For Asia 2025, an Asia House publication launched on March 8, Dominic Barton, Global Managing Director, McKinsey & Company, contributed his thoughts on the dynamic centre of the new global economic landscape.
Competition used to be a steady, slow-moving phenomenon, dominated by the giant companies of the Western world. Two-thirds of the companies listed on the Fortune Global 500 in the 1960s were still there 15 years later. New competitors were easy to spot because they were well known, in the same sector, and usually from another advanced economy. But today new competitors burst into prominence seemingly instantaneously from any part of the world and any sector, and can gain scale in a moment.
Three great forces are combining to change the game here: a shift in the weight of the world economy towards emerging economies – driven by urbanisation; accelerating technological change; and proliferating cross-border connections. Asia is playing a prominent role in each.
Economic centre of gravity shifts east and south
The balance of power of the world economy, measured by GDP, is shifting east and south at a speed never before witnessed. In year 1, the centre was located in Kashmir. Over almost 2000 years, industrial revolutions and urbanisation in Britain, Europe, and the US, slowly shifted the centre of gravity north and west. By 1950, the centre of gravity was somewhere in the middle of the Atlantic, near Iceland, as the weight of the world economy shifted more decisively towards the US. However, in only 75 years, Asia’s resurgence will cause the pendulum to swing back. By 2025, the centre will be near Kazakhstan – reversing 2,000 years of economic shifts in less than a century.
The scale of change is staggering. After its Industrial Revolution, Britain took 154 years to double economic output per person, and it did so with a population (at the start) of 9 million people. The US achieved the same feat in 53 years with a starting population of 10 million people. China and India have done it in only 12 and 16 years respectively, each with about 100 times as many people. In other words, this economic acceleration is roughly 10 times faster than the one triggered by Britain’s Industrial Revolution and is 100 times the scale: an economic force that is 1,000 times as large.
This profound shift is fuelling the growth of a formidable new wave of Asian competitors that are making their presence felt on a global stage. Many of them have grown exceedingly rapidly on the back of populous home markets. Bharti Airtel, the largest telecommunications company in India, has about 275 million mobile customers in South Asia and Africa – that compares with the 116 million wireless customers of AT&T, the largest telecommunications company in the US. Mumbai’s Tata Group employs more than 580,000 people worldwide and is now one of the largest private-sector employers in the UK. Beijing-based Lenovo is now on a par with HP as the largest seller of PCs in the world by volume after its purchase of IBM’s PC business. Thai Union Group is the world’s largest producer of tinned tuna, and is a true multinational company; owning the Chicken of the Sea brand in the US and the UK’s John West Foods.
It’s not just the size of these new Asian corporate giants that makes them fierce competitors. Many of them have extraordinary ingenuity and have honed in on home markets that are more diverse and fast-moving than the world’s mature markets. They have learnt to compete for customers at very different income levels, and have had to cope with constraints in physical and social infrastructure. They typically invest at twice the rate of their Western peers. These companies are nimble, aggressive, and imaginative. South Korean designers are responsible for some of the most innovative designs in the car industry. Samsung and LG, both South Korean, ranked first and third in the iF design rankings awarded by International Forum Design in Hanover in 2015. Sony and Panasonic came fourth and fifth. Apple ranked seventh.
Technological change accelerates
The increasing spread and power of the internet and new digital technologies are reinforcing and accelerating globalisation, and Asian companies are in the vanguard. The story of e-commerce is totemic. On 1 December 2014, Americans spent a record US$2.65 billion online. But, just weeks before, an even more significant online event took place. On 11 November, China’s Singles’ Day and a major shopping event – Chinese online marketplace Alibaba recorded sales of US$9.3 billion. America’s eBay had once seemed an unstoppable global force, but Alibaba has now surpassed it in terms of market capitalisation. By July 2014, Alibaba’s market capitalisation was nearly three times that of eBay.
These online exchanges are vast businesses in their own right – the giant beneficiaries of the technological revolution. But they are also gateways for even the smallest companies and individuals to become micro-nationals. More than 90 per cent of eBay commercial sellers export to other countries, compared with an average of less than 25 per cent of traditional small businesses.
In the past, size was a prerequisite for a global presence; today, start-ups can plug into powerful global digital platforms with ease and expand to millions of customers in a matter of years, if not months, without the encumbrance of legacy systems or large fixed costs. These new entrants can buy state-of-the-art systems off the shelf and install them in weeks; 3D printing means that small companies can ‘print’ complex prototypes, moulds, and products with no tooling or set-up costs. Cloud computing gives start-ups and entrepreneurs IT power and back-office services on the cheap. This leaves large companies in almost every field vulnerable.
Cross-border connections proliferate
Another strength of Asian companies is that they have reached scale at a time when globalisation is accelerating. The international ambitions of these companies are going with the grain of broader trends.
Five types of global flows – goods, services, finance, people, and data and communication – reached US$26 trillion or 36 per cent of GDP, in 2012: 1.5 times larger relative to GDP than in 1990. Global flows could nearly triple by 2025. These flows are driving economic growth, contributing between US$250 billion and US$450 billion of GDP growth or 15 to 25 per cent a year. The economies most connected to these networks of flows see up to 40 per cent more benefit than the least connected.
‘South-south’ flows between emerging markets have grown from just US$200 billion, or 6 per cent of global cross-border flows of goods in 1990 to US$4.3 billion or 25 per cent in 2012. Asia is increasingly prominent and is on its way to becoming the world’s largest trading region. Seven of the top 20 trade routes in the world involve an emerging market, and six of those include China. India has jumped 16 places on the McKinsey Global Institute’s (MGI’s) Connectedness Index, reflecting India’s shift from being a net exporter rather than an importer of services. Singapore ranks fourth of all countries in the world because it is such an important hub for flows of finance, trade in goods and services, and people.
These profound economic shifts are mirrored by a dramatic change in the prominence of companies. Between 1980 and 2000, the number of Fortune Global 500 companies headquartered in emerging economies held steady at just over 20. By 2025, MGI sees more than 45 per cent of these Fortune 500 giants hailing from emerging economies.
From made in Asia to invented in Asia?
Will the new Asian competitors be a different breed altogether, relying not on size but on their ingenuity and innovation? The evidence suggests that the answer is yes. In the recent past, China was best when absorbing know-how from others and scaling up. In the high-speed trains business, for instance, the China South Locomotive & Rolling Stock Corporation committed itself to spending US$3 on developing its own technology for every US$1 the company spent on imported technology. In just six years, China has become the world’s top player in high-speed trains and is on the cusp of becoming a major exporter. But China is now the prime actor in its own innovation story. Take two examples: biopharmaceutical company BeiGene has put four cancer drugs into clinical trials in the past 18 months, saving time by creating a proprietary testing model; BGI, a biotechnological company, owns 50 per cent of the world’s genome sequencing capacity and is the world’s biggest centre for animal cloning.
Across Asia, tech-savvy start-ups are conquering home markets and becoming players on the international scene. E-commerce platforms abound from Myntra and Flipkart in India to Coupang, South Korea’s largest mobile commerce company, which received a US$1 billion investment from Japan’s SoftBank in 2015.
Reset your intuition
The world is changing rapidly, upending well-established expectations and intuition. The dynamic economies of Asia and the new wave of international competitors they are incubating are transforming the competitive landscape. Proliferating networks of global flows coupled with the spread of the internet and digital technologies are powerful door-openers and super-chargers. Executives looking at the competitive wave coming from Asia will need to be agile, aggressive, and, above all, optimistic if they are to seize the opportunities as well as meet the challenges.
Dominic Barton is the Global Managing Director of McKinsey & Company.
He is based in London and leads the firm’s focus on the future of capitalism and the role that business leadership can play in creating long-term social and economic value. Before becoming Global Managing Director, Dominic served as McKinsey’s Chairman in Asia from 2004-2009. He also headed McKinsey’s office in South Korea from 2000-2004.
McKinsey & Company is a Champion Supporter of Asia House.
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