Growth through consolidation in SEA

Consolidation is a natural and necessary phase for any industry, as companies compete for growth and market share, whether it’s more revenue or users.
    In a study of 1,345 large mergers globally over 13 years, the Harvard Business Review (“HBR”) has found that industries progress predictably through a clear consolidation life cycle. Recognising which stage your industry is in and factoring it into your strategy is critical, as it will affect the outcome of your company.According to HBR, there are four stages of the Industry Consolidation Life Cycle which will be explained using examples from the tech industry.
    Stage 1: Opening
    The cycle starts with a single startup in a new market. The opportunity attracts new players who quickly enter the market resulting in fragmentation. The robo-advisory space in SEA with startups and spin-offs from major financial institutions are currently in this stage. At this stage, companies focus on aggressively acquiring users and market share.
    Stage 2: Scale
    This stage is about pushing for quicker scalability through inorganic methods. Bigger players will buy up competitors. The industry will consolidate rapidly, and the top 3 players will start to emerge. India’s e-commerce sector is an example of an industry in stage 2. The industry has seen a series of acquisitions, mergers, and shutdowns. Flipkart’s acquisition of electronics retailer Letsbuy.com in 2012 for an estimated $25 million was a sign of the start of consolidation. India’s tech sector has gone through a wave of M&A in the last few years with a majority of them being e-commerce deals. Snapdeal acquired online recharge platform, FreeCharge in 2015 for an estimated $400 million. In 2016, Flipkart acquired Jabong at $70 million through its fashion arm Myntra.
    In SEA, certain verticals within the tech sector including e-commerce are already showing signs of moving into the consolidation phase. Alibaba’s acquisition of Lazada followed by Lazada’s acquisition of Redmart is a clear indication of Stage 2. The Chinese Internet giant through Lazada will continue to consolidate assets it needs to dominate the SEA e-commerce space.
    Stage 3: Focus
    The bigger companies that have emerged from stage 2 will now focus on expanding their core business and aggressively try to outgrow their competition. Mega deals and large-scale consolidation will take place. The ride-sharing industry is currently at this stage with Uber expanding into food delivery via UberEats. Uber and Didi also consolidated in 2016 in a US$35 billion deal with Uber taking a 20% stake in Didi.
    Stage 4: Balance and Titans
    At this stage, titans control the industry. Companies in this juncture have to defend their position by finding ways to grow their core business and create new growth drivers. Google restructuring into Alphabet is an obvious example of that. With growth in search advertising slowing, the new corporate structure allows its various moonshot companies from longevity search to drones, to operate independently and move faster.
    The Consolidation Curve Strategy
    Every company in every industry will go through these four stages either as a single entity or as part of a combined entity. With innovative and disruptive technologies, the rate of the cycle will get increasingly shorter. Therefore, it’s important that a company’s strategy aligns with the stage of its industry. Companies need to account for these external factors in their strategy in order to move up the consolidation curve, particularly in stage 2 and 3, which are periods of fierce competition and high M&A activity.
    The company that captures critical mass and move up the curve fastest will win, and slower companies with fewer resources will either be acquired or disappear.
    Reference: The Consolidation Curve by Harvard Business Review, https://hbr.org/2002/12/the-consolidation-curve
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