All of Southeast Asia’s largest platform companies recently reported second-quarter earnings. Some results were better than others, but Sea Group, Grab and GoTo continue to struggle with fundamentals. The latter two companies are not profitable, while Sea’s performance disappointed investors.
Simply put, all of these companies have tried to replicate the massive success of Alipay and Tenpay by building their own autonomous ecosystems, but the strategy doesn’t make sense in Southeast Asia, which is fragmented relative to China. Each country has different regulations and market demographics. The competition is extremely fierce compared to what Chinese companies faced in their early days.
Although Sea, Grab and GoTo appear to be doubling down on their respective ecosystems, there could be a limit to the viability of that approach as competition intensifies across all of their core business areas.
The unique conditions of the Chinese market
Alipay and Tenpay became dominant in China by becoming indispensable for Chinese users in e-commerce (Taobao and TMall) and messaging (WeChat). In their early years, the two had almost no serious competition, meaning they didn’t need to constantly spend to subsidize clients like Sea, Grab and GoTo. It is easier to retain users when there are no real alternatives.
It also means that profitability can be achieved sooner. Alibaba turned a profit in 2002, just three years after its founding. Tencent reached that milestone a year early, three years after its launch in 1998.
When Chinese companies went public, they were already established and profitable companies. Tencent went public in 2004 in Hong Kong and Alibaba in 2014 in New York. This latest IPO was the largest ever in the world at the time.
In contrast, Sea, Grab and GoTo went public when they were still losing money and would, at best, take several years to become profitable. The clock is ticking: Sea was founded in 2015, Grab in 2012, and the two companies from which GoTo was formed in 2021, Gojek and Tokopedia, were founded in 2010 and 2009 respectively.
Additionally, Alipay and Tenpay benefited from the relative homogeneity of the Chinese market, where more than a billion people speak the same language and have similar cultural habits. This meant that Chinese platform companies did not have to spend time, money and other resources developing customized products for customers in different geographies.
Mobility could be a flawed foundation
While Alipay and Tenpay built their respective super apps on e-commerce and messaging, with which they then integrated digital financial services, both Grab and GoTo are betting that they can thrive on ride-sharing. However, the viability of that strategy remains an open question. If we look at UberUBER and Lyft – companies that emulated Southeast Asian platform companies – lost, respectively, $8.8 billion and $1.2 billion in 2022, and have never been profitable. Ride-sharing is a notoriously challenging business in itself, never mind trying to tie it into a half-dozen other digital services.
Keep in mind that ride-hailing companies likely built their business models, at least in part, on the idea that driverless cars would end up making up a large portion of their fleet, allowing for a much lower cost structure. attractive. Remember Grab’s partnership with the Driverless vehicle startup NuTonomy announced in September 2016? You could be forgiven for forgetting. Grab also announced in 2018 that it planned to market their robo-taxi operations before 2022.
Of course, Grab will not agree with its mobility business. In its second quarter results release, the Singapore-based company reported that the gross value of its mobility merchandise for the quarter was $1.32 billion, up 28% from $1.03 billion a year earlier. Grab also said its GMV mobility had recovered to 85% of pre-Covid levels. Some markets are doing as well or better than 2019, including Malaysia, Singapore and Thailand.
Then there is the question of how well mobility fits with fintech. We have always been cautious about integrating the two. Just because a transportation app has your credit card saved in your e-wallet doesn’t mean you want that app to be your bank.
The fact that GoTo recently launched its GoPay wallet as a standalone app suggests that the Indonesian company is aware of this issue. “We hope Gopay reaches a wide audience, especially those who are not already users of Gojek and Tokopedia.” Patrick Walujo, CEO of GoTo Group he said in July.
Fintech is the brightest spot
The good news for Sea, Grab and GoTo is that even if they can’t be Southeast Asian super apps, their respective fintech businesses have big potential.
Grab’s fintech division performed quite well in the second quarter. Revenue increased 223% to $40 million thanks to better monetization of the payments business and higher contributions from loans, although gross merchandise value decreased 13% to $1.3 billion from $1.49 billion in the same period from last year. Meanwhile, loan disbursement grew by 47%.
As for GoTo, it is among the most recognized technology companies in its huge domestic market of Indonesia, where a significant portion of the population of 275 million has limited access to the formal banking system. According to GoTo’s own estimates, 97 million Indonesians are unbanked. GoTo has a foothold in the digital financial services market thanks to both its investment in local lender Bank Jago and its GoPay app.
Compared to Grab and GoTo, Sea’s fintech business is more mature, with full digital banks in Singapore, Malaysia, the Philippines and Indonesia. In it second bedroom, Sea’s digital financial services revenue rose 53.4% year-over-year to $427.9 million, while adjusted EBITDA was $137 million, compared with a loss of $111.5 million for the second quarter of 2022.
It will be interesting to see if SeaBank in the Philippines can replicate the success of the company’s Indonesian digibank, which posted a net profit of $18 million in fiscal 2022, in part because it successfully leveraged synergies between Shopee and the online bank. . Just like in Indonesia, Shopee is one of the largest e-commerce platforms in the Philippines.
Stretched too thin
Overall, Grab, GoTo and Sea may eventually have to downsize, spin off or exit loss-making businesses if they want to succeed in digital financial services, where they compete against many competing fintechs alone. All three companies spent years fighting for the fences when venture capital money was flowing freely and have yet to fully adapt to the new normal.
While banking may have synced naturally with existing digital services in China, that may not be the case in Southeast Asia. Sure, Shopee could be an exception, but even then, Shopee faces intense competition that Alibaba’s e-commerce platforms did not face.
Ultimately, Sea, Grab and GoTo fight against the commoditization of digital services that has occurred in recent years in Southeast Asia. The three companies do not own anything that is effectively irreplaceable, the way Taobao and Alipay were for Chinese online shoppers, or WeChat for Chinese people chatting with family, friends and colleagues.
For that reason, we consider that Tik-Tok, which is indispensable for the lives of many of its users, could be a real threat to GoTo and Shopee’s e-commerce businesses. In 2022, TikTok Shop expanded to six Southeast Asian countries: Singapore, Malaysia, Indonesia, Philippines, Vietnam, and Thailand. In recent interviews, Southeast Asian users said Asian Nikkeis “They are obsessed with the app,” as it simplifies the online shopping process with easily scrollable lists of videos.
Until they find a way to earn lasting user loyalty, Sea, Grab and GoTo will face constant threats from competitors that will cause investors to ask difficult questions about the viability of their respective business models.
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