A once-in-a-lifetime pandemic has left virtually no aspect of life or business untouched. Leaders have had to identify a new set of urgent priorities to cope and keep up with the ever-shifting situation, from increasing the pace of digitization and defining net-zero emissions targets, to addressing critical talent questions.
As we mark the two-year anniversary of the Asian Century, we sat down with McKinsey leaders to ask: what are the biggest changes you’ve observed since the Asian Century began? Looking ahead, where do the biggest opportunities lie in Asia? Here’s what they had to say.
Asia’s recovery at multiple speeds
Senior partner Oliver Tonby elaborates on Asia’s economic recovery in the face of the pandemic.
Clearly, the biggest worry for business leaders around the world shifted in early 2020. In 2019, we had no idea what was to come; a global pandemic few had anticipated, which has triggered the most challenging economic downturn of a generation. It has also accelerated and given new force to preexisting trends.
We are now going to see recovery of multiple speeds as we fight COVID outbreaks that are coming in waves. Before the pandemic, there was a broad consensus that Asian economies were going to grow at a robust rate. Since then, the Asian economy has actually contracted by 1.5 percent overall in 2020, compared to 3.2 percent contraction globally.
Looking ahead, Asia is expected to rebound faster. The IMF forecasts that Asia can grow at 7.5 percent in 2021, and 6.4 percent in 2022. As a contrast, the global economy is expected to grow by 6 percent and 4.9 percent, respectively.
But the recovery of Asian economies is happening at varied speeds. Several economies demonstrated rapid recoveries in the second quarter of 2021: year on year, South Korea grew at 7 percent; Indonesia by 7 percent, China and Japan by 8 percent, and Malaysia, the Philippines, India, and Singapore all recorded double digit growth.
Despite that, only China, South Korea, and Vietnam have managed to recover to pre-pandemic levels. In fact, in July, the IMF downgraded its April forecast for several Asian economies. India is down by 3 percent from its April forecast, Japan by 0.5 percent, and the ASEAN region by 0.6 percent.
Several of these countries are fighting record numbers of infections and deaths as we speak. We expect to see wide variations in economic recovery rates among these economies, as these rates are a function of vaccination rates, the stringency and effectiveness of containment policies, countries’ dependence on tourism and other contact intensive services, as well as the degree of policy support.
The immediate challenge, as in so many other parts of the world, is to continue to fight COVID infections, but at the same time deal with the deep economic fallout of the pandemic. It has not only raised the geopolitical temperature, but also exacerbated some of the preexisting challenges.
Sadly, the pandemic’s effects have been regressive, hitting those with the lowest incomes the hardest, and increasing income and gender inequality which were already high in Asia. For example, in April 2021, the Asian Development Bank (ADB) estimated that the number of people living in poverty in Asia has increased by more than 170 million people in 2020 as a result of the pandemic. Additionally, despite accounting for 39 percent of the global workforce, as much as 54 percent of the job losses due to COVID-19 has been amongst women. If we advance women’s equality in Asia, it could add $4.5 trillion, or about 12 percent to GDP, annually across Asia.
A closer look at India
Gautam Kumra, Chairman of McKinsey’s offices in Asia, identifies three opportunities India has to potentially add another $2.5 trillion to its economy over the next decade.
India has been one of the 18 economies in the world that have been outperforming in per capita GDP growth rate for almost three decades. Between 2014 to 2019, though, we saw a slowdown in the economy, and this was further impacted by the COVID crisis and the onslaught on both lives and livelihoods.
After a substantial GDP decline last year, India is on to a very fast recovery, with most economists postulating potential double digit GDP growth rate this year. The challenge for India is how to sustain about 8 percent growth between 2022 and 2030, because this is what is needed to produce about 90 million jobs to give employment opportunities to the up and coming. These 90 million jobs would roughly be 60 million net new jobs and 30 million from displacement from agriculture, manufacturing, and services.
This 8 percent GDP growth also requires about a 7 percent increase in productivity growth rate, which means India needs to adopt a range of high productivity frontier opportunities. They come in three types; the first being, is India becoming a manufacturing hub for the world? There’s a lot the government is doing to incentivize companies in the chemicals, auto component and electrical sectors for India, in addition to being a powerhouse for IT and digital services.
The second set of opportunities comes with India becoming a more competitive nation. For example, power and logistics costs, which tend to be prohibitive in India. Logistics are 13 percent of GDP, and commercial power tariffs are one of the highest in the world. These would need to be rationalized through both reform and more competitive models to increase India’s competitiveness as a country.
Finally, a set of growth opportunities can be found in how Indians live and work. For example, urbanization needs to continue to kick in, but that requires the development of more efficient smart cities, shared mobility, and a much higher productivity retail model. If these opportunities are captured, they could potentially add another $2.5 trillion to India’s economic value over the next decade.
New developments in Asia’s regional networks
Senior partner Karel Eloot explains how the COVID-19 pandemic has reinforced Asia’s regional networks, and what this means for companies doing business in Asia.
In the past two years, three trends that we discussed in our Future of Asia flows and networks report have become even more prominent. The first was what we termed ‘Asia-for-Asia’, which is the continuous trend of regionalization. Both regionalization and the shift from trade of goods to trade in services are happening really quickly.
Before COVID-19, 60-80 percent of the flows in goods, foreign direct investment (FDI), and people were intra-regional in Asia. As response to the pandemic, companies have further accelerated regionalization and localization to enhance the reliance and resilience of their supply chains. For example, in 2020 ASEAN became China’s largest trading partner.
The second trend is the digitization of operations. In our report, we discussed the increase of data flows across Asia, and to enhance resilience of the supply chain, companies have been digitizing even faster. In our global survey, around 70 percent of executives indicated they have plans to accelerate the adoption of automation and artificial intelligence. Asia is no exception to this—last year, sales of industrial robots in China increased by around 20 percent.
The third trend is the rising importance of the sustainability agenda. In our report, we analyzed 16 flows related to Asia, and we found that only the waste flow was declining. Sustainability has become even more important in the last few years, with China, Korea, and Japan all announcing goals for reaching carbon neutrality over the next 30 to 40 years.
Consumers are also paying more attention to sustainability; more than half of the consumers we surveyed in Asia recently said they have already changed products or services they buy out of concerns related to climate change. This increasingly impacts how companies manage their products, services, and supply chains.
Asia’s net-zero imperative
Partner Yuito Yamada explains why we can expect to see a huge wave of transmission and sustainability efforts across Asia over the next ten years.
Asian governments, companies, and consumers are seeing a huge change in sustainability transmission. Firstly, governments like Japan, Korea and China have announced net-zero targets, and some Southeast Asian countries are trying to do so as well.
Secondly, in terms of companies, different industry sectors have started to announce net-zero targets towards 2050, and more will come as financial institutions start announcing sector-based targets as well.
Thirdly, consumers are starting to change significantly. Changes in consumer behavior, as we saw in the change in attitude towards plastics, are taking place here in Asia, but this is going to come more in terms of how people eat and consume. In the next ten years or so, we expect to see a huge wave of transmission and sustainability efforts across Asia.
How Asia’s consumers will drive global growth
Partner Naomi Yamakawa elaborates on the major demographic shifts transforming Asia's consumer markets, and what businesses should be mindful of to capture part of Asia’s $10 trillion consumption growth opportunity over the next decade.
Looking forward to the next ten years in Asian consumers, we continue to see a very vibrant economy. This will bring about many shifts, and Asia’s consumer markets will be at the forefront of technology. These changes in Asia will be brought upon by three inevitable demographic shifts, and one shift which we need to make happen.
The first shift is the rise of the single economy—there will be more single households in Asia than ever before. Representing a significant part of the economy, how companies serve these single households, or the ’lonely economy’, will be important, as they will have an impact on serving portions, methods of delivering goods and services, as well as an expanded need for self-care.
The second shift is the impact of Generation Z and Millennials on the Asian economy. As Asia will have a huge population growing into spending power over the next ten years, the way these people interact with services and brands is totally different from their predecessors. In order to thrive, companies will need to reevaluate their business models, the way they brand themselves, and the value they bring to these new consumers.
The third shift is the aging economy. Asia is seen as very young but especially in places like North Asia, the above-60 consumers will represent a very large part of the economy and savings, thus becoming a huge opportunity to look into. Members of the aging society will not be the people you saw ten years ago; they will be fully digitally enabled. We need to be able to serve these Insta-Grannies and Insta-Grandpas in a way where it is comfortable and fulfilling for them.
The last shift that we need to bring upon, and there will be effort required, is the empowerment of women and their consumption. If we can empower women to be active in the economy, it can unlock up to $2.2 trillion worth of consumption in Asia alone. With these four shifts happening, Asia continues to be a very significant hotspot in the global consumer world.
Are cities still a vehicle for growth in Asia?
Jonathan Woetzel, senior partner and director of McKinsey Global Institute, explains how the COVID-19 pandemic has affected what’s happening inside Asia’s cities.
Much has changed in Asia, but some things have remained: cities. Cities are still there, and urbanization is still happening. Every year, 20-30 million people move, and while they may be a little more spread out, particularly those with digital jobs, that process of integration and the movement from rural to urban society continues to be a meta-trend across Asia.
That said, what’s happening inside cities is a bit different to what it was two years ago. Clearly, the rise of the app, from e-commerce to e-health, is very sticky and is staying as we all get used to a more digital life. On the other hand, some things will probably snap back; notably, online education has been shown to be less satisfactory than its offline alternative.
And, of course, mobility itself has had a lot of constraints from the pandemic, whether it’s on supply chain management or domestic tourism. These impacts are being felt, and we expect that as we move beyond the pandemic, mobility will snap back. So, cities? Still there. What’s happening within them? Very different.
Regional resilience and new opportunities
Senior partner Wonsik Choi elaborates on how the last two years have reinforced Asia’s resilience as a region.
Resilience epitomizes the character of Asia as an economic bloc. Asia has proved remarkably resilient to exogenous shocks over the decades; its diverse but complementary economies have conferred considerable robustness to supply chains and economic activities, and these strengths will continue to prevail in the years ahead.
At the same time, the pandemic has pointed to many opportunities for Asia to further increase its flexibility and optimize its operating models for speed and agility. During the pandemic, the social contract between governments and business, and between businesses themselves, took on a whole new life and dynamism.
This spirit of collective action could develop into a new Asian operating model. Asia has made larger shifts than almost any other region in the past decade and has navigated that change very effectively. There are many extreme complex challenges ahead, but I have no doubt that Asia’s resilience will continue to prevail and further add to the region’s prosperity going forward.
One way Asia will lead the world is in the growth and export of talent. Asian countries produced 76 percent of the world’s science, technology, engineering, and mathematics (STEM) graduates from 2016 to 2018, and India produces the most computer science graduates in the world with over 200,000 a year.
The COVID-19 pandemic has massively disrupted Asia’s ability to export its talent across borders, which had been on a steady and strong rise until the outbreak. On the other hand, the pandemic has also created an opportunity for Asian companies and industries alike to tap into the region’s strong talent endowment.
Digital adoption, for example, has taken a quantum leap, accelerating the digitization of internal operations by three to four years for many companies and industries. Asia’s share of global IT service revenue has also increased over the past decade from 25 percent to 29 percent, and that share could rise further with its ample pool of talent.
Technologically leapfrogging into the future
McKinsey Global Institute partner Jeongmin Seong shares three observations on Asia’s technology landscape and what this means for the region’s opportunities to leapfrog.
I’d like to highlight three observations about the evolving technology landscape in Asia. First is a continuation of Asia’s technological transformation, even during the pandemic. In our previous research, we pointed to Asia’s significant technological transformation over the past decade.
For instance, Asia accounts for more than 50 percent of global growth in research and development (R&D) spending, and for more than 80 percent in patents filed around the world. This trend has continued even during the pandemic—in the first half of 2021, venture capital investment in Asia grew at double digits, while China continues to be a leader in terms of patent applications.
The second trend is a significant acceleration of digitization. Even before the pandemic, Asian customers were enthusiastic adopters of digital services, so it is not surprising to see the surge of ecommerce and delivery businesses in Asia. What will be interesting over the coming decade is whether the behavioral shifts caused by the pandemic will stick. For example, the surge of telemedicine and remote working could lead to structural changes in our behavior, and as a result related business models.
The final trend is the expansion of business technology services. Over the next five years, spending on technologies such as cloud, analytics, Internet of Things, and AI are expected to grow at a rate of over 20 percent per year. With Asia accounting for more than 70 percent of STEM graduates in the world, the region’s strong talent base suggests Asia has strong potential to substantially increase its presence in this area.
These three trends can create exciting opportunities for the commercialization of new ideas and eventually, advanced productivity growth in Asia over the coming decade.
New priorities for Asia’s supply chains
Patti Wang, engagement manager, elaborates on why the future of Asia’s supply chain is bright, but only if they are resilient.
The Asian Century has arrived and stayed. In our 2019 article, ‘Asian flows and networks are defining the next phase of globalization’, we observed a greater shift in regionalization rather than globalization. The pandemic has accelerated this shift, reinforcing that Asia will become the future focal point of global trade.
The COVID-19 pandemic has drastically changed the intensity of trade. Over the last 20 years, trade has been growing at 3.5x GDP; within the last year, however, this multiplier has dropped down to 1.0x. The overall decline in trade intensity has had varying effects on different trade corridors.
Asia’s exports to Europe and North America took the deepest hit; rather, intraregional trade has remained relatively strong and continues to be a key driver of trade within Asia. The disruptions associated with the pandemic are likely to intensify companies’ focus on business and supply chain resilience.
To achieve greater resilience, countries will need to adapt different strategies for growth, while companies will need to consider reconfiguring their supply chains to avoid future shocks. Building supply chain resilience can take many forms beyond just relocating production, with some options to consider being strengthening risk management capabilities, improving transparency, or potentially building resilience within supplier and transportation networks. One of the other things many companies are doing is digitalization, but the speed at which this happens can vary widely within companies.
The future of Asia’s supply chain is bright, but only if they are resilient. Notably, the pandemic has exposed the vulnerability of the global supply chain. From the demand side, the crisis is changing the strategic context of supply chains, affecting various sectors in different ways. Some industries, such as aerospace, may be facing the prospect of prolonged periods of suppressed demand. On the other hand, sectors such as consumer-packaged goods and medical supplies are racing to maintain high and volatile demand.
On the supply side, even in the parts of the world where COVID-19’s initial effects started to recede, dislocation appears to remain a fact of all different aspects of life. For example, a recent McKinsey survey of manufacturers in Asia showed that companies are still struggling with sudden material shortages. Coupled with the steep drops in demand and worker vulnerability, the overall network has begun to falter and is changing rapidly as regulation and border closures continue to disrupt supply chains.
Looking forward, global trade will likely continue to grow but perhaps at a slower pace. Due to an increased need for resilience, countries will need to adopt different strategies for growth, and companies will need to reconfigure their supply chains and consider alternatives to build more resilience.
These are a few of the shifts that have characterized the coronavirus pandemic from a business leadership viewpoint thus far. The question, or indeed the challenge, is whether organizations and leaders will be able to continue in these ways in the future. Stay tuned for answers, leader perspectives, and more from the Future of Asia at mck.co/foa.