at 14% CAGR.

* Online bookings for hotels — estimated to be worth billion in 2018 and rising at 18% CAGR — have an even higher growth potential. 

* Online Vacation Rentals is emerging as the most dynamic segment in Online Travel, on track to exceed 0 million in bookings in 2018 and growing at 24% CAGR. Buy securing increasing consumer trust and supportive regulations, online vacation rentals have the potential to grow to almost billion by 2025.

An estimated 41% of all travel-related bookings in Southeast Asia this year have been made online. That’s up from 34% in 2015 – a rise attributed to improved user experience and heightened consumer trust in online platforms. As these trends continue to unfold, up to 57% of all travel bookings will be completed online by 2025.

From a country perspective, the Indonesian and Thai online travel markets are the two largest in Southeast Asia, with .6 billion and .1 billion in GBV, respectively, in 2018. The meteoric rise of Traveloka, the Indonesian Online Travel unicorn, has played a key role in accelerating the development of the online travel ecosystem in its own domestic market — the fastest growing in the region at 20% CAGR. Traveloka’s expansion in markets like Thailand and Vietnam is also contributing to accelerate the growth in the region. It is also worth noting how the online travel market in Singapore — with .5 billion in GBV in 2018 — continues to punch above its weight, supported by the highest per-capita spend in the region.

Ride-hailing GMV – which now includes on-demand food delivery – is at almost USD 8 billion, and is expected to more than triple by 2025. With 35 million active users and 8 million rides booked each day, the ride-hailing vertical has grown 4x since 2015.

Only 20% of Southeast Asians regularly use ride-hailing services, indicating there is still “huge headroom for further growth” in the vertical.

Changing ecosystem

In their original 2016 report, Google and Temasek identified six key pain points that Southeast Asia would need to address to fulfill its online potential by 2025. These were:

* Improved internet infrastructure to provide reliable and affordable internet access for more 

user

* Increased consumer trust in online marketplaces and transactions

* Better access to talent for tech companies

* Improved logistics network

* Wider adoption of digital payments solutions

* Greater availability of venture capital

According to this year’s report, significant progress has been made in each of these areas, but challenges remain.

The report states that as of June, there were over 350 million internet users across the region’s six largest economies – Indonesia, Malaysia, Singapore, Thailand, Vietnam, and the Philippines, known collectively as the “ASEAN 6.” This represents an increase of 90 million since 2015.

More than 90% of Southeast Asians internet users primarily access the net using their smartphones, underlining the importance of mobile to tech companies operating in the region.

Consumer trust 

Active user numbers across all four analyzed verticals – ride-hailing, ecommerce, online media, and online travel – have shot up over the past four years, indicating increased consumer trust in online services.

Google and Temasek estimate that the number of Southeast Asians who have purchased online through e-Commerce platforms has increased from less than 50 million in 2015 to over 120 million in 2018. During the same period, the number of active users of Ride Hailing services has increased from 8 million to 35 million. Online gaming — the most popular internet economy sector among Southeast Asians — continues to gain popularity, with over 164 million Southeast Asians playing online in 2018 — up from 130 million in 2015. Online travel also continues to see a steady increase of travel bookings completed online — up to 41% in 2018 from 34% in 2015.

Talent access

Google and Temasek estimate that around 100,000 individuals are employed by tech companies in Southeast Asia, with this number expected to double by 2025 should the online economy meet their projections.

They calculate that these companies will need to expand their teams by around 10% year-on-year – compared to a maximum of 3% in other areas of the economy – to meet these growth needs.

Venture capital

As mentioned above, total venture investment in the region has boomed in recent years. The report states that VC funding “has rapidly turned from being a challenge for the Southeast Asian internet economy ecosystem to being one of its core strengths.”

However, it’s worth reiterating that most of that capital is going to a handful of unicorns that have already established themselves in the marketplace. While funding is also making its way to Southeast Asian startups earlier in their lifecycles, investors remain wary about putting their money into growth-stage businesses in the region.