How Asian firms can create value

Asian companies will continue to grow their share of global GDP over the next decade, but as Ben Stretch, associate partner in our Sydney office and co-author of Future of Asia explains, they will have to do more to become as profitable as their North American and European Union counterparts. Ben lists strategy execution, talent management and identification of clear performance indicators as critical for Asian companies to succeed.

What are the biggest megatrends you’re seeing in Asian Corporations?

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First of all Asia accounts for a growing share of the global economy, and is on track to rise to about half of global GDP by the year 2030.  Not surprisingly Asia's firms are also gaining ground.

Firstly, if you look at the 5000 largest companies in the world by revenue 43 percent of them are now from Asia, up from just 37 percent a decade ago.

Secondly, there are now significantly more Asian firms in the top 5000 than there are companies from either the EU or North America?

Thirdly, China is the big driver of this story. And that’s demonstrated by Chinese firms having doubled their representation on the list over the decade.

There are now 900 Chinese firms in that top 5000 list, however, revenue and profitability are obviously very different things. And we’ve found through our research some really notable differences when we analyze the profitability of Asian firms. On aggregate, Asian firms are not yet as profitable nor value-creating as companies either in North America or in the European Union.

In fact, over the past decade the largest North American companies delivered 9.3 percent annual returns on invested capital, and that compares to just 7 percent for Asian firms.

Overall, our research suggests that North American companies generated cumulative economic profits around USD 245 billion over this last decade. While Asian companies collectively accumulated economic losses of around 260 billion US dollars.

So in short, Asian companies overall have largely offset the economic value creation that’s been had in North America. We’ve also found that there’s a significant difference between the return on invested capital that listed companies generated in Asia versus unlisted firms in the region.

The first thing to say here is that unlisted companies everywhere tend to create less value than listed companies.

It’s not just a particular Asian geography or region phenomenon. At the core of this is choice of sector, and there are just some sectors that continue to, over time, prove themselves to be consistently high return on invested capital generating sectors.

It is in many of these sectors that Asia is underrepresented: Technology, Pharma and medical products are three such examples.

What will it take for these corporations to continue to create value through 2030?

Firstly, I’d suggest there’s no way to truly 100 percent future-proof any business.

However, there are some things you can do to significantly increase your odds of success. First, having a strategy is not enough, you need to have a strategy that your team can execute. And that means paying real attention and putting real energy into looking at the people on the talent and the capabilities that your organization is going to need to deliver the strategy. And this is one area where we find our clients often underinvest.

Secondly, be sure that the strategy you’re designing is one fit for where you need to be in 2025 or 2030; not one that is merely fit to get you to be at the bar today.

Finally, you need to be really clear on the metrics and the KPIs, and the measures that you're going to use to assess your progress on this journey and the delivery of the strategy. And incredibly importantly, ensuring the board, the CEO, and the management team all understand and are aligned around those metrics is absolutely critical to be able to lead and stay the course when the going gets tough.

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