spending, report

State of company spending in Southeast Asia (2019)

November 19, 2019

Improved education, widening Internet access, increasingly affordable technology, and government support is resulting in the meteoric rise of “the Southeast Asian entrepreneur.” These entrepreneurs are starting businesses, getting funding, and spending big on scaling. Here are some of the biggest company spending trends across SEA.

Improved education, widening Internet access, increasingly affordable technology, and government support is resulting in the meteoric rise of “the Southeast Asian entrepreneur.”

That’s what an annual report on Southeast Asia’s digital economy—jointly published by Google, Temasek, and Bain & Company—found recently. According to them, the region’s digital economy is now worth US$100 billion, and will triple to US$300 billion by 2025.

This growth can be attributed to grants, tax exemptions, and laws which are intentionally designed to support rapid scaling, and savvy investors who are injecting billions of dollars into the ecosystem. Average deal sizes and overall funding amounts have increased since 2018, another report by Bain & Company states, signifying high trust in the market and hopes for the next unicorn—or perhaps even a decacorn.

Indeed, as of 2018, Southeast Asia is home to 10 unicorn startups, including Tokopedia, Go-jek, and Grab, and this number is expected to double within the next five years.

A comparison of the ten unicorns in Southeast Asia and the amount of funding each has received.

Unfortunately, for every full-fledged unicorn that successfully stretches its wings, about 70 other startups crash. Case in point: Singapore-based grocery delivery startup Honestbee went from raising a S$20 million funding round in 2015 to running out of money just four years later. And Uber famously exited Southeast Asia in 2018 after failing to win over the market.

Why do some companies succeed, whereas others fall hard?

A widely-shared study by CB Insights says that running out of funds is the second most common reason startups and SMEs fail. In fact, a whopping 80% of ASEAN startups in one industry burns cash at a rate of over US$100,000 a month.

Unfortunately, this money is rarely managed properly. Many companies are either burning too much of their funds and losing their runway far too quickly, or being too thrifty and failing to reach critical mass.

The startup ecosystem in Southeast Asia is healthy and conducive for SMEs and startups, but to fully take advantage of the benefits, companies need to be fully conscious of their business expenditures. Here are the top trends in startup and SME spending patterns these days.

1. Digitalization and telecommunication spending is increasing by US$13 billion each year

ASEAN has the third-largest number of Internet users in the world after China and India. To keep up, companies are investing heavily in digitalization. The UN ASEAN Investment Report 2018 found that cross-border investment in ASEAN’s digital economy is rising, particularly for sectors of e-commerce, digital content, Internet platforms, and digital solutions.

A map detailing different Internet penetration rates around the world.

Telecommunication investment in the region is projected to reach US$166 billion by 2030, growing at an average of US$13 billion per year. These investments are made to address growing data demand, increase broadband coverage and transition to 4G or 5G networks. Startups and infrastructure providers alike are building telecommunication infrastructure, upgrading technologies, establishing their own data centers, and developing new technology.

Startups aren’t the only movers in the digitalization trend. Many traditional companies and conglomerates are responding to Industry 4.0 in a number of ways:

  • They set up a digital division and digitize internal systems and procedures to improve efficiency
  • They use digital technology (e.g. e-commerce platforms and apps) as marketing tools (e.g. Salim and Aboitiz) and to support market expansion (e.g. Lippo through MatahariMall, Ayala Corp through Zalora and Charoen Pokphand through Makroclick). Some firms innovate or invest in new business areas such as in fintech (e.g. CIMB, Lippo and Ayala Corp)
  • They establish digital start-ups (e.g. Charoen Pokphand and Ayala Corp) and/or invest in third-party digital start-ups (e.g. Triputra and JG Summit), either directly or by setting up investment funds (e.g. Singtel through Innov8, Axiata through Axiata Digital Innovation Fund, Charoen Pokphand through Ascend and Lippo through Venturra Capital)
  • They invest and diversify their business to include more data-centric operations, digital solutions and downstream activities that use their telecommunication infrastructure and services

Sure, digitalization is a buzzword—and has been for the past few years—but it’s also a very real trend that is opening up new business and growth opportunities for ASEAN companies and communities.

2. 65% of Southeast Asian marketers are prioritizing omnichannel marketing above most other marketing strategies

The percentage of active social media users in Southeast Asia increased by 47% in 2017, a trend that continues into 2019. This increased mobile and internet penetration in ASEAN countries has resulted in a drastic increase in marketing spend in the region, specifically in Singapore, Indonesia, Thailand, Taiwan, the Philippines, Malaysia, and Vietnam.

The Southeast Asian digital economy is expected to grow massively within the next few years.

Source: https://www.visualcapitalist.com/southeast-asia-digital-growth-potential/

It’s important to note the type of marketing being prioritized. According to the Interactive Advertising Bureau Singapore’s marketing spend forecast, more and more consumers are using multiple online channels to access the content they need.

Because this ultimately drives up company omnichannel and digital marketing spend, Southeast Asian marketers in 2019 are prioritizing real-time marketing (65%) and omnichannel delivery and engagement (52%) above customer journey mapping (44%) and artificial intelligence (36%).

marketing concept priorities

It’s clear that an omnichannel marketing strategy is becoming more and more crucial for a business’ success in Industry 4.0. Omnichannel marketing has been found to boost purchase frequency by up to 250% and increase customer retention rates by up to 90%. Plus, companies that connected with customers through three or more channels earned an 18.96% engagement rate, whereas their single-channel counterparts earned just 5.4% engagement.

By crafting highly-interactive messages that account for unique consumer tastes, companies can better address an ever-changing market.

Overall, the ASEAN market for digital advertising is expected to expand by 13.93%, reaching $15.35 billion in 2026.

3. As companies expand across borders, business travel expenditures will more than double by 2025

Seeing as companies are regularly being told to “expand early” to other Southeast Asian countries, it’s no wonder ASEAN business travel spend is rising rapidly. According to Amadeus, an international IT travel provider, company spending on business trips is “expected to soar to $900 billion by 2025 from the current $400 billion.”

APAC travel spending for business purposes is expected to increase drastically.

But companies still face many struggles in the Asia-Pacific region. Many employees suffer from a lack of local language support for most booking tools and relentless travel schedules. Reimbursements and payments also cause major administrative headaches. And unclear company policies, if they exist at all, often incentivize booking less-than-ideal flights.

A McKinsey survey on Asian business travel habits found that, as a result, one in three business travelers “do not always strictly adhere to their company policy.”

Travel expenses can quickly add up. To manage possible cost-overruns, companies should develop clear guidelines and adopt approved company spending cards. These cards offer higher visibility into employee spending and are easier to track and manage than a plethora of paper receipts.

4. Startups that spend to develop their own proprietary technology and IP could reap up to 70% sales growth

Consulting firm Bain and Company says that investment in Southeast Asian startups is projected to rise to $70 billion by 2024. Billions of dollars are moving around in the ecosystem today—a majority of which is flowing into tech research, development, and innovation.

According to a study conducted by NUS Enterprise, however, not much comes after R&D. A research team may achieve a breakthrough, but that breakthrough rarely results in a product and compelling business case, explains director Dr. Wong Poh Kam.

“There’s a no man’s land where the work can’t be funded as research anymore but there’s no product ready for market,” he says. “We spend so much money in research but perhaps we should be thinking about diverting some of it into [actual product development].”

Startups that follow up on R&D by developing their own intellectual property (IP) achieve an average of 70.4% sales growth per year. In comparison, less innovative firms only earn 41% growth.

5. SaaS business expenses across industries could triple by 2023

Perhaps due to the high costs of proprietary technology development, SMEs and startups in Southeast Asia are increasingly turning to cloud software, infrastructure, and platforms as services. The Software-as-a-Service (SaaS), Infrastructure-as-a-Service (IaaS), and Platform-as-a-Service (PaaS) industry is expected to increase threefold, from US$26.0 billion in 2019 to US$76.1 billion by 2023.

Ecommerce retailer Zalora and online supermarket RedMart are among the growing list of companies that have opted for cloud SaaS and enterprise resource management (ERM) applications, especially in human capital management (HCM) and procurement applications.

These managed services improve business agility and speed by automating some of the administrative work related to running a business. They offer refined functionality and more direct control and visibility over logistics, IT, human resources, and more.

In an ADP research survey, nearly 80 percent of executives polled said workforce automation saved them up to 360 hours a year. And 59 percent of organizations say their investment in automated services ultimately led to reduced operational costs.

Scott Russell, president and managing director at SAP Southeast Asia, explains, “Most companies are beginning with a hybrid approach, adding cloud deployment on top of existing on-premise systems. Others started with cloud applications, as required by their business needs.

Competing and staying relevant requires prudent spend management

Only one-fifth of young Singaporean startups are self-sustaining and more than half are not yet cashflow-positive. In fact, 56.8 percent of startups are found to be “struggling”—they fail to generate employment and growth.

bills

There are a few ways to reduce the risk of running out of cash or failing to reach profitability:

  • Have a realistic budget
  • Do not spend on what you do not need
  • Understand your cash conversion cycle
  • Set clear milestones (MRR, # of customers, MVP, etc.)
  • Look for funding early—it can take several months to fully close a funding round
  • Always be aware of your company's spending with automated spend management tools
  • Emphasize organized and timely reporting and accounting
  • Invest in compliance
  • Work closely with accountants

Many founders have made a financial decision they regret. Southeast Asia’s business ecosystem is a world of great promise and dedicated support, but it’s also one where risk abounds. Mitigating risks and managing company finances effectively is crucial to ensuring that the breakeven point gets closer—not further away—with each passing month.

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