Blog

SOUTH-EAST Asia is fast emerging as an investment hot spot for artificial intelligence (AI) leaders such as Nvidia and Microsoft, which are ploughing money into cloud services and data centres. But the region’s own young tech companies are failing to capitalise on the boom.

While the world’s biggest companies are set to splurge up to US$60 billion over the next few years in South-east Asia as its young populations embrace video streaming, online shopping and generative AI, little is flowing to the region’s startups that have AI at their core. Investors are wary about betting on unproven entities, and the region has yet to show it can produce innovative companies that can scale significantly.

Venture investment in South-east Asia’s young AI businesses has amounted to just US$1.7 billion so far this year, out of about US$20 billion for the Asia-Pacific region as a whole, data from Preqin shows. Only 122 AI funding deals have taken place in South-east Asia in 2024, versus the Apac total of 1,845.

The disconnect is raising doubts about the emerging region’s ability to build up its private sector and compete with the US and China, the world’s AI leaders. Venture investors’ scepticism towards South-east Asia’s AI efforts is weighing on the growth potential of its entire home-grown tech sector.

Globally, investors are racing to tap the AI opportunity – but for now, their focus is largely on the US and China. The US snatched US$68.5 billion in AI funding in 2024, while China took up about US$11 billion, Preqin data shows.

On the surface, South-east Asia and its population of 675 million have what it takes: It counts more than 2,000 AI startups, which is more than South Korea and almost as many as Japan and Germany, a report by tech advisory Access Partnership showed. Singapore, the region’s major business hub, ranks third in the Global AI Index, scoring high on indicators including the number of AI scientists per million people.

But the broader region, with countries such as the Philippines, Indonesia, Thailand and Malaysia, is culturally and economically varied, complicating efforts to rapidly scale products and services. That has led to a perennial question asked by investors: Can local tech companies profitably compete on the global stage?

“The region’s diversity in language, culture, and infrastructure makes it harder to create large, unified data sets – something AI solutions traditionally rely on to scale,” said Jussi Salovaara, managing partner and co-founder of Antler, a Singapore-based early-stage venture capital firm.

AI investors are looking at so-called foundation models that underpin various services, the software engineering required to train and refine them, as well as the hardware enabling it all, said Sang Han, a partner at East Ventures. “All that is not happening at scale in South-east Asia,” he said.

The region’s entire venture capital industry is also suffering from a dearth of exits exacerbated by weak initial public offering markets, illustrating how difficult it is for Silicon Valley’s private capital-fuelled model to catch on in developing markets.

Private funding of companies in South-east Asia is set to drop to its lowest level on record, research from Google, Temasek and Bain showed, slowing sharply from pandemic highs as investors become more choosy and capital becomes more expensive.

Vastly different agendas

Local governments are not sitting still. Virtually all have developed their own national AI frameworks, with Singapore also providing funding to industry startups through its investment vehicles.

More is needed, and the region’s governments must work together to create a coordinated plan, said Kelvin Lee, co-founder of investment platform Alta.

“Countries in South-east Asia are focused on vastly different agendas: some on advancing high-tech sectors, others on improving basic infrastructure and living conditions,” he said. “This divergence makes it hard to prioritise moonshot innovation on a regional scale.”

Yet South-east Asia’s potential cannot be ignored. While its AI industry is sputtering, its digital economy as a whole is growing in the double digits both by revenue and profit, according to a Google, Temasek and Bain study. It has a growing middle class with rising incomes, and expanding mobile and Internet user bases. It is also seen as being relatively shielded from geopolitical risks stemming from US-China tensions.

South-east Asia’s AI opportunity may lie early in the value chain, including the collection and organisation of big data, said Neo Weisheng, a partner at venture capital firm Qualgro. “That’s what can help us build core assets that will lead to a competitive advantage.”

Some of the region’s more successful AI startups have emerged this way. Singapore-based Patsnap has invested in collecting, cleaning and structuring data that has become the backbone of AI models. Over the past 17 years, it built up large data sets spanning patent, chemical, drug and food databases, used by customers such as Nasa, Tesla and Walt Disney.

Now, the SoftBank Group-backed company is using that data to train its own sector-specific large language models and has added AI tools such as natural language processing.

Indonesia’s Alpha JWC, one of the venture capital firms bullish on the region, has teamed up with the Pijar Foundation to create a sandbox to help connect talent and budding AI startups to some of the country’s largest corporations.

“Through this programme, we have greater visibility on the different pain points large corporations face in integrating AI into their workflows, and the talent that’s available to solve these problems,” said Jefrey Joe, a partner at Alpha JWC.

Efforts like that are fuelling optimism in the local startup industry that there is still an opportunity to catch the AI wave. But the push requires more cooperation between all industry stakeholders, Joe said.

“Capital can only take us so far,” he said. “It’s all about the ecosystem – we need the regulator, governments, buyers, suppliers, consumers to come together.” BLOOMBERG