SE7EN Digital Truths from SE Asia

In the past couple of weeks I’ve been meeting with some ‘Masters of the Universe’ in Singapore, Jakarta and Manila. Chairmen, CEOs, entrepreneurs. The topic of discussion has been the capital flowing into Southeast Asian tech. And in the past 48 hours, Rocket Internet’s results. Let me synthesise it all for you.

1. We’re rocketing towards a Golden Age

We’ve all read the stats and used the infographics with clients, in board meetings and so on: Growth, mobile, growth, mobile, growth, mobile. Commerce, commerce, commerce. For years and years to come, off a low base.

Some would say there’s a golden age coming in Southeast Asian digital commerce. That the pre-pubescent child is quickly becoming a young adult. But how big is it, really? Are SEA consumers really buying online? Rocket Internet’s Asian figures for the half year to 30 June 2014 tell us a lot.

Zalora’s 1.2m active customers placed 1.5m orders worth around US$70m generating revenues of US$55m in the six months, up 40%+ on the prior corresponding period (PCP), with an EBITDA loss of US$42m, a big reduction over PCP. Average basket was around US$46 – not bad! Lazada’s gross orders for the half were US$91m, up 200% on PCP, driving revenues of $59m and an EBITDA loss of US$50m – okay if you can fund it! (See Footnote 1).

By contrast Rocket’s smaller food service play, Foodpanda, produced US$11m of gross transactions and revenues of US$1.5m for the half which is a doubling in size but it’s accompanied by an EBITDA loss of US$13.5m. I’d be awake at night if that was my baby…

So there is strong growth and SEA consumers are buying online. But there’s also a lot of red ink, which is by now an accepted feature of the start-up journey. That’s OK in my book provided your start-up is very well funded and is trending quickly toward cash flow break even.

2. Money is streaming into SEA Digital

Anecdotally, capital is flowing into digital investments around SEA. I see it as a stream, but not yet a flood. The way it is flowing varies from country to country.

For instance in Bangkok and Jakarta, high net worth investors and family offices are driving start-ups through seeding incubators, venture funds and direct start-ups.

Venture funds have long been established in Singapore, in some cases with government support.

Telcos and traditional media companies are investing, hungry to reinvent themselves and establish new digital revenue streams.

So the capital is there, but by no means with the concentration or quantum one sees in Silicon Valley.

3. Old Telcos and old media are going to hurt if they aren’t already

Telcos and traditional media companies are scrambling to reinvent themselves before the legacy well runs dry. As they should.

Today’s huge gross margins are going to shrink. It’s written in the stars. Just look what has happened in developed markets like Australia, the US and the UK. The situation is urgent, and it’s going to be difficult.

I wouldn’t want to be a newspaper owner or traditional telco in SEA today. Consumer habits may not have caught up with the West yet, but they will, and the old guard really needs to be prepared.

Telcos may be at the epicenter of the mobile revolution but selling handsets isn’t going to cut it in future. To quote one telco CEO we met with last week, “my tech businesses are bleeding and my people don’t have the right background to manage them. But I can’t shut them down as that would be an admission of defeat.”

Of course, generalisations are unfair. But in principle only a handful of really sharp operators will see this cycle out in good shape.

4. Winners are grinners. It’s going to be a competitive bloodbath.

You might ask, who will the winners be? Web history shows that you want to be early, you want to be well capitalised, and you want to be No. 1 or No. 2.

When thinking about who the grinners are going to be, it’s hard to ignore the Rocketeers. Zalora and Lazada, whether you love them or not, are kicking butt and taking no prisoners.

Rocket has built a legion of smart digital entrepreneurs who have now left Rocket to launch their own ventures. It’s great to see them and non-Rocket ventures raising money and growing fast – for instance aCommerce/Ardent and Grabtaxi. And then there’s the Catcha team, forging its own path via ASX-listed companies. There are too many others having a go to mention.

Don’t forget the giants like Rakuten, eBay and Alibaba. Alibaba’s Chinese heritage makes it a contender to respect greatly, if not fear, in SEA. Alibaba has already bought into Singapore Post which, all things equal, could help transform SingPost/SP eCommerce. And Rakuten…the Japanese conglomerate that uses English as a first language, that just renamed its subsidiaries to Rakuten, quietly expanding everywhere: a veritable stealth bomber.

There’s little doubt to this observer that when the music eventually stops there will be many casualties – as there should be – but the winners are identifying themselves quite quickly and some are going to be extremely valuable businesses.

5. Be a fox, not a dinosaur

Everyone under 40 that I’ve spoken with believes that the next generation of Southeast Asian conglomerates will have a huge digital component.

The younger generation believes that the dominant conglomerates today are dinosaurs and will shrink in relevance over time, as more web-savvy, nimble ‘foxes’ rise from nowhere.

Some conglomerates are hoping that their young scions will build new, scale businesses alongside the old. Fox meets dinosaur. This seems to be especially prevalent in Indonesia, but less so in the Philippines where frustration is being expressed by the younger generation at the level of capital still being invested by the older generation in bricks and mortar in preference to digital.

My money is on the foxes and perhaps one or two smart foxosauruses that are visionary enough to put capital to work now.

6. Opposing viewpoints from the mall

There’s a genuine divergence of opinion on the future role of the mall.

The baby boomer Chairmen and CEOs I’ve met with tend to believe that luxury malls will remain relevant for decades. In cities where there are few local parks or places to relax, they will remain air conditioned havens to congregate and be seen, to shop and even pray (yes, some have been blessed as places of religious worship).

By contrast the younger generation believes that when enough SKUs are available online and 4G penetration is high, shoppers will flock to the web for variety and price discovery. They may continue to visit malls, but they’ll go for the F&B and a bit of shopping, but in the end they will shop there less. (I may not be Gen X or Gen Y, but I agree with them!)

The younger generation ‘gets’ the ascendancy of Rocket’s marketplaces and the relentless marketing spend and smarts required to dominate. In my meetings I got a strong feeling that the older generation has limited situational awareness and a high adversity to risk. And digital marketing spend. Which is very relevant to this conversation given that they still control the purse strings. They surely risk being left behind.

7. Face is a real killer

If ever there was a deadly sin that’s a big issue in Asia, it’s the concept of face. It’s a real issue. Money is being poured into ventures that will never, ever make it. But no one wants to pull the pin. I’m certain that Mr. Market will make that decision for investors and owners in due course.

The Seven Truths…

Dear reader, it’s surprisingly hard to maintain your attention in 1,200 words or less. So now you have my sound bite – the Seven Truths. Believe my truths or not – as you wish – but whatever you do, don’t be a dinosaur! And carpe diem – never a better time.

Footnote 1: Credit to Steven Millward at TechinAsia. I didn’t pour over the Rocket accounts in detail – took the numbers at face value, and didn’t probe to see whether the numbers are gross or net of returns, whether there’s any fancy accounting footwork, whether development is capitalised, EBITDA is better than operating cash flow etc. The truth is out there Mulder, and it could be quite different from what you see…

Roger Sharp is Chairman of Asia Pacific Digital, the region’s leading independent digital marketing and commerce group.

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