McKinsey Quarterly

Addressing society’s pain points: An interview with the CEO of Ayala Corporation

Jaime Augusto Zobel de Ayala reflects on Asia’s imperative, and his own, to find inclusive and creative solutions to complex and uncertain challenges.

For more than three decades, Jaime Augusto Zobel de Ayala, chairman and CEO of the Philippines’ oldest conglomerate, Ayala Corporation, has overseen a diverse portfolio of companies that includes real estate, banking, telecommunications, water, healthcare, and power. His tenure has been marked by a conviction to orient the company toward what he calls society’s “pain points.” From the start, Zobel has sought to prioritize access to housing, electricity, medicines, and water throughout his country and create conditions where great ideas can flourish. In 2017, the UN Global Compact named him as one of its ten Sustainable Development Goals (SDGs) Pioneers for “showcasing how business can be a force for good” and for his “efforts and achievements in advancing SDGs.” 

Sidebar

Zobel recently spoke virtually with McKinsey’s Detlev Mohr to discuss leading through uncertainty, dealing with changes and challenges in Asia, and meeting the needs of all Filipinos.

The Quarterly: How do you assess this moment in time, as the world meets the challenges posed by COVID-19?

Jaime Augusto Zobel de Ayala: There is almost no comparison for assessing this moment in time. I can’t think of any event in recent history, not even those events that included world wars, that resulted in all nation states being affected negatively in such a fundamental and sweeping way. This crisis has resulted in a massive reshaping of the economic and social environment globally. 

As in past major disruptive events, every significant shift has resulted in new ways of interacting, new ways of producing and buying goods and services, and new ways of how we perceive ourselves and the variables that affect our lives. What’s difficult now is the magnitude of will and resources required to reignite our economies and progressively guide them to a new, stable equilibrium, while trying to avoid the dangers of wild pendulum swings to the extreme polar ends of corrective measures.

Video
The CEO of Ayala Group on managing stakeholder interests

With this pandemic, the massive and extended deceleration in supply and demand, resulting in a breakdown in revenue flows, creates significant fissures in our current economic infrastructure, as well as interconnectedness. There will also be significant social dislocation. However, I believe in the inherent capacity of people to reinvent themselves, of our institutions to adapt to changing circumstances, and of economies to rebuild to new heights. The recovery of Germany and Japan after World War II, as extreme examples, are a testament to this.

The ubiquity of travel, brought about by lower costs and more optionality, has led to unprecedented levels of movement across the world before the pandemic. However, when the current environment corrects itself, there will likely be far less movement of people across nation states. Most of us will be adapting to new forms of communication as part of this adjustment. In the past, I hardly used video sessions like this one. It didn’t feel appropriate, but now it’s become a perfectly normal component of my life. At short notice, only a month into a strict lockdown, we pivoted to hold our annual stockholders’ meeting on an online-video-meeting platform. This was a first in our history as an institution.

That being said, I do hope that human interaction reverts to some normality even if not as actively as in the past. The catalytic effect of group interaction on bonding, teamwork, trust building, and our ability to create and execute has been proven over time. We will have to find a new equilibrium between the use of technology and our need, as social animals, to physically interact and connect.

The Quarterly: Asia seems to be especially resilient. What’s driving that?

Jaime Augusto Zobel de Ayala: Asia has been an exciting part of the world for some time now because of its large population base, its incredible number of young people, and its strong consumption-led growth. Add to that the wealth creation that’s beginning to take place, and you have the makings of a very dynamic economy with significant momentum. 

I grew up at a time when Western economies had all the physical infrastructure we envied. Today, when you look at the massive investments across many parts of developing Asia, you see the building of a new infrastructure at a whole different scale of technology and efficiency, integrating new standards of modernity and progressiveness.

There was a time when a significant volume of Asian goods and services were shipped to cater to the demand from the Western economies of Europe and the United States. There has been a fundamental change in the trade patterns across Asia. Now, of course, China has become an important fulcrum of trade in terms of the import and export of goods and, increasingly, of services. And we have seen an increasing movement of trade not only among the Southeast Asian nations but also between, and to, India, China, Japan, and Korea. There’s a renewed vigor in the integration of supply chains in this part of the world.

As an economic grouping of countries, Greater Asia has become an exciting place to develop businesses; innovation is encouraged and is thriving. Our prognosis continues to be that of broad-based growth and expansion, fueled by the democratization of technology, education, and travel, as well as higher per capita incomes.

The Quarterly: Are there macrotrends in Asia’s development that worry you?

Jaime Augusto Zobel de Ayala: There has been a great deal of tension created by the rise of China and the resulting political and economic decoupling of China and the US economy. We have not seen this level of negative interaction in the past, and Southeast Asia has been affected by this set of events. While this breakdown in the global trade system has led to significant dislocations across many industries, it has also resulted in new opportunities for economies that are astute and agile enough to realign their priorities to take advantage of this disruption. The Philippines, and other parts of Southeast Asia like Vietnam and Thailand, are net beneficiaries of these shifts.

As an economic grouping of countries, Greater Asia has become an exciting place to develop businesses; innovation is encouraged and is thriving.

What worries me more than the disruption in trade flows, however, are the new tensions arising from technology-related competition. There’s a bifurcation taking place on the technology front between China and the United States. As countries, we’ve benefited from an increasing commonality of standards. People forget that in the early days of the telecommunications industry, countries, and even provinces and states within countries, could not seamlessly interact between each other. Travelers, international businesses, and callers bore the brunt of the siloed systems’ ill effects.

When we started to invest in the telecommunications industry in our country back in the early 1990s, we had to choose which technology platform to use for the burgeoning mobile industry at that time. In the early ’90s, there was the CDMA standard in the US and the GSM mobile standard developed out of Europe. At that time, we opted for the GSM platform, which was then the new Pan-European standard.

The GSM platform was built to create a common set of standards across Europe to encourage interoperability across its united economies and, ultimately, to provide a more seamless, satisfying user experience. It put emphasis on an important framework of agreements in the development of mobile technology that allowed us to continue to use the services as we crossed national borders. This focus on a set of global, interoperable standards laid the groundwork for the mass production of telecommunications equipment that improved call quality and brought costs down for all consumers as the efficiencies of scale in manufacturing evolved.

Video
What makes Asian companies ‘Asian’

However, this US–China geopolitical and trade tension, resulting in a new bifurcation of standards and technological development, will break down the tremendous advantages that we are enjoying. It will also disrupt the tremendous efficiencies brought about by companies and countries focusing on their areas of competence or comparative advantage. In its current trajectory, you will see 5G technology take a leap forward in certain parts of the world but not in others. And we may find ourselves working across different platforms with no commonality of vision, rules, and standards.

The Quarterly: What do you think about the uncertainty and leading through it?

Jaime Augusto Zobel de Ayala: The current trends toward building trade and technology walls around our national economies are what worry me most at this point in time. I’m a great believer in a progressive capitalist system’s distinct ability to bring millions out of poverty and create sustainable opportunities for countries like ours to participate and compete in the global economy. Our BPO [business process outsourcing] industry and our community of expatriate Filipino workers providing services are just two examples of our global integration. If countries start closing borders and tightening immigration, they begin to destroy the foundations that have resulted in a more efficient and pluralistic world. In a more isolated world, there will be more expensive products, less unity of action, and slower growth. We will also lose momentum toward creating a framework of common purpose in areas that should be of global concern.

Countries will have to use their balance sheets to pump prime their economies and jumpstart economic activity. Different countries will have different levels of commitment to this. I’m more concerned about finding ways to stimulate the demand side of the economic equation, to ignite the willingness of individuals to start spending again, and to encourage a more optimistic view of the future. This will be more challenging than reopening the supply side, which involves allowing factories to start producing again and getting people back to work safely. We need to find ways to inspire confidence, believe in a future together, and begin to act in unison. That will require us to find new ways to cooperate, work in harmony across the public and private spheres nationally, and build on commonalities across regions.

The Quarterly: Are there any characteristics of Asian companies that differentiate them from the West and that may help address the challenges you mentioned?

Jaime Augusto Zobel de Ayala: It is hard to generalize, especially in Asia. We’ve become far more global as societies with respect to our customs, our professional and personal interactions, our languages, our standards, and our education. These commonalities have led to a more unified view of the social and economic environment we would like to create and our values as people.

But I would say that, in general, although not always, there is an awareness in Asia of the primacy of the community over the individual. In the West, there’s maybe more focus on the individual—which has benefits in generating entrepreneurial fervor, innovation, and creativity. But in Asia, where this sense of common purpose is a bit more prevalent, people are more willing to conform to and accept decisions that benefit society as a whole.

Sidebar

The Quarterly: What does it take for companies to thrive in Asia?

Jaime Augusto Zobel de Ayala: Asia is made up of many different types of economies—some very advanced ones with very formal institutions, and others, still emerging, with weaker, less defined institutions.

To thrive in Asia, you’ll have to be comfortable dealing with diversity in its many forms—different cultures, different systems, and different languages—and iterating to get to common ground or achieve a desired result. While English may seem more and more commonly used, I don’t think it is evenly understood. Importantly, there is distinct variability in directness or indirectness when communicating agreement or disagreement.

You’ll be dealing with dense societies with infrastructure constraints and less stable institutions. You will have to be a little more entrepreneurial, imaginative, and resilient in the way you solve problems and work toward desired results.

On the positive side, the pain points are also where opportunities lie. And that’s why you get a number of entrepreneurs testing new concepts and technologies in this part of the world where the markets are large, young, and growing; where disposable income and aspirations are rising; and where rules and regulations are still being formed and refined. In the Philippines, we have a number of young entrepreneurs testing out new payment systems and technologies that target savvy younger consumers who are digitally fluent and active. Filipinos topped the global charts in SMS messaging when it started, and social-media usage now.

In Asia, you have to be flexible, patient, and a little more relaxed about demanding perfection in the way things work. Seek progress instead. If you are able to adjust to their specific cultural needs and aspirations, the people in Asia are eager for new goods, services, and technology solutions that transform their lives.

To thrive in Asia, you’ll have to be comfortable dealing with diversity in its many forms—different cultures, different systems, and different languages—and iterating to get to common ground or achieve a desired result.

The Quarterly: We’ve been hearing that COVID-19 has accelerated digital transformation in many businesses, whether it’s in their business model or their organizational structure. Does that resonate with you?

Jaime Augusto Zobel de Ayala: Very much so—it’s actually resulted in radical change.

At a time like this, you have to have an open mind and not be stubbornly committed to past practices. For example, we’ve historically taken great pride in Ayala’s culture of thinking ahead and planning for the long term. With the crisis, I had to advocate for a far shorter planning horizon. We devised execution scenarios over the next two weeks, the next two months, the next two quarters, and we’ve constantly reviewed and revised them. Our management committee met daily. I had to adjust, fairly radically, to a new way of motivating an organization, engaging with stakeholders, preparing for uncertainty, and responding to dynamically changing variables.

Our consumers, too, are radically changing. We have many businesses—banking, telecommunications, mobile wallets, utilities, retail malls, offices, townships, health, education, automobiles—and so we have a broad and unique vantage point of these changes. We are seeing a massive shift to online banking, digital person-to-person payment transfers, e-commerce, an increase in “do it yourself” stay-at-home activity, and commerce via social-media platforms. We see a spike in demand for delivery services.

It’s imperative that we use data and science-based approaches to understand these changes and understand which of these are deep set and irreversible. Luckily, we now have some strong analytics capabilities, and we’re using as many touch points as we can to start measuring how people are behaving in this new environment. Are they too scared to go out? Will they reenter malls? What will persuade them? How will they behave in a digital environment versus the physical one?

Our analytics capabilities are helping us readjust to the new reality, and I expect we’ll probably learn a lot over the next couple of months on behavioral patterns, consumer needs, and societal pain points.

The Quarterly: Has the pandemic triggered any reimagination of the role of corporations in society?

Jaime Augusto Zobel de Ayala: Maybe it took COVID-19 for all of us to understand that we all have to support each other as communities and institutions if we are to rebuild successfully. Our capitalist ecosystem can be fragile. All of us who thrive on the successes of capitalism need to have a sense of responsibility and empathy to counteract the forces of inequity that the system also creates. We have to find ways to compensate for this. 

When the pandemic hit, our first priority was to protect our employees. We wanted to make sure that they felt financially secure and physically healthy. We immediately released an emergency response package that covered wage continuance, leave conversions, and loan deferments to our direct employees. We built dedicated medical facilities where our employees and their families could seek testing, treatment, and quarantine support. We provided stipends to partners who were on daily wage, “no work, no pay” arrangements—including about 70,000 construction workers and some employees of our agency providers—to help them ride out the period of work stoppage.

The second phase was to ensure that our broad ecosystem stayed in place as we collectively tried to recover. We gave many of our mall tenants a reprieve on rent. Our banking side deferred loan payments and gave breaks on fees and interest charges.

The third order was to support the community at large, especially those most economically vulnerable. In a developing country like the Philippines and a burgeoning urban center like Greater Manila, this was a large segment of the population.

Addressing society’s pain points: An interview with the CEO of Ayala Corporation
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We realized that the government would be unable to act swiftly, as it needed time and appropriate approvals to realign its budget. So we sought to support government in bridging the immediate food needs of our most at-risk countrymen. We spearheaded “Project Ugnayan,” a private-sector partnership with a number of like-minded groups, that distributed emergency food packages, shopping vouchers, and medical assistance to 2.8 million families, or more than 14 million individuals. A total of 270 firms came together quickly. Everyone understood they had a broader responsibility, and this created a very interesting dynamic in our country—a sense of common purpose and a coming together of different groups that may not otherwise have done so.

Our balance sheets were not structured for anything like this, but we used our resources to try to create an environment of trust that would allow us to rebuild together. On Ayala’s part, the sum of our group-wide COVID-19 response, as of June 30, stood at PHP 9bln ($186 million) pretax, a significant amount relative to our group’s net income of PHP 7.9bln ($163 million) in the first six months of 2020.

The Quarterly: How do you balance shareholder value and the interests of a larger group of stakeholders?

Jaime Augusto Zobel de Ayala: I don’t think it’s about mutually exclusive priorities. It’s a philosophy about our role and responsibility as an institution.

When I graduated from business school, in 1987, and returned to the Philippines, I found that not everything that I learned was relevant to the emerging market realities of the nation. I needed to take the pulse of the country and better understand its pain points, so I spent 10 to 20 percent of my time on nonprofit initiatives. I eventually adapted and applied the skills I learned in business school, including my ability to convene like-minded individuals and harness communal financial resources. I got involved in a number of youth and technology-related projects and found ways to create momentum in key areas of opportunity.

Those personal experiences and advocacies evolved into the conviction that I needed to provide a form of leadership for the Ayala Group that will allow it to become more relevant to the needs of the country. We used to focus on the affluent end of the market in terms of our products and services, but I wanted to leave a legacy of an institution that addressed the needs of the vast majority of Filipinos. It also made sense to grow the institution by broadening and diversifying our market base.

Maybe it took COVID-19 for all of us to understand that we all have to support each other as communities and institutions if we are to rebuild successfully.

The Quarterly: What are some of the steps you made as a business that reflect this philosophy?

Jaime Augusto Zobel de Ayala: Broadening our consumer base required us to radically change our product-and-servicing cost structures while ensuring that we continued to deliver competitive value and clear, compelling reasons for customer preference in the telecommunications, banking, healthcare, education, water distribution, and real-estate sectors. We fostered a culture of using technological know-how and innovation to address societal needs.

From there, we began to think about our role as an institution and realized that we needed to address inequality if we wanted to remain relevant to the changing dynamics of this country. We aligned Ayala to the national development agenda and began to broaden our definition of our stakeholder community—well beyond our shareholders or current customers—that we believed was relevant to our long-term success.

It’s all part of building trust in a community. If you lose that trust, you’re no longer seen as a contributor to the system, and both your institution and stockholders would be worse off for it. Finding a balance between your commitment to the providers of capital and the broader community may be tricky, but if you can align your institution to the broader progressive development goals of a country, I believe you’ll have the power to create sustainable value and compelling innovation.

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