Inflation in Asia: How leaders can prepare for volatility

Global inflation is increasingly unpredictable, leaving companies unsure how to navigate the current environment. McKinsey’s Mahima Chugh and Joseph Tesvic discuss the effects of inflation on businesses in Asia. They offer five reinvention themes that companies can consider to build resilience and set them apart from competitors. 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.

Denise Lee: Hello, and welcome to a new episode of the Future of Asia Podcast. I am Denise Lee, a partner in McKinsey’s Taipei office, and I’m your host for today. In this episode, we’ll be talking about how global inflation has been affecting Asia and how companies can respond to these latest developments. I’m excited to be joined by two distinguished guests: Mahima Chugh, a partner in the Mumbai office, and Joseph Tesvic, a senior partner in McKinsey’s Sydney office and leader of our Asia–Pacific Operations Practice. It’s great to have you both with us today. Before we delve into the topic at hand, could you briefly introduce yourselves to our listeners?

Mahima Chugh: Hi, I’m Mahima and I’m a partner in our Mumbai office. I spend my time with consumer clients working across growth topics in consumer products, durables, and retail.

Joseph Tesvic: I’m Joseph Tesvic and I’m a senior partner who has spent more than two decades in McKinsey’s Sydney office. I lead our Asia–Pacific Operations Improvement Practice, as well as our local Consumer Practice. I spend most of my time working with consumer-facing companies on significant strategic and operational transformations.

Denise Lee: According to recent McKinsey research, inflation in many countries has more than doubled projections over the past six months. What is the current situation in Asia, especially in comparison to global figures?

Joseph Tesvic: So far, we’ve seen a significant effect on Asia across the board: mid-single-digit inflation in most countries, accompanied by scarcity in many of the inputs that consumers and businesses seek. It might not be quite as stark as in Europe and the United States, which so far have peaked at around 9 percent, but it is significant if we take the last 20 or 30 years as the point of comparison. What’s different from some of the prior inflationary cycles in Asia is that inflation is everywhere—in every country and every industry. So, whether it’s energy, coal, gas, electricity, or the price of food and commodities, pretty much everything in Asia is seeing an inflationary cycle.

The predictions made by banks and macroeconomists recently show that no one knows the direction in which inflation is going. Mahima and I hosted almost 100 senior executives recently, and we asked them where they thought Asian inflation would be at the start of 2023. Half of them thought it would be higher than it is now, and half lower, showing the high level of residual uncertainty. Equally, 85 percent of them thought it would take a year or more to get back to normal in their home countries. We are not predicting a quick resolution.

Denise Lee: How has this current scenario changed the economic outlook of Asian countries? Should Asian businesses be worried?

Mahima Chugh: We continue to remain bullish on Asia and the growth opportunity that it offers for the global economy. We believe that it’s going to have a material contribution to incremental growth going forward. This could also be looked at as a significant inflexion moment and a great opportunity. Looking back to the 2008 financial crisis, companies that set themselves up well during that time, and were agile and thoughtful in their responses, outperformed their peers for the next decade. So, while it is worth considering short-term responses in the current inflationary scenario, this is also the moment for companies to take a deep look at their value chains to see what could be transformed that will set them apart in the future.

Denise Lee: What advice would you give to companies and CEOs in Asia navigating this period of volatility?

Joseph Tesvic: If you are belt tightening, you’re doing it wrong. You need to set yourself up for a decade of outperformance, and that requires reinvention. We’re counseling our clients along five reinvention themes.

The first one is to use this situation as an opportunity for radical product and service simplification, which requires companies to operate differently from normal. For example, many companies rationalize products or services and, typically, this might mean removing 10 percent by tweaking the margins. For the sake of simplicity and efficiency, now is the time to think about removing 50 or 80 percent. Clean sheeting needs to be done at every level of a product, like the packaging or where and how it’s produced. Companies need to start doing this kind of forensic analysis—this can have a remarkable effect on business, not only downstream, but also on products and services upstream in value. Companies should think about whether it is time to reinvent their business models. Should they be a subscription-based rather than a fee-based for a product or service? Or should the company engage with its customers in a different way? All of these are variants of radical product and service simplification.

The second reinvention theme is supply-chain transparency and resilience. The old ways don’t work anymore. Instead, businesses need to digitize the supply chain and be transparent on inputs—and even the inputs of their inputs—focusing on the critical spares, inventory, surfaces, and particularly labor in this low-unemployment environment. For example, many companies say that they can’t get chips to put into electronics. There actually are enough chips; it’s just that they may be hard to find. Companies have to have the transparency to know who has capacity, and act quickly to get ahead in their sectors.

The third theme is next-generation operations improvement. Typically, this involves using a combination of digital analytics, human-centered design, and agile and robotic automation. Using these levers in a sophisticated way will have about twice as much the business impact than using analog levers. We see this with our clients—whether it’s with frontline work automation, back-office processes, external spend (that is, procurement), or capital productivity.

Mahima Chugh: The fourth reinvention theme is next-generation revenue growth management, which is how businesses deal with the product suite that they offer their users, and how they access them. This is what we call “prize pack architecture.”

When looking at this, companies must consider whether each one of their services and products meets a particular need and is relevant for a specific occasion. And they should also ask themselves, “Are there new requirements that have been created by the macroeconomic disruption that are worth addressing? Do some options need to be retired?” At its core, price pack architecture used to be a mix of art and science. It has now moved completely into the ambit of pure science and is powered by data, with logical decisions on ROI and the balance of volume and value growth.

The velocity and granularity with which prize pack architecture is designed is what is going to set companies apart. Demand generation is at the other end of the spectrum. This used to be about linear television, then digital demand levers. Now we believe that it’s about agility and customization, and a conversational incremental reach using different levers. Companies need to make sure that different channels are reaching the consumer, and generating demand from the physical point of sale to the geotagged notification that the consumer gets. It varies by product and service but companies must assess their capabilities to be agile and customize their marketing communications.

Changes are happening with channel management as well. In the past, the physical and digital channel players were looked at in isolation. However, incredible integration has created large, aggregated omnichannel ecosystems. The COVID-19 pandemic really changed consumer behavior with a dynamic switch between offline and online channels. Omnichannel management needs to include ensuring that everything is backed up by a robust ROI understanding, even items like promotions or discount calendars. This understanding should not only consider past performance, but also the next-generation go to market, which could be the future potential of different zip codes and how you manage them.

The fifth reinvention theme is at the heart of an organization and how it operates. How should companies go about reimagining their entire operating models? There are multiple levels here—from talent to value to hiring versus outsourcing—but the one I’d like to underscore is rescaling. According to our research, as much as 30 percent of most global companies’ workforces are going to require substantial rescaling by 2030—if businesses want to remain relevant in the next decade. Companies that realize this soon, identify the pockets of rescaling, and quickly get ahead will definitely be better set up, not only during this inflationary period but also in the future.

Denise Lee: Thank you, Mahima. What is the one thing that our listeners should take away from this conversation?

Mahima Chugh: Companies need to take a step back to look at the entire business cycle and question what could be disrupted if it has not been so far. They should assume that if it’s not the macroenvironment, then it could be an insurgence. This is the moment to predict upheavals that could happen, get ahead of them, and be ready for the next disruption, which is probably around the corner.

Joseph Tesvic: My biggest takeaway is that there is a massive level of uncertainty coming to Asia, and the greater risk is underreacting rather than overreacting to it.

Denise Lee: Thank you both for your time. We have come to the end of this episode of the Future of Asia Podcast. If you enjoyed it, keep a lookout for more to come. And if the topic of resilience interests you and you would like to read more on it, go to www.mckinsey.com/FutureOfAsia.

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