South-East Asia shows the high cost of fast growth

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WITH China’s technology giants facing a plethora of struggles, South-East Asia was supposed to be the hip new market that offered a well of fast-growth companies. 

That’s coming at a heavy cost. Earnings reports from e-commerce and gaming provider Sea Ltd as well as food and deliveries giant Grab Holdings Ltd are a stark reminder that years of break-neck speeds have been largely driven by subsidies and marketing. 

That wasn’t a problem when deep-pocketed venture capitalists like SoftBank Group Corp and Temasek Holdings Pte Ltd were pumping money in during their start-up phases. 

But now they need to walk on their own. And they’re stumbling. 

Sea last year posted a 127% increase in sales driven by its Shopee online retail platform. Grab posted a less-impressive 44% rise as it continues to battle pandemic lockdowns. 

Crucially, though, losses widened for both Singapore-based companies. Although sales in Sea’s e-commerce division more than doubled in 2021, its cost of revenue for that sector also doubled, as did corporate-level marketing expenditure. The result is a widening of its net loss to more than US$2 billion (RM8.36 billion).

Grab, which listed on the Nasdaq via a special-purpose acquisition company merger in December, saw its loss expand 30% to US$3.6 billion.

Grab’s numbers are dramatic. While the company cut base incentives — the amount paid to merchants and drivers in commissions and fees — it drastically increased the total doled out to suppliers as well as to consumers (in the form of discounts and promotions). 

This is normal for a start-up that’s adding users hand over first and doubling revenue each year. It’s irrational behaviour when all that effort allows you to boost monthly traction users by a mere 3% in a year. 

Sea’s story is similar, and it has continued on in the same vein because it raised more than US$7 billion in debt and equity in 2021, taking total fundraising above US$11 billion over the past two years. 

So, while its 2017 stock market debut in New York means Sea is no longer a private company, its current strategy could best be described as a publicly-listed start-up. 

It can keep burning investor cash to chase unprofitable growth because there remains trillions of dollars of cheap money sloshing around the world thanks to a decade of quantitative easing. 

That’s not going to last. The impact of Russia’s invasion of Ukraine makes the size and timing of US-led rate rises uncertain, but their arrival is guaranteed. That could be a real problem if funding dries up, South-East Asian economies slow and revenue growth dips before they even have a chance to turn a profit. 

Some policymakers in the region are already shifting their focus toward battling inflation as it becomes a risk to their pandemic recoveries. 

Investors have already punished both companies for their profligacy — both are trading at around half of where they were at the start of the year — but that share slide might continue unless management quickly shows an ability to tighten the purse strings and display some fiscal discipline. 

In other words, they need to show that they can grow up. — Bloomberg 

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owner