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Is consolidation on the horizon for Southeast Asia tech?

Source: Envato Elements

After witnessing the recent listings of several tech companies in Southeast Asia, investors watching the region might wonder if Southeast Asia’s tech scene has reached a new era where exits and consolidation activities will become the new normal.

We believe the following four factors could catalyze the region’s consolidation activities in the future.

1) Pursuit of inorganic growth by cash-rich tech startups

Large and late-stage tech companies have sprung up across Southeast Asia in the past few years after successfully raising numerous rounds of funding.

These more established tech companies have ample liquidity and are increasingly open to pursuing further growth and expansion inorganically.

The recent M&As in the region indicate two key strategic considerations that are influencing the acquisitions:

  1. Adding new product segments/verticals or markets into startups’ offerings
  2. Strengthening their existing offerings (verticals or markets)

For instance, Grab acquired the Singapore-based robo-advisory startup, Bento, in 2020. The acquisition was mainly driven by the strategic consideration of adding a new product segment because it helped Grab bring retail wealth management and investment solutions to its users and partners.

On the other hand, the acquisition of the Singapore-based home renovation platform, Qanvast, by Livspace in 2021 is an example of the second strategic consideration. This acquisition helped Livspace strengthen and consolidate its position in existing markets (Singapore and Malaysia).

We’ve further summarized some additional strategic acquisition examples by the region’s cash-rich tech companies in the following table:

As the region’s cash-rich tech startups become keener to seek inorganic growth, future consolidation activities would likely also pick up.

2) Expansion of large domestic tech companies from other regions/countries

Countries in Southeast Asia are culturally diverse and very different from each other despite their geographical proximity. The region has 11 countries with a wide range of cultures, ethnicities, languages, religions, economic development status, etc., which give rise to very different consumer behavior and market characteristics.

Southeast Asia is one of the most diverse regions in the world

As large domestic tech companies from neighboring countries and regions expand to Southeast Asia to build their regional businesses, the region’s diversity and differences pose challenges to their expansion since each country likely requires a unique greenfield approach.

Compared to building the operations from scratch, an acquisition is a much quicker alternative to entering the region and securing the necessary talent and expertise in the market.

In recent years, we have also seen a wave of Indian tech companies entering the Southeast Asian market and, in the process, snapping up startups.

For example, the Indian Fintech company, Razorpay, has indicated its plan to expand into Southeast Asia in last year’s capital raise. Following this, it made its foray into the region by acquiring the Malaysia-based Fintech company, Curlec, at the beginning of this year.

Another good example is the merger between ECAPS (India-based payment company) and Ayannah (Philippines-based digital financial services provider). The merged company now aims to offer affordable digital financial services to the burgeoning middle class in both South Asia and Southeast Asia.

As large tech companies from other regions continue to eye Southeast Asia for their international expansion, this would also fuel consolidation activities.

3) Consolidation in fragmented sectors

Although the region’s diversity creates challenges for tech companies from other regions and countries to enter, it gives space to smaller, homegrown tech companies to develop and grow.

Hence, some popular themes in the region (sometimes even within a country) have become highly crowded and fragmented, which might be ripe for future consolidation.

An example of this is the digital payments/e-wallets vertical. For instance, in Vietnam, it was reported that the government had granted more than 30 digital payment intermediaries and e-wallets licenses.

Major e-wallet players in the country include MoMo, Moca (partnership with Grab), ZaloPay (part of VNG), ViettelPay, and VNPay.

MoMo has emerged as a clear leader in this vertical. Its valuation reached above $2 billion at the end of last year after closing another round of a $200 million capital raise.

The company was reported to have 31 million users in Vietnam alone (~30% of the country’s total population). Given this, it isn’t difficult to see major players like MoMo consolidate their position further in the following years by acquiring smaller players.

Another theme that we believe could see future consolidation is the quick commerce (Q-commerce) sector. While consolidation has been going on over the past years in the food delivery platforms, the new golden child has been Q-commerce, which promises to deliver mainly groceries in less than 15–30 minutes.

Q-commerce is highly fragmented as almost every major tech company/food delivery platform in the region has started their operations during the pandemic — GrabMart, Pandamart, HappyFresh Supermarket, and many more. Besides, there are numerous stand-alone players in this vertical — Bananas, Astro, Dropezy, etc.

With the pandemic gradually easing into an endemic, the market opportunity for Q-commerce remains to be seen. Therefore, we could expect players that don’t have the right scale and efficiency to face difficulties and be swallowed up by the larger ones.

As leaders start to emerge in these fragmented themes, we believe consolidation activities in those verticals will also gain momentum.

4) Pursuit of super-apps

Since tech startups in the region look to enhance their user engagement and increase monetization means, many have started to aggressively develop their own ecosystems by having more varied business offerings, with a view to becoming a super-app.

As a result, the overlap between tech companies’ offerings increases, setting the scene for more synergistic consolidation and investment.

One aspiring example is Malaysia’s AirAsia, which recently changed its name to Capital A as it grows beyond a low-cost airline. Thanks to the travel curbs during the pandemic, the company has proactively expanded its services and offerings to develop the ecosystem.

Its super-app now offers services that include ride-hailing (AirAsia Ride), food delivery (AirAsia Food), Fintech (AirAsia Money), etc., across Malaysia. It entered Thailand last year by acquiring Gojek’s operations in the country. After launching its financial product marketplace and food delivery service in Indonesia, it has been eyeing to expand further.

VNG, being the first unicorn in Vietnam, is another aggressive contestant for the region’s super-apps. Initially started as a gaming company, VNG has expanded to include e-commerce (Tiki), a social messaging platform (Zalo), digital payments (Zalo Pay), etc.

In recent years, it proactively invested in other startups to enrich its ecosystem. For example, since 2021, it has invested in 6 startups to bring more services to its users, including a digital gifting and reward platform (Got It), a B2B e-commerce player (Telio), and a logistics platform (EcoTruck).

With more tech companies resorting to the super-app business model, we could expect more inorganic expansion and consolidation in the coming future.

Against the backdrop of shaky global equity markets and the ongoing geopolitical tensions, coupled with the catalysts highlighted above, strategic M&A exits and consolidation in Southeast Asia’s tech could definitely be on the horizon.

The article was published on TechCrunch om 16th June 2022

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