Revisiting an annual conversation, McKinsey’s Jonathan Woetzel and the Financial Times’ Asia editor Robin Harding look ahead to the major business themes in 2023. Despite anticipated setbacks and flare-ups on the world stage, they see growth for the region. An edited version of the conversation follows.
Gautam Kumra: I am Gautam Kumra, chairman of McKinsey Asia, and you’re listening to the Future of Asia Podcast Series. The Asian century has begun. The region is now the world’s largest economy. As Asia’s economies evolve further, the region has the potential to fuel and shape the next normal. In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses across the globe. Join us.
Jonathan Woetzel: Good morning. I’m Jonathan Woetzel. I’m a senior partner with McKinsey and a director of the McKinsey Global Institute, and I’m pleased to be joined today by Robin Harding, the Asia Editor of the Financial Times. Robin previously was the Tokyo Bureau Chief for six years and before that he was based in Washington covering the US Federal Reserve. He’s responsible for steering coverage across Asia and managing the FT’s award-winning network of correspondents, setting strategic priorities, and helping project the FT as a distinctive and authoritative voice in Asia. Welcome back, Robin. It’s a pleasure to talk to you again. It was this time last year that we looked forward and backwards. Many unexpected things happened. So, glad to have you back.
Robin Harding: Jonathan, thank you so much for having me again.
Jonathan Woetzel: Let’s do the scary thing, let’s look back and say what surprised you about 2022—and what were some of the things that you would say, "Yep, saw that coming."
Robin Harding: I tried to mark my homework: I went back and listened to our conversation last year and one thing that’s striking is the word “Ukraine” is not mentioned once. I don’t think we should beat ourselves up too much about that on a podcast about the future of Asia, but clearly, unexpected events can materialize. And because we live in such a globally interconnected world, it was the Ukraine conflict that led to the huge commodity price and trade shocks, which were the big, unexpected drivers in Asia last year.
So, what did we get right? Well, I think most of the things we said on the podcast last year were fairly sensible. We talked about the delayed COVID-19 reopening in Asia and the impact that would have on both perceptions and economies. I think that was very much the story in Asia, certainly in China. We talked about inflation and how that was going to be a big story, and the question was, “When it would peak?” We were broadly on the money there. So, I don’t think we did too badly. But what’s going to be this year’s Ukraine? Who knows!
Jonathan Woetzel: Right. Between the black swans and the grey rhinos … living in quite the zoo here! I think that we can give ourselves passing marks.
Robin Harding: Forecasting, as everyone knows, is a bit of a mug’s game but we all have to do it because we have to make decisions amid uncertainty about the future. You’ve got to make your best guess about what may be coming down the tracks.
Jonathan Woetzel: With that as the lead-in, let’s look forward. Where, in Asia, are the stories that executives should be paying attention to for the coming year?
Robin Harding: When I look forward at the news environment for 2023, politically, this should be a relatively tranquil year because of where we are in the political cycle for the big players. By the end of the year, the US presidential primaries will be kicking into gear. But having just had the party congress in China, with Xi Jinping confirmed for his third term, the first half of this year ought to be a period where the US and China can try to reestablish more of a working relationship and some degree of rapprochement. I also think that structurally things have changed in that relationship. We’re not going back to where we were. Everything we hear says that there are more US national-security restrictions in the pipeline, that this doesn’t end with semiconductors, that there’s more coming in other technologies, like AI and the biotech pharma area.
If you turn to economics, the question is, will there be a recession in the US? I think it’s more likely that there will be a clear recession in Europe, given the energy-price shock there. The forecasts for the United States are a bit all over the place. There’s quite a lot of uncertainty about whether it will be a soft landing or a hard landing for the US. And when inflation comes down, you’ve got to look at how quickly the Fed can pivot to lower interest rates. If they do, then obviously that will play out in Asia as well. On the other side of Asia, how quickly will the Chinese economy bounce back? The underlying state of China’s economy is fairly soft at the moment. But the big unknown is how much and how effective will stimulus from Beijing be. It’s certainly top of Beijing’s agenda to get the economy moving again. So, that’s another thing that we’ll be looking out for.
On the business side, we may talk more about electric vehicles (EVs). I think that’s going to be a huge, huge story this year from Asia. We’ll also start to see whether some of the big investments to diversify the semiconductor supply chain work or not. I’m pretty skeptical—but it’s going to be a year of realization about that. And there’s lots more going on as well. Obviously, AI is a big theme. How seriously to take it in 2023? I’m not sure. But certainly, it’s one we’ll be watching.
Jonathan Woetzel: That’s a pretty robust agenda. Let’s look at different pieces of it, starting with a regional or global perspective, particularly for our executive audience—the relationships between countries and navigating all of that. If you were to pick out one or two flash points, things that might be important to keep an eye on, where would you see the most important areas of contention? You mentioned semiconductors—would that be one of them?
Robin Harding: As we all know, the US-China relationship is the most important international relationship in the world, and it’s going to drive events throughout the 21st century. If you look at the nature of that relationship, as I said, it’s changed structurally. When I was in Washington only ten years ago, the mood was very much still: “Let’s engage with China. As China gets richer, it will become more liberal, it will become more democratic, and they’ll move towards us. All we have to do is keep working with them, persuade them, and things will get better.” That mood has gone away and there’s no sign of it coming back. Now there’s very much a mood of suspicion, competition, concern, and a focus on national security. Previously, the economic bureaucrats in the United States had more weight in that conversation. I don’t think any of that is changing back.
The consequence is that we should be expecting flare-ups in this relationship. It’s hard to predict what those will be. Last year, things like Nancy Pelosi’s visit to Taiwan—which the FT scooped, incidentally—ended up having a big impact. So, we can’t see the individual things, but I think that we will see more of these flare-ups. And the big question is how well they can be managed and whether the US and China can manage to talk more so that the impact of the flare-ups can be minimized, or whether they’ll have a big disruptive effect like they did last year.
There are plenty of other things around the region that could cause concern in 2023. In 2022, Sri Lanka’s debt crisis was a big story. But there are multiple other countries, particularly in South Asia, which are in a very fragile condition. Some smaller ones like Nepal are in real difficulties. In Southeast Asia, the repercussions of the geopolitical contest between the United States and China play out. Each country in the region is in a slightly different situation, but what you see in all of them are internal questions about how they want to line themselves up; and external pressures, with the US pushing them to do one thing and China pushing them to do another. And that plays out separately in each different country. That’s the big picture: it’s all shaped by the US-China relationship and post-pandemic fragility in a number of economies.
Jonathan Woetzel: I can see that volatility is becoming a new normal: moving away from a narrative of steady, straight-line progress to more one of zigs and zags. But the International Monetary Fund (IMF) sees the global economy growing quite handily this year at around 3.2 percent. India is growing at 6 or 7 percent, give or take. China, we’re not quite sure, but it’s going to bounce back. It’s less about the direction and more about how high. I’m curious about your point of view. Should we be paying more attention to Asian endogenous factors or the global exogenous factors, in looking at the outlook for these economies? Which matters more?
Robin Harding: I’d certainly say the Asian endogenous factors matter more. It’s in the nature of the news business that we look at fluctuations around trends—it’s the earthquake, the war, the crisis at company X that makes the news. But the trend, certainly in Asia, is relentless growth, as it has been for the last couple of decades. And when you look at the growth in economies like Vietnam or Bangladesh, or increasingly in India, in Indonesia, which are countries with big populations, it’s dramatic. And it’s not population-driven growth anymore. In those countries birth rates have dropped significantly, and they’re now going through their demographic transition—their demographic dividend. So, this is real, per capita GDP increasing growth. And it’s relentless across much of Asia, even in China. I mean, bad years for Chinese GDP are still pretty good. And 2023 doesn’t look like it’ll be a particularly bad year.
So, the endogenous Asia growth story, the growth of the middle class, remains as strong as ever. The exogenous factors cause the problems. That’s what causes things like a debt crisis in Sri Lanka or Pakistan. And those are still very important, because they’re an enormous setback to what would otherwise be good growth. Sri Lanka is a case in point: an economy that had been growing very, very well for a number of years. And yet this debt crisis has set that back dramatically, with consumers who are otherwise increasingly enjoying middle-class lifestyles suddenly struggling to afford basic necessities and not having fuel to put in their cars.
I would certainly emphasize the endogenous growth factors. But you can never ignore events and crises because the depth of the setbacks and the scars they leave are very, very great. Both sides of the coin are relevant.
Jonathan Woetzel: Reassuring to know that there is a dynamic here, that these things are in counterpoint to each other. You referred to GDP per capita: that could be either consumption or productivity driven. But either way, it’s per capita growth. On one hand, then this is overreach, and movements in the global interest rate environment affect that, raising the cost of that growth to points you would not have expected. Let’s turn to the specifics of this growth. Building on what you were just saying, it’s no longer so much about the demographics. So, what’s underpinning it?
Robin Harding: Fundamentally, I don’t think there’s anything particularly new here. With the emergence of global value chains, of peace and stability in Asia, there’s been a broad set of factors that have led to the economic growth in the region over the last few decades. And they’re broadly still in place—globalization, accessibility of technology transfer, and capital investments in these countries. So, the big picture hasn’t changed. What’s interesting is to look at what makes the difference between an 8 percent Vietnam-type growth and a 5 percent Indonesia-type growth. They’re both very good, but obviously one type of transition is happening faster than the other. And it largely comes down to things like education and the effectiveness of state capacity. Can you mobilize the whole nation to transform itself very, very quickly, as happened in China? Or is it a bit more of a chaotic, bottom-up growth trajectory, which is probably the case in India and Indonesia, where there is more emphasis on democracy?
Jonathan Woetzel: At the beginning of this discussion about growth, you mentioned two factors: global value chains and their development, and peace and security. It might come as something of, I wouldn’t say surprise, but perhaps a new idea: that Asia has had this unprecedented period of relatively unbroken peace and security. And I’m not asking for a prediction on this one. But would you say that’s been an underpinning factor? Are there reasons for concern about that, going forward?
Robin Harding: I do think it’s been an enormous underpinning factor. It’s very easy to forget how insecure the world was just a few decades ago, and the number of countries in Asia that have been racked by civil wars or border wars within our lifetimes, and how that has largely gone away. That’s been an enormous factor in the region’s growth story. Are there reasons for concern? Now, obviously, the elephants lurking behind your question there are Russia and Ukraine, but also tension between the US and China. India and Pakistan as well. So, there are state-to-state tensions. But that’s a little bit different from the kind of internal insecurity that makes it hard to grow.
If you look at, for example, the situation in Indonesia a few decades ago, or Sri Lanka, where you previously had the civil war. That makes it so hard for an economy to develop because you have fundamental internal insecurity. You can’t invest with confidence that your own policy is secure. And I don’t see that reemerging around Asia. I guess we should all be very concerned about the reemergence of great-power tensions and the imperialist war of conquest in Europe, but I don’t think we should worry about the reemergence of internal insecurity that threatens the Asian growth model.
Jonathan Woetzel: Well, let’s cross our fingers on that one. It’s an interesting reality of the Asian experience, that we’ve been largely successful in quieting those tensions and have been drowning—I love your phrase, “in a sea of relentless growth.” There have been good reasons for people to set aside their differences and get back to building an economy. But let’s look at some of the other broader themes like sustainability. That’s really become a hot topic, but do you see it as a reality, in the sense of investments being made, value chains evolving, consequences either mitigated or adapted to? What’s the outlook for sustainability in the coming year?
Robin Harding: I see sustainability as a huge driver. When I talk to people in Asia about it, I think they see it a little bit differently from people in the United States or Europe, who may view sustainability as a fundamental objective in itself that leads them to take certain actions. In Asia, I see it more that business has come to see sustainability as an important factor in their ultimate markets: Asian, but also European and American, consumers. They see the global shift, in all sorts of policy arenas, to taking sustainability seriously. There’s just a very pragmatic business adaptation: "Right, sustainability matters. We need to show that we’re making a contribution to it. We need to be aware that it may fundamentally affect certain parts of our business. We’re going to get on and deal with that."
That tends to be how Asian businesses respond to sustainability. What you don’t see very much of, I don’t think, are businesses predicating themselves on sustainability as a concept and driver in itself.
Jonathan Woetzel: I think that’s right. Sustainability for sustainability’s sake, pure and simple, seems to be less prevalent. But it’s a bit hard to define that: I don’t think any company anywhere would abandon their mandate for shareholder returns entirely, or they wouldn’t be a company for very long.
We mentioned EVs briefly. One could argue that an EV is a sustainable version of automotive transport. But one could also say it’s simply a better technology, that it has co-benefits such as sustainability and carbon emissions. How would you think of that as you look at that value chain?
Robin Harding: I think that it’s a little of both, but most fundamentally for Asia—and let’s talk about two specific countries, China and Indonesia—it’s an enormous business opportunity. What’s coming is a complete upending of the traditional automotive industry and supply chain. I try to write about this because I think people in the US and Japan just have no idea what’s coming: the wave of Chinese-produced EVs, the number of Chinese EV companies that are rapidly emerging. The productivity and cost advantage they’re able to bring to bear is going to be dramatic. I really think this is going to be one of the big business stories of the next five to ten years.
So, is it sustainability driving this? Is EV technology better? We know that sustainability is driving people toward EVs in many countries. I’m not sure you can say it’s technologically better, but it works, and it works well enough. And the economics of EVs are so different from internal-combustion-engine vehicles because they’re such simple products. I often say it’s like the toy car my son has, which just has a battery in it and a little motor. You put it down on the floor and off it goes. There’s very little fundamental difference between that and a consumer EV. It’s just bigger and it’s got a steering wheel and some other bells and whistles. But there are only about 20 components in the drivetrain; it’s a motor and some wheels.
For China, it’s an enormous opportunity to break into the global automotive industry and become potentially the dominant car producer for the world. And for Indonesia, which is a big raw-material supplier for batteries, it’s an opportunity for commodity exports. But the industrial strategy in Indonesia is focused on banning exports of the raw commodities because they want to move up the value chain and become a big producer of batteries. I think that’s a very realistic prospect as well.
Jonathan Woetzel: So, this is as much about the industry structure that we’ve had for decades and disruption to that, and the opportunity this creates, as it is about the regulatory or consumer pull around sustainability, or the push to achieve a given set of net-zero targets. Is that what I hear you saying?
Robin Harding: Looking at it from Asia, I don’t think sustainability is the driver. I don’t think technology is the driver. I think that pure, raw business opportunity is the driver. One interesting question down the line, if as I suspect this industry does concentrate in China and we do see booming Chinese exports of EVs, is this: does the conversation in Europe and America change to, "Oh gosh, we focused on sustainability and in the process, we’re killing our auto industry?” And do the sustainability regulatory drivers actually reduce in those markets? Because they’re having such a negative economic effect on their own industries. That’s a separate question.
So, when I look at it from Asia, I don’t see a huge drive for sustainability leading to a shift to EVs. I see the fundamental ability to succeed in this technology and drive disruption of the global auto industry. That seems to me to be far more of the driver here, although of course there are EV subsidies in China, and that is an important factor in getting the industry going there.
Jonathan Woetzel: It’s the economics, I hear you saying.
Robin Harding: At the very least, that’s what’s interesting to me.
Jonathan Woetzel: I think that there are some very interesting players out there who, for example, are redefining the driving experience itself, and looking beyond EVs to autonomous vehicles (AVs), to the idea of a car as a digital streaming device or as a storage for a battery. That becomes the profit and business opportunity: EVs as a means to an even bigger end. Any thoughts on whether 2023 might see some of those players break out or whether that business case might become a visible driver?
Robin Harding: I think 2023 is probably a little early for that. But it’s interesting to compare the vehicle with other products that went from being analog to being digital. You had your Walkman, and you were playing cassettes. And when that went digital, you got the iPod. The user interface was suddenly quite different, but it was still a little black box that sat in your pocket. Conceptually it wasn’t that different from the predecessor analog technology. It was considerably better but the form factor and the way you used it was similar.
But then you look at what’s happened since, now that music is digitized. The way it’s consumed has changed completely and we’ve ended up with the streaming business model, which seems to be the endpoint for the economics of music. And the device has changed from being a separate player to usually being your phone; it’s connected. The point is that the initial transition is quite straightforward. I think the same will happen with EVs and digital autos. Initially, you just get a digitized automobile, which is very similar to the previous automobile. That’s probably where we are in this transition, and we will be for a few more years.
But once you’ve done that, when you untether yourself from the traditional design factors, all sorts of things start to become possible. Obviously, autonomous driving is big; you have lots of people working to make that real. I think it’s still some way off. But how you use the vehicle, what it actually is—the device itself will change in all sorts of ways that may be quite hard to anticipate right now.
Jonathan Woetzel: Any other business opportunities related to sustainability that a company should keep an eye on, beyond EVs?
Robin Harding: There are lots of other technologies out there still vying for their place. When I was in Japan, I covered hydrogen a lot. I’m not persuaded that the economics of hydrogen will work but it’s still a very interesting technology and there’s a whole other value chain potentially associated with that. One of the things people in Japan talked about is the idea of importing green hydrogen from places like Australia. The vision is that you would have huge parts of Australia covered in solar panels generating hydrogen, which would then be shipped in tankers to Japan to meet Japan’s energy needs. There are people working on trying to do things like that.
And there’s a whole set of negative almost opportunities around sustainability, where there’s pressure to change existing practices. For example, tuna fishing: there’s not enough tuna for all the consumers in Asia, so how the region manages its fisheries and how that resource is distributed is going to be a big conversation. Around deforestation, palm-oil production in Indonesia and Malaysia—these are really big conversations where sustainability concerns are going to have a very large impact on business in the region. So, trying to find the opportunity lies in thinking, “Well, if regulation stops us doing that, then what will be the consequence, what’s going to come in instead? And how do we get involved in it?”
Jonathan Woetzel: It’s an interesting landscape. It’s very optimistic. It feels like for Asia, it’s going to be a relatively prosperous year, all things considered. There are more tensions and more flare-ups, but there’s this underlying driver. A lot of people say, with a more long-term view, that this will be the Asian century. Would you subscribe to that? Or how would you caveat it?
Robin Harding: One of the great joys of working in Asia is that you have a fundamental basis of optimism and progress and growth to work from. We have colleagues in London, and it’s always very fretful in London, with concerns about this or that. You just don’t have that in Asia. There’s always a basis for feeling positive about things—certainly, in the economic sense. It’s going to be the Pacific century. Whether we remember it as the Pacific century or the Asian century is an interesting question because I still think that the United States is the heart of the world economy, the heart of technological progress, and we don’t yet see much sign of Asia taking away that title.
I think the real question is whether Asia can have the social, political, and cultural weight to match its economic heft. Because we just don’t see that at the moment. It’s still a Euro-American world when it comes to the systems that we live in. I don’t think people still look to the United States as the model for what they want to be, but I’m not sure that the region is quite ready to step up and make it the Asian century. But it’s always a work in progress. Who knows what it’s going to look like in 20 or 30 years’ time?
Jonathan Woetzel: It’s an interesting conundrum. As one system emerges, there’s a desire to say, these are the institutions that represent it. And those become the standard bearers, so that we can say, it’s an Asian Century. But a characteristic of Asia in many ways is that the institutions of Asia are, well, fragmented to be polite.
Robin Harding: It’s always, of course, very silly to talk about a place called ‘Asia’. It’s frustrating, there are at least three different Asias, probably more. It’s a huge, huge region. So, I’m not sure whether Asia needs pan-Asian political institutions. But certainly, to be the leader, to be the place that sets the agenda, your institutions have to be attractive to others. And that’s something that the region has not yet developed.
Jonathan Woetzel: Indeed. And that’s what gives the rest of us a varied landscape to investigate. Lots to look at. And the only way to do it is to go out and be bottom-up.
Robin Harding: Very much so. That’s fundamentally what we do as journalists. And what we offer to you as readers out there is we have people on the ground, on their job. I’m on the phone telling them every day to get out there, talk to people, tell me what’s going on. I don’t want you sitting in your office and coming up with theories about the country you’re in. Go out and give us the voices of the people so that we can get a feel for what’s happening on the ground.
Jonathan Woetzel: Great. More of those stories please, Robin in 2023. Looking forward to that. And thank you so much—this has been a pleasure.
Robin Harding: Thanks, Jonathan. Really enjoyable conversation.
Gautam Kumra: You have been listening to the Future of Asia podcast by McKinsey & Company. To learn more about McKinsey, our people, and our latest thinking, visit us at mckinsey.com/FutureOfAsia, or find us on LinkedIn, Twitter, and Facebook.