Southeast Asia Shows the High Cost of Fast Growth

(Bloomberg Opinion) -- With China's technology giants facing a plethora of struggles, Southeast 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. were pumping money in during their startup 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 $2 billion. Grab, which listed on the Nasdaq via a SPAC merger in December, saw its loss expand 30% to $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 startup that's adding users hand over first and doubling revenue each year. It's irrational behavior 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 $7 billion in debt and equity in 2021, taking total fundraising above $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 startup. 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 U.S.-led rate rises uncertain, but their arrival is guaranteed. That could be a real problem if funding dries up, Southeast Asian economies slow, and revenue growth dips before they even have a chance to turn a profit. Some policy makers 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.

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