A Moment of Reckoning for ASEAN Tech:The Changing Economic Landscape Signaling the End of an Era

The unicorn high enjoyed by Southeast Asia for the last decade is wearing off in conjunction with market downturn. Source: Nikkei Asian Review

In their March report, the Indonesian super-app provider, GoTo, said that its 2022 net loss widened by 56% to 40.4 trillion rupiah ($2.6 billion) as the company continues to struggle to turn a profit.

The company was formed in May 2021 through a merger of Gojek, a ride-hailing and food delivery service provider, and Tokopedia, a local e-commerce platform operator. GoTo was among a raft of tech “unicorns” -- start-ups valued at more than $1 billion -- that had emerged in Southeast Asia before the pandemic. The significant growth of Venture Capital (VC) investments during that time has helped the region to give origin to more than 40 “unicorns.”

However, while 2022 was supposed to be a time of celebration for these unicorns, long considered one of Southeast Asia's symbols of innovation, there was no such fanfare in the stock market. GoTo’s struggles are a microcosm for the wider tech space, where the unicorn high is fading. 

The negative outlook is the result of a complex combination of factors: the largely hawkish policies of central banks, developed economies attempting to curb post-COVID-19 inflation (such as the rate hike by the US Federal Reserve), Russia’s invasion of Ukraine and the subsequent volatility in food and energy prices. While 2021 was an ideal year to be an early-stage tech entrepreneur and investor, 2022 is a whole different story.

But what now for 2023?

For one, as Southeast Asian tech companies brace for a tougher business environment, they are borrowing from the U.S. industry's latest playbook: mass layoffs. The region's largest platforms, like Indonesia's GoTo and Singapore's Sea, have reduced their total workforces by as much as 10% this year, with some companies signaling even further reductions.

There seems to be a consensus within the tech world: The rising cost of capital has led companies to seek sustainable growth as opposed to burning cash to acquire market share. However, while some companies are still contemplating on their next moves, some have already taken severe measures.

In addition to Indonesia's GoTo and Singapore's Sea, Singapore’s super-app operator Grab has also “reduced their head count” and begun "pausing or slowing hiring in various corporate departments" since the beginning of this year, Chief Financial Officer Peter Oey said during the company's earnings call this month.

Southeast Asia is made more vulnerable due to the fact that they are highly impacted by Western companies’ layoff. The wave of tech layoffs in the U.S. has ripple effects on their Asian bases. Amazon is said to have cut around 10,000 employees, and Meta announced 11,000 job cuts while Twitter has cut 50% of its global workforce.

This is deeply concerning to tech hubs like Singapore which houses 80 of the world's top 100 tech companies, with employees there awaiting their fate in Southeast Asian locations amidst the wave of layoffs globally. As most of these companies are headquartered in the U.S., their Southeast Asian arms will undoubtedly follow a global direction where growth plans are concerned.

While the global economic climate is the driving force for these layoffs, another reason for this seems to be that many high-growth tech companies hired too aggressively during the COVID-19 pandemic to meet an unprecedented demand for digital services and goods. 

As such, tech companies are now finding it tough to secure capital on the back of rising interest rates amid high inflation, and there is a dire need to consolidate their resources to restructure and build more relevant workforces. But how long will this trend continue exactly?

A fundamental point to note is that not all tech companies are the same. Low-interest rate periods like the pandemic gave investors more incentive to search out for higher returning and more speculative assets. This often led to valuations that were detached from reality, with the death of cryptocurrency an apt example. But there are other tech companies with marketable products and services that undeniably contribute to real economic activity and productive investment, especially relative to their earnings and market cap.

This is all subjective of course. The value big tech adds to the real economy is an ongoing debate. The reckoning, however, is that ASEAN highflying tech companies are finally prioritizing profitability over growth amidst the global economic headwinds. T

Tech start-up’s in Southeast Asia are still largely unprofitable, with names like Sea Group and Grab amassing billions of losses annually. Uber, which shares many similarities with Go-Jek (a subsidiary of GoTo), should not be seen as an ideal business model to replicate. Aside from many regulatory dust-ups around the world, it is fantastically unprofitable. According to its 2021 Annual Report, the ride-hailing company incurred cumulative net losses of $23.6 billion as of December 2021.

This brings about a key point -- tech companies in Southeast Asia need to create shareholder value and add value to the real economy while being profitable. With a population of 680 million with digital adoption nascent, there are direct and tangible links to the real economy that tech companies can tap into. Market frictions are substantial in much of the region, so these platforms do solve actual coordination problems by leveraging mobile technology to match buyers with sellers more efficiently (and in Sea’s case they also have valuable commercial IP in their gaming division).

Unsustainable and fast growth comes with a high price Source: Nikkei Asian Review

The abundance of cash in the last decade has allowed start-ups to stay private longer and continue receiving additional funds despite heavy losses. Gaining market share was paramount with the prioritization of speed over capital efficiency. This was because it was clear they would eventually have to become profitable; but they couldn't steer the ship because everyone else was doing the same. There is an evolution here with the shifting from strong to sustainable growth.

But whether mass layoffs make sense, or if it will leave tech companies too lean to function, only time will tell. Investors will be happy that tech companies are streamlining and not overspending. However, if the quality of services diminishes, questions of excessive cutting will undoubtedly be raised. Most tech companies in Southeast Asia are still bleeding money and those expecting to break even will take time.

As Indonesia’s tech champion GoTo remains in the red, it is placing its focus on profitability. However, caution is a tough watchword for young tech companies in fast-growing, competitive markets, especially with it being vulnerable to higher outlays by the competition. In many ways, GoTo can be seen as a proxy for the ASEAN digital economy overall, with the almost impossible dual prospect of cutting costs and growing market share.

It is a tough balancing act that has no universal solution. Only time will tell whether defending market share or regaining growth momentum will be the way to go. One thing is for sure though: The unicorn high of the last decade has worn off, and ASEAN tech must now confront a much grimmer reality where investors prioritize profit over growth.