EMBARKING ON THE NEW ASIAN CENTURY
As the 19th century was led by Europe and the 20th century was led by North America, in the 21st century the question is no longer how quickly Asia will rise but how it will lead. Oliver Tonby is Asia Chairman at McKinsey & Company, and co-author of Future of Asia, which is built around a series of reports by the McKinsey Global Institute.“ The center of gravity is shifting towards Asia in many ways,” Tonby says. “Asia is increasingly central in the growth of global consumption that is happening in the world. It is increasingly central in the trade flows that are happening. It’s increasingly central in the innovation and technology development that is happening.” To illustrate his point, Tonby references some of the conclusions from McKinsey’s analysis:
- By 2040 more than 50% of the world’s GDP is going to be in Asia.
- Between now and 2040 more than 50% of the incremental growth in consumption is going to be in Asia.
- More than 40% of venture capital investments are in Asia.
- Asian entities own more than 65% of the world's patents.
- More than 36% of unicorns today are Asian.
- Some of the world’s largest technology companies are in Asia.
- More than one out of every $2 invested in the last 10 years has been in Asia.
Ashwini Prakash, Managing Partner in the India region of Stanton Chase, says, “Many factors have contributed to the rise of Asia as an economic power over the year. For Prakash, the deciding factor is leadership. “What really made this change happen is transformational leadership. We definitely have very agile, smart leaders who actually have a blend of both the Western and the Asian worlds, and they have made this transformation happen. Leadership is at the core of everything in the Asian sector. Now things have really evolved. We have incredible, future-facing leaders here who have made the transformation happen in Asian countries.”
Ati Simatupang, Partner and Managing Director based in the Jakarta office of Global Sage, looks at the evolution of leadership in Asian companies in tandem with the economic rise of the continent. “Prior to the Asian economic crisis in 1998, most Asian companies started pretty much as family businesses with leadership that was very much top-down and consensus, where loyalties are very important, trust is very important. That leadership trend continues now, but has evolved with influence from the West.” In the current digital age, Simatupang says, “Technology has reduced the information and expertise gap between East and West, and the two have moved closer together. Leadership approaches and models in the East have evolved accordingly in line with western trends”
If 50% of the world’s population is women, 50% of the world’s population of the world’s talent is women. That’s the reason for making this a priority and Asia has a long way to go on this topic.
While Asia is rising, it is important to remember that after the second world war Japan achieved remarkable growth and since the 1970s has been the third-largest economy in the world. Japan is high tech, developed, is an important source of investment and one of the drivers of growth for ASEAN and India.
Prakash observes, “What started off as a cost-efficient region is gradually and steadily becoming an innovation hub. There were cultural and decision-making differences between Asia and the West, but the first phase of globalization blurred the cultural borders of the world. The evolution of global in-house centers over that period gave us a peep into what Asia is capable of.”
POPULAR CULTURE IN THE ASIAN CENTURY
Asia’s cultural influence is growing with Asia’s economic prominence. “We’re already seeing this worldwide,” Tonby explains. “Go to any city in the West, you will find different variations of Asian food. Look at the global box office revenues that come from Asia, and that means Bollywood, it means China, it means Korea. You see K-pop music, which is extremely popular globally. So absolutely, culture is following.”
Will Asian cultural influences be as pervasive as Western culture? That remains to be seen, but it's certainly growing and it's influencing the world. Mark Sungrae Kim is partner-in-charge of Heidrick & Struggles’ Seoul, Korea office. “If we talk about content like K-pop music and K-drama/movies, in the last year the Korean film “Parasite” won the Oscar award, and then, recently a Korean boy singing group called BTS just reached the number one on the Billboard chart. So it's not only Samsung, LG, Hyundai Motors, Korean products, but even Korean content.” The tourism industry also shows signs of the rising influence of and interest in Asia, as well. “Before COVID-19, we were having a lot of visitors to Korea. So I think the Asian brand, it's evolving, and it's not just gaining interest in the U.S. or Europe, but also in Latin America and Africa.”
The continent has withstood generations of change and upheaval to arrive at this moment of cultural and economic prominence. “As you know, In Asia, we have grown up in a lot of uncertain times,” Simatupang says. “So we have been in a lot of crises in the past 20 years, in each market, with the biggest crisis obviously in 1998. And then we had another financial crisis in 2008. And now COVID. And in between, we face many other uncertainties and small crises. So there's a lot of uncertainty which actually makes Asia more resilient.”
In the current period of accelerating disruption and change, resilience may be key to Asia’s success. “One of the reasons for this resilience and the promise for the future is diversity. There really isn’t one Asia.” Tonby says. He describes four Asias:
- Greater China by itself is the world’s largest or second largest economy by GDP, if looked at by PPP adjusted. It’s growing fast, it’s technologically sophisticated. It attracts a lot of capital, and it’s also now a source of capital.
- The advanced Asian countries include Japan, South Korea, Singapore, New Zealand and Australia. These are very advanced countries, high GDP per capita. These are sources of capital, but they have moderate to low growth. So they’re also looking for growing markets.
- ASEAN or emerging Asia has been growing at 5% on average since 2000 and it looks to continue that way. It is very heterogeneous with the world’s largest Muslim majority country in Indonesia, the world’s largest Buddhist majority country in Thailand, one of the world’s largest Christian majority countries in the Philippines, all of these very large countries but very diverse relative to one another, and all of these are in one market. ASEAN is a source of labor that is used to produce labor intensive goods.
- India and frontier Asia has been growing very fast until just before COVID, and is a huge source of technology talent with more STEMM graduates than any other place in the world. It's a huge market with low GDP per capita, and is less connected to the rest of Asia.
“You have these very different Asias, but they are all complementary,” Tonby says. “That’s part of what is beautiful about Asia and part of what makes Asia resilient, and what makes it also very promising for the future. That makes it complicated to work there, as well.”
IN THE ASIAN CENTURY, LEADERSHIP GETS COMPLICATED
Breathtaking growth and constant disruption have shaped the successful leadership profile in Asia.
Johan Uittenbogaard is the Managing Partner of Odgers Berndtson in Tokyo. “As a leader of a business in Asia, you have to be able to deal with disruption in a very positive way. So when we look at the leaders we are recruiting for our clients, one of the main elements is how can that individual deal with change? How can they change themselves when that’s being called for, and then importantly, are they able to change their teams as well?”
For example, Uittenbogaard says, “Throughout most of Asia, things are changing so rapidly there that if you have a successful business now, you might just lose it to a competitor that nobody’s ever heard of who completely destroys the market in a couple of months’ time. As a leader, how do you deal with that? What we do as a business, we have created a psychometric testing methodology to test people on how they can deal with change.”
Organizations that traditionally did not have business process continuity teams or who were not really bothered about such teams are now setting up their own risk management teams.
Rapid growth and compounding crises are examples of the kind of change leaders in Asia must navigate. For example, Simatupang says, “Double digit growth for us is not just 10-20%, it is often growth which can be 60%, 100%, 300%, so that is the growth that a lot of Asian companies faced in the past 20 years. So how do you actually keep up with that fast-changing growth? You just have to be agile, thinking fast, making decisions fast and being resilient; and then you have a crisis in front of you. So how do you take on this crisis and move through that crisis?”
She says, “A lot of leaders are now facing a very hard time. Before, we faced political and economic crises. Now, it’s everything. You have the social crisis, you have the economic crisis, you have the health crisis. And with that, every leader is required to look beyond, to think what’s next, right now.”
The impact of growth is also complicating the flow of executive talent in Asia. Kim explains, “A lot of the Asian companies, mainly Chinese and Japanese before them, but recently also Korean companies have been buying global brands and global companies. It is actually the Asian owners and investors who are investing in global. Now, a lot of these local Asian companies are looking for global talent, not only for their global business, but also for their local business.”
An additional leadership challenge is addressing the vast complexity of Asian markets. “Just because you have worked in China, it doesn't mean that you can easily manage in Korea, Japan, or Indonesia. They are totally different markets,” Kim says. “The language and culture are different, the dynamics, the legality, everything is different.”
These vastly different markets are increasingly turning their attention from the West toward each other.
THE NEXT CHAPTER IN GLOBALIZATION IS REGIONALIZATION
McKinsey’s research points to an increase in regionalization. Tonby says, “We are increasingly seeing Asia for Asia.” For example, Tonby describes intra-regional trade which originates in Asia and ends up in another part of Asia. “Intra-regional trade accounts for more than 60% of trade in Asia. So in Greenfields investing, 59% of it ends up in Asia. So again, it’s Asians investing in other companies, investing in other Asian countries. We see it in travel. 74% of travel is intra-regional. So we’re clearly seeing this increasing ‘Asia for Asia.’ All of these factors have been growing significantly over the past 10 years.”
The shifting of supply chains is an important factor in this regionalization, driven by increasing labor costs in China and the growth of manufacturing in Southeast Asia. “Now Chinese labor costs can be three times that of Vietnam,” Tonby explains. “Couple that with increasing geopolitical tensions and companies assessing where they produce, where the supply chains go to and from, and they're increasingly thinking about diversifying investment. The destination of that is often, by quite a significant majority ASEAN and then next, India. And now COVID has accelerated these trends of shifting of those supply chains.”
This trend is not new, Tonby adds. “In 2017, Vietnam was already responsible for 7% of the world's emerging market labor-intensive goods, and it's continuing. We see this happening in India and Indonesia, Bangladesh, and there's more to come.” Tonby notes that this regionalization preceded COVID-19. “And by the way, it started also before the rise in US-China trade tensions. This is not about that, either. These factors have accelerated this regionalization, but it started well before.”
THE TALENT SUPPLY CHAIN
Much like the regionalization seen in the movement of goods and services, a similar trend may soon take shape in the movement of talent. “More and more, clients are actually bringing in people from other Asian countries,” Simatupang observes. “More and more big companies are basically preparing for when the expat leaves and then they will try to look for local talent.”
Scarcity remains a problem, with a generation of local leadership talent still coming into its own. “You’re going to need stronger leaders in Asia, and this is something where, to be really honest, there is not enough talent in the market. And that makes sense because excluding Australia, Singapore, Japan and Korea, most countries have not been in a similar capitalist environment for more than 15, 20 years max. They were under-developed 20 years ago, and there was little leadership developed. And leadership doesn’t just stand up, ready in two or three years.”
There's a lot of uncertainty which actually makes Asia more resilient.
The talent pipeline, then, is critically important for both Asian companies and global companies doing business in Asia.
For example, an often-cited key to weathering change is effective succession planning. “Twenty years ago, we did need all of those expats, all their expertise. The local talent during that time was not sufficient. We needed to grow the local talent and be ready to become the future leaders. Even Asian companies hired top talent globally; from Europe, the US, from Australia to lead that organization, and then develop the local pipeline. The local pipeline is growing but there are some markets that are still not ready. So they still need some expertise from outside.”
But outside leadership comes with some risk—retaining the rising generation of top talent. “If you don't have a local CEO or General Manager, the talent one level down won’t see future career opportunities,” Kim warns. “For example, one company had a new expat coming in every year or so who doesn't know much about the market. The local team members became frustrated that they were teaching these leaders instead of being led by them. So the good and smart people eventually left. Best to have a mixture of Western or expat and local management. If all of your leaders are expatriates, then good, up and coming leaders will not stay around for very long. They will be looking for outside opportunities.”
If weathering the transition from expat to home grown leadership isn’t enough, companies and countries in Asia are also dealing with the existential threat of climate change.
WEATHERING THE STORM OF CLIMATE CHANGE
We’re going to face a temperature increase of two degrees by 2050, with 600 to 700 million people in Asia, particularly in India, Pakistan, and Bangladesh, that live in areas where there’s a significant chance of lethal heat waves. So working outside, let alone being outside, is potentially lethal. The impact on manufacturing, on outdoor labor and therefore productivity and therefore growth and GDP in these countries is very, very substantial.
We also look at the likelihood of increased droughts, in particular Southwestern Australia and parts of China. There are going to be parts of those regions that are going to spend as much as 80% of time in drought by 2050.
We looked at the likelihood of increasing volatility in crop yields and the problem with increasing volatility is farmers can’t plan. And if there’s volatility, they make significantly less. So there’s a significant increase in the volatility of yields for crops.
Infrastructure is massively at risk from flooding, whether from typhoons, riverine flooding, or coastal flooding. So much so that Indonesia is moving its capital, Jakarta, because it is sinking.
These are real, very dangerous outcomes of climate change. From an economic perspective, “At least 2.8 trillion US dollars of GDP is at risk from this climate change in Asia,” Tonby says. “The opportunity here is for Asia to step up its game. And the good news is that over the last two years there’s been a significant shift in the sentiment around climate change. I’m now much more convinced that most CEOs take this seriously because their customers expect them to, because their employees expect them to, because the children of those very same CEOs say, ‘listen, time is up, it’s time to do something.’”
Are organizations in Asia doing something? Simatupang says, “Talk about sustainability has transformed from being a buzzword to reality. Right now, a lot of organizations think and manage and plan a strategy around climate change. I think the C-suite would definitely like to put it as a KPI but in terms of putting climate change into the strategy, it’s still something new, something that’s up and coming. At this stage in my experience, it is ‘nice to have,’ not really a ‘must.’”
Now, a lot of these local Asian companies are looking for global talent, not only for their global business but also for their local business.
Prakash is witnessing an increase in clients looking for candidates with experience in sustainable practices. “Recently, I hired a head of supply chain for one of the life sciences companies in Bangalore. One of the key requirements for this candidate was that he should have had experience working on power consumption and how we can utilize wind energy, et cetera.”
“Asia is basically a very disaster-prone continent,” Prakash explains. “You have a lot of coastline, you have low lying territories, you have extreme weather, you have tsunamis, and there are many countries which are island countries. So climate change affects us more in Asia than probably any other place.”
Recognizing the growth in infrastructure in Asia, Tonby says, “Hopefully that new investment is made with a view to mitigate climate risk. If you look at new energy, renewable energy, Asia is the place where it’s happening in an order magnitude: 60% of renewable energy capacity going forward is going to come into Asia, and Asia already dominates the portfolio of renewable energy.”
Climate change is an immediate threat, but governments have limited resources to address a range of pressing needs. Tonby says, “Against job creation and against lifting people out of poverty, do governments see addressing climate change as something that works in the same direction, or is it opposing? There are different views on that in different countries.” Some are planning with a one-hundred-year view on climate risk and others are taking action, but it ends up competing with other priorities.”
A key priority is the fight against COVID-19. Governments have spent and will continue to spend on prevention and treatment, as well as mitigating the economic impact of the pandemic. Tonby says, “COVID also means that governments have spent a lot of money, and they need to spend a lot more money, so there’s going to be a fight for every dollar when of course, investing in climate change also requires money. The hope is that some of those stimulus programs will come with a green orientation. If you’re going to stimulate new infrastructure, make sure that it helps mitigate climate risk.”
PLAN AHEAD TEAMS
Mitigating risk and anticipating trends and opportunities is the role of plan ahead teams. To put the need for such teams in context, Tonby says, “You have the devastating effect of COVID as one factor, you have a technology revolution that is going on that is affecting everything. You have an emerging, new- world order, geopolitical tensions, and these will not go away irrespective of any election. And then you have climate change as our generation’s imperative, and you mix all this together, and that is a pretty uncertain future.”
And in that uncertain future, organizations need to be looking at the range of scenarios. “So you plan, you try to plan back for that,” Tonby says. “This is different than your traditional strategy team. This is a taskforce. It is CEO plus the business leaders, the heads of different business lines that are in the game together looking at intelligence, developing scenarios, identifying options. That’s what the plan ahead team does.”
COVID-19 has inspired more organizations to invest in scenario planning. “A lot has happened after the pandemic, even organizations which traditionally did not have business process continuity teams or who were not really bothered about such teams are now setting up their own risk management teams,” Prakash says. “They’re calling it by different designations, but the idea and agenda is the same: how they can plan ahead, how they can see the unknowns, so that the organizations are kept more informed, well-prepared, and more agile to handle whatever is coming.”
There are few companies now that have not been through this exercise, Tonby says. “Now the challenge is refreshing, updating, and being agile when changes come, so you actually have to do this much more frequently than the past, and by the way, it rolls into your budgeting, your year-long
budgets. It’s pretty tough to put in place a decent year-long budget, now. So you end up doing this at much more frequent intervals than you did in the past.”
And what are the leadership qualities of those plan-ahead team members? For Tonby, “folks that are curious. Curious and creative folks who are analytically oriented, folks who are externally oriented, looking outside for what’s happening, but also folks who are practical: what does it mean in practice that, so you can actually bring it back to some decisions that you will or will not make.”
Prakash says, “I believe resilience, bold decision-making, maintaining communication with stakeholders to maintain their trust and confidence, and team players who always keep their people and organization ahead of them are the few key skills that every team needs to possess to navigate through any crisis.”
Diversity is also key to effectively imagining and preparing for the unknown.
THE ROLE AND IMPACT OF DIVERSITY IN ASIA
Diversity and inclusion pose a tremendous opportunity for growth and innovation in every organization, worldwide. For Tonby, “This is a huge opportunity for Asia. It is one of the biggest opportunities, actually, that there is for Asia.”
Tonby addresses the opportunities presented by both gender parity in workforce participation and the impact of women in leadership across Asia. “We have analyzed this in detail in our power of parity report a couple years ago. We had looked at how the GDP of different countries can increase by between 11 to 16% over the next decades by increasing gender parity. You’re talking about trillions of dollars across Asia. And it’s very different country by country. So in Singapore, we already have 44% participation. You go to India and it’s only 23% participation. So increasing gender participation is a huge opportunity.”
The second level of opportunity when it comes to gender in Asia is women in leadership. “If you look at different countries and companies by and large, we’re talking about significantly less than 20% of the C-suite level. It’s even lower participation at the board level, at 10% or less,” Tonby says. And the impact of that disparity is obvious. “There is ample, empirical evidence that gender balanced companies perform better than those that are less gender balanced.”
“Koreans are known to be hard working people and many now have global experience. More and more global companies are hiring Koreans and other Asian talent as they have ‘best of both worlds’,” says Kim.
Prakash is noticing more organizations that actively promote a culture of diversity and innovation. “Organizations have increasingly understood the importance of having diverse teams so that they keep challenging their fundamental assumptions and come up with more creative and innovative thought processes of running an organization. This they see as a winning formula, diversity and innovation.”
Tonby adds, “We can have a long debate as to causality and correlation and so on. To me, it’s very simple, which is I have never heard a CEO complain that they have too much talent and too many leaders. That has never, never in my more than 25 years, never heard that sentence, ‘I have too much talent and too much leadership.’ It’s always the opposite. And if 50% of the world’s population is women, 50% of the world’s population of the world’s talent is women. If the funnel isn’t 50% throughout, very simply, we’re losing out on a huge part of the world’s talent. That’s the reason for making this a priority and Asia has a long way to go on this topic.”
WHO SUCCEEDS IN THE ASIAN CENTURY?
“One size does not fit all,” Prakash says.
The same can be said for strategy.
Simatupang explains, “We cannot use the same strategy across every market, because a successful strategy depends on the scale of the economy, the readiness of the market itself, the people's different skill sets. There are quite different elements that one company needs to consider.” Key among them, she says, is “sensitivity to the local cultures.” For example, “A global company coming to Indonesia, or to Vietnam, they need to understand the local culture and the market itself to be successful. Without that, it is very difficult because if you bring your product from the U.S. with the U.S. system, that might not work well with the ecosystem in Indonesia, Vietnam, or even Thailand. You need to adjust, and come up with a different business strategy in each market.”
The first question is, what leadership do you need in headquarters if you want to be successful in the Asian country, in the Asian century?
Uittenbogaard reinforces that observation. “American companies often think, let’s just copy and paste our success model in America and put it everywhere else in the world. With an opposite approach, Japanese companies have basically rendered international business units separate from their global business. Neither of those two models work. You need to get a business that is truly global. Some people call the difference between a global business and an international business, where an international business has got dots on the map and a global business really is represented throughout the organization at every level, from people from around the globe.”
In order to do that, however, the global perspective must permeate the organization. Uittenbogaard explains, “The Chinese national will know China, but may have no clue about India. So having Asia represented in your leadership is not that simple.” He says, “If you have a senior leadership team or even your board where you don’t have expertise about Asia, how do you think you can develop not just the strategy, but also the execution to be successful in Asia? So before we start talking about what kind of leadership you need in Asia, I think the first question is what leadership do you need in headquarters if you want to be successful in the Asian country, in the Asian century.”
Prakash reminds us that “Asia has the highest consumption power, it has the world’s largest and biggest middle-class population, India being the classical example, China next. Everybody’s cost-conscious here. At the same time, they are fueled by aspiration for better lifestyle. If you think ‘it’s a very cost-conscious market, let’s not even launch Louis Vuitton there,’ sorry—you’re wrong. They know where to spend, where not to spend. It is a lifestyle understanding, which is really important if you want to be successful in Asia.”
Tonby says, “If you look at this, if you look at growth in demand, if you look at technology development, if you look at the corporate ecosystem, I think it’s fair to say that the center of gravity is shifting closer towards Asia. That’s why we’re talking about this,” he says.
“The Asian century has arrived.”