In an increasingly unstable world – dealing with inflation, war, shifting supply chains, rising interest rates and likely recession – one of the most stable regions is Southeast Asia.
Why is that? A major factor is a longstanding encouragement of companies using digital tools to disrupt entire industries.
That’s the conclusion of a study produced by the newly created Angsana Council, a think tank organized by Monk’s Hill Ventures, a Singapore-based venture capital firm.
Co-written by consultancy Bain & Co., the Angsana paper* argues that TEDs – technology-enabled disrupters, which could be startups or incumbents dedicated to digital transformation – have played a critical role over the past twenty years in assuring Southeast Asia continues to grow.
“TEDs are the greatest force of progress in most developing countries,” the report says. This is because these companies improve other, more traditional drivers of economic growth, such as business creation, competition, investment, productivity, and infrastructure.
Digital spurs competition
There are two reasons that tech-savvy companies are more impactful than others.
First, they are changing the rules by forcing the traditional masters of business, such as tycoon-run conglomerates and state-backed champions, to accelerate their own innovation or risk being displaced.
Second, they are informally weaving cross-border markets and businesses, which for investors or partners makes Southeast Asia more of a “region” than just an amalgamation of neighboring countries.
A third point made later in the paper that these impacts are felt more powerfully in emerging markets because digital tech allows companies to leapfrog stages of development that occurred in the industrialized markets.
Let the challengers in
The heart of the study is a handful of case studies that illustrate these arguments. The paper looks at aviation, finance, logistics, and super-apps.
What these examples have in common is a surprising willingness by authorities across different countries to give challenger businesses a chance.
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This is part of the region’s response to the traumatic 1997 Asian Financial Crisis, which put crony capitalism in a bad light. Policymakers knew they had to put their economies on a better footing. It is nonetheless remarkable to see how willing they were to foster competition. It is equally notable how effectively challenger businesses embraced digital technology.
From 2001, Malaysia allowed AirAsia to launch, directly competing with the national carrier in the low-cost segment. Other governments quickly followed.
The rise of low-cost carriers forced incumbents to restructure, but the challengers weren’t just about low airfares. They were able to charge less because of their use of websites and apps to sell tickets and artificial intelligence to optimize operations. By 2019, the challengers boasted higher passenger volumes than the flagship carriers.
Increasingly this was enabled by fintech. More Southeast Asians used online or mobile finance, including for buying airline tickets. E-commerce and ride-hailing companies such as Grab and GoTo have acquired digital banking licenses. And incumbents such as DBS have aggressively pursued digitalization.
Regulators have been supportive of fintech, even when it involves startups eating away at traditional banks’ market share, or when it raises questions about consumer protection.
Similarly with third-party logistics and super-apps, authorities have recognized that challengers are more likely to grow the economic pie by servicing the rising middle class. Incumbents that adapt to this new breed of digital entrepreneur will also thrive.
Stability through disruption
Technology and disruption aren’t the only aspects the MHV/Bain paper touches on. It takes a broad sweep of economics, investment, and other policy areas. It finds that in some respects, Southeast Asia’s economic performance has actually been mediocre, compared to other regions such as Latin America, South Asia and Eastern Europe.
But Southeast Asia has been above all stable. Sometimes to a fault, with Malaysia and Thailand’s political ossification leading to performance setbacks over the past decade. It is vulnerable to a decline in global trade, but it is also well diversified in terms of trading partners, with many countries possessing metals and other natural resources in demand.
The best reason for optimism is that the region’s bureaucrats and ministers have proven ready to risk a little stability to allow disruptive startups. These have created a new class of wealthy entrepreneur and have forced family-owned conglomerates and state-linked companies to adapt.
Digitalization is creating networks of consumers across borders: think of aviation combined with payments and lending, and the cross-border spillover effects this creates. It has also raised the bar in terms of consumer expectations.
Digital finance has been a critical component of this change. Its role looks likely to accelerate.
*“Southeast Asia’s Pursuit of Emerging Markets Growth Crown: How Four Factors Could Step Up Southeast Asian Growth”, Angsana Council and Bain & Co, 2022.