By Faridun Dotiwala, Joydeep Sengupta, and Jatin Pant, McKinsey & Company
Leading CEOs in Asia explain how COVID-19 has accelerated five business trends in the region and why they’re confident that unprecedented opportunities lie ahead.
“The best time to plant a tree,” a Chinese proverb reminds us, “was 20 years ago. The second best time is now.” The lesson resonates today in Asia. Leading companies are turning pandemic-driven changes into opportunities for future value creation. Part of the reason they can do so is that they have long been cultivating the roots that sustain a company’s ability to be nimble, aggressive, and decisive in the face of adversity and uncertainty. Another is that they’re setting their aspirations even higher now, and following through by making bolder commitments, moving faster, and scaling up. That’s why they grow while others wither.
The Asian corporate sector was in a difficult situation even before the COVID-19 pandemic. Some 50 percent of cumulative new global capital went to Asian companies in the past decade, yet the vast majority of Asian companies destroyed economic value, with most sectors losing between 30 and 50 percent of market capitalisation. COVID-19 has widened the gap between those at the top of the power curve of economic profit and those at the bottom, a trend that is likely to accelerate in the postpandemic era.
To understand what it takes to manage successfully through the pandemic while also building for the future, we interviewed about 20 leaders of some of Asia’s top-performing companies. Without exception, these men and women believe that the pandemic is an inflection point and a catalyst, not a speed bump, turbocharging existing trends and making it all the more pressing for leaders to boost their companies’ performance. They’re confident that the best years for their businesses lie ahead and are doubling down on Asia’s future. In this article, we share the five big trends that these CEOs believe are shaping the future of the Asian corporation and examine how CEOs are scaling up the attributes they will need to steer a company to success in that challenging future.
1. Asia Will Determine The Future Of Asia
No matter where their company is headquartered and no matter what sector they serve, each leader we spoke with believes that a new macroeconomic context is emerging. Asia is trading with Asia. While many Asian companies are interdependent with companies around the world, all of the companies we spoke with are interdependent with other Asian companies. Their CEOs tend to perceive regional governments as value-adding stakeholders; the formation of the Regional Comprehensive Economic Partnership—the world’s largest free-trade pact, comprising 15 countries in the Asia–Pacific region—in November 2020 only augurs deeper integration. And while the CEOs allow that growth may not be as meteoric as in the recent past, they all agree that the Asian market will grow in global stature, given its youthful population, a rising middle class, and the market’s growing power. “If you look at both wealth formation and consumption,” said Piyush Gupta, CEO of Singapore’s DBS Bank, “Asia continues to outpace most other parts of the world.”
CEOs of Asian companies believe in such growth despite the socioeconomic challenges in some countries. “Even though, at the country level, you may see more nationalism, the strong trend at the lower levels is greater interdependency between companies,” said Won-Pyo Hong, CEO of Samsung SDS. As the McKinsey Global Institute (MGI) reported last year, 60 percent of goods traded by Asian economies are within the region, and 71 percent of Asian investment in start-ups and 59 percent of foreign direct investment is intraregional. “In the past, a lot of goods and services moved to the Western world,” said Jaime Augusto Zobel de Ayala, chairman and CEO of the conglomerate Ayala Corporation in the Philippines. “There has been a fundamental change in the trade patterns across Asia …. We have seen an increasing movement of trade not only among the Southeast Asian nations but also between, and to, India, China, Japan, and Korea.”
One frequently cited concern is geopolitical uncertainty. A 2019 MGI report analyses the evolution of China’s relationship with the rest of the world, most notably with the United States. “COVID has exacerbated those tensions [between the two],” remarked Gupta. “A world where we have to start choosing sides could be tricky,” he continued. “We’re going to have to play it very carefully and tactically on a whole range of different issues.”
Unpredictability is leading CEOs to reexamine their supply chains for resilience. “Companies don’t want to find themselves relying on a single country for critical supplies,” according to Christophe Weber, president, CEO, and representative director of Takeda Pharmaceutical Company, a Japanese pharmaceutical that switched to a dual-sourcing strategy six years ago. “We cannot just wait and see; we have to anticipate disruptions in the way we architect and design our supply chains.” Other companies, such as Samsung SDS, are also multisourcing. That said, expect supply chains to remain Asia-centric as companies choose to keep manufacturing and processing facilities close to their customers.
2. Data And Digital Innovation Are Transforming Consumer Journeys
Even before the COVID-19 outbreak, Asian companies were among the most technologically advanced, serving the world’s most digitally savvy consumers. The pandemic is accelerating those dynamics.
“We are seeing a massive shift to online banking, digital person-to-person payment transfers, [and] e-commerce, [along with] an increase in ‘do it yourself,’ stay-at-home activit[ies], and commerce via social-media platforms,” observed Zobel. Unsurprisingly, McKinsey’s consumer sentiment survey has shown that e-commerce usage has expanded in all countries during the COVID-19 pandemic, with consumers across Asia expected to increase their reliance on online channels. Added Scott Hahn, CEO of South Korean private-equity firm Hahn & Company: “Comfort with digital in Korea was somewhat demographic- and age-specific prior to COVID. Now, because of the pandemic, those who are older are doing a significant amount of their daily activities online.”
The shift has been remarkable. In Singapore, DBS Bank saw consumer use of its digital tools increase by up to 400 percent during the pandemic. State Bank of India (SBI), India’s largest bank, added more than 30,000 users per day on its YONO (you only need one) mobile app, which offers services for banking, investments, and trading, as well as a platform for online shopping. Online consultations on the Ping An Good Doctor telemedicine platform have surged eightfold since the start of the pandemic. Seeing the shift, companies in all kinds of industries have accelerated their investment in digital consumer offerings. India’s Tata Motors, for example, digitised the entire end-to-end process of buying a car, from selection to transaction to delivery. One of Hahn & Company’s portfolio firms is making rapid purchase and delivery of used cars faster than ever thought possible. Digital is now de rigueur. “Increased investment in digital capabilities is just the price you pay for entry to the park,” said Peter Harmer, managing director and CEO of Insurance Australia Group (IAG), citing the success of its consolidated customer-engagement platform, which accounts for around half of all customer interactions. “So one thing we’ll be doubling down on is finding extra investment capacity to accelerate what we’ve been doing through our digital channels to feed off of the customer behavioral change that’s definitely occurred.”
Asian CEOs say they are starting to see the payoff from investments in artificial intelligence (AI) and machine learning. Ping An Group’s co-CEO Jessica Tan said, “We’re trying to build analytics to help HQ be embedded in the front line, be it in sales, product, or risk management.” The strategy has allowed the company’s motor-insurance division to reduce its operations team by 32 percent, while still enjoying 50 percent growth every year. “In essence, we’ve more than doubled our productivity,” said Tan. Similarly, Samsung SDS expects to save around three million working hours in 2020 by incorporating robotic process automation into more than 26,000 projects. “Effectively, we’ve increased the number of employees by 10 percent,” said Samsung SDS’s Hong.
Much of that IT investment is enriched by Asia’s thriving digital ecosystems. SBI’s YONO app is constantly expanding its services to its customers and will soon launch a business-to-business platform in which AI and data analytics will power financing services for micro, small, and medium-size enterprises. “Our philosophy [around the YONO app] has been that whatever you imagine in terms of your daily needs, whatever you need to do, you should be able to do on one single platform,” said Rajnish Kumar, the recently retired chair and CEO of SBI. “The ecosystem approach gives us a chance to become much more integrated with where the end-user demand is,” added Tan. Ping An Group was originally founded as an insurance company in Shenzhen, but its investments to build digital platforms that other industry players can leverage has allowed the company to cross into other sectors including healthcare and smart city solutions. Southeast Asian mobility leader Grab has leveraged its reach and delivery network to create an “ecosystem of digital services” that now includes financial, grocery, and insurance services.
Increasingly, technology is enabling Asia to capture and create value. “While Western companies focused on value capture, Asian companies tended to be really focused on scale, size, and market share,” said Kiran Mazumdar-Shaw, the chairperson and founder of Biocon, the largest biopharmaceutical company in India. “The Indian pharmaceutical sector has a huge global market share of vaccines and generic drugs—50 percent and 20 percent, respectively—but when you look at the value capture, it’s only 3 percent. We need to know how to move up the value chain.”
3. Scale—With A Local Touch—Will Consolidate Power
The pandemic will create opportunities for stronger companies to consolidate and become bigger. “That’s principally because, while there’s a lot of debt floating around right now, there’s going to be the need to recapitalize large numbers of companies over the next year or two,” explained DBS Bank’s Gupta. “Many countries and sectors don’t have enough equity, and this will give rise to the opportunities to consolidate new global champions.”
A programmatic M&A strategy is one instrument companies may use to acquire new capabilities and grow in size. “M&A activity is almost a necessity now in Asia,” said Hahn. “Think of the emphasis on size; if you want to balance supply chains and do that quickly, you’re going to need to buy rather than build. Bigger companies have been able to respond faster. Size leads to speed, which leads to flexibility and increased adaptability.” Against a backdrop of shifting market dynamics, we’ve found that companies that keep their portfolios on the move—including being unafraid to divest and rechannel resources to where they predict value creation will be—tend to enjoy higher total returns to shareholders.
Acquisitions are just a starting point. Following its acquisition of the car website Autohome in 2016, Ping An incorporated it within the company’s offline and dealer platforms and grew it to become an integrated platform where users can also access financing and repair services. “Typically, when you buy a business at a reasonable price, they’re facing some bottlenecks in their growth,” said Tan. “The acquisition is really just a seed …. It doesn’t replace all the hard work that you will still have to do.” Since Autohome’s integration, its market cap has multiplied nearly fourfold. Being big, and especially being big in a digital ecosystem, should be a technological advantage. Reach and scale can generate the volume of data needed to create a “virtuous cycle” that helps to refine a company’s machine-learning technologies.
That said, being an Asian powerhouse also entails being a local listener and learner. “Asia is composed of diverse cultures and economies at different stages of development,” said Keith Choy, the regional head of GSK Consumer Healthcare in Asia–Pacific. “You have Australia, that’s more Western and developed; other developed countries like South Korea; and emerging and fast-developing countries like China and India. Not to mention the heavily populated countries of Vietnam and Indonesia.” Choy stressed that global companies such as GSK must be local to discern, adapt, and respond to customer preferences and needs while maintaining consistency with global branding and reputation. As Hong put it, global companies launching a product in a new market must “really understand the value of a product or service [in that particular market].” Four of Samsung SDS’s seven Lifestyle Research Labs are located in Asian cities (Beijing, Delhi, Seoul, and Singapore), and they are dedicated to parsing the nuances in the day-to-day habits and conditions of people living in key markets. For instance, air-conditioning units sold in India are installed with specially designed compressors that can withstand temperatures of more than 40 degrees Celsius.