The question of how important Asian economies are for global growth is no longer debatable. The region has become and will continue to be the centre of global economic activity for many decades to come. But the rise of Asia has been faster and more impactful than most forecasters expected.
Ten years ago, China overtook Japan to become the world's second-largest economy behind the United States. Last year, India decisively passed both France and the UK to move into fifth place. According to the UK-based Centre for Economics and Business Research, India is expected to overtake Germany and claim fourth spot by 2026.
This means that within this decade, three Asian countries -- China, Japan and India -- will rank among the world's four largest economies.
The rise of Asia is happening much faster than expected, notes "The Future of Asia" a new multi-channel, multi-year research effort by McKinsey & Company, in partnership with the McKinsey Global Institute (MGI). The in-depth research study examines not how quickly Asia will rise, but how Asia will lead the global growth of the future.
"If you want to understand the global economy and its future, you need to understand Asia," says Oliver Tonby, chairman of McKinsey offices in Asia. Supplied/McKinsey
According to the MGI discussion paper "Asia's Future is Now", one of the most dramatic economic developments of the past 30 years has been consumption in emerging Asian markets and their integration into global flows of trade, capital, talent and innovation.
In the decades ahead, the paper says, Asia's economies will go from participating in these flows to determining their shape and direction.
"If you want to understand the global economy and its future, you need to understand Asia. Not just its stunning economic ascendancy, but its complexity, resilience and interconnectedness through industrialisation, investment, infrastructure, trade, culture and innovation," said Oliver Tonby, chairman of McKinsey's offices in Asia and one of the authors of "Asia's Future is Now".
NEW TRADE ORDER
While people have taken note in recent years of very sluggish growth in global trade, the underlying trend of future trade is starting to become clearer. The headline numbers might look weak, but Asia is consuming much more of what it makes, which has dramatic implications in the longer term.
The latest assessment by the International Monetary Fund (IMF) put global trade growth at just 1% in 2019, which was its seventh consecutive downward revision. It was the weakest performance since 2009, when the world was just starting to recover from the financial crisis that originated in the United States.
The main reasons economists and analysts cite for reduced trade activity have included weakness in business capital spending as well as the impact of protectionism amid the ongoing US-China trade conflict.
While Beijing and Washington have moved to ease concerns by signing a phase-one trade agreement, tough negotiations to ensure a healthy long-term trade relationship remain ahead. Political and security disagreements between the two superpowers will continue to complicate the picture, especially if Donald Trump wins re-election in November.
But in any case, global trade is undergoing a significant transformation with Asia at its heart, the McKinsey research notes.
"As consumption rises, more of what gets made in Asian countries is now sold locally instead of being exported to the West," the MGI paper noted.
Over the decade from 2007 to 2017, China almost tripled the value of its production of labour-intensive goods, from US$3.1 trillion to $8.8 trillion. But at the same time, the share of gross output of China's exports decreased dramatically, from 15.5% to 8.3%. A similar picture was seen in India.
According to Jonathan Woetzel, a senior partner at McKinsey and a director of MGI, more than half of all trading activity in Asia is now intra-regional. Shorter supply chains make it easier to transfer products, especially when connectivity infrastructure has been improving at a dramatic rate.
Chnese consumers now account for one-third of global spending on luxury goods, according to a Bain & Company report. Photo: Bloomberg
In short, we are now entering a new era of globalisation that is different from the previous one, he observed.
"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," said Mr Woetzel. "Today, only 18% of goods trade involves exports from low-wage countries to high-wage countries."
SERVICES ON CENTRE STAGE
Another important development to note is the boom in Asian services trade as well as trade in creative goods. Asia is no longer the cheap factory of the world, especially for the world's second largest economy.
China's minimum wage has continued to rise significantly, partly due to the improvement of skills, experience, knowledge and technology development of its workforce. That is pushing more low-skilled and labour-intensive work to less developed countries in Asia as well as Africa.
Beijing, meanwhile, is pushing ahead with its ambitious "Made in China 2025" initiative, which seeks to transform the country into a global high-tech leader. The programme involves government subsidies, heavy investments in research and innovation, and targets for local manufacturing content.
According to a report on the creative economy by the United Nations Conference on Trade and development (Unctad), China's trade in creative goods and services is already outstripping that of other countries.
"China's contribution to the global creative economy is both important and has driven more than a decade's worth of growth in creative industries and services," said Marisa Henderson, creative economy head at Unctad.
Only 18% of goods trade now involves exports from low-wage countries to high-wage countries, says Jonathan Woetzel, director of the McKinsey Global Institute. Supplied/McKinsey
She noted that a country's creative economy growth is fuelled by internet accessibility, a big consumer marketplace and a growing digital economy. The art market, film and entertainment industries in China are continuing to expand exponentially.
The Unctad data also shows that Asia outpaced all other regions, with China and Southeast Asia combined accounting for more $220 billion worth of creative exports. This figure is almost double that of Europe.
Apart from China, Unctad noted, the other top performing developing economies that stimulate global trade in creative goods are India, Singapore, Hong Kong, Taiwan, Turkey, Thailand, Malaysia and the Philippines.
CORPORATE TRAILBLAZERS
On the supply side of the economy, many Asian companies now rank among the world's largest. According to McKinsey Corporate Performance Analytics and the Fortune 500 Global ranking, 210 of the world's 500 biggest companies by revenue are Asian. Asia's share of top-performing firms globally has increased from 19% to 30% over the past two decades.
Interestingly, not only is the size and power of these Asian companies rising but so too is the diversity of the sectors in which they are expanding. Asian firms have become global market leaders not only in areas such as manufacturing and automotive but also in technology, finance and logistics.
"Over the past 20 years, the industry mix of the region's largest firms has shifted. Manufacturing of capital goods is now a smaller share of the region's economy, while infrastructure and financial services have also grown significantly," the MGI paper noted.
Some of China's biggest global heavyweights now come from the technology sector. In recent years, the world has witnessed the rise to world-class status of Alibaba, Huawei, Baidu and Tencent, to name a few. It is something that most of us never expected to see coming this soon.
Not so long ago, China was often referred to as a tech copycat, borrowing ideas and innovations from other western companies and making products at the lower quality and cheaper prices.
Now things are different. Chinese companies today are challenging established market leaders in many industries: mobile devices, smart gadgets, online services, social media as well as telecommunications.
Growing alongside with established Asian corporations from Japan and South Korea, Chinese companies are and will continue to be shaping the future of digital innovation globally.
ASPIRING SHOPPERS
Not only is the region leading the way on the supply side of goods and services, Asians have also become known as aspiring shoppers both in physical stores and in the online world. McKinsey has projected that the region will fuel half of all the consumption growth expected worldwide over the next 10 years.
The size of the Asian middle class is growing at a dramatic rate and is projected to reach 3 billion by the end of the decade. Southeast Asia alone already has 80 million households in the consuming class and this figure is on track to double by 2030, with Indonesia as one of the region's leaders.
The story is spelled out clearly in the luxury goods industry. Manufacturers and retailers of luxury goods, from handbags and sunglasses to premium apparel, watches, jewellery and cosmetics are shifting their marketing resources to target Asian consumers.
Chinese consumers alone were responsible for one-third of the total global spending on personal luxury goods in 2018, according to a report by Bain & Company.
According to a 2019 Credit Suisse report on global wealth, China is now home to more wealthy people than the United States. The same report also found out that not only that Asian countries together have 4.4 million US-dollar millionaires, but the region also has 100 million members of the world's top 10% earners.
According to Savills, a UK-based multinational property services group, more than 75% of Chinese consumers' spending on luxury items is done while travelling abroad. Luxury retailers have picked up on this trend as their new store locations are based on the cities that attract the most Chinese tourists.
The same story can be seen on the e-commerce side. Asian shoppers are now shaping the future of the online world. According to Internet World Stats, Asia already accounts for half of the world's internet users. China and India alone make up one-third of the total.
"China, Japan, South Korea and Singapore are among the most digitally advanced nations in the world," the MGI paper noted. "Only about a decade ago, China accounted for less than 1% of the value of worldwide [digital] transactions. That share is now more than 40%."