Five Windows of Opportunity for Post-Pandemic Asia
By Gautam Kumra and Jonathan Woetzel
Across Asia the COVID-19 pandemic not only triggered the most challenging global health crisis and economic downturn for a generation but also accelerated and gave new force to preexisting trends, notably, digitization. New windows have opened for business across the region as we look forward to life beyond the pandemic.
While deep uncertainty remains, the region exhibited resilience in the face of this extraordinary shock. The Asian economy contracted by 1.5% in 2020, while the world economy shrank by 3.2%. Moreover, Asia is expected to rebound faster. In July 2021, the International Monetary Fund forecast that Asia would grow at 7.5% in 2021 and 6.4% in 2022, compared with 6% and 4.9% for the world.
We should note however that the speed of recovery varies significantly within Asia and that the pandemic has been bruising for the most vulnerable people, including those on low incomes and women. In April 2021, the Asian Development Bank estimated that the number of people living in poverty in the region increased by more than 170 million in 2020 because of the pandemic. Gender inequality was widespread across Asia before the pandemic and has worsened because of it.
Notwithstanding such damage and the potential for continuing pandemic-related disruption, Asian economies still have a great deal of charge left in their batteries. We see five open windows of opportunity.
1. Strengthening Asian Networks of Trade and Flows
The economic disruption of the pandemic has shown that resilience matters more than ever. Deepening intraregional connections should help the region. Before the pandemic, 60% of goods traded by Asian economies and 59% of foreign direct investment was intraregional. Powerful regional trade networks were propelling Asia to an increased share of world trade. In 2020 the economies of ASEAN became China’s largest trading partner for the first time, overtaking the European Union.
Value chains are becoming more localized and regionalized. Large developing economies — China and India in particular — are consuming more of what they produce. In China, 28% of computers and electronics produced were exported in 2017, compared with 55% in 2007. India exported 35% of its final output in apparel in 2002, a peak share; by 2017, that share had fallen to 17%. The economic disruption associated with the pandemic appears to have accelerated the shift toward Asia-for-Asia supply chains.
2. Boosting Growth Through Innovation
In the decade before the pandemic, Asia posted the largest shares of regional growth in key technology metrics: 52% of global growth in technology company revenue, 43% of global growth in start-up funding, 51% of global growth in R&D spending, and 87% of global growth in patents filed. The region today has considerable scale in start-up investment with 40% of the global total, as well as in Intellectual Property creation, that should support technological leapfrogging, particularly in consumer-facing and manufacturing sectors. Again, COVID-19 appears to have accelerated technological adoption and innovation.
Asia’s highly adaptable digital population embraced new digital services enthusiastically and, during COVID-19, even traditionally less digitized parts of the economy became more digitized.
Asia can progress considerably further on innovation, particularly in advanced Asian economies. In 2021, the Bloomberg Innovation Index put South Korea top of a list of the most innovative countries. Entrepreneurship in emerging Asian economies and India is likely to continue, given their large young populations, long-term growth momentum, and widespread inefficiency that can be tackled using innovation. India has strength in numbers, with more than 20 million new STEM graduates every year.
3. Drawing a New Consumer Map
Asian consumers are expected to account for half of global consumption growth in the next decade, equivalent to a $10 trillion opportunity. As incomes rise across Asia, more consumers will reach the higher tiers of the income pyramid. By 2030, 70% of Asia’s combined population may be part of the consuming class (defined as spending more than $11 a day in 2011 purchasing power parity terms). As recently as 2000, only 15% were in this category. This is a huge upward shift in purchasing power.
The most promising source of growth is the increasing diversity of consumption growth within cities. Take, for instance “digital natives,” born between 1980 and 2012, who may account for 40% of Asia’s consumption by 2030. Or consider the rise of single-person households; they could account for almost one-third of households in advanced Asian economies by 2030. To serve this robust “singles economy,” growth is occurring in social media, home food delivery, smaller packaged-food portions, solo dining, and travel, and even pets and robot “friends” as companions.
4. Leading the Climate Transition
Asia is well placed to lead global adaptation and mitigation efforts as climate risk climbs to the top of the policy and corporate agendas. Renewable energy is expected to account for an estimated 40% of average annual global energy investments through 2025, and Asia is a leading player. The region has the largest share of any region in the world of installed renewable capacity — 45%, compared with Europe’s 25% share and North America’s 16%. Asia is expected to pull further ahead, accounting for 64% of new renewable capacity additions globally between 2019 and 2040, according to the International Energy Agency.
Asia is heavily exposed to climate risk and has the incentive and capabilities to play a key role in global adaptation and mitigation efforts, in the process enhancing its own resilience.
5. Enhancing Corporate Profits by Unlocking Productivity
Before the pandemic, Asia’s corporations had grown substantially, thanks to a huge wave of capital investment with $1 of every $2 in new global investment going to companies in Asia which, in 2020, accounted for 43% of the world’s largest companies by revenue. However, that growth in scale and revenue has not, overall, translated into higher economic profit. An abundance of cheap capital had led to falling returns around the world, but more than half the deterioration was in Asia.
As corporate Asia plots its path out of the pandemic, there is significant scope to turn this around, in the process supporting the region’s recovery. Asian companies have continued to scale up, even during the COVID-19 pandemic. The number of Asian companies included in the Fortune 500 increased from 208 in 2018 to 229 in 2021.
The pandemic, its aftershocks, and even its aftermath are likely to pose complex challenges. However, Asia has repeatedly demonstrated its resilience and adaptability in the face of crises, and the region has come out stronger once the crises have receded.
Gautam Kumra is Chairman, McKinsey Asia and Jonathan Woetzel is a senior partner and a director of the McKinsey Global Institute.
