From e-commerce to smart manufacturing: Growth areas in South-east Asia for investors to watch

Underpinned by long-term demographic and structural trends, South-east Asia has recorded strong growth in online spending. From 2016 to 2021, e-commerce sales in the region multiplied fivefold. 

“This growth presents a bounty of potential investment opportunities across the digital economy ecosystem, from the entire logistics value chain to digital payment services and manufacturing,” says Ms Ecaterina Bigos, chief investment officer, Asia ex-Japan, AXA IM Core.

For example, in just a few years, Tokopedia has grown rapidly to become one of Indonesia's most visited websites, with over 90 million active users monthly as of 2023. This rise can be attributed to a combination of factors, including robust internet penetration, a growing middle class with increased disposable income and a young, tech-savvy population.

Tokopedia's story offers a snapshot of other dynamic digital economies in South-east Asia, which have witnessed a similar acceleration in recent years.

The popularity of e-commerce in South-east Asia was already evident pre-pandemic. The sector boomed during the global pandemic – accelerating forward at an altogether different pace as consumers were restricted from visiting brick-and-mortar retailers. Following the pandemic, it remained among the fastest-growing regions due to a relatively lower e-commerce penetration at 18 per cent, compared to China at 31 per cent and South Korea at 36 per cent. This figure for South-east Asia has the potential to grow to 23 per cent by 2027. 

In particular, the Philippines and Malaysia enjoy the strongest online retail growth worldwide, expanding annually by about 25 per cent and 23 per cent in 2022, respectively.

With the continued accumulation of wealth and technological advancements, the region is witnessing rapid transformation across all industries, creating a dynamic investment landscape around the broader digital economy beyond e-commerce. For instance, increased connectivity is fuelling exciting opportunities within fintech and digital healthcare systems that address gaps in these markets.

“With limited access to traditional physical bank branches and banking services like credit cards, the unbanked and underbanked population in Asia has gone straight to fintech solutions for payments and wealth management,” says Ms Bigos.

In Vietnam, for instance, where physical banking services are less accessible, the population has leapfrogged to fintech solutions for payments and wealth management, facilitating the growth of mobile payments. As stated in the Vietnam Innovation & Tech Investment Report 2023, fintech deals in the country remained resilient in 2022, accounting for 38 per cent of the total capital invested.

In the manufacturing space, South-east Asia is benefiting from US-China trade tensions that are reconfiguring global supply chains in the region’s favour. According to the Boston Consulting Group, the region’s new trade volumes could amount to US$1 trillion (S$1.35 trillion) through 2031. Concerned by geopolitical uncertainty, multinational corporations (MNCs) are seeking alternatives to Chinese manufacturers in specific parts of their value chains. 

Located at the heart of two major free trade areas, South-east Asia offers these MNCs strong manufacturing capabilities, global trade connectivity and low-cost structures. This trend presents opportunities for investors as the region continues to invest in Smart Industry 4.0 manufacturing solutions in areas such as next-generation robotics, cloud computing and advanced logistics services.

Indeed, South-east Asia’s share of global foreign direct investment inflows has risen from a pre-pandemic annual average of 7 per cent between 2011 and 2017, to 12 per cent in 2020 to 2021.

“While the region may be some way from fully realising its manufacturing potential – needing more efficient regional supply chains and infrastructure – efforts have already begun in countries like Singapore, Malaysia and Vietnam, with industry road maps and strategic plans,” says Ms Bigos.

She noted that smart technologies will help unlock the region’s manufacturing potential, with the manufacturing bloc of Malaysia, Thailand, the Philippines and Vietnam already accounting for 7 per cent of global manufacturing output.

Despite challenges surrounding the region’s relatively nascent digital infrastructure and skillsets, the potential for growth is undeniable. Says Ms Bigos: “Investors will play a key role in unlocking South-east Asia’s full growth potential, calling for strategic investment and innovation to capitalise on the unique opportunities the region offers.”