Annual review 2017

Local heroes

Southeast Asia’s tech sector is booming as investors put their backing behind a growing band of highly innovative home-grown start-ups. And as businesses pivot to digital technologies to transform their business models, continued strong growth looks certain.

Brendan Hannigan

Partner, Allen & Overy

Sugianto Osman

Partner, Allen & Overy

Connell O’Neill

Partner, Allen & Overy


Southeast Asia is increasingly on the radar of financial and strategic investors and it’s easy to see why.

The ten economies that make up the Association of Southeast Asian Nations (ASEAN) – Indonesia, Singapore, Malaysia, the Philippines, Brunei, Thailand, Vietnam, Laos, Cambodia and Myanmar – represent a market of some 640 million people, the third largest in the world.

Although these economies are developing at very different rates, the combined output from the region already adds up to the world’s fifth largest economy with growth continuing to be propelled by significant productivity gains.

A young population and a rapidly growing middle class is driving consumer demand, with digital technology playing a central role in meeting their call for aspirational products and services. Mobile phone penetration is phenomenally high and internet usage is growing at a ferocious rate. Indeed, a Temasek/Google report last year predicted that the region’s internet economy, already worth USD50bn, is set to quadruple to USD200bn by 2025.

Yet while the region has for many years been a focus for intra-Asia investment, particularly from Japan, investors from elsewhere have been relatively slow to capitalise on opportunities in the region, in some cases thwarted by hurdles on inbound investment which are frequently subject to change.



Gaining momentumRead more

That has left a gap in the market. And – nowhere more obviously than in the tech sector – that gap has been filled by ambitious and imaginative home-grown innovators with a keen understanding of their local markets and local consumer needs.

“In the tech space we’ve seen a whole range of start-ups launch across the region. They’ve had the benefit of seeing what works in other parts of the world and are adapting services for their local market,” says Sugianto Osman, a partner in our Jakarta office.

“Those that have reached a certain size are now seeing a wide range of foreign investors approaching them to make investments.”

GO-JEK is a case in point. Indonesia’s first ride-hailing app grew quickly using motorbikes to negotiate Jakarta’s crowded streets. While it has since faced competition, it has moved way ahead by developing into a broad lifestyle business, progressively adding new increasingly popular services to its offering. Recent funding rounds have seen it attract investment from PE and sovereign funds and Asian strategic investors.

“The people behind these businesses are responding to a gap in the market and are just getting way ahead, developing, gaining momentum and getting to scale before the bigger players start to look in,” says Brendan Hannigan, A&O ASEAN corporate partner based in Singapore.

Sometimes the source of this burst of innovation is tied up with the mundane realities of life in the region, he notes. “If you live in a city like Jakarta, Bangkok or Ho Chi Minh, the business of getting from a to b is just very difficult. Promised government investment in roads, airports and ports will take time to deliver, so a lot of these innovative companies are coming in with their own local fixes.

“So if there’s a provider you can log into on your phone, order your product or service and have it delivered to you rather than sit in traffic for hours, you’re obviously going to do that. And once a solution has been found in one city, it can be replicated elsewhere across the region.”

The region is also proving highly fertile ground for fintech operators and for obvious reasons with so many people across the region remaining ‘unbanked’, says Sugianto. Here is a ready and highly connected potential customer base for digital banking services.

Business transformationRead more

But this is by no means a story just dominated by start-ups responding to consumer demands in novel ways. This is also a story of businesses across sectors and across the region harnessing technology to transform their operations, argues Connell O’Neill, a partner in our Sydney office.

“We are starting to see a maturation of businesses across Asia as they either catch up with the most advanced business models in other markets or, because they are relatively new and unencumbered, and can manage to leapfrog business models in other markets,” he says.

With China increasingly challenging the tech dominance of Silicon Valley, and with huge investment being put into the sector across the region, both in terms of finance and home-grown innovation, it is no longer U.S. brands that are in the driving seat, he says. “It is Asian brands that are captivating audiences, certainly for the consumer but also on the enterprise side of things.”

A proliferation of tie-ups, corporate accelerator schemes and joint-venture partnerships promises a boom in enterprise transformation across many sectors in the region, he predicts. And businesses are digging deep to make sure they stay ahead of the technology curve.

A telecoms company saddled with a host of legacy systems from the first generation of mobile services, or a bank looking to modernise its existing IT infrastructure to embrace new technologies like blockchain, are now likely to revisit the entire infrastructure to understand how it can deliver new benefits to customers.

“People are starting to realise that the pivot to digital has got to be total, because if you do it in a piecemeal way you are likely to get boxed in and left behind. That’s been the pattern in more mature markets for some time, but we are really seeing that kind of thinking in Asia now.”

Even big monopoly businesses in key markets are feeling a pressure to look again at the efficiency and sustainability of their business models, driven by the example being set by nimble and highly innovative companies, he adds. Increasingly, tech is being seen by these businesses, as by others, as an enabler rather than just a cost centre, with company CIOs playing a bigger and bigger role in revenue generation.

Changes in the regulatory landscape are helping to fuel the boom. Crowd-sourced equity funding is opening new routes to alternative financing, and more relaxed rules on foreign investment in key areas like e-commerce are opening the door not only to new funding but new ideas and services.

“Governments could be a significant hurdle depending on how they play their role in dealing with the disruption caused by these new technologies and players,” warns Sugianto. “They face significant pressure from incumbents to stop or delay the progress of the new entrants and need to strike a balance between competing interests.”

But he is hopeful: “I have to say the Indonesian Government has been doing a great job here, recognising that this is something you can’t hold back and trying to create the right regulatory environment for them to thrive.”

Singapore has also emerged as a hub for fintech development and is beginning to challenge Hong Kong, long seen as the darling of the fintech space, regionally. Government incentives and a willingness to provide a ‘sandbox’ environment where new technologies can be tested in a benign regulatory environment have helped that growth, and the example is now being followed in other ASEAN markets.

Political and economic cohesionRead more

Although efforts to create greater political and economic cohesion between the ASEAN countries have not moved as far or as fast as some predicted, there is a growing sense of the region being a distinct market in its own right.

The political dream of creating a single market – something along the lines of the EU – remains a distant one, however, despite some progress on equalising tariffs and trading rules.

Sugianto again: “You have to remember that ASEAN was created first and foremost to bring stability and peace to a once troubled region. It has achieved that and that has brought huge economic benefits in the process.

“Will a single market be created? I don’t know to what extent. Economies are at very different stages of development. Singapore is well ahead. Indonesia is growing at a very fast pace. Myanmar is only just opening its doors. So it remains to be seen to what extent countries within ASEAN will seek to protect their interests or open up.”

But maybe such political moves will eventually be overtaken by events in the digital economy, argues Connell. “Technology is one of the key factors driving the region towards a single market. People trading across borders, buying things with their mobile phones, making use of new ride-sharing or banking services, and businesses forming innovative technology partnerships, that’s a story that speaks more to me about a single market than any treaty put in place by lawmakers,” he says.

Home advantageRead more

As investment builds another question remains. Will the local tech businesses that have established such a strong presence be able to hold their own against challengers from other markets, if and when they join the fray?

“I think one of the features of businesses generally – and it’s not just in the tech sector – is that you have local operators with market knowledge, brand recognition and increasingly professional management. It’s quite difficult for a big foreign competitor to come in and just supersede them,” says Brendan.

“The more intriguing question is how will they build on their current strengths? While some might become buy-out targets, it is just as likely that others, as they achieve scale and grow their reach, will become acquirers themselves and investors in other markets.”

We see a clear role for A&O in this exciting period for the Asian market.

“We are right in the middle of what businesses are doing to reposition themselves for the future, whether that’s in the start-up world or in the whole area of business transformation,” says Connell. “We are determined to play a leading role and are doubling down on our investment to help clients see the benefits that investing in technology can bring.”

Changes in the regulatory landscape are helping to fuel the boom. Crowd-sourced equity funding is opening new routes to alternative financing... opening the door not only to new funding but new ideas and services.