Asia at the forefront of global change: On the cusp of a new era

| Podcast

In this episode of the Future of Asia Podcast, Chris Bradley, a director of the McKinsey Global Institute (MGI), and Jeongmin Seong, a partner at MGI, discuss a recent report that looks at the new era being brought in by global disruptive events—a transition that will require major changes. They particularly focus on Asia, detailing how the region sits at the center of these changes. Asia will be significantly affected by the shifts, but they will open new opportunities that can enable the region to thrive.

An edited version of their conversation follows.

Angela Buensuceso: Is Asia on the cusp of a new era? A new McKinsey Global Institute report argues that not only will Asia be the furnace in which a new era is forged, it may also experience heightened versions of global geopolitical, demographic, and resources challenges. In this episode of the podcast, we are joined by Chris Bradley and Jeongmin Seong, co-authors of the MGI report, Asia on the cusp of a new era.1Asia on the cusp of a new era, McKinsey Global Institute, September 22, 2023.

Angela Buensuceso: Why do you believe that Asia is on the cusp of a new era, and what forces are changing that will result in this new era?

Chris Bradley: We really believe Asia is on the cusp of a new era, making it an exciting time to live in the region. We’re at an inflection point of many forces—the world feels awfully strange at the moment, doesn’t it? There was a pandemic, there are wars and massive technological breakthroughs happening, and the geopolitical environment feels different. This is an incredibly unusual time in history. However, when doing the report, we stepped back and realized that this has happened before.

Every generation or so, there’s an era of disruption. For example, about the time I was finishing high school, the Berlin Wall fell, the World Wide Web was invented, and a new era of globalization and digitization came into being—I came into adulthood in a completely new world from that I had been born in. Around the time I was born, there was an oil crisis, the Vietnam War and the gold standard both ended, and the integrated circuit was invented. That led to a time that was radically different again, around the 70s and the 80s, with oil crises and elevated inflation. And, going as far back as to when my father was born, the end of the Second World War caused another period of massive disruption that paved the way to a new era.

We’re presently opening a door to another new era. This is exciting, but also confusing because we see that, at these sort of times, the rules of the world fundamentally change, and because of that, rule books also have to change.

If the past 30 years has been a time of radical change, I would argue it has been remarkably consistent in the underlying rules and direction of travel. For example, Moore’s law has been a consistent force.2 Globalization has been a consistent force. The entry of hundreds of millions of new consumers and new producers into the world economy, not only in China and India but also in Eastern Europe, has been a consistent force. The outcomes of those forces have been surprising but the forces themselves haven’t. We have lived in a time that has had a consistent set of rules. Those rules are now changing.

In the report, we’ve laid out that, if there were a rule book of the world, it would have five chapters of change, and we cover what those changes are. Chapter one is around the world order and geopolitics. Chapter two focuses on what the fundamental technology platforms’ and technologies’ trajectories of the world are. Chapter three may read the slowest, but possibly is the most powerful force of all, which is demographics—that is really going to shape humanity’s reality. Chapter four covers the fundamentals of how we eat, move, and produce things, down to energy and materials. And chapter five focuses on capital, both physical and financial, which really does make the world go round.

Angela Buensuceso: Jeongmin, would you like to add anything?

Jeongmin Seong: Chris talks about a year of big shifts in the world and takes an Asian perspective. There is another big shift, which is the position of Asia in the new era versus the previous era, the Era of Markets (1989 to 2019).3Asia on the cusp of a new era, McKinsey Global institute, September 22, 2023. When we entered the previous era, Asia was a minority in the world—a taker of the global rules set by others. Now, Asia is the new majority of the world. It accounts for 57 percent of global GDP growth, 64 percent of patent generation, and more than half of global middle-class households. Asia has the opportunity to become a shaper of the new rules for the world.

But, Asia is extremely large and diverse. It is five times the size of Europe; more than 2,000 languages are spoken in the region; and Singapore’s per capita GDP is 60 times that of Nepal’s. So, what is Asia? We believe that there is no single Asia but at least five different ones: advanced Asia, emerging Asia, frontier Asia, China, and India. Each Asia is as large as a continent and each will experience the new era differently, but each will also have an opportunity to shape it.

What is interesting is how the different Asias complement each other. For example, advanced Asia and China have a strong capital and technology foundation, but growth is slowing and the population is aging. On the other hand, emerging Asia and India have fast growth, younger demographics, and technology deployment opportunities. As a result, when looking at the share of intraregional trade—which essentially represents the proportion of trade occurring within a specific region—Asia ranks among the highest globally, accounting for about 60 percent of total trade. In case of Europe, the figure is around 70 percent and, in many other regions, the range varies from 20 to 40 percent.

Angela Buensuceso: Could you tell us more about the shifts described in the five chapters and how they could impact the different Asias to which you referred?

Jeongmin Seong: The first is the world order chapter. In the previous era, Asia benefited a lot from globalization and became a global trade hub by leveraging the complementarity across Asia. However, in this new era, the world is becoming multipolar and may face increased contention. The question is, how can Asia continue its pragmatic cooperation model and balance security and economic agendas?

We examined the top-80 trade corridors and found that 49 of them involve Asia. Among the top-20 fastest growing corridors, 18 are linked to Asia and, within the top-20 largest trade routes, 13 are associated with the region. Asia really has become the global trade hub. At the same time, Asia’s trade network is highly interdependent, and this interdependence is prominent in some other strategic value chains. Take electronics as an example: all top-40 chips-related corridors involve Asia. China is the largest importer of chips and also the largest exporter of downstream products, accounting for 70 to 80 percent of global exports of mobile phones or laptops.

As a result of this situation, various countries are now asking whether they are too dependent on a specific group of economies. They recognize that it will be crucial to navigate trade growth while managing security and resilience agendas in this new era.

Chris Bradley: A statistic from our research that’s stuck with me is that the amount of trade happening within Asia is almost as high as the amount of trade happening within the European Union. However, while the European Union has a huge political and legal machinery to make it work, Asia doesn’t have anything other than just good old-fashioned pragmatism. As the world becomes multipolar, can that pragmatic model survive? A lot of our research looks at future trade scenarios and, in our view, world trade can’t be undone. The world is globalized, so we have to learn to live in a new global reality while accepting that we have ties that bind.

Jeongmin Seong: In the technology chapter, we look at how, in the previous era, the focus was predominantly on hardware innovation and digital penetration. Here, Asian economies successfully became a strong manufacturing hub for the world. However, in the new era, the focus is shifting toward software solutions and transversal technologies. Can Asia transition from being a tech manufacturer to a tech creator? We analyzed 3,000 top tech-related companies and found out that Asia is punching above its weight in four key manufacturing areas: consumer electronics, industrial electronics, electric vehicles, and semiconductors. In these sectors, Asian companies had about 40 to 70 percent of global revenue shares.

But, in areas with high technology barriers such as software, biopharmaceuticals, and medical technology, Asia still lags, holding only a single-digit revenue share. In fact, some Asian economies still heavily depend on importing core knowledge. For example, China’s import of intellectual property (IP) was three times greater than its exports of IP. And, for India, the ratio was nine times greater. In a new era that faces geopolitical uncertainty, we need to ask how Asia can continue to move up the innovation curve.

Chris Bradley: It’s no surprise, really, that a lot of the tension concerning technology is around some of the electronic supply chains—there is competition for battery control and, increasingly, tensions around semiconductors. These tech platforms are not just incidental to these geopolitical issues, they’re right at the center of it.

Jeongmin Seong: In the chapter on demographics, we look at how Asia enjoyed a huge demographic dividend in the previous era. However, in the new era, the region will experience a big labor market mismatch because the working age population is shrinking.

Asia is facing increasingly low productivity. The key question for the new era is how to drive a productivity revolution across Asia and solve this mismatch. In fact, some parts of Asia are aging rapidly—in advanced Asia and China, the pace of aging is twice as fast as that of western economies. The good news is that other countries in Asia, such as India, Indonesia, and Vietnam, still have a younger population. Yet, there exists a big productivity gap between old and young Asia, for example, India’s productivity within tech is only one-eighth of that in advanced Asia.

So, how can this challenge be addressed in the new era? One solution is to move people to where jobs are. The cross-modal migration in Asia has been very limited. The stack of migrants as a percentage of the total population in China, Japan, and Korea is only between 0.1 percent and 3.0 percent. Therefore, a more workable solution is to move jobs to where people are. To achieve this, Asia will need a productivity revolution, including reskilling, upskilling, and automation across the whole region.

Chris Bradley: In the past 30 years, more than half of the growth in the working age population came from Asia. That was leveraged by urbanization, as the urban population tripled in China and doubled in India. There was a massive surge of workers entering the industrial economy—more than in the history of humanity. In fact, it will remain the biggest ever. It won’t ever happen again because, as we know from UN projections, the world is at what is called “peak child,” and the number of children will decline.

The movement of people into cities isn’t over. In the report, we particularly zoom in on India, which is critical to the future of Asia. One of the aces it holds up its sleeve is that 46 percent of Indian workers still work on farms. In China, that number is just over 20 percent and, in the United States, it’s only 2 percent. This shows how much further Asia has to go in terms of urbanization. The continued migration into urbanization is one of the great offsets Asia has for demographics, so that’s why the region—India and some of those other larger economies—has no choice but to become a critical part of manufacturing chains. I think this is going to be a phenomenal shift in how the world works.

Let me move onto something that’s gone up on everyone’s agenda—resources and energy systems. Reason number one is carbon: we need to find a way to reshape the world’s energy systems. Energy is so much at the heart of everything that we hardly think about it. It’s a bit like water: you don’t think about it till you’re thirsty. However, when looking at geopolitics, we’ve realized that energy security really matters and that, in some economies, affordability constraints are beginning to be a reality. We have to jointly solve the problem of getting clean, safe, reliable, and affordable energy to people, but do so in a way that does not emit carbon.

In Asia, this matters disproportionately, but the region is also disproportionately challenged as 97 percent of global emissions’ growth in the past 30 years has been from Asia. The vast bulk of industrial energy uses are in Asia, yet that’s the hardest to decarbonize. This is where the challenge gets interesting: a typical Asian individual uses one-third of the energy used by someone in an OECD economy. To put that into practice, China uses a bit over 100 gigajoules of energy per person per year—that is about what two Toyota Corollas would use in petrol. In India, it’s more like 25 or 30 gigajoules, compared to the developed world, which is over 200, up to 300. Even the most industrialized parts of Asia aren’t on OECD standards of energy usage.

What needs to be worked out is how these energy systems can be grown while being decarbonized. The principal technologies for decarbonizing energy—renewable electricity—works in regions where it can be added to an existing baseload system. But, what is not known yet is how to double or triple an energy system only using renewables without having the backup of a thermal system. That explains why there are around 125 coal-fired power plants currently being built in Asia.

To decarbonize industry, which disproportionately is borne by Asia, is a huge challenge. But, it also means that the pace of the energy transition really is going to be set in Asia. Now, there’s a bright light of hope. For example, the electrification of vehicles. China is by far leading the world in this field. In many respects, countries in Asia—despite their growing energy systems—still need to add one-and-half times Europe’s energy to their electricity supply by 2050. They will be able to take advantage of new technologies as they are developed. There are a lot of reasons to be excited and optimistic.

If we look to the future, Asia will account for the majority of global energy consumption growth because of continued urbanization, the rise of a middle class, and rapid industrialization. The region will need a lot more energy going forward. But, at the same time, there’ll be exciting innovation opportunities because of this challenge—for example, green hydrogen or carbon capture technology, climate analytics, and smart grids are all opportunities for players in Asia.

Let me move on to the final chapter, which is capitalization. Somewhere between 60 to 80 percent of productivity growth—which is what really drives development—is explained by capital deepening (meaning that every worker has more capital). Capital comes in many forms; it’s not only the tools and machines that people use, but the infrastructure and the cities in which people live.

For example, in the mid-1990s, China and India had around $10,000 of capital per worker. To put that into perspective, the typical American worker had nearly $300,000 of capital. India managed to triple or quadruple this figure by 2022 to about $30,000 or $40,000 of capital per worker; China managed to increase it eight or nine times to $80,000 to $90,000 of capital per worker. That is what has underpinned the incredible surge in income, wealth, and development.

This journey of growth in Asia is clearly not over because Japan still has four times more capital per worker than China does and 11 times more than India. Bringing this growth of capital to Asia means that people will be able to have safe and prosperous lives. That, however, is going to take a lot of money. In just the past decade, Asia mobilized around $91 trillion of capital; we estimate that in the next decade it will need another $137 trillion.

The point about this new era is not that we need capital, it’s more that the rules of the capital market seem to have to change. The hope of almost infinite pools of cheap money, without inflation and ever-expanding balance sheets, is being called into question. If we have higher inflation for longer, the balance sheet stresses will start to show—so we have to think of how to mobilize that capital.

Furthermore, the extra challenge in Asia is that the return on capital is lower. You’d expect in a high-growth region with so much opportunity, the return on capital would be higher, but—at least for corporations in Asia—the return on invested capital is around 6 or 7 percent compared to around 11 percent or more in the United States. Every marginal dollar of capital going into the United States makes more money.

The surge of capital in Asia meant that, for about a 40-year period, one billion or more people were experiencing “top-gear” growth, which is growth at more than 7.5 percent. Japan in the 1960s, Korea in the 1970s and 1980s, and China in the early 2000s saw fast rates of growth. The amount of building disruption and of radical change it takes to be in top-gear growth is phenomenal. The issue now is that there aren’t any large groups of population in top-gear growth. India is doing well to get above 5 percent growth, but it’s never been able to get into that top gear above 7.5 percent.

Asia is going to have to work out how to solve a triple challenge: how to mobilize ever more capital, how to do that on top of a balance sheet that’s already stretched, and how to do that in a set of new capital market realities—with improved return on capital.

We’re in a period coming out of the COVID-19 pandemic when a lot of people slipped out of top-gear growth, and the fundamental growth prospects, particularly for China, appear to be lower. If we really want to see a radical improvement in living standards and see more of the world’s population have safe and prosperous lives, a huge amount of capital is going to have to be raised.

A still-life photograph of unopened lilies set against a black background.

Asia on the cusp of a new era

Jeongmin Seong: Chris mentioned a $137 trillion figure, which is the fixed asset investment to be deployed in Asia over the coming decade. To put that in context, that is larger than the sum of Europe and the United States. The good news is that Asia is a high-savings economy. Therefore, the next step for the region is about creating more dynamic and efficient financial systems to improve the capital allocation and increase the return.

Angela Buensuceso: How can companies prepare for this new era and what do these shifts mean for businesses and industries across Asia?

Chris Bradley: When you put all this together, it really is an arresting picture of change. The fundamental rules of how we work are changing. Governments and companies need to revisit—in a very deep way—some of the playbooks via which they operate. However, just because times are confusing or uncertain, it doesn’t mean we can be complacent. It is in periods of inflection that the world is shaped.

To get our heads around this, we collaborated with the Asia Business Council, a group of senior business leaders in Asia, and we asked them, “If these are the things happening in the world, what does it mean for your companies?” Three-quarters of them said that this cusp of a new era meant they needed to fundamentally reshape their corporate strategies and business models. They saw this change as anything but tactical; they saw it as a deeply strategic shift.

The good thing is that when we asked them, “How do you feel about this world?”, 82 percent of them told us they feel optimistic about the future. I think that’s the great Asian spirit of relentless optimism, seeing opportunities and connections, but equally, being willing to do what it takes to make that optimism a reality and make transformational changes.

The clients we work with are stepping back and saying, “Okay, let’s do a key assumption to check on our strategy. What are the things that we’re assuming are true about the world and our strategies about globalization, or around technology, or around capital? How many of those do we think are still right? And to the extent that we have to refresh our assumptions of the world, how might that express itself in a different set of choices?” For some boards, the confusion puts them on the backfoot; they want to wait to see what happens. I think companies that grab the ball of change and run with it will be the ones that move to a more shaping posture.

Jeongmin Seong: As companies step back and think about the big picture, they can also consider two categories of actions. One is to prepare for the next year for their own organization. For example, to deal with geopolitical uncertainty, companies can initiate no-regret moves such as diversifying the supply chain or substituting highly concentrated and hard-to-replace materials to enhance the resilience of their supply chains. And, as they undertake those measures, identifying leading indicators of change will be helpful. For instance, shifts in greenfield foreign direct investment may serve as a precursor to the reconfiguration in global manufacturing footprints.

The second action is to shape the next year in collaboration with others to steer toward a better outcome. Companies can do this by engaging with other stakeholders such as industry associations or public institutions. For example, in the tech domain, turning a quantity advantage of STEM talents in Asia into a quality advantage will require improving the entire education and innovation ecosystems. Demographics upskilling and reskilling the workforce cannot be done by a single company.

Angela Buensuceso: Do you have any final thoughts you would like to share?

Chris Bradley: The summary message is very simple: the world is on the cusp of a new era. A new set of rules is coming and new playbooks will be needed. Asia is at the center of these changes; it is the new majority and is the central actor in bringing in the new era interventions. It’s going to be an exciting time for the world, even more so for Asia.

Jeongmin Seong: We need to focus on the era as a whole, in addition to a year. Many business leaders are busy dealing with quarterly and yearly targets. However, with the arrival of a new era where the rules and assumptions will change, it will be extremely helpful to take a step back and think about the big picture and what these changes will mean for businesses.

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