2023 – a time of living dangerously for region’s tech players?

2022 was not a good year for the tech sector across the globe. After two years of growth during the Covid-19 pandemic, 2022 saw valuations crash and employees get laid off. In South-east Asia, the story was much the same. The two most prominent examples are Sea, which ended 2022 around 80 per cent down from its peak a year earlier, and with 10 per cent of its staff seeking other opportunities, and GoTo, which ended the year some 70 per cent down from its initial public offer (IPO) in April, and having shed 12 per cent of its workforce. The year ahead for technopreneurs in South-east Asia looks to be one of pivoting, consolidation, and, for some, survival until better days.

The fundamentals for this region have not changed: a large, diverse, and young population driving one of the fastest economic growth paces in the world. Indeed, even though the Asian Development Bank recently revised South-east Asia's 2023 growth forecast down from 4.9 per cent to 4.6 per cent, this compares favourably to East Asia's projected growth of just 2.4 per cent.

Huge potential for growth

The economies of South-east Asia have huge potential for growth of the digital economy and the rise of middle-class consumers. A report by Google, Temasek and Bain & Company, e-Conomy SEA 2022, put the gross merchandise value of the region's e-commerce sector at around US$200 billion in 2022, an increase of 20 per cent from the previous year. The region also added 20 million more Internet users, to reach 460 million.

While South-east Asia's e-commerce growth had slowed in 2022, and will likely slow into 2025, the report is still projecting a strong 17 per cent CAGR (compound annual growth rate). The report believes that the growth will come mostly from Vietnam and the Philippines, as well as in new sectors such as SaaS (software as a service) and Web3, while e-commerce and fintech will continue to grow strongly. Vietnam's e-wallet provider MoMo, for example, is expected to grow from 10 million users in 2020 to 50 million by end-2023, while payment solutions provider VNPay is already available in more than 200,000 locations.

Across the region, with 70 per cent of the people still unbanked, the upside for fintech remains huge.

Web3 will be interesting for the region. Web3 is the Internet that we are familiar with, but extended and driven by blockchain and decentralisation.

While there was a cryptocurrency bloodbath in 2022 -- one that will continue into this year -- crypto is far from the only use for blockchain. Other use cases include distributed ledger technologies, which provide transparency for transactions and logistics such as in tracking agricultural products from farm to market. This alone could well help enable digital-averse SMEs across the region to join into the wider digital economy.

Experts believe that Web3 will be as disruptive as the previous "webs", which will also generate new opportunities for nimble startups and corporations. One key area expected is in the tokenisation of assets, be they real estate or real paintings, thus possibly creating significant investment and fund-raising opportunities. One early sign of this was UBS issuing US$50 million in tokenised debt securities in December 2022, in Singapore and Hong Kong. 2023 may be the year that Web3 starts to take off in South-east Asia.

Nonetheless, the many headwinds faced by South-east Asian economies in 2022 aren't fading away. The litany of woes is well known, from the war in Ukraine, to continued supply chain disruptions, to high inflation and high interest rates, to a China still reeling from uncertainties on how it would deal with Covid-19. Jia Jih Chai, co-founder and CEO of Rainforest, shed light on the near-term game plan of technopreneurs: "Founders are being prudent by managing costs in this environment to ensure there is sufficient runway till late 2024."

In December, Grab made such signals with announced budget cuts and hiring freezes, with a view to breaking even in 2024. In a company memo, CEO Anthony Chen said: "None of these decisions were easy but are meant to help us get leaner and fitter, as we accelerate towards sustainable, profitable growth ... More so than ever, we need to adopt a frugal and prudent mindset as we prepare for 2023."

In 2023, instead of using increasingly expensive capital to drive growth, tech companies will redouble their focus on profitability and customer engagement. The year will likely see significant merger and acquisition (M&A) activity, as smaller players are taken over or merge to present a stronger offering, while others will divest parts that no longer make sense, much like what GoTo recently did with Alfamart. Given the less-than-stellar share performance of tech companies in 2022, there may also be fewer IPOs in 2023.

Consolidation

Given that the region now has 50 unicorns and 2,000 startups that have raised more than US$1 million in funding, consolidation may be the path going forward. For the "soonicorns" -- startups with valuations in the hundreds of millions -- they will have to trim their expectations and give up more equity to get the same amount of funds, or figure out how to survive to 2024 and beyond. That implies more cost-cutting, market exits and layoffs. Those that still need more funds to survive the year will more likely tap existing investors than try to convince new ones.

Some of the headwinds buffeting the region also represent opportunities. For example, the ongoing trade war between China and now a number of countries, coupled with continuing Covid uncertainties in China, has given rise to new terms such as "friend-shoring" and "China plus one". These terms speak of moving away from an overreliance on just China as a manufacturing hub. Strong potential beneficiaries include India and Vietnam. Singapore has also been benefiting from money and manpower flows exiting mainland China and Hong Kong. The outflows of money and expertise will feed into the region.

So how will 2023 play out? The pessimist believes that if we aren't already in a recession, just one more negative event will take us there. The optimist believes that the region's strong fundamentals and entrepreneurial spirit will see us through. The realist is preparing for both scenarios.

Foo Maw Der is professor of entrepreneurship at Nanyang Business School (NBS) and director of Nanyang Technopreneurship Centre (NTC). Faith Teh is deputy director of NTC. Ronald Hee is research fellow at both NBS and NTC.

 

Source : The Business Times