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Asia is on track to top 50% of world GDP BY 2040

 
  • Asia accounts for half (2.2 billion) of the world’s internet users
  • China provided 20% of the world’s venture capital between 2014-2016

 

Asia is on track to top 50% of world GDP BY 2040

 

ASIA is now the centre of global economic activity. Today, China competes as an economy with the US; India is poised to overtake the UK to become the world’s fifth largest economy, with a GDP about double the size of either Canada or Russia; and sizeable growth among smaller and midsize countries pushes the region into a leadership position.

The rise of Asia is happening faster than expected. Fast-followers are already industry leaders. The rural class is already the urban middle class. Asian cities are already international financial centres.

McKinsey & Company, in partnership with the McKinsey Global Institute (MGI), launched Future of Asia – a new multi-channel, multi-year research effort that examines, not how quickly Asia will rise, but how Asia will lead.

“If you want to understand the global economy and its future, you need to understand Asia,” said Oliver Tonby, chairman of McKinsey in Asia.

“Not just its stunning economic ascendancy, but its complexity, resilience and interconnectedness through industrialisation, investment, infrastructure, trade, culture and innovation.

“The 21st-century will be characterised by a pivot toward Asia, and business and market leaders will need an accurate picture of what a future Asia will look like as they set long-term strategies.”

Framing an extensive series of analysis to follow, MGI has released a discussion paper, Asia’s Future is Now, which provides an overview of Asia’s role in four areas: trade flows and networks; corporations in Asia; technology; and the Asian consumer.

Asia is transforming trade

Asia’s output is accelerating. McKinsey’s research highlights that the region is on track to top 50% of global GDP by 2040 and drive 40% of the world’s consumption. Furthermore, as consumption rises, more of what gets made in Asia is being sold locally instead of being exported to the West.

Jonathan Woetzel, a senior partner at McKinsey and director of MGI, said intra-regional trade is increasingly important to Asia with supply chains becoming shorter and more localized. Today, 52% of Asian trade is intra-regional.

“While the previous era of globalisation was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labour costs, today only 18% of goods trade involves exports from low-wage countries to high-wage countries,” Woetzel said.

Asia is no longer the cheap factory of the world. Asian labour arbitrage is waning. As wages have risen in China, countries like Vietnam, India and Bangladesh have managed to grow their exports of labour-intensive manufactured goods by annual rates of 15%, 8% and 7%, respectively. 

The Asian services trade is booming too. While the trade intensity of goods has declined, service flows have become the real connective tissue of the global economy – and Asia’s services trade is growing 1.7 times faster than the rest of the world’s.

Asia is shaping the future of digital innovation globally

Asia is online and booming. Today it already accounts for half (2.2 billion) of the world’s internet users; China and India alone account for one-third. The region’s enormous pools of digital consumers support a flourishing and innovative technology sector.

China has become a force to be reckoned with in digital, at home and around the world. As a major worldwide investor in digital technologies and one of the world’s leading adopters of new technologies, it is already shaping the global digital landscape and supporting and inspiring entrepreneurship far beyond its own borders.

Asia also has ample venture capital to support technology innovation and entrepreneurship. China provided 20% of the world’s venture capital between 2014-2016, with India not far behind.

China now ranks second only to the United States in terms of startup investment.

Innovation hubs are starting to take root too. As of April 2019, Asia was home to more than one-third of the world’s ‘unicorns’ (start-ups valued at more than US$1 billion). Ninety-one of these companies are in China, followed by India with 13, South Korea with six, and Indonesia with four.

Asian corporates are on the rise

More than 40% of the world’s 5,000 largest companies are Asian. The 2018 Fortune Global 500 ranking confirmed that 210 of the world’s 500 biggest companies by revenue were Asian. Their presence is game-changing - not just in sheer numbers, but also in performance.

The region’s share of top-performing firms has grown from 19% to 30% the past two decades. Most of these companies are from China, India, Japan, and Korea, and the most dominant sectors within this group are computers and electronics, automotive, and banking.

Wonsik Choi, managing partner of McKinsey in Korea and a founder of the Future of Asia project, said: “Our research has found that ‘superstar’ firms in the top decile of performance are generating higher economic profits than ever before, while losses are growing among the worst-performing firms, some of which are ‘zombie’ firms that actually destroy value.”

In the decade since 2005-07, the economic profit produced by top-quintile Asian firms has increased by 57% (versus 33% in North America).

Meanwhile, the economic profit destroyed by bottom-quintile Asian firms increased sevenfold (versus 2.5 times in North America).

This effect tends to squeeze the firms in the middle of the distribution. This phenomenon is global, but it is particularly pronounced in Asia.

The superstar effect in the corporate world is mirrored by widening disparities between cities, regions, and population segments. Asia may be replicating some of the patterns that have taken hold in the West.

Asia’s consumers are a force in the global economy

By 2020, Asia’s middle class will be around three billion strong and may be home to half of the world’s middle class. Southeast Asia alone, which had 80 million households in the consuming class only a few years ago, is now expected to double to 163 million households by 2030.

These newly prosperous consumers will have income levels that allow them to make significant discretionary purchases. McKinsey projects that, over the next decade, the region may fuel half of consumption growth worldwide.

The ‘Asian consumer’ resists easy characterisation. Asia’s Generation Z has very different buying behaviours and values to the region’s seniors, who will drive 15% of global consumption growth, adding some US$660 billion to what they already spend today.

This young post-90’s generation of consumers are starting to shift their preference for foreign brands and bias against domestic brands; in fact, they are starting to choose them over foreign brands more often.

Brands will need highly targeted strategies to succeed across such a diverse and fragmented region. As companies strive to meet ever-high expectations, Asian consumers will increasingly set trends for the rest of the world.

 Asia is a hub of world trade, home to some of the world’s largest companies, the fastest-growing part of the internet, and the engine of global consumption growth. In the months ahead, McKinsey and MGI will return to each of these topics with a series of comprehensive research reports.

“We hope to illuminate not only the region’s future trajectory but also how Asia is putting its own stamp on the world economy,” said Tonby.

 

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