Building 21st century companies in Asia

Future of Asia Building 21st century companies in Asia

It is notable that Asian consumers tend to be more willing to share data with service providers than their western counterparts. A 2021 Euromonitor survey found that in China, India, and Thailand, more than 45 percent of respondents said that they share data for personalized offers, compared with less than 30 percent in, for instance, France, Germany, and the United Kingdom. Despite this, there is growing concern among consumers about risks to privacy and the ability to control their own data. In response to public discomfort, regulation of the use of data are evolving rapidly across Asia, and CEOs need to be cognizant of this changing landscape and strive to balance the economic benefits of using exploding data pools with being sensitive to risk.

2. Square the sustainability and growth circle, and lead the energy transition now

The challenge of achieving growth in a sustainable (and inclusive way) is a challenge for CEOs around the world. But propelling growth even while promoting sustainability is arguably a more complex balancing act in Asia than elsewhere.

Many Asian economies are still in the “developing” stage, and the most pressing priority for many businesses is accelerating growth, vaulting more people out of poverty, and creating employment particularly in the wake of the pandemic. The Asian Development Bank estimates that the number of people living in poverty (living on less than $3.20 a day) may have increased by 170 million in 2020.

Asian companies need to generate sufficient profit to fund future growth. Before the pandemic, profitability was a challenge in Asia. An abundance of cheap capital had led to falling returns around the world. Globally, economic profits fell, from $726 billion in 2005–07 to a loss of $34 billion in 2015–17. Asia experienced a swing in economic profits from $150 billion to a loss of $207 billion. This was more than half the global deterioration.

At the same time, Asian economies are arguably more exposed to physical climate risks than any other region. Under a high-emissions RCP 8.5 global warming scenario, by 2050, between 600 million and one billion people in Asia could be living in areas with a nonzero annual probability of lethal heat waves. GDP at risk in Asia accounts for more than two-thirds of the total annual global GDP impact. About $1.2 trillion in capital stock in Asia could be damaged by riverine flooding in a given year by 2050, equivalent to about 75 percent of the global impact.

Pressure on businesses and governments to embrace sustainability is growing among consumers, investors, and employees, particularly the young. A 2020 McKinsey survey asked if respondents perceived sustainable packaging as more important than they did before COVID- 19, and more than half of respondents in China, India, and Indonesia said that they were more concerned, a higher proportion than among their counterparts in Europe and the United States. In a 2020 Ipsos survey, between 37 and 43 percent of respondents in Asia said they were “much more worried” about climate change than they had been a year earlier, compared with 18 to 27 percent in North America and 19 to 24 percent in Europe.

Around the world, expectations on the role of business is rising. At the start of 2020, threequarters of respondents in the trust barometer run by Edelman said they expected companies to lead change, rather than respond only when governments insist. Regulators and businesses are responding. Five countries in Asia have passed laws or proposed legislation mandating net-zero emissions, and 15 have put net-zero emissions into policy documents, according to one nonprofit organization. A rising number of companies in Asia have been setting, or committing to setting, a science-based target for emissions reduction: 33 companies did so in 2018, 60 in 2019, 107 in 2020, and more than 260 in November 2021.

Asian CEOs who can strike the fine balance between growth and profitability on the one hand, and sustainability on the other, have an opportunity to turn the challenge of sustainability into new investment, innovation, growth, and talent-attraction opportunities. Even in cases where the scientific case for investment in climate stabilization or mitigation is evident, many CEOs will need to negotiate a range of trade-offs not only between short-term shareholder value and environmental commitments, but also the impact of climate risk mitigation on a broader range of stakeholders. Among the challenges that may face CEOS are finding where corporate responsibility ends and where the responsibility lies with governments and other societal institutions of our society. There may well be cases where eliminating a “high-emissions” product line costs jobs in the community where the company is located. How can the right balance be struck?

For all the complexity of striking the right balance, there are very large opportunities in Asia. Asia is in a relatively strong position to play a critical role in the global energy transition. In the case of renewable energy, which is expected to account for an estimated 40 percent of average annual global energy investments until 2025, China and India have the highest and the fourth-highest installed capacity globally. These two economies also have the lowest cost of solar and onshore wind energy, and are expected to be responsible for most of the global growth in solar and wind, the two energy forms expected to make up more than 80 percent of new cumulative renewable additions to global energy capacity from 2018 to 2040.

There will be new investment opportunities, too. To reach net zero emissions by 2050, McKinsey estimates that spending on physical assets needs to increase by 60 percent, from an estimated $5.7 trillion today to $9.2 trillion. Asia is expected to represent a large share of global investment. Clearly, companies, alongside governments, will need to make bold resource reallocations; energy companies will, over time, reinvent themselves as renewable energy companies. Focusing on renewables and clean tech is an opportunity to create investment and jobs—and mitigate risk.

3. Create scale through organic growth, alliances, and M&A

Scale matters, but Asia creates it in somewhat different ways than their Western counterparts. Asian corporations tend to favor alliance- and ecosystem-building more than M&A to create a virtuous cycle from scale by maximizing the value of ecosystems and using the complementary strengths of different types of Asian economies. However, there is an open question whether such organic and alliance-based approaches will be sufficient; Asia’s CEOs may need to up their game on M&A in parallel.

Scale across different geographies can enable companies take advantage of Asia’s complementary strengths. For instance, Advanced Asia and China can offer substantial IP, technology know how, and capital. Rapidly growing Emerging Asia and India and Frontier Asia offer attractive market growth and deployment opportunities. Many CEOs we interviewed said that they have established an R&D and operational footprint across the region to localize and adapt to the local environment while maintaining consistency with global branding and reputation.

Over the past decade alone, Asian companies have increased their share of the G5000—the world’s largest 5,000 largest firms by revenue— by six percentage points to stand at 43 percent today. That is larger than any other region. This scaling up of corporate Asia has conferred considerable benefits on the economies of the region, including stable employment growth, rising incomes, and consumer benefits in the form of, for instance, lower prices and more available and competitive products. As noted in MGI’s 2018 research, a progrowth agenda coupled with highly competitive large firms has been a source of considerable success for Asia.

However, we are now entering a decade that is arguably characterized by an unusual degree of uncertainty and dynamic change across Asia, and scaling up businesses organically may not be sufficient. Rather, companies should strive to create a virtuous cycle by scaling beyond their own borders and in a strategic way, specifically driving external alliances and programmatic M&A to acquire new capabilities, achieving technological advantage through scale in a digital ecosystem, and maximizing the benefits that come from the complementary nature of the constituent economies of Asia by ensuring the most effective geographic coverage.

The virtuous cycle of scale can be especially valuable in digital ecosystems, for instance by generating the large volume of data that can support the improvement of a company’s machinelearning, analytics, and other digital technologies. True Corporation, a telecommunications player in Thailand, set up True Digital, a digital and analytics unit designed to lead the digital transformation of the entire group and become an innovation hub within a digital ecosystem comprised of a broad range of partners. By integrating services to many aspects of consumers’ lives, including communications, mobility, retail, commerce, and entertainment, the company generates insights that can be used by its ecosystem partners. For instance, they can use the data to design effective promotion campaigns and optimize retail footprint. Collaboration with companies with vast pool of data could open up new opportunities. In China, US-based Vanguard and Ant Group formed a joint venture to offer investment advisory services with a deliberately low minimum investment requirement, for example.

The Asian Century is well underway. The region is delivering on robust economic, but there is also disruption to existing business models and the corporate mix. What worked in past eras may no longer be fit for purpose in the next, and Asia’s corporate landscape is changing rapidly, shifting from makers toward services, digitizing, and climbing the value chain. Massive industrial firms are making way to hyper-globalized, technologydriven companies. Against this backdrop, the role and priorities of CEO needs to evolve, too. The five themes explored in this article are a starting point for rethinking what it takes to be a 21st century corporation in Asia.

Gautam Kumra is the Chairman of McKinsey’s Asia offices. Joe Ngai is the Managing Partner of McKinsey’s Greater China offices. Joydeep Sengupta is a McKinsey senior partner in Singapore. Jeongmin Seong is an MGI partner in Shanghai, where Jonathan Woetzel is a McKinsey senior partner and a director of MGI

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From"Building 21st century companies in Asia", McKinsey & Company.