Southeast Asia’s digital economy is expected to reach $200 billion in gross merchandise value (GMV) this year, ahead of earlier forecasts, as the global pandemic boosts demand for online services. However, market players will need to use data to better understand consumer behavior to sustain growth as adoption of digital services increases across the region.

About 460 million internet users currently live in six Southeast Asian markets, of which 100 million have been online in the past three years, according to this year’s e-Conomy SEA report, jointly published by Google, Temasek and Bain & Company. The six countries – Singapore, Thailand, Vietnam, Malaysia, Indonesia and the Philippines – have a combined population of more than 600 million people.

Despite global headwinds including disrupted supply chains, geopolitical tensions and inflation, Southeast Asia’s digital economy was on track to reach $200 billion in GMV this year, three years ahead of forecasts made in the report’s inaugural edition in 2016.

The e-commerce sector continued to lead the group in terms of growth, forecast to reach 16% in GMV, although offline shopping has resumed in parts after the pandemic. Urban affluent consumers and young digital natives are the most serious adopters of digital services, representing 98% and 92% of e-commerce users respectively.

The report notes that market players, however, are shifting their priorities away from customer acquisition to focus on establishing deeper engagement with existing customers to drive value, loyalty and frequency.

This will prove critical as adoption of digital services matures and growth trajectories slow. Growth in new internet users, for example, reached 11% in 2020 and 10% in 2021. It is expected to slow further to 4% this year, with 20 million users going online for the first time.

As digital adoption matures, market players will need to better understand usage behavior across consumer segments to unlock additional freedom for growth, Google’s vice president for Southeast Asia Stephanie Davis said at the launch of the report on Thursday.

She noted that after years of accelerated growth, digital adoption is normalizing. E-commerce, for example, was nearing full adoption among digital consumers in the region’s urban areas, while take-up of groceries as well as on-demand video and music services was minimal as consumers reverted to their pre-pandemic habits.

Davies outlined key factors that would help sustain digital growth in Southeast Asia, pointing to the need for digital inclusion and for market players to establish a path to profitability.

She added that a robust data infrastructure and regulatory framework will be critical to strengthening the entire ecosystem, particularly supporting local small and medium enterprises (SMBs) as they expand in the region. The seamless cross-border flow of data and transactions, for example, will be essential.

Asked how Google balances growing data security and privacy concerns as companies seek to collect more data to better understand user behavior, she said the focus should not be on increasing the amount of data to collect. but on how existing data can be better used.

This, she said, can be achieved by collaborating with third-party vendors.

Davis, however, urged governments to reassess data sovereignty rules. Noting that data security can be built into a global infrastructure, she said that means storing information on local servers is not necessarily the safer option.

Growing data sovereignty requirements have also made cross-border transactions more complex. She urged governments to adopt a fairer approach and more consistency in the region’s data regulatory landscape.

Growth opportunities in untapped segments

To further unlock the potential of Southeast Asia’s digital economy, efforts must be made to attract suburban and lower-income consumers.

The adoption of e-commerce, for example, has spread to suburban consumers, while other sectors such as food delivery and on-demand music services remain predominantly urban practices. Since adoption in this segment is still nascent, there is room for growth.

in urban areas, where affluent consumers and young digital natives make up the largest portion of the digital economy, the growth opportunity will come from deeper engagement, said Bain & Company Asia Pacific partner and digital practice head Florian Hope.

This could come in the form of more frequent and valuable orders, subscriptions or cross-selling of services such as consumer lending. Uptake and spending by “budget-strapped” urban and suburban consumers remains lower, he said, noting that market players here will have to come up with more economically sustainable ways to serve these customers.

According to this year’s report, Southeast Asia’s digital economy is expected to grow twice as fast as total GDP by 2030, when it is expected to reach $1 trillion in GMV.

Singapore’s digital economy is projected to expand by 22% to reach $18 billion this year, with further potential to reach $30 billion in 2025. The country’s GMV growth will be fueled by e-commerce, which is the largest digital sector and is expected to reach $11 billion in 2025.

“As a technology hub and regional gateway for funding and talent, Singapore will continue to play a key role in the next phase of growth in Southeast Asia’s digital decade,” said Fok Wai Hung, Temasek’s Deputy Head of Technology and Consumer Affairs for Southeast Asia. “Singapore’s vibrant ecosystem provides an enabling environment to nurture the financial, natural, social and human innovations that are critical to the development of a sustainable digital economy.”

Hope added: “Singapore’s digital economy will continue its steady growth trajectory thanks to its position as a regional hub, against the backdrop of Hong Kong’s headwinds and digitization moves, including its Smart Nation initiative and strategic investments in key sectors such as digital finance services.’

He noted that competition in digital finance will further intensify, with growth to 2025 driven by the digitization of investment and lending through digital banks and fintech technologies.