Five windows of opportunity for postpandemic Asia

Although the COVID-19 pandemic has caused hardship, Asia has remained relatively resilient, and opportunities for growth are opening up.

 

The Asian century has arrived, we proclaimed in July 2019. At that point, we had no idea what was to come—a global pandemic few had anticipated, which triggered the most challenging global health crisis and economic downturn for a generation but also accelerated and gave new force to preexisting trends, including, notably, digitization. New windows have opened for business across the region as we look forward to life beyond the pandemic.


While deep uncertainty remains, Asia as a region exhibited resilience in the face of this extraordinary shock. GDP growth has proved relatively stable through the pandemic. The Asian economy contracted by 1.5 percent in 2020, while the world economy shrank by 3.2 percent. Asia is expected to rebound faster. In July 2021, the International Monetary Fund (IMF) forecast that Asia would grow at 7.5 percent in 2021 and 6.4 percent in 2022, compared with 6.0 percent and 4.9 percent for the world.


However, the outlook varies within Asia. Economies have been recovering at different speeds. The economy of China had surpassed its pre-COVID-19 level in the second quarter of 2020, while the economy of Vietnam reached that milestone by the third quarter of 2020, and those of South Korea and Australia by the first quarter of 2021. Other Asian economies—including India, Indonesia, Japan, Malaysia, Philippines, Singapore, and Thailand—remained below their prepandemic levels at the time of writing. In July 2021, the IMF downgraded its growth forecasts for some Asian economies from its April outlook—India by 3.0 percentage points, Japan by 0.5, and the Association of Southeast Asian Nations (ASEAN) by 0.6. Wide variations in economic recovery rates among Asian economies reflect differences in vaccination rates, the stringency and effectiveness of containment policies, dependence on tourism and contact-intensive services, and the degree of policy support, among other factors.


The road ahead will, without doubt, be challenging. The pandemic has been bruising for economies—particularly 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—defined as having less than $3.20 a day in terms of purchasing-power parity (PPP)—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. In India, for instance, one study found that during the first COVID-19 lockdown in 2020, only 7 percent of men lost employment, compared with 47 percent of women (and these women had not returned to work even by the end of 2020). Exacerbating the situation across economies is economic disruption associated with extreme weather events.


Notwithstanding such risks and the potential for continuing pandemic-related disruption, Asian economies still have a great deal of charge left in their batteries. In this article, which marks the two-year anniversary of the Future of Asia program launched by the McKinsey Global Institute and McKinsey & Company offices in Asia, we highlight five windows of opportunity in the region.


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, MGI found that 60 percent of goods traded by Asian economies were within the region and 59 percent of foreign direct investment was intraregional. Powerful regional trade networks were propelling Asia to an increased share of world trade. In 2020, when the pandemic was in its full first wave, global trade contracted by about 5 percent, yet Asia’s share of intraregional trade remained at around 60 percent. The economies of ASEAN became China’s largest trading partner for the first time, overtaking the European Union. The share of China’s exports to ASEAN economies has increased from 12 percent in 2015 to 15 percent as of the first half of 2021. Imports rose from 11 percent to 15 percent in the same period. China has been ASEAN’s largest trading partner for 12 consecutive years.


Meanwhile, value chains are becoming more localized—and regionalized. In earlier MGI research, we noted that large developing economies—China and India in particular—are consuming more of what they produce, and this has led to declining trade intensity both within economies and globally. In China, 28 percent of computers and electronics produced were exported in 2017, compared with 55 percent in 2007. India exported 35 percent of its final output in apparel in 2002, a peak share; by 2017, that share had fallen to 17 percent. These trends are leading to localization strategies among companies in certain markets; “In China for China” is an example. According to business-climate reports from the European Chamber and American Chamber released in 2021, surveys of their member companies suggest that 80 to 90 percent of companies do not plan to relocate out of China. This share has been stable in recent years. Among the companies indicating they intend to leave China, between 50 and 60 percent said they would relocate to other parts of the Asia–Pacific region. These findings confirm and reinforce Asia’s regionalization trend.


The economic disruption associated with the pandemic appears to have accelerated the shift toward Asia-for-Asia supply chains. In interviews with McKinsey, all Asian executives—no matter where they were headquartered—indicated that increasingly Asia is trading with Asia. These discussions revealed that although many Asian companies remain interdependent with firms around the world, all were interdependent with other Asian companies. These corporate networks are expected to deepen after the formation in November 2020 of the Regional Comprehensive Economic Partnership of 15 countries in Asia–Pacific.


2. Boosting growth through innovation


In the decade before the pandemic, MGI found that Asia had posted the largest shares of regional growth in key technology metrics: 52 percent of global growth in technology company revenue, 43 percent of global growth in start-up funding, 51 percent of global growth in R&D spending, and 87 percent of global growth in patents filed. The region has considerable scale in start-up investment and IP creation that should support leapfrogging, particularly in consumer-facing and manufacturing sectors. Asia accounts for 40 percent of global investment in start-ups and 38 percent of strong patents (those with a strength index above 50) filed between 2016 and 2018.


COVID-19 appears to have accelerated technological adoption and innovation, including digital technologies and automation. A McKinsey Global Survey published in October 2020 indicated that companies accelerated the digitization of their customer and supply-chain interactions and of internal operations by three to four years, and the share of digital or digitally enabled products by seven years. Sales of industrial robots in China increased by 19 percent in 2020, for example.


Asia’s highly adaptable digital population has continued to embrace new digital services enthusiastically over the past years. Traditionally less-digitized parts of the segments and sectors have become more digitized. By the end of 2020, people aged 60 and over in China accounted for 11 percent of the total internet population, a jump from 6 percent in March 2020, according to the China Internet Network Information Centre. Use of telemedicine services and virtual property-tour services across Asia also surged. In 2020 and as of July 2021, Southeast Asia added nine new unicorns, including a digital-payments firm in Vietnam, a freight-logistics company in Indonesia, a delivery company in Thailand (Thailand’s first unicorn), a used-car marketplace start-up in Malaysia, and an analytics company in Singapore, just to name a few.


For all the rapid technological progress so far, there is reason to believe that Asia can drive yet more innovation. Advanced Asia has significant opportunities to push the innovation frontier. In 2021, the Bloomberg Innovation Index put South Korea at number one in its list of the world’s 60 most innovative countries. By March 2022, the government of Japan plans to launch a university endowment fund with financing of about $90 billion to enhance research capabilities. Chinese companies have been strengthening R&D capabilities. In a McKinsey survey of 95 R&D executives in China, 62 percent of respondents said that China’s product-development capabilities in their industries already matched or defined global best-in-class performance or that this would be reached within the next five years. Entrepreneurship in Emerging Asia and India is likely to continue, given the large young population, 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, but can turn that into higher-quality innovation, building on existing strength in business-technology services. Overall, the different parts of Asia complement each other, providing a solid foundation for more local innovation.


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. However, Asia’s consumer landscape is changing and diversifying as the result of demographic and technological shifts, and companies need to be cognizant of three major shifts.


First, as incomes rise across Asia, more consumers will reach the highest tiers of the income pyramid. By 2030, recent MGI research found that 70 percent of Asia’s combined population may be part of the consuming class, defined as spending more than $11 a day in 2011 PPP terms. As recently as 2000, only 15 percent were in this category—a huge upward shift in purchasing power. In the past 20 years, 80 percent of Asia’s consumption growth came from lower-income tiers of the consuming class as new entrants joined. In the next decade, 80 percent of that growth could come from higher-income consumers.


Second, cities will continue to drive consumption growth, but the most promising source of growth is the increasing diversity within cities, which is creating new and increasingly heterogeneous demand. Take, for instance, Asia’s increasingly “online first” digital generation. These “digital natives,” born between 1980 and 2012, may account for 40 percent of Asia’s consumption by 2030. Or consider the shrinking size of Asian households. The average size of households has