Today’s economic and political disruptions could trigger a new era for the world. Asia starts a new era from a position of strength, but—at the nexus of the world—will face a heightened version of global challenges, from trade tensions to aging to the demands of energy security and the net-zero transition, according to new McKinsey Global Institute research, Asia on the cusp of a new era.
Asian businesses are preparing for major strategic shifts. Alongside the new research, MGI collaborated with the Asia Business Council on a survey of CEOs in the region. More than 80 percent of CEOs expressed optimism about a new era, but three-quarters said that significant or transformative strategic shifts will be necessary on a broad front.
“In the past era, Asia arguably benefited more than any other region from the major trends of globalization and digitization,” said Jeongmin Seong, an MGI partner. “And it starts a new era in a strong position. Looked at collectively, the diverse and dynamic countries of Asia are now such a large part of the global economy, they can shape a new era.”
“A new era is going to have very different underlying forces than in the past, and Asia will be at the center of these forces,” said Chris Bradley, a McKinsey senior partner and MGI director. “Asia will be the furnace in which a new era is forged, and it may be that Asia experiences a more concentrated, heightened version of global challenges. For instance, it is the crossroads of global trade, and could now find itself in the crosshairs of trade tensions.”
“Asia’s CEOs are overwhelmingly optimistic, but they see the need for very significant strategic shifts to manage the challenges of the new era,” said Nick Leung, a McKinsey senior partner. “Interestingly, most Asian businesses see the need for transformation in multiple areas. This suggests they believe that the years ahead are really going to be very different than the recent past and that they need to adjust.”
“There are at least five different Asias that will experience a new era differently, but all of them can potentially help shape it,” Gautam Kumra, a McKinsey senior partner and chairman of McKinsey Asia. “Strong complementarity among the different Asias can continue to stitch them together through pragmatic economic cooperation.”
Key findings include:
- Asia’s economies were the great beneficiaries of deepening global connections, rapid digital adoption, and broadening urbanization and capitalization over the past 30 years. Complementary comparative advantage in trade. Today, 59 percent of Asian trade is with other Asian countries.
- A new era will have very different underlying forces than those that shaped the past 30 years and, at the nexus of those forces Asia will experience a more concentrated, heightened version of the global challenges across five domains:
o Asia is the world’s trade crossroads but could now find itself in the crosshairs of trade tensions. Of the world’s 80 largest trade routes, Asia is in 49 on at least one end, and 22 on both ends. It is also home to 18 of the 20 fastest-growing corridors, and 13 of the 20 largest. Commercial pragmatism has driven Asia’s integration rather than political alignment. Can that continue if trade tensions rise?
o Asia excels in manufacturing of technology. In consumer electronics, industrial electronics, electric vehicles, and semiconductors, it accounts for more than 40 percent of the world’s 3,000 top technology-related companies’ share of global revenue, R&D spending, and patents. But the value created by tech is moving to software and solutions. Can Asia reinvent itself as a tech creator as well as a tech manufacturer.
o
Asia
has largely been in a demographic sweet spot with large pools of young workers
and surging productivity in key economies. But the Pacific Rim’s high-productivity
economies are now aging. Overall, Asia has the people to fuel growth, but 90
percent of the expected increase in its nonfarm workforces from 2022 to 2050
will be where productivity is relatively low. Can Asia shift value chains to
where the workers are and raise productivity everywhere?
o
Asia is
the world’s largest energy consumer, but still needs much more to fuel future
growth. Asia is under-energized—its per capita consumption is only at one-third
of the OECD average. Securing the energy it needs could be trickier amid trade
tensions. Asia is also the world’s largest carbon emitter, but its energy
transition will be challenging because the region remains highly industrialized
and industry is hard to decarbonize. Can Asia get the energy it needs even
while reducing emissions?
o
Asia
has sucked in the most capital of any region in the world—$91 trillion between
2000 and 2021. But it still needs more. Over the next decade, Asia’s fixed
investment could be close to $140 trillion—more than the combined total of $89
trillion for the United States and the EU. But can Asia get the capital it
needs in a less certain macroeconomic environment and amid new balance sheet
stress? The trick will be to deepen its financial markets and improve capital
allocation and returns.
- Asia starts a new era in a position of strength as the world’s new “majority.” Asia accounted for 52 percent of global GDP growth between 2015 and 2021. In 2001–21, it contributed 59 percent of growth in world trade, and 53 percent of the world’s manufacturing value added. It is home to 56 percent of the world’s middle-class households.
- A new Asia Business Council survey finds that 82 percent of top executive respondents are optimistic about a new era, but a huge majority—74 percent—say that significant or transformative strategic shifts will be needed in multiple domains. Three groups of companies emerge from the survey results:
o About 10 percent of companies say they can take a “business as usual” approach. This small minority of business leaders thinks that trends in the five domains have relatively low strategic significance for their businesses.
o About 16 percent of companies believe that they need to rethink strategy in one or two domains. Technology and energy are the aspects that stand out.
o The rest—a huge majority of 74 percent—say they need to drive fundamental transformations in three or more domains.
